Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sofia Ricardo Borges and Ana Teixeira de Sousa, appointed by the Deontological Council of the Administrative Arbitration Centre to constitute an Arbitral Tribunal, hereby decide as follows:
ARBITRAL DECISION (consult full version in PDF)
I – REPORT
On 3 April 2018, A..., S.A., NIPC..., with registered office at Rua ..., ..., ..., ...-... ..., filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, briefly referred to as LRAT), seeking the declaration of illegality of the acts of additional assessment of CIT (Corporate Income Tax) No. 2017..., No. 2017... and No. 2017..., relating, respectively, to the years 2013, 2014 and 2015, and respective compensatory interest assessments, in the total amount of €67,966.80, as well as of the act of dismissal of the administrative review of the appeal concerning those acts.
To substantiate its request, the Applicant alleges, in summary:
That the conditions required by paragraph r) of Article 23-A of the CIT Code are met, whereby the amounts paid to the company "B...", with registered office in territory subject to a clearly more favourable tax regime, should be considered as expenses;
That the condition of deductibility required by paragraph c) of Article 23 of the CIRC is met, in order to permit the deduction of costs with financing of its subsidiary entities, incurred by it.
On 04-04-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
The Applicant did not proceed with the appointment of an arbitrator, whereby, pursuant to paragraph a) of subsection 2 of Article 6 and paragraph a) of subsection 1 of Article 11 of the LRAT, the President of the Deontological Council of the CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable time period.
On 23-05-2018, the parties were notified of such appointments and did not manifest any will to refuse any of them.
In accordance with the provision of paragraph c) of subsection 1 of Article 11 of the LRAT, the collective Arbitral Tribunal was constituted on 14-06-2018.
On 03-09-2018, the Respondent, duly notified for this purpose, filed its reply defending itself solely by way of objection.
On 11-10-2018, the meeting referred to in Article 18 of the LRAT took place, where the witnesses presented by the Applicant were examined, and the time period referred to in Article 21(1) of the LRAT was extended.
Having been granted a time period for the presentation of written submissions, the parties filed the same, ruling on the evidence produced and reiterating and developing their respective legal positions.
It was indicated that the final decision would be notified by the end of the time limit set in Article 21(1) of the LRAT, as extended.
The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, subsection 1, paragraph a), 5 and 6, subsection 2, of the LRAT.
The parties have legal standing and capacity to sue, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the LRAT and Article 1 of Regulation No. 112-A/2011, of 22 March.
The proceedings do not suffer from any nullities.
Thus, there is no obstacle to the examination of the case.
Having considered all the above, it is now necessary to render:
II. DECISION
A. FACTUAL MATTERS
A.1. Facts established as proven
The Applicant carries on, as its main activity, the installation of machinery and industrial equipment (CAE 33200).
The Applicant takes the form of a public limited company.
The Applicant is subject, under CIT, to the general taxation regime.
On 31-08-2015, the Applicant recorded in account "312132 – Acquisitions in third countries", the amount of €100,000.00, resulting from 4 invoices issued by company "B...", relating to commissions (Management Fee).
"B..." is a company resident in the United Arab Emirates.
The Applicant considered the amounts paid to "B...", as an expense for the purpose of determining taxable profit for both accounting and tax purposes.
There is no written agreement that formalizes a brokerage contract with company "B...".
Group G... comprises at least three companies (C..., D... and E...) which, between 2012 and 2015, awarded equipment and service provisions to the Applicant in an amount totalling €2,500,000.00.
The first contact between the Applicant and that Group, which gave rise to the equipment supply and service provision contracts referred to, was promoted by an Angolan citizen named F..., and without the intervention of the latter, such contact would not have taken place.
By email dated 30-05-2015, a representative of the Angolan company G... sent to the Applicant, for payment, the invoices issued by "B...".
The said invoices were issued after reconciliation of accounts with Group G... and verification that the business values between the latter and the Applicant had been achieved.
Some messages were exchanged between representatives of G... and the Applicant, regarding the tax treatment of the mentioned invoices, in particular concerning the issue of double taxation.
In the years 2013, 2014 and 2015, the Applicant recorded in account "25 – Borrowings obtained" amounts relating to financing obtained from credit institutions and financial companies.
Part of the financing obtained by the Applicant from banking institutions was used in financing "H..., S.A." (hereinafter, H...).
In the same years, the Applicant recorded in account "26117 –H..., S.A." amounts relating to loans granted to the subsidiary company H....
The said loans were not made with the fixing of an interest rate.
In 2013, 2014 and 2015, the Applicant considered, respectively, as an expense the amount of €129,776.16, €93,016.08 and €106,278.61 relating to interest on financing obtained, which it recorded in account "6911 – Interest on financing obtained".
