Process: 162/2014-T

Date: December 15, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (162/2014-T) involves a challenge to an IRC (Corporate Income Tax) assessment for the 2009 tax year issued to A SGPS, S.A., a holding company in a tax group regime. The company contested a financial adjustment assessment of €29,779.28, claiming fundamental procedural violations. The claimant argued that the tax assessment suffered from a critical substantiation defect (falta de fundamentação) and that the Tax Authority failed to provide proper legal reasoning in both the original assessment and the subsequent administrative claim dismissal decision. The company alleged a double correction error in calculating the tax group's taxable income, where corrections to a subsidiary (A, S.A.) were improperly applied by both increasing the fiscal result and reducing tax losses by the same amount (€96,384.18). This violated Article 70 of the IRC Code governing special tax regimes for corporate groups. Additionally, the claimant invoked preterição de formalidade essencial (omission of essential formality), specifically the failure to notify and allow participation before the decision under Article 60(1)(a) of the General Tax Law (LGT). The company argued these violations infringed constitutional guarantees (Article 268(3) CRP), the duty to substantiate tax acts (Article 77 LGT), and procedural notification requirements (Articles 36-37 CPPT). The Tax Authority responded that the claimant confused the assessment's origin, clarifying it resulted from corrections to another group company (B Representações) rather than from the inspection order cited by the claimant. The case exemplifies how procedural safeguards and the substantiation requirement serve as essential taxpayer protections in Portuguese tax law, particularly in complex tax group scenarios where calculation errors can compound across multiple entities.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 162/2014 – T

Subject: Corporate Income Tax – Lack of substantiation; lack of notification for participation in the decision.

I – REPORT

  1. On 21 February 2014, the company A SGPS, S.A., holder of the tax identification number ..., with registered office ... (hereinafter referred to as the "Claimant"), submitted to the Administrative Arbitration Centre (CAAD) a request for the establishment of an arbitral tribunal with a view to obtaining an arbitral decision, in accordance with the provisions of Articles 2, No. 1, paragraph a) and 10 of Decree-Law No. 10/2011, of 20 January (hereinafter referred to as RJAT), seeking the declaration of illegality of the act of dismissal of the administrative claim (reclamação graciosa) with number ..., and consequently, the tax act of financial adjustment assessment of Corporate Income Tax (IRC) with number 2013 ..., of 13/05/2013, relating to the year 2009, in the amount of €29,779.28 (twenty-nine thousand, seven hundred and seventy-nine euros and twenty-eight cents), the statement of interest calculation No. ... and the statement of account adjustment No. ....

  2. In the request for arbitral decision, the Claimant chose not to appoint an arbitrator.

  3. In accordance with No. 1 of Article 6 and paragraph b) of No. 1 of Article 11 of RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed as sole arbitrator the undersigned Jorge Carita, who accepted the position within the legally stipulated period.

  4. The arbitral tribunal was constituted on 28 April 2014.

  5. On 30 May 2014, the Respondent, having been duly notified for this purpose, filed its response.

  6. On the same date as the response, the Respondent attached the instructing administrative file.

  7. The meeting provided for in Article 18 of RJAT was waived by the Parties.

  8. The Claimant and the Respondent submitted, within the period fixed by the arbitral tribunal, written arguments, respectively on 31 October and 17 November 2014.

  9. The position of the Claimant, expressed in the request for arbitral decision and in the written arguments, is, in summary, the following:

9.1. The statement of financial adjustment assessment of Corporate Income Tax No. ..., relating to the year 2009, which was the subject of the dismissed administrative claim No. ..., was not prepared in accordance with the legally provided procedures.

9.2. In fact, the Claimant understands that in order to arrive at the corrected taxable income of €658,885.50, the Tax and Customs Authority (hereinafter referred to as "TA") added to the fiscal result of the group €96,384.18 corresponding to the corrected taxable income of A, S.A. in the year 2009, a subordinated company of the Group in which the Claimant is the dominant company, and additionally corrected the tax losses of the group by the same amount.

9.3. In continuation of this reasoning, the TA, instead of deducting from the fiscal result of the group (€607,355.00) the tax losses resulting from the corrections made to the companies that are part of the Special Tax Regime for Groups of Companies (RETGS) (€44,853.68), carried out a double correction, by increasing the fiscal result with the taxable income determined by A, S.A., on the one hand, and subtracting from the tax losses of the group the same corrections.

9.4. Specifically, the financial adjustment act is tainted with error on the grounds of law, insofar as the correction in question does not result from the application of Article 70 of the Corporate Income Tax Code in the version in force at the date, since the determined taxable income does not result from the algebraic sum of the taxable profits and tax losses determined in the individual declarations of each of the companies belonging to the group.

9.5. The Claimant also states that the draft order for dismissal of the administrative claim presented merely concludes that "Having consulted the Tax and Customs Authority's computer system, it was verified that the assessment in question originated from corrections made by the Tax Management Division, not from the service order indicated by the claimant. The ... did not give rise to any correction, as evidenced by the document attached to the file at pages 51/52.", adding that, "in view of the above, consideration of the grounds presented by the Claimant is precluded".

