Process: 165/2018-T

Date: November 7, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 165/2018-T) addresses the application of Portugal's General Anti-Abuse Clause (GAAC) under Article 38(2) of the Tax Code (LGT) to IRS assessments totaling €1,529,996.86 for fiscal years 2013 and 2014. Three taxpayers—A, B, and C—members of a family business group known as 'GROUP E,' challenged IRS liquidations issued by the Tax and Customs Authority (TCA) following tax inspections. The taxpayers were de facto administrators and shareholders of companies D and E, which were involved in manufacturing robotized welding cells and wire drawing operations. The dispute arose after E made significant investments under the QREN-SI Innovation incentive system (€10 million project) but failed to meet contractual conditions for a performance award from IAPMEI, specifically regarding balanced economic-financial situation and project coverage by equity capital. To remedy this, D, a creditor of E for €1,748,897.60, converted its receivables into equity. The TCA applied the GAAC, arguing this restructuring constituted tax abuse. The claimants contested the assessments on grounds of formal defects (failure to state reasons adequately) and substantive legal errors (misapplication of facts and law). The collective arbitral tribunal was constituted under the Legal Regime for Tax Arbitration (LRTA) with three arbitrators designated by CAAD's Deontological Council. The tribunal confirmed its jurisdiction, found no procedural irregularities, and proceeded to merit-based examination, establishing detailed facts about the corporate structure, shareholdings, investment projects, and the debt-to-equity conversion that triggered the anti-abuse investigation.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Dr. José Poças Falcão (President), Dr. Cristiana Maria Leitão Campos and Dr. Cristina Aragão Seia, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

REPORT

A... (hereinafter A...), taxpayer no..., residing at Rua ..., ..., ...-... ...; B... (hereinafter B...), taxpayer no..., residing at Rua..., ..., ...-... ...; and C... (hereinafter C...), taxpayer no..., residing at Rua ..., ..., ...-... ..., came, under article 2º no. 1, paragraph a), and articles 10º et seq. of the Legal Regime for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, with the wording introduced by article 228º of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LRTA") and articles 1º and 2º of Ordinance no. 112-A/2011, of 22 March, to submit a request for constitution of a Collective Arbitral Tribunal in which the Tax and Customs Authority is Respondent (hereinafter "TCA" or "Respondent").

In such request, the Requesters, in coalition of claimants and cumulation of claims, under article 3º, no. 1 of the LRTA, seek the arbitral decision on the legality of the Personal Income Tax (PIT) assessments listed below relating to the years 2013 and 2014, in the total amount of € 1,529,996.86 (one million five hundred and twenty-nine thousand nine hundred and ninety-six euros and eighty-six cents) and their consequent annulment invoking vice of form, by omission of the duty of substantiation and vice of violation of law by error of the TCA as to the facts and as to law.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of the CAAD and automatically notified to the Tax and Customs Authority on 4 April 2018.

The Requesters did not proceed to the appointment of an arbitrator, wherefore, under the terms provided in paragraph a) of no. 2 of article 6º and paragraph b) of no. 1 of article 11º of the LRTA, the President of the Deontological Council of the CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

On 23.05.2018, the parties were duly notified of such designation, having manifested no intention to refuse the designation of the arbitrators, under the combined terms of article 11º, no. 1, paragraphs a) and b), of the LRTA and articles 6º and 7º of the Deontological Code.

Thus, in conformity with the provision in paragraph c) of no. 1 of article 11º of the LRTA, the Arbitral Tribunal was constituted on 14 June 2018.

The TCA, called upon to pronounce itself, submitted a Response in which, only by way of defence, it argued for the dismissal of the claim, contending for the maintenance in the legal order of the disputed assessments on the understanding that they constitute a correct application of law to the facts, and attaching a copy of the administrative process.

By order of 11 September 2018, the meeting provided for in article 18º of the LRTA was dispensed with and the parties invited to submit written arguments which they did, pronouncing themselves on the disputed questions, reiterating and developing their respective legal positions.