The Applicant holds 99.1% of company H..., an entity established to operate in the real estate area and which has in its assets a real estate portfolio of several warehouses forming an industrial complex of 15,000 m2.
The management of H... has been carried out by the Applicant, whose administrators are likewise administrators of the subsidiary.
The loans made to H... allow the Applicant to carry out a set of investments that contribute to its own appreciation, allowing the Applicant the subsequent receipt of income, by way of dividends distributed by it (H...).
The Applicant was subject to a general inspection procedure covering the years 2013, 2014 and 2015, in compliance with Service Orders OI2016..., OI2016... and OI2016....
On 16-01-2017, in the context of the inspection action, the Applicant was notified to send elements demonstrating that the amounts paid to company "B..." corresponded to operations effectively carried out and did not have an abnormal character or exaggerated amount.
The Applicant replied to the Tax Authority notification, through a document it sent by post on 15-02-2017.
In May 2017, the Applicant was notified of the Final Inspection Report.
From the inspection report, regarding the questions at issue in this arbitral proceeding, the following appears:
Tax Year 2013
Tax Year 2014
Tax Year 2015
Following the corrections made during the inspection, the Applicant was notified of the additional CIT assessments No. 2017..., relating to the year 2013, No. 2017..., relating to the year 2014 and No. 2017..., relating to the year 2015.
The Applicant filed an administrative review of the appeal concerning the above-mentioned assessments.
In the administrative review proceedings, the Applicant attached "prints" of emails exchanged between the Applicant and the Angolan Group I..., between 12-03-2015 and 17-09-2015.
The Applicant was notified of the decision to dismiss the administrative review of the appeal.
A.2. Facts established as not proven
"B..." is a company with connections to Group G....
In granting loans to its subsidiary, the Applicant intends to promote the increase in the value of the capital stake it holds, through the strengthening of the economic potential of the subsidiary company.
A.3. Substantiation of the factual matters proven and not proven
Regarding factual matters, the Tribunal does not have to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate between the factual matters proven and those not proven (cf. Article 123, subsection 2, of the CPPT and Article 607, subsection 3 of the CPC, applicable by virtue of Article 29, subsection 1, paragraphs a) and e), of the LRAT).
Thus, the facts relevant for the judgment of the case are chosen and cut out in function of their legal relevance, which is established in view of the various plausible solutions to the legal issue(s) (cf. previous Article 511, subsection 1, of the CPC, corresponding to current Article 596, applicable by virtue of Article 29, subsection 1, paragraph e), of the LRAT).
Thus, having regard to the positions assumed by the parties, in light of Article 110(7) of the CPPT, the documentary evidence and the file attached to the proceedings, as well as the witness testimony produced, the facts listed above were considered as proven, with relevance to the decision, having in mind that, as was written in the Judgment of the TCA-South of 26-06-2014, rendered 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 established as proven in points 9 and 11 are based on the witness testimony produced, which demonstrated clarity and objectivity with respect to the content of the said facts, leaving no reasonable doubt to the Tribunal as to their verification.
The facts established as not proven result from the absence of evidence in their regard.
Thus, the first of the facts not proven was not corroborated by documentary or witness evidence; what resulted from the latter was that the contacts between the Applicant and Group G... were promoted by an Angolan citizen named F..., with B... being unknown to that group until the moment of the invoicing at issue in the proceedings, which came in the name of that company.
As for the second of the facts established as not proven, no documentary evidence was presented regarding it, and nor was it the subject matter of the witness testimony produced.
Neither proven nor not proven were allegations made by the parties and presented as facts, consisting of strictly conclusive statements, not susceptible of proof, and whose truthfulness is to be assessed in relation to the concrete factual matters consolidated above.
B. ON THE LAW
a. on the payments and entity subject to a clearly more favourable tax regime
As indicated by the Applicant, and accepted by the Respondent, the first and fundamental question to decide in the present proceedings concerns whether the charges invoiced in the year 2015 by company B..., with registered office in..., United Arab Emirates, to the now Applicant, and paid by the latter, relating to intermediation services in the commercial relations between the Applicant and Group G..., correspond to operations effectively carried out without abnormal character or exaggerated amount.
This question arises because the said B... is an entity registered in the United Arab Emirates, which is listed in Regulation No. 292/2011, which defines the list of countries, territories and regions with clearly more favourable privileged tax regimes.
The normative epicentre of the legal question to be resolved is located in Article 23-A(1)(r) of the CIRC in force at the date, which provided that:
"1 - The following charges are not deductible for the purpose of determining taxable profit, even when accounted as expenses of the tax period: (...)
r) Amounts paid or due, in any form, to natural or legal persons resident outside Portuguese territory, and subject therein to a tax regime identified by regulation of the Government member responsible for finance as a clearly more favourable taxation regime, unless the taxpayer proves that such charges correspond to operations effectively carried out and do not have an abnormal character or an exaggerated amount. (...)