9.6. Without presenting any response to the defect alleged by the then Claimant, nor providing any basis for its substantiation.

9.7. The same occurring with respect to the final order for dismissal of the administrative claim which, even after the Claimant exercised its right to be heard, merely states that "Having analysed the contradictory statement, it is verified that the claimant does not present new facts that would allow alteration to what was already explained in the draft decision already notified and the sense of dismissal of the request projected".

9.8. In this way, the Claimant understands that it was denied its right to defence and to be heard, insofar as the right to substantiation of all acts carried out in tax matters that affect the rights and legitimate interests is clearly an essential guarantee of taxpayers, in accordance with the combined provisions of No. 3 of Article 268 of the Portuguese Constitution (CRP), Article 77 of the General Tax Law (LGT) and Articles 36 and 37 of the Code of Tax Procedure and Process (CPPT).

9.9. As for the defence method used (administrative claim), contrary to what the TA suggests, that instead of the Claimant having presented an administrative claim, it should have resorted to Article 37 of the CPPT, the Claimant understands that the TA is in error. This is because what is at issue in the administrative claim is the lack of substantiation of the decision on the administrative claim and not the lack of substantiation of the act of notification of the decision.

9.10. On the other hand, the Claimant understands that the statement of financial adjustment assessment, whose legality it also contests, is deprived of substantiation, since it contains no substantiation whatsoever, thus violating Articles 268, No. 3 of the CRP, 77 of the LGT and 36 and 37 of the CPPT.

9.11. The Claimant also understands that it was unequivocally denied its right of participation in decisions, granted by paragraph a) of No. 1 of Article 60 of the LGT.

9.12. Concluding that the statement of account adjustment, and the consequential statement of interest calculation and statements of account adjustment, are tainted by error on the grounds of law, and cannot be validly maintained in the legal order.

9.13. Even if this is not understood to be the case, the Claimant understands that the statement of financial adjustment and the decision on the administrative claim in the case sub judice would always have to be annulled, due to manifest defect of form, due to lack of substantiation, which results in an inescapable denial of the Claimant's defence rights.

  1. The position of the Respondent expressed in its response and written arguments is, in abbreviated summary, the following:

10.1. In fact, the Claimant is in error in associating the assessment at issue with the result of the inspection action to which was assigned the Service Order No. ... and from which no unfavourable acts resulted.

10.2. The Claimant well knows that the assessment in question results, not from the inspection action directed at the Claimant A SGPS, S.A., but rather from the corrections made to company B – Representações, S.A., a company belonging to the group of which the Claimant is the dominant company.

10.3. In fact, in the year 2008, B Representações declared tax losses in the amount of €253,203.84, and following Inspection Order No. ..., an inspection procedure for Corporate Income Tax/2008 of B Representações, the tax losses were corrected to €99,561.84, so the tax losses reportable for the year 2009 became €153,642.00 (instead of the €253,203.84 initially declared).

10.4. In fact, B Representações voluntarily submitted a replacement Form 22 declaration, in which it calculated tax losses as €153,642.00, as proposed by the Tax Inspection Services.

10.5. However, another inspection action was opened against B Representações, but for the year 2009, with partial scope in respect of Corporate Income Tax.

10.6. In that year, B Representações, in its initial Corporate Income Tax declaration, declared a taxable profit of €250,026.18, from which it deducted, in accordance with Article 47 of the Corporate Income Tax Code, part of the tax loss determined by itself in the year 2008 in the Form 22 Corporate Income Tax declaration initially filed (€253,203.84), which resulted in the determination of nil taxable income, when it could only deduct the amount already corrected in 2008, that is, €153,642.00.

10.7. However, in the absence of timely correction by the taxpayer B Representações and being a purely arithmetic correction, the services proceeded with its official correction, which gave rise to the assessment at issue – Assessment No. ... of 13/05/2013, in the amount of €55,357.24.

10.8. And, in a period coinciding with the processing of the assessment in question, an internal inspection procedure No. ... of 21/01/2013 was opened against the Claimant, inserted in the control actions of taxpayers taxed under the special tax regime for groups of companies.

10.9. It so happens that, meanwhile, B Representações submitted the replacement Form 22 declaration in accordance with what was stated in the draft report of the inspection action with Service Order No. ....

10.10. As there was no need for corrections, the Claimant was notified of the result of the inspection action ..., from which no unfavourable acts resulted.

10.11. By virtue of the correction made to ..., in accordance with the service order ..., stated in the replacement declaration filed by it, which gave rise to the assessment now at issue, and being ... the subordinated company, in accordance with RETGS, the Claimant paid part of the amount determined and stated in the assessment contested and notified to it, which was €55,357.24.

10.12. In this way, the Respondent proceeded with the statement of financial adjustment, which represents an amount to pay of €29,779.28 that reflects only the differential between the amount to pay/owed and the amount already paid by the Claimant, that is, €55,357.24 – €25,577.96.