7 November 2018 was set for the rendering of the final decision.

SANITATION (PRELIMINARY OBJECTIONS)

The arbitral tribunal was regularly constituted and is materially competent, in the light of the provision in articles 2º, no. 1, paragraph a), and 30º, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties possess legal personality and legal capacity, are legitimate and are represented (articles 4º and 10º, no. 2, of the same instrument and 1º of Ordinance no. 112-A/2011, of 22 March).

No exceptions or nullities are present, wherefore it is imperative to proceed, next, to examination of the merits of the claim.

MERITS

FACTUAL MATTERS

FACTS PROVED

The following facts are judged to be proved:

a) The Requesters, presenting themselves in coalition of claimants, challenge the following Personal Income Tax assessments for 2013 and 2014, originating from inspection actions carried out against them:

b) The assessments were issued by the TCA, in application of the general anti-abuse clause provided for in no. 2 of article 38º of the Tax Code (LGT), following inspection procedures carried out:

  • against D...: service orders nos. OI2016... and OI2016... of 18.07.2016, of general scope and extending to the fiscal years 2013, the first, and 2014, the second;

  • against E...: Dispatch DI2017... of 14.03.2017, with the objective of consultation, collection and cross-referencing of elements extending to fiscal years 2013 and 2014;

  • against Requester A...: service orders nos. OI2017... (2013) and OI2017... (2014) of 19.07.2017;

  • against Requester C...: service orders nos. OI2017... (2013) and OI2017... (2014) of 19.07.2017 (pp. 1-2 of Administrative File A...);

  • against Requester B...: service orders nos. OI2017... (2013) and OI2017... (2014) of 24.07.2017.

The Requesters are the principal promoters and fostering agents of a business group of family character, known as "GROUP E..." of which form part, among others, the companies D..., Lda., Tax ID no. ... (hereinafter designated as D...) and E..., S.A., Tax ID no. ... (hereinafter designated as E...).

The Requesters A..., B... and C... were de facto responsible for the company D..., assuming its administration in the biennium 2013/2014.

A..., father of C... and B..., is manager without any equity participation in D... and shareholder of E...

C... is a partner of D... and shareholder of E...

B... is a partner of D... and shareholder of E...

The company E... has as its corporate purpose the exercise of commerce, industry of manufacture and repair of robotized welding cells, handling and palletizing as well as the exercise of commerce, industry of manufacture and repair of robots and welding equipment, their respective components and accessories, or any other industrial product (p. 17 et seq.; permanent certificate E..., at pp. 64 et seq. of Administrative File C...).

The share capital of E... is distributed as follows:

Participant % Amount (euros)
A... 49.98 1,599,000.00
C... 24.98 799,500.00
B... 24.98 799,500.00
Others 0.06 2,000.00
TOTAL 100.00 3,200,000.00

The corporate purpose of D... comprises wire drawing or cold straightening from rolled wire of own production and acquired, as well as the manufacture and repair of welding machines and equipment (p. 21 et seq. of Administrative File A...).

Its share capital is distributed among four quotas as follows:

Participant % Amount (euros)
F..., Lda. 52.00 78,000.00
E... 46.34 69,500.00
C... 0.83 1,250.00
B... 0.83 1,250.00
TOTAL 100.00 150,000.00

Between 2008 and 2013, E... made a significant investment in productive equipment supported by the investment incentive system QREN-SI INNOVATION - Ordinance no. 1464/2007 of 15 November.

To that end, it entered into a Financial Incentive Concession contract with IAPMEI in 2008 within the scope of Innovation Incentives (Contract no. 2008/...) in the amount of €10,072,182.62, contained in Annex 2 attached to the arbitration request and which is hereby fully incorporated herein.

In 2013 and after the physical and documentary verification of the entire project by the technicians of the contracting entity – IAPMEI – it was found that one of the legal premises for accessing the Performance Award provided for in that contract was unfulfilled - relating to the balanced economic-financial situation and project coverage by own capital (pp. 111-116 of Administrative File C...).

D... was, in 2013, creditor of E... in the amount of €1,748,897.60.

For compliance with the condition referred to in n), the IAPMEI technicians indicated, in October 2013, the need to reinforce the own capital of E... in approximately €2,000,000.00 (pp. 111-116 of Administrative File C...).