10.13. Although the Claimant invokes that it does not understand, given the alleged lack of substantiation of the assessment, the fact is that it understood quite well what was at issue. See Article 30 of the Request "The statement of financial adjustment (...) aimed to alter the value considered as payment of self-assessment by the Claimant, thus taking into account the amount paid (...)".

10.14. It is further noted that the Claimant presented the administrative claim whose dismissal is discussed here, starting from the assumption that the assessment in question is related to Service Order No. ... opened in the name of A SGPS, in order thereby to challenge the assessment.

10.15. However, the assessment in question is not related to the inspection procedure opened in the name of A SGPS.

10.16. The assessment in question is consequent to the arithmetic corrections of the alteration of the tax loss of 2008 to B Representações, which should have been reflected by B Representações in the Corporate Income Tax/2009 declaration, and which would have generated a corrective assessment, insofar as the taxable income went from nil to positive.

10.17. Having not done so, the services proceeded with its official correction.

10.18. The Claimant did not use the appropriate means to request the substantiation allegedly lacking. Thus, instead of having presented an administrative claim, it should have resorted to Article 37 CPPT.

10.19. In fact, the TA's response is brief, but reflects everything that is necessary to inform, because the Claimant is in error in associating the assessment at issue with the Service Order indicated by it, and founding the Claimant's claim on Inspection Order ... could not, in the context of an administrative claim, the TA have decided differently from the way it decided, because the grounds presented did not result from the Inspection Order invoked.

10.20. And, since purely arithmetic corrections are at issue, it is not necessary to provide the exercise of the right to be heard.

10.21. Concluding that, from the waiver of the right to be heard, no violation of the principle of the right to be heard results in the case sub judice, and there are no new elements that could be brought forward by the Claimant that could alter the substantiation of a tax act already consolidated in the legal order, thus there is no legal omission whatsoever, constituting any illegality.

II – MATTERS TO BE DECIDED

  1. In view of the above, the main matters to be decided are as follows:

a) Whether the decision for dismissal of the administrative claim No. ... and the underlying tax act of Corporate Income Tax assessment No. ..., relating to the year 2009, in the amount of €29,779.28 issued by the Ministry of Finance, Tax and Customs Authority, Area of Tax Justice, Division of Administrative and Contentious Justice, suffers from illegality by incurring in the defect of violation of the law;

b) Whether the decision identified in the preceding paragraph is tainted with a defect of form due to lack of substantiation;

c) As to the Corporate Income Tax assessment sub judice, whether there was a lack of substantiation, as well as an omission of the essential formality of lack of prior hearing of the taxpayer and consequent violation of Article 60, No. 1 of the LGT for participation in the formation of the act.

III – PRELIMINARY EXAMINATION

The Tribunal is regularly constituted and is materially competent, in accordance with Articles 2, No. 1, paragraph a), 5, No. 2, and 6, No. 1, of RJAT.

The request for arbitral decision is timely, in accordance with No. 1 of Article 10 of RJAT.

The parties have legal standing and legal capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10, No. 2, of RJAT and Article 1 of Regulation No. 112-A/2011, of 22 March.

The proceedings do not suffer from defects that would invalidate them.

Having considered everything, it is necessary to render a decision.

IV – FACTUAL BASES

  1. Taking into account the tax administrative proceedings and the documentary evidence attached to the file, it is now necessary to present the factual matters relevant to understanding the decision, which is established as follows:

12.1. Of "A – SGPS, S.A." – dominant company/Claimant

A. The Claimant is classified, for Corporate Income Tax purposes, under the Special Tax Regime for Groups of Companies (RETGS), as the dominant company.

B. In the year 2008, a tax loss of €147,162.52 was declared by the Claimant's group, and it was corrected to €44,853.68, as a result of Article 78 of the Response.

C. On 31.05.2010, the Claimant submitted the Form 22 income declaration of the group, relating to the year 2009, to which was assigned the identification code of the Declaration ....

D. On 21.01.2013, the Claimant was subjected to an inspection action carried out by the TA with the purpose of analysing the periodic Corporate Income Tax declaration of the year 2009, under Service Order No. ... (cf. Report of the Tax Inspection, page 17 of PA).

E. On 22.05.2013, the Claimant was notified of Assessment No. ..., the interest calculation statement No. ... and the account adjustment statement No. ..., with payment deadline of 17.07.2013, relating to the year 2009, in the amount of €55,357.24 (fifty-five thousand, three hundred and fifty-seven euros and twenty-four cents) (cf. pages 19 to 21 of PA).

F. On 30.05.2013, in the context of the inspection action above-mentioned, the Claimant was notified that such inspection did not result in any corrections (cf. Report of the Tax Inspection, pages 23, 51 and 52 of PA).

G. On 03.06.2013, the Claimant made a partial self-assessment payment relating to the mentioned assessment, in the amount of €25,577.96 (twenty-five thousand and five hundred and seventy-seven euros and ninety-six cents) (cf. pages 36 to 37 of PA).

H. On 02.07.2013, the Claimant was notified of the financial adjustment assessment of Corporate Income Tax (IRC) No. ..., relating to the year 2009, in the amount of €29,779.28 (twenty-nine thousand, seven hundred and seventy-nine euros and twenty-eight cents), the interest calculation statement No. ... and the account adjustment statement No. ... (cf. pages 13 to 15 of PA).

I. The amount referenced in the financial adjustment assessment took into account the amount paid by the Claimant. Thus, the amount of €29,779.28 was determined taking into account the Corporate Income Tax assessment of 22.05.2013 relating to the year 2009, in the amount of €55,357.24, from which was subtracted the amount €25,577.96, which relates to the amount paid by the Claimant (cf. Article 30 of the Claimant's request and Article 38 of the Respondent's response).

J. On 18.09.2013, an administrative claim procedure was opened, to which was assigned No. ..., by the Finance Services ... (cf. page 1 of PA).

K. The impetus for the aforementioned procedure was given by the Claimant, since it did not accept the assessment in question, for which reason, pursuant to Article 137 of the Corporate Income Tax Code and Articles 68 et seq. of the CPPT, it presented the respective administrative claim.

L. By fax dated 28.10.2013, the Claimant was notified of the draft order for dismissal of the administrative claim, as well as to exercise the right to prior hearing, in accordance with Article 60 of the LGT.

M. On 12.10.2013, the Claimant exercised the said right of hearing.

N. On 26.11.2013, the Claimant was notified of the dismissal of the administrative claim procedure decision (cf. pages 1 to 40 and 53 to 76 of PA).

O. On 21.01.2014, even though not agreeing with the correction made, the Claimant made the payment of the tax stated in the financial adjustment assessment, now at issue, in the amount of €29,779.28 (cf. document No. 13 attached to the Request).

12.2. Of "B – ... Representações, S.A." – subordinated company

P. On 21.04.2010, Service Order No. ... was issued to the taxpayer "B – ... Representações, S.A.", a company subordinated to the Claimant, which was inserted in the activity of "control actions of taxpayers taxed under the special tax regime for groups of companies", with respect to Corporate Income Tax of the year 2008.

Q. On 31.08.2012, B Representações, S.A. was notified of the draft corrections relating to Service Order No. ..., in accordance with and for the purposes of Article 60 of the RCPIT and the LGT, causing the fiscal result of the year 2008 to change from a declared tax loss of €253,203.84 to €153,642.00, with a correction being made in the amount of €99,561.84.

R. As during the period for the exercise of the right to be heard, the taxpayer voluntarily regularized the described situation, through the filing of a replacement Form 22 Corporate Income Tax declaration on 17.09.2012, the incorrectness reported in the draft corrections ceased to have effect, and it was proposed to close that service order on 12.10.12 (cf. pages 43 to 47 of PA).

S. On 20.03.2012, Service Order No. ... was issued to the taxpayer "B – Representações, S.A.", a company subordinated to the Claimant, which was inserted in the activity of "control actions of taxpayers taxed under the special tax regime for groups of companies", with respect to Corporate Income Tax of the year 2009, with a correction being made to the deducted tax loss.

T. The said company determined in the 1st Form 22 Corporate Income Tax declaration for the year 2009 a taxable profit of €250,026.18 from which was deducted, in accordance with Article 47 of the Corporate Income Tax Code (at the date of the facts), part of the loss determined by the taxpayer in the year 2008, which resulted in the determination of nil taxable income. However, as a result of the inspection action for the year 2008, in which corrections were proposed that altered the tax loss calculated by the taxpayer, it voluntarily presented a replacement Form 22 declaration, in which a tax loss of €153,642.00 was calculated (see pages 31 to 34 of PA).

U. As a result of the alteration of the tax loss of the year 2008, the deductible tax loss in subsequent years changed from €253,203.84 to €153,642.00, so a correction was made to the taxable income to €96,384.18 (€250,026.18 - €153,642.00) (cf. pages 25 to 30 of PA).

  1. With respect to the facts stated in the preceding number, the documents attached to the file and the administrative proceedings are relevant, all analysed and considered in conjunction with the pleadings, from which resulted agreement as to the factuality presented by the Claimant in the request for arbitral decision.

  2. There are no facts stated as not proven, because all facts relevant to the assessment of the request were stated as proven.

V – LEGAL GROUNDS

  1. We shall now determine the law applicable to the underlying facts, in accordance with the matters already stated above (see No. 11).

  2. We shall begin by assessing the first matter stated, that is, whether the decision for dismissal of the administrative claim No. ... and the underlying tax act of Corporate Income Tax assessment No. ..., relating to the year 2009, in the amount of €29,779.28 issued by the Ministry of Finance, Tax and Customs Authority, Area of Tax Justice, Division of Administrative and Contentious Justice, suffers from illegality by incurring in the defect of violation of the law.

  3. The Claimant is classified under the special tax regime for groups of companies (RETGS), a regime provided for in Articles 69 to 71 of the Corporate Income Tax Code, and has chosen, as the law permits, the application of that regime for determining the taxable income in relation to all companies in the group. Under this regime, it is the responsibility of the subordinated companies to calculate their respective individual profit and it is the responsibility of the parent company to calculate and assess the tax due by the group.