As the E... Group was at that time experiencing serious financial difficulties, it was negotiated with G... (G...) the financing of that amount, through a loan to E... as the debtor entity.

G... effectively loaned the said sum to E..., which transferred it to D... on 13.12.2013 (p. 79-86 of Administrative File C...).

The objective of the operation was the balancing of the economic-financial situation and the reinforcement of the own capital of E..., as, being this debtor to D... in the amount of €1,748,897.60, the value of the financing/credit provided by G... was delivered to D... as payment of that sum, with E... changing from debtor to creditor of D... in approximately €250,000.00.

The amount of €2,000,000 was on the same date transferred, as a loan to the Requesters, in three installments, to account PT... of which Requester C... is holder (pp. 149-151 of Administrative File C...).

In D..., these amounts were recorded in the Requesters' accounts, as follows:

  • A... – €1,000,000

  • C... – €500,000

  • B... – €500,000

These amounts were subsequently used by the partners to reinforce the own capital of E... through the provision of supplementary contributions exactly in the same amounts as those referred to above (pp. 79-87 and 95-106; table p. 47 of Administrative File C...).

In 2014, the IAPMEI technicians verified that even so, the condition of the balanced economic-financial situation and project coverage by own capital was not met, with the need for further reinforcement of the own capital of E... in an additional €500,000.00 (pp. 110-111 of Administrative File C...).

The contractual scheme used was identical to the previous one (table pp. 53 of Administrative File C...): E... contracted a loan in that amount with G..., an amount which it loaned to D....

This, in turn, loaned that same amount to the Requesters (€250,000.00 to A... and €125,000.00 to each of the others) without any remuneration, term or penalty for breach being established, amounts which the Requesters used to reinforce the own capital of E... (pp. 160 of Administrative File C...).

On 19.09.2014, E... transferred to D... the sum of €500,000, an amount which the latter immediately transferred, in three installments, to account PT... of which Requester C... is holder, as a loan (pp. 87-94 of Administrative File C...).

aa) Amounts which returned to E... in the form of supplementary contributions made by partners A..., C... and B...

bb) In the own capital of E..., supplementary contributions made by partners A..., C... and B... are thus included, totaling €2,500,000.00, with €2,000,000.00 recorded in 2013 and €500,000.00 in 2014, in the accounts indicated below:

Supplementary contributions recorded in E... 2013 2014 Total
Account 5311 – A... 1,000,000.00 250,000.00 1,250,000.00
Account 5312 – C... 500,000.00 125,000.00 625,000.00
Account 5313 – B... 500,000.00 125,000.00 625,000.00
Total 2,000,000.00 500,000.00 2,500,000.00

The loan contracts referred to above did not comply with the legal requirements formally required (pp. 149-151 and 160 of Administrative File C...).

In both situations, the funds returned to E... in the form of supplementary contributions of capital, in proportion to the Requesters' shareholding in that company, to comply with the solvency ratio of 25%, required by IAPMEI for the company to access the innovation incentive system.

The shareholders of E... thus saw their supplementary shareholdings reinforced.

The acts and legal transactions carried out by the Requesters and by companies D... and E... had as their objective compliance with a legal clause that provided access to the latter to the investment incentives contracted.

Only Requester B... exercised the right to prior hearing within the scope of the inspection procedure.

On 04.04.2018, the Requesters submitted the request for arbitral decision which gave rise to the present case.

FACTS NOT PROVED

There are no other facts with relevance to consideration of the merits of the case that have not been proved.

MOTIVATION REGARDING FACTUAL MATTERS

As regards the factual matters proved, the conviction of the Arbitral Tribunal was based on the free appraisal of the positions assumed by the Parties (regarding facts) and on the content of the documents attached to the proceedings, not contested by the Parties, as well as on the analysis of the administrative processes attached by the Respondent.