In this regard, Rui Duarte Morais states that "Each company, including the parent company, shall file its declaration, calculating its respective fiscal result (as if this special regime were not applicable). The parent company shall also file another declaration, where it calculates the taxable income of the group (in accordance with the rules of this regime) and shall self-assess the tax due." (see Notes to the Corporate Income Tax Code, Almedina, 2009, pages 155 and 156, note 333). This reasoning aligns with Article 70 of the Corporate Income Tax Code which states that the taxable income of the group is calculated by the dominant company, through the algebraic sum of the taxable profits and tax losses calculated in the periodic individual declarations of each of the companies belonging to the group.

Transposing the method of determining the taxable income of groups of companies, set out in the RETGS, to the case of the Claimant, in order to break down the difference between the taxable income of the group declared, in the amount of €460,189.48 and that determined by the TA in the amount of €658,885.50, we have:

Subordinated company "B – ... Representações, S.A."

Fiscal Result of the Year Enterprise TA
2008
Declared Losses €253,203.84
Correction €99,561.84
Corrected Losses €153,642.00
Losses to carry forward to 2009 €253,203.84 €153,642.00
2009
Taxable Profit €250,026.18
Deducted Losses €250,026.18
Corrected Losses €153,642.00
Corrected taxable income €96,384.18
Assessment 0 €39,724.69

Dominant company "A – SGPS, S.A."

Fiscal Result of the Year Group TA
2008
Declared tax loss €147,165.52
Corrected tax loss €44,853.68
Difference between declared and corrected loss €102,311.84
Correction of prior year losses €44,853.68
2009
Declared tax loss €147,165.52 €44,853.68
Algebraic sum of fiscal results €607,355.00
Taxable income €460,189.48 €658,885.50
Correction €198,696.02
Corporate Income Tax Assessment €131,114.80 €186,472.04
Corrected Corporate Income Tax Assessment €55,357.24

In these terms, the determination of the corrected taxable income in the amount of €658,885.50 concerns the increase of €96,384.18 relating to the correction of the Corporate Income Tax taxable income of the year 2009 of the subordinated company "B – Representações, S.A., in accordance with the inspection action of that year and the replacement declaration issued (cf. facts stated T and U) and of €102,311.84 relating to the correction of the tax loss of the year 2008 of the Claimant, cf. fact stated C. (difference between the tax loss declared by the Claimant of €147,165.52 and the correction of that loss to €44,853.68).

Thus, the taxable income determined by the Claimant for the year 2009 in the amount of €460,189.48 was corrected to €658,885.50 (€460,189.48 + €96,384.18 + €102,311.84).

The calculation of the individual profit of each subordinated company is, in the RETGS, and insofar as the dominant company is concerned, merely a preliminary act for the application of the regime for determining the taxable income of the dominant company and the consequent assessment of tax.

It should be noted that CAAD Arbitral Decision No. 10/2012-T states that "The RETGS does not require that the profits of subordinated companies have become final, i.e., that a final judgment has been formed or resolved on the act of their self-assessment and, much less, that they have already been subject to inspection, correction and approval by the tax authorities, before the dominant company determines the Corporate Income Tax of the group.".

It follows, therefore, that the assessment, which is the subject of the administrative claim now in Arbitral Decision, is an arithmetic correction of the taxable income of the Claimant resulting from a correction in the tax losses calculated by the subordinated company "B – Representações, S.A." in the year 2008 and which the TA needed to correct.

  1. The Claimant, in fact, intends to challenge the primary act which is the Financial Adjustment Assessment of Corporate Income Tax No. ..., and consequent account adjustment and interest assessments (cf. pages 13 to 15 of PA), which gave rise to the secondary act which was the act for dismissal of the Administrative Claim No. ....

However, contrary to what appears from the Request presented by the Claimant, that primary act derives from Service Order No. ... and not from Service Order No. ....

As stated in facts D and E, the Claimant was subjected to an inspection action carried out by the TA with the purpose of analysing the periodic Corporate Income Tax declaration of the year 2009, under Service Order No. ... (cf. Report of the Tax Inspection, page 17 of PA). In the context of this inspection action, the Claimant is notified by the TA with the information that it did not result in "(…) any tax acts or tax-related acts that are unfavourable to it". (cf. Report of the Tax Inspection, pages 51 and 52 of PA).

Thus, the basis that supported the assessment put at issue was not in fact the one stated in the Request, from which, as we have seen, no correction resulted, but rather Service Order No. ....

This last-mentioned inspection action was inserted in the control actions of taxpayers taxed under the special tax regime for groups of companies, relating to Corporate Income Tax of the year 2009, carried out against the subordinated company "B – Representações, S.A.".

In fact, after verifying all the elements, the TA decided to carry out a correction to the deducted tax loss, since in the year in question, 2009, part of the tax loss determined in the year 2008 was deducted, which, in the context of the inspection action of that year 2008 (...) changed from €253,203.84 to €153,642.00, thus giving rise to the assessment put at issue, producing effects in the situation of the dominant company, which, as we have seen, is responsible for calculating and assessing the tax due by the group. Due to fully agreeing with the respective substantiation, the subordinated company presented a replacement Form 22 declaration in accordance with the corrections proposed in the draft report. Part of the amount determined and stated in the assessment in question was paid by the Claimant (€25,577.96), thus giving rise to the statement of financial adjustment, which represents an amount to pay of €29,779.28, an amount already paid on 21.01.2014, by the Claimant (cf. fact stated O.).

In these terms, since the substantiation of the assessment that the Claimant intends to annul concerns Service Order ... (where corrections to the taxable income and consequently assessment of tax in default actually derived), the fact is that it cannot use Service Order No. ... to sustain that the assessment put at issue is defective, with error in the grounds of law, when no correction to the taxable income of the Claimant resulted from that inspection action. Therefore, the alleged illegality of the dismissal decision of the administrative claim due to the defect of violation of the law should not be considered well-founded. It should be noted that it is not within our remit here to discuss any illegality, in light of substantive norms, which expresses the character of an improper tax payment, as was explained in this point.

  1. We shall next analyse the matter of whether the decision for dismissal of the administrative claim No. ..., which is the subject of the present arbitral proceedings, is tainted with a defect of form due to lack of substantiation.

  2. The matter now raised follows from the preceding point. The assessment now at issue in these arbitral proceedings is not related to the inspection procedure ..., it is consequent to the arithmetic corrections of the alteration of the tax loss of 2008, which should have been reflected in the Corporate Income Tax declaration of the year/period 2009, insofar as the taxable income went from nil to positive, thus generating the corrective assessment now at issue.

  3. We must now analyse the lack of substantiation, as well as the omission of the essential formality of lack of prior hearing of the taxpayer and consequent violation of Article 60, No. 1 of the LGT for participation in the formation of the act, as to the Corporate Income Tax assessment No. ... underlying the decision for dismissal of the administrative claim No. ... (see paragraph c) of No. 11).

  4. Substantiation is a requirement of tax acts in general imposed constitutionally through Article 268 of the CRP. In tax matters, the duty of substantiation is regulated in Article 77 of the LGT. Diogo Leite Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, in annotation to Article 77 of the LGT, state "As the STA has been understanding, the legal and constitutional requirement of substantiation aims, primarily, to enable interested parties to know the reasons that led the administrative authority to act, in order to enable them a conscious choice between accepting the legality of the act and challenging it. For this objective to be achieved, the substantiation must provide to the recipient of the act the reconstruction of the cognitive and evaluative itinerary followed by the authority that carried out the act, in such a way that it can be known clearly the reasons why it decided the way it did and not in a different manner." (see General Tax Law. Annotated and Commented, 4th ed., Lisbon, Encontro da Escrita Publishing House, 2012, pp. 675).

  5. Substantiation must consist of an exposition of the factual and legal grounds that motivated the decision. As stated in the Decision of the Supreme Administrative Court "According to the uniform jurisprudence of this SAC, and taking into account the functionality of the institute of substantiation of administrative acts, that is, the instrumental purpose it pursues, an act will be duly substantiated whenever a normal recipient can be aware of the meaning of that same decision and the reasons that sustain it, allowing it to understand the cognitive and evaluative itinerary followed by the administrative entity, and to consciously choose between accepting the act or activating the legal means of challenge" (cf. Case No. 0554/10, of 02.12.2010).

  6. If the substantiation does not clearly explain the motivation of the act, due to obscurity, contradiction or insufficiency, the act is considered not substantiated (see No. 2 of Article 125 of the Code of Administrative Procedure (CPA)). Furthermore, the substantiation of acts that affect the rights and legally protected interests of citizens must be accessible, that is, the content of the substantiation must be easily perceptible to the recipient (see No. 3 of Article 268 of the CRP).

  7. The Corporate Income Tax assessment sub judice, as already mentioned, results from the arithmetic correction of the Corporate Income Tax of 2009 of the subordinated company "B – Representações, S.A.", in accordance with Service Order ..., inspection action which had the purpose of reflecting the correction that derived from the inspection procedure of the year 2008 (Service Order...), also in respect of Corporate Income Tax, with effect in the situation of the dominant company, since it is the responsibility of the subordinated companies to calculate their respective individual profit and it is the responsibility of the parent/dominant company to calculate and assess the tax due by the group, in accordance with the RETGS. In other words: the subordinated company, in the 2009 Corporate Income Tax, could only deduct €153,642.00 of prior year losses, however €250,026.18 was deducted, up to the extent of its respective taxable profit. For this reason, the subordinated company not having reflected this difference in amounts in the Form 22 declaration, relating to the 2009 Corporate Income Tax, and being the taxable income of the group, as well as the tax, allocated in relation to the dominant company, it was necessary for the TA to correct that result, changing the Claimant from nil taxable income to positive. In fact, in the year 2008, the Claimant's group declared a tax loss of €147,165.52, having corrected that loss to €44,853.68. However, as regards Corporate Income Tax of the year 2009, the Claimant always considered prior year losses in the amount of €147,165.52 (see fact stated C.). Being necessary, given the correction of the year 2008, to proceed with the arithmetic correction of the 2009 Corporate Income Tax, increasing €96,384.18, the result of €250,026.18 - €153,642.00, to the taxable profit and correcting prior year losses to €44,853.68.