LEGAL MATTERS

PRINCIPAL ISSUE

The Requesters come to challenge Personal Income Tax assessments no. 2017..., 2017... and 2017... relating to the year 2013; and 2017..., 2017... and 2017... relating to the year 2014, in the total amount of € 1,529,996.86 (one million five hundred and twenty-nine thousand nine hundred and ninety-six euros and eighty-six cents) and seek their consequent annulment invoking vice of form, by omission of the duty of substantiation and vice of violation of law by error of the TCA as to the facts and as to law, in the improper application of the general anti-abuse clause (GAAC) provided for in no. 2 of article 38º of the Tax Code, following inspection procedures carried out.

For its part, the Respondent defends the dismissal of the claim, contending for the maintenance in the legal order of the disputed assessments on the understanding that they constitute a correct application of law to the facts.

It is appropriate, first of all, to define the legal framework of the question.

LEGAL FRAMEWORK

Article 38º, no. 2, of the Tax Code establishes a general anti-abuse clause, under which "acts or legal transactions essentially or mainly directed, by artificial or fraudulent means and with abuse of legal forms, to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that would not be achieved, in whole or in part, without the use of such means, are ineffective for tax purposes, and taxation shall then be effected in accordance with the rules applicable in their absence and the mentioned tax advantages shall not be produced."

In the case sub judice, the TCA decided to apply the general anti-abuse clause considering that, for purposes of Personal Income Tax taxation, "(…) the main objective of the operations in question, as they were designed, was to provide the shareholders with financial resources so as to increase their shareholdings in the capital of E... without taxation in Personal Income Tax" (point 15 of Response).

To assess the legality of the assessments in question, we must verify whether the four cumulative prerequisites for application of the anti-abuse regime contained in article 38º, no. 2 of the Tax Code are met, embodied in (i) the artificial means, (ii) motivated exclusively by a fiscal purpose, (iii) reduction, elimination or deferment of tax, (iv) the result achieved not being intended by the legislator and, for that reason, being subject to normative-systemic disapproval.

First and foremost, following what was established in the CAAD decision rendered in proceedings 180/2014-T, "(…) it should be emphasized that the general anti-abuse clause is an exceptionally exceptional norm.

The exceptional nature of this norm results both from the fact that it allows taxation to be effected through the application of rules other than the general rules that the law provides for the transaction(s) actually carried out, and, more importantly, because it constitutes a deviation from the principle of legal certainty, in its dimension of predictability of the applicable tax law, which is a basic principle of tax law.

Certainty and predictability imply that taxpayers can rely on the typicality of the type of legal tax provision, that they can be sure that, once the transactions that the taxable event rule provides for are carried out, they will be taxed in accordance with its provisions.

The GAAC shall only be applicable in cases where it should be considered that the value of legal certainty is not put in question, the idea of confidence in the legal norm inherent in the idea of the Rule of Law, because the taxpayer, objectively, should know that the act or transaction which it carried out, in the circumstances in which it occurred, cannot be framed within the legal provision because it is not coherent with the "spirit of the law," even though, formally, it may find "support" in the literal element of the norm.

However, differently from what occurs with regard to norms with identical purpose, which we find in other branches of the legal order, such as the institute of abuse of rights or the principle of good faith, the GAAC is not an open general clause that permits the interpreter to set aside the legal solution (taxation) that results from the norm that would be applicable (the taxable event rule whose hypothesis the facts fulfill) invoking considerations of material justice or substantive coherence of the tax legal system.

The GAAC is also itself a typical norm - as it could not fail to be, being a norm that directly affects tax rules of incidence - that can only be applied when, indubitably, all and each of the prerequisites provided therein are verified.

This means that the interpreter must refrain from any judgments about, namely, whether the tax saving achieved is or is not "justified" or "acceptable," whether the concrete situation affects or not a supposed horizontal equality between taxpayers.

The interpreter, the judge, has only the duty to verify whether, in the concrete case, all and each of the prerequisites for application of the GAAC are or are not, indubitably, present.

And such analysis, such interpretation, has to be conducted in a restrictive manner, as the rules of legal hermeneutics require with respect to exceptional norms.

The interpreter is completely forbidden to give the GAAC a scope of application more extensive [to make an extensive interpretation] than that which results from the legal text itself, even under the pretext of achieving material justice in the concrete case.

It will be said that, in such a manner, the efficacy of the GAAC in combating forms of tax avoidance that could reasonably be considered abusive is greatly reduced.