  8. It should be noted that from the statement of financial adjustment it results that the only field altered in the Corporate Income Tax assessment was field 28 relating to "Self-assessment Payment", which changed from €131,114.80 to €156,692.76, corresponding to the payment made by the Claimant of €25,577.96 (see fact stated H.).

  9. Thus, it results that the act of assessment, the underlying act to the decision for dismissal of the administrative claim under analysis, which is the subject of the request for arbitral decision, meets a minimum content of information that allows consideration of the requirements met that are required for the substantiation of tax acts, and which are referred to in the preceding points Nos. 21 and 22.

  10. Since it is an arithmetic correction, derived from the inspection action Service Order ..., it was possible for the Claimant to know the evaluative and cognitive itinerary followed by the TA to proceed with the assessment. From the content of the arguments inherent to this proceeding, it results that the Respondent actually had knowledge of that itinerary.

  11. In these terms, the alleged omission of formality, resulting from the invoked non-compliance with the legal duty of substantiation, which in accordance with Article 268 of the CRP and Article 77 of the LGT is incumbent upon the TA, should not be considered well-founded.

  12. Finally, we must analyse the matter of the omission of essential formality due to lack of prior hearing and consequent violation of Article 60 of the LGT.

  13. As referred to in point 17, the calculation of the individual profit of each subordinated company is, in the RETGS, and insofar as the dominant company is concerned, merely a preliminary act for the application of the regime for determining the taxable income of the dominant company and the consequent assessment of tax. It is the periodic income declaration of the group, presented by the dominant company, that is assessable and not the declarations of the subordinated companies, even though each of the companies included in the scope has the duty to submit an individual periodic income declaration, which does not produce assessment effects (cf. Article 120, No. 6 of the Corporate Income Tax Code).

  14. Article 60 of the LGT ensures the participation of taxpayers in the formation of decisions and resolutions that concern them, in accordance with the established in No. 5 of Article 267 of the CRP.

  15. However, No. 3 of Article 60 of the LGT states "Having the taxpayer been previously heard in any of the phases of the procedure referred to in paragraphs b) to e) of No. 1, his hearing before assessment is waived, except in case of invocation of new facts on which he has not yet pronounced".

  16. The jurisprudence of the STA has stressed that the fact that the taxpayer was heard before the conclusion of the report of the tax inspection waives his hearing before the assessment (see Decision SAC of 15-10-2003, appeal No. 1115/03; Decision SAC of 16-05-2007, appeal No. 186/07; Decision of the Plenary of SAC of 24-10-2007, appeal No. 131/07, available at www.dgsi.pt/jsta).

  17. In the factuality that is the subject of these arbitral proceedings, it was proven that the subordinated company, in the period granted to exercise the right to prior hearing with respect to the Draft Report of Tax Inspection Service Order ..., agreed with the corrections proposed by the TA, submitting the replacement Form 22 declaration (see fact stated T.).

  18. Thus, the financial adjustment statement, which represents an amount to pay of €29,779.28, reflects the differential between the amount to pay (resulting from inspection action Service Order...) and the amount already paid by the Claimant, does not constitute a new fact capable of being framed in No. 3 of Article 60 of the LGT, because there is no alteration of facts or of criteria for analysing them, in relation to what was established in the Report of Tax Inspection Service Order ... on which the Claimant was heard, as it itself admits in Article 23 of its Request.

  19. In order to make clear that, in accordance with the RETGS, the calculation of the individual profit of each subordinated company is, and insofar as the dominant company is concerned, merely a preliminary act for the application of the regime for determining the taxable income of the dominant company and the consequent assessment of tax, it should be noted that the aforementioned CAAD Arbitral Decision No. 10/2012-T states that "It is a presumption of law and fact of the fiscal regime established that the dominant company has control over the activity and over the profits of subordinated companies. The subordinated companies are truly a long arm of the dominant company.".

  20. Considering the above in the preceding points, the allegation of the Claimant that there was an omission of essential formality due to lack of prior hearing is unfounded.

VI – DECISION

Accordingly, this Arbitral Tribunal decides:

a) To dismiss the request for arbitral decision and, in consequence, to uphold the tax acts contested in the case;

b) To condemn the Claimant in the costs of the proceedings, in the amount of €765.00, taking into account the amount already paid.

The value of the proceedings is fixed at €29,779.28, in accordance with Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by force of paragraphs a) and b) of No. 1 of Article 29 of RJAT and of No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at €765.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the request was entirely dismissed, in accordance with Articles 12, No. 2, and 22, No. 4, both of RJAT, and Article 4, No. 4, of the cited Regulation.

Let it be notified.

Lisbon, 15 December 2014.