This may be the reality, but it results, unquestionably, from the exceptional nature of the norm and what that nature imposes on the interpreter, the judge. (…)"

Let us proceed then.

THE ELEMENTS OF THE GAAC

It is undisputed, in doctrine and jurisprudence, that the applicability of the GAAC presupposes the cumulative verification of four prerequisites: the means element; the result element; the intellectual element; the normative element.

2.3.1. Means Element

Returning to the decision already referred to, it cites COURINHA who, with regard to the means element, states that "this element corresponds to the path chosen by the taxpayer to obtain the desired gain or tax advantage, i.e., the act(s) or legal transactions whose structure is determined according to a given tax result." Adding that "It is, in conclusion, from the level of incoherence between the form or structure chosen and the taxpayer's factual fiscal economic purpose, between the end for which that adopted form is concretely delivered and the cause proper to it," that the verification of this element will be assessed.

The structuring of the acts or legal transactions carried out by the taxpayer, beyond being directed at obtaining a tax advantage, will also have to be simultaneously endowed with an anomalous, unusual, artificial, complex form, that is, it will be necessary that the acts or transactions are based on artificial or fraudulent means and with abuse of legal forms.

In the case at hand, the Requesters contend that the only purpose (sole and exclusive objective) was the necessity to reinforce the own capital of E... to comply with a solvency ratio of 25%, a necessary condition to access the community aid framework, specifically, the QREN-SI INNOVATION Incentive System (Ordinance no. 1464/2007 of 15 November, IAPMEI, contract 2008/...).

The TCA understands that the main objective of the operations in question, as designed, was to provide the shareholders with financial resources so as to increase their shareholdings in the capital of E... without taxation in Personal Income Tax.

From the facts proved, it results that the acts carried out had the objective of overcoming a legal barrier that prevented the company E... from accessing the said QREN-SI INNOVATION Investment Incentive System which required a balanced economic-financial situation and project coverage by the company's own capital, not being acts made voluntarily with a view to obtaining a tax advantage.

Indeed, E... resorted to bank financing to, using D... as a vehicle, make the same money available to its shareholders (shareholders of E..., since Requester A... is not a partner of D...) and, finally, return the money to its origin, the Bank, in this case, G.... Beyond the reinforcement of the own capital of E..., this "scheme" based on the loan contracted with G... also permitted the liquidation of the debt that E... had with D... in the amount of €1,748,897.60, which favored the balancing of the economic-financial situation of E...

It is true that, for this purpose, several loan contracts were entered into, apart from the legally required formalities and without the due stamp tax being paid. However, that question is not under consideration in the present proceedings nor is it within the competence of this Tribunal.

The TCA refutes the Requesters' argument that the form adopted would be the only way to resolve E...'s problem, understanding that nothing prevented financing from being obtained by the shareholders with the guarantee of E..., to effect their own supplementary contributions.

It should be noted that, where different typical legal paths exist for achieving a particular economic result, the taxpayer is not obliged to choose the path that, for it, would be more burdensome.

Therefore, the TCA's assertion that the same economic result could be obtained by another path is irrelevant in terms of applicability of the GAAC.

Thus, the means element is not verified.

Means Element

The end/result element means that the acts in question must be essentially or mainly directed to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to obtaining tax advantages that would not be achieved without the use of such means.[1]

As COURINHA teaches, in the result element it is sufficient to demonstrate that the subject obtained, through its acts, the verification of a certain tax advantage and the equivalence of the economic effects with those of the normal taxed act.[2]

In the concrete case, it is proved that the shareholders of E... saw their supplementary shareholdings reinforced. Even though supplementary contributions constitute reinforcement of own capital, the shareholders who provided them acquire the position of creditor from the moment the company decides their restitution, which evidences an obvious tax advantage.

However, as stated in the Tax Inspection Report, "what is decisive in the application of the GAAC is to assess whether the chosen act or legal transaction has a substance, economic or otherwise, that can be said to be predominant in its relationship with the (comparative) tax advantage objectively resulting from that choice."