The Arbitrator

(Jorge Carita)

Frequently Asked Questions

Automatically Created

What happens when a Portuguese IRC tax assessment lacks proper legal reasoning (fundamentação)?
When a Portuguese IRC assessment lacks proper fundamentação (legal reasoning), it violates Article 268(3) of the Portuguese Constitution, Article 77 of the General Tax Law (LGT), and Articles 36-37 of the Tax Procedure Code (CPPT). The lack of substantiation constitutes a formal defect that can render the assessment invalid and subject to annulment. Tax authorities must clearly explain the factual and legal grounds for any correction or adjustment. If the assessment or the decision dismissing an administrative claim fails to provide adequate reasoning explaining how the tax was calculated and which legal provisions were applied, taxpayers can challenge the act in administrative claim procedures or through CAAD arbitration. The substantiation requirement is considered an essential guarantee of taxpayers' defense rights, ensuring transparency and enabling effective contestation of tax determinations.
Can a corporate tax reassessment be annulled for failure to notify the taxpayer before the decision?
Yes, a corporate IRC reassessment can be annulled for failure to notify the taxpayer and allow participation before the decision. Article 60(1)(a) of the General Tax Law (LGT) grants taxpayers the right to participate in administrative decisions that affect their rights and interests. This right of prior hearing (direito de audição prévia) is fundamental in Portuguese tax procedure. When the Tax Authority makes corrections or adjustments affecting a taxpayer's tax position, particularly in complex situations like tax group regimes, it must notify the taxpayer and provide an opportunity to present their position before finalizing the decision. Failure to observe this notification requirement constitutes preterição de formalidade essencial (omission of essential formality), a serious procedural violation that can invalidate the entire assessment. This guarantee ensures taxpayers can exercise their constitutional rights of defense and contradictory procedure, and its violation provides grounds for annulment through administrative claim, hierarchical appeal, or tax arbitration.
What is the CAAD arbitration procedure for challenging an IRC liquidation correction in Portugal?
The CAAD (Centro de Arbitragem Administrativa) arbitration procedure for challenging an IRC liquidation correction in Portugal follows the framework established by Decree-Law 10/2011 (RJAT - Legal Regime for Tax Arbitration). Taxpayers can submit a request for arbitral decision under Articles 2(1)(a) and 10 of RJAT, either choosing to appoint an arbitrator or allowing the CAAD Ethics Council to appoint a sole arbitrator. The procedure begins with filing the arbitration request identifying the contested tax act and legal grounds. The Tax Authority then files a response and submits the administrative file. Parties may waive the hearing provided in Article 18 of RJAT and submit written arguments. The arbitral tribunal issues a binding decision that can declare the illegality of tax assessments, dismissal decisions on administrative claims, and related acts. This alternative dispute resolution mechanism offers taxpayers a faster, more specialized forum than judicial courts for resolving technical tax disputes, including complex issues involving tax group calculations, substantiation defects, and procedural violations in IRC assessments.
How does preterição de formalidade essencial affect the validity of a Portuguese tax assessment?
Preterição de formalidade essencial (omission of essential formality) is a serious procedural defect that fundamentally affects the validity of Portuguese tax assessments. Essential formalities include mandatory procedural steps that protect taxpayers' constitutional and legal rights, such as the right to prior notification and participation in decisions (Article 60 LGT), proper substantiation of tax acts (Article 77 LGT), and notification requirements (Articles 36-37 CPPT). When a tax assessment or related decision omits an essential formality, it creates an irremediable defect that violates taxpayers' defense rights and due process guarantees. Unlike minor procedural irregularities, omission of essential formalities cannot be cured or ignored, and the affected act must be annulled. In the context of IRC assessments, this includes failures to notify taxpayers before making corrections, absence of legal reasoning explaining adjustments, or denial of the right to be heard. Such violations provide autonomous grounds for annulment, regardless of whether the underlying tax calculation is substantively correct, reflecting Portuguese tax law's emphasis on procedural safeguards as fundamental taxpayer protections.
What are the legal grounds for annulling an IRC reassessment related to a tax group (grupo fiscal) in Portugal?
Legal grounds for annulling an IRC reassessment related to a tax group (grupo fiscal/RETGS - Special Tax Regime for Groups of Companies) in Portugal include both substantive and procedural defects. Substantively, reassessments must comply with Article 70 of the IRC Code, which governs how taxable income is calculated for tax groups through the algebraic sum of individual companies' taxable profits and losses. Errors in applying this calculation methodology, such as double corrections where the same amount is both added to the group's fiscal result and subtracted from tax losses, constitute errors on grounds of law (erro sobre os pressupostos de direito) warranting annulment. Procedurally, tax group reassessments must satisfy all substantiation requirements under Article 77 LGT and Articles 36-37 CPPT, clearly explaining how corrections to subsidiary companies affect the group's consolidated position. Additionally, the dominant company must receive proper notification and opportunity to participate in decisions affecting the group under Article 60 LGT. Failure to meet these requirements, particularly when corrections originate from inspections of subsidiary companies but affect the group's consolidated assessment, provides grounds for annulment through administrative claim or CAAD arbitration, protecting the tax group's constitutional and legal procedural guarantees.