The operations carried out present advantages that are not solely or mainly one possible tax advantage. They have, in other words, economic-financial rationality (access to investment incentives). Indeed, the non-fulfillment of the conditions contracted with IAPMEI put at risk the reimbursable incentive valued at up to €4,379,130.00 and the performance award that could reach €2,988,656.86.

Therefore, the requirement of a main or exclusively fiscal purpose cannot be considered proved. And this fiscal purpose should have been proved by the Respondent.[3]

Intellectual Element

The intellectual element is the most characteristic prerequisite of the GAAC.

As COURINHA explains, here "the manifestation of evasion of law is revealed in the taxpayer's claim to obtain primarily a tax advantage, directing towards this end the transactions or acts which it carries out. The non-fiscal purpose which, in turn, should guide the action of any subject (…) is here substituted, in its normal preponderance, by a fiscal purpose, ending up secondary."

In the concrete case, we have, as a proved fact, the legal-economic consequences of the transactions carried out and the absence of taxation is an acquired datum.

It is extremely difficult to weigh the "relative weight" of each of the motivations present, given that, from the outset, both do not translate into "savings" in monetary terms that can be directly compared.

The non-fiscal importance of the transactions in question results evident from the valuation of the facts previously made. The transactions carried out made it possible to achieve a result of significant importance for the continuation of the normal activity of E..., of which the Requesters are shareholders: access to the QREN-SI Innovation Investment Incentive System, at a time when the company was experiencing serious financial difficulties.

As was explained in the decision rendered in proceedings 180/2014-T of the CAAD, "being objectively impossible to assess the relative importance of the two interests (fiscal and non-fiscal) present (despite the amount of the tax advantage obtained), the doubt would have to necessarily benefit the taxpayer in a context – as is that of the present proceedings - in which the burden of proof of the facts alleged for application of the general anti-abuse clause rests with the TCA (article 74º, no. 1, of the Tax Code). [cf. also articles 414º of the Code of Civil Procedure, 346º of the Civil Code, 100º of the Tax Code of Procedure and Process and 29º-1/c) of the LRTA. Defending, essentially, this orientation, cf. further, in arbitral jurisprudence, the decisions of the CAAD nos. 62/2014-T, of 1-9-2014 and 267/2013-T, pp. 34 and 23, respectively (Collectives presided by Mr. Councilor Jorge Lopes de Sousa).

Hence, in this framework, it would result, in the case, from the absence of proof as to the exclusivity or preponderance of the fiscal interest in the practice of the succession of acts which also led to an effective and significant tax saving."

Normative Element

COURINHA states with regard to the normative element that this "is intended to confer coherence to the tax system, to the norms and to the Legal Order, i.e., to the interpretation and application of Tax Law, attempting to extract, keep present and evidence the principles and purposes which shape – the spirit and intention of the law and not merely its letter, contributing to its understanding and avoiding the respective formal abuses. (…) It can be said, in view of the existence (and requirement) of this element, that the GAAC is not, after all, a mere expedient for obtaining tax revenue at any cost, based on the fact that the taxpayer obtains a tax advantage. The fiscal disregard of such acts or transactions will only occur when, combining all the above-mentioned requirements, it is demonstrated that the tax effect obtained (always with regard to the effects identically obtained) merits a judgment of disapproval by the Law."

We will begin by emphasizing the following: one question, which has already been addressed, is that of the fiscal motivation of the transaction or transactions carried out; another, different, is that of, in the assumption that the transactions carried out are not anomalous or artificial, a fact which the TCA acknowledges at p. 59, knowing "of the contrariety of the result to the Law." It is only of the latter question that we will now deal.

Now, insofar as there is no effective increase in the assets of the Requesters, the result obtained is not in non-conformity with the ratio legis, the spirit or purpose of the law, the principles of the Code in question or of the Tax System itself, which aims to tax the patrimonial increase of taxpayers.

In summary, the means, intellectual, result and normative elements do not cumulatively occur, which is a necessary condition for the fulfillment of the typicality of the GAAC, and thus, there is no place for the application of article 38º, no. 2 of the Tax Code.

Now, the application of the general anti-evasion clause to the acts carried out by the Requesters required, in the case under analysis, and for compliance with no. 2 of article 38º of the Tax Code and with no. 3 of article 63º of the Tax Code of Procedure and Process (TCPP), that the TCA prove that the Requesters carried out acts or legal transactions essentially or mainly directed by artificial or fraudulent means and with abuse of legal forms to the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose or to obtaining tax advantages.

The TCA failed to prove, contrary to what is stated at pp. 56-58 of Administrative File of C..., that there was no interest other than fiscal or that it is certain that no economic benefit other than the exclusion of taxation can be envisaged. Quite the contrary. From the facts proved, it results that the principal and predominant motivation of the acts carried out by the Requesters, which are here under scrutiny, was to comply with the aforementioned conditions imposed by IAPMEI, a decisive factor for setting aside the application of the GAAC.

The TCA itself acknowledged, at p. 59 of Administrative File of C..., that the acts and legal transactions which comprise the structure devised and implemented by the Requesters are, in themselves, valid and correspond to the effective will of the taxpayers.

It further adds that the organized accounting of the taxpayers enjoys the presumption of truthfulness, and it is the burden of the TCA to rebut that presumption, demonstrating that the facts recorded are not true[4]. Which also did not occur.

In view of the foregoing, and since the prerequisites for application of article 38º, no. 2 of the Tax Code are not met in the proceedings, nor did the TCA succeed in demonstrating their verification, as was required of it by no. 3 of article 63º of the TCPP, we must conclude that the Personal Income Tax assessments in question are illegal.

ISSUES WITH KNOWLEDGE PREJUDICED

Inasmuch as the request for arbitral decision is based on violation of law, which provides effective protection of the Requesters' interest, knowledge of the other issues raised is prejudiced, as being useless [article 130º of the Code of Civil Procedure (CCP)].

IV. DECISION

The Tribunal Arbitral decides as follows:

  1. To judge as wholly well-founded, on the basis of violation of law, the request for annulment of the tax acts subject to the arbitration request corresponding to Personal Income Tax assessments nos. 2017..., 2017... and 2017... relating to the year 2013; and 2017..., 2017... and 2017... relating to the year 2014.

  2. To condemn the Respondent to payment of the costs of the present proceedings.

VALUE OF THE PROCEEDINGS

In accordance with the provision in article 306º, no. 2 of the CCP, 97º-A, no. 1, paragraph a) of the TCPP and 3º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 1,529,996.86.

COSTS

Under article 22º, no. 4 of the LRTA, the amount of costs is fixed at € 20,502.00, under Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Respondent.

Let notification be effected.

Lisbon, 7 November 2018.

The arbitrators,

(José Poças Falcão)

(Cristiana Maria Leitão Campos)

(Cristina Aragão Seia)

[1] Cf. LEITE DE CAMPOS, Diogo and COSTA ANDRADE, João, Contractual Autonomy and Tax Law (The general anti-evasion rule), Coimbra: Almedina, 2008, pp. 9-10.

[2] COURINHA, Gustavo, op. cit., p. 176.

[3] LEITE DE CAMPOS, Diogo and COSTA ANDRADE, João, op. cit., pp. 77 et seq.

[4] Decision of the Central Administrative Court of the South, proceedings 05014/11, of 16-10-2012.

Frequently Asked Questions

Automatically Created

What is the General Anti-Abuse Clause (Cláusula Geral Anti Abuso) in Portuguese IRS tax law?
The General Anti-Abuse Clause (Cláusula Geral Anti Abuso - CGAA) in Portuguese IRS tax law is codified in Article 38(2) of the Tax Code (LGT). It grants the Tax and Customs Authority power to disregard or recharacterize transactions that, while formally legal, are primarily designed to obtain tax benefits contrary to the law's spirit and purpose. The CGAA applies when taxpayers engage in acts or arrangements that, despite complying with legal formalities, lack economic substance and are motivated principally by tax avoidance objectives. The TCA must demonstrate that the arrangement constitutes an abuse of legal forms, lacks valid business purpose beyond tax benefits, and results in tax advantages inconsistent with legislative intent. Application requires detailed substantiation in assessment notices, including specific factual findings and legal reasoning demonstrating how the arrangement meets abuse criteria.
Can multiple taxpayers jointly challenge IRS tax assessments through CAAD arbitration proceedings?
Yes, multiple taxpayers can jointly challenge IRS tax assessments through CAAD (Administrative Arbitration Centre) arbitration proceedings under coalition of claimants (coligação de requerentes) as provided in Article 3(1) of the Legal Regime for Tax Arbitration (LRTA - Decree-Law 10/2011). This procedural mechanism allows related taxpayers facing similar or connected assessments to consolidate their claims in a single arbitral proceeding with cumulation of claims (cumulação de pedidos). In Process 165/2018-T, three family members (A, B, and C) successfully invoked this provision to challenge related IRS liquidations totaling €1.5 million arising from coordinated tax inspections of their interrelated business activities. The collective arbitral tribunal comprised three arbitrators designated by CAAD's Deontological Council. Coalition promotes procedural efficiency, ensures consistent rulings on related matters, and reduces costs when taxpayers share common factual backgrounds and legal issues stemming from the same tax authority actions or business transactions.
What are the legal grounds for annulling IRS tax assessments under Portuguese tax arbitration?
Under Portuguese tax arbitration, IRS assessments can be annulled on two primary legal grounds: (1) formal defects (vícios de forma), particularly failure to state reasons adequately (preterição do dever de fundamentação) as required by Article 77 of the Tax Code, which mandates that tax assessments contain sufficient factual and legal grounds to enable taxpayers to understand the basis for taxation and exercise their defense rights effectively; and (2) substantive legal violations (violação de lei), including errors in applying law to facts (erro sobre os pressupostos de facto) or misinterpretation of legal provisions (erro sobre os pressupostos de direito). In Process 165/2018-T, the claimants invoked both grounds, arguing the TCA failed to properly substantiate its application of the General Anti-Abuse Clause and misapplied legal standards to their debt-to-equity conversion. The arbitral tribunal must examine whether assessments comply with formal requirements and correctly apply tax law, with power to fully annul unlawful liquidations under Article 2(1)(a) of the LRTA.
How does the CAAD arbitral tribunal process work for challenging IRS liquidations in Portugal?
The CAAD arbitral tribunal process for challenging IRS liquidations in Portugal follows the Legal Regime for Tax Arbitration (LRTA - Decree-Law 10/2011). Taxpayers initiate proceedings by filing a request for arbitration within 90 days of notification or final administrative decision. The request must identify disputed assessments, grounds for challenge, and requested relief. Upon acceptance by CAAD's President, the TCA receives automatic notification. If claimants don't appoint an arbitrator, CAAD's Deontological Council designates a three-member collective tribunal (for claims exceeding €61,500 or involving multiple parties). Parties may reject arbitrators within 15 days. The tribunal constitutes formally after this period. The TCA then submits a written response defending the assessments. The tribunal may dispense with hearings (as in Process 165/2018-T) and invite written arguments. Decisions must issue within six months of tribunal constitution. The process provides expedited, specialized adjudication of tax disputes with legally binding decisions subject to limited judicial review, offering an alternative to traditional administrative and judicial channels.
What constitutes a failure of duty to state reasons (preterição do dever de fundamentação) in Portuguese tax law?
Failure of duty to state reasons (preterição do dever de fundamentação) in Portuguese tax law constitutes a formal defect invalidating tax assessments under Article 77 of the Tax Code (LGT). This fundamental procedural guarantee requires the Tax and Customs Authority to provide sufficient factual and legal grounds enabling taxpayers to understand the assessment basis and exercise effective defense rights. For General Anti-Abuse Clause applications, substantiation requirements are particularly stringent: the TCA must detail specific facts demonstrating abuse, explain why the arrangement lacks economic substance, identify the tax benefits obtained, articulate how these benefits contradict legislative purpose, and demonstrate the nexus between form and abuse. Generic or conclusory statements are insufficient. The assessment must enable an informed third party to understand the tax authority's reasoning independently. In Process 165/2018-T, claimants alleged the TCA's assessments failed this standard regarding the debt-to-equity conversion, potentially rendering the €1.5 million IRS liquidations procedurally defective and subject to annulment regardless of substantive correctness.