7 - The provision of paragraph r) of subsection 1 shall apply equally to amounts indirectly paid or due, in any form, to natural or legal persons resident outside Portuguese territory and subject therein to a clearly more favourable tax regime, when the taxpayer has or should have knowledge of their destination, such knowledge being presumed to exist when there are special relationships, within the meaning of subsection 4 of Article 63, between the taxpayer and the said natural or legal persons, or between the taxpayer and the mandatary, trustee or interposed person who makes the payment to the natural or legal persons.
8 - The Tax Authority and Customs notifies the taxpayer for the production of the proof referred to in paragraph r) of subsection 1, and for this purpose, a time period of no less than 30 days must be fixed.".
In the case at hand, as results from the established factual matters, the Applicant deducted for the purpose of determining taxable profit the amounts paid to company B..., unquestionably a legal person resident outside Portuguese territory and subject therein to a clearly more favourable tax regime.
To assess the legality of such deduction, not accepted by the Tax Authority and subject to separate taxation under Article 88(8) of the CIRC applicable, it is therefore necessary to assess whether:
such charges correspond to operations effectively carried out; and
they do not have an abnormal character or an exaggerated amount.
As has just been seen, the first question to be verified regarding the legitimacy or otherwise of the deduction of costs made by the Applicant, and at issue in the present arbitral proceedings, concerns the demonstration that the charges deducted correspond to operations effectively carried out.
In this regard, the Applicant made a probative effort aimed at demonstrating, in summary, that it effectively carried out commercial operations with the Angolan Group G..., operations that were only possible through the intermediation to which the invoicing at issue in these proceedings refers.
In light of the established factual matters, there is no doubt in this proceeding that the Applicant's relations with Group G... were indeed initially intermediated, that such intermediation was fundamental for the establishment of those relations and that such relations came to generate (significant) taxable profits in the Applicant's sphere.
Nevertheless, this Tribunal considers that such proof does not exhaust the burden of proof that fell upon the Applicant.
Rather, it is considered that proof that "such charges correspond to operations effectively carried out" is not limited to simple proof that the operations to which the charges correspond occurred in objective reality, but also implies the demonstration that the same, having effectively taken place in reality, had as parties the taxpayer who bore the charge, on the one hand, and the natural or legal person resident outside Portuguese territory and subject therein to a clearly more favourable tax regime, on the other.
In other words, the proof of the effectiveness of the operations to which the deducted charges correspond, relating to payments made to a natural or legal person resident outside Portuguese territory and subject therein to a clearly more favourable tax regime, presupposes an objective dimension – that is, proof that in reality the operations in question occurred – and a subjective dimension – that is, proof that the same took place between the taxpayer wishing to deduce the charge and the entity subject to a more favourable tax regime that invoiced and received it.
If this were not the case, moreover, two types of objectively intolerable situations would be admitted from a rational and systematic standpoint, namely:
situations in which a taxpayer bears a charge corresponding to operations that do not concern it;
situations in which a taxpayer carried out operations with a given entity (for example, resident in national territory), and then made the payment to another entity, resident outside Portuguese territory and subject therein to a clearly more favourable tax regime.
Furthermore, the regime for payments made to entities subject to a clearly more favourable tax regime has an underlying dissuasive purpose of carrying out payments to entities located in such jurisdictions, for reasons linked to the prevention of fraud and money laundering, from which the special relevance derives of the assurance that the entities referred to effectively pursue, in reality, an economic activity, and are not merely fronts for obtaining undesired benefits from the regimes typical of the locations where they are registered.
Given this, that is, that the proof of the effectiveness of the operations to which the deducted charges correspond, relating to payments made to a natural or legal person resident outside Portuguese territory and subject therein to a clearly more favourable tax regime, presupposes an objective dimension and a subjective dimension, it must necessarily be concluded that the Applicant failed to fully comply with the burden of proof that rested upon it.
Indeed, it does not result from the factual findings that the operations to which the deducted charges correspond, and whose deduction was corrected by the Tax Authority, were carried out with B....
The facts ascertained go unequivocally in the direction that the intermediation in question was always executed by the Angolan citizen who presented himself as F..., never, until the moment of invoicing, having any intervention of the said company or in its name been known, either with the Applicant or with the counterparty G..., noting that even the invoicing came sent by the services of this group, and not through any channel related to the said B....
On the other hand, nothing is ascertained regarding this company, beyond the appearance of invoicing with its details; in particular, no indication whatsoever is ascertained, and far less proof, that it is an entity with factual existence and real activity.
The factual matters ascertained are, thus, coherent with a general context, where a picture is drawn in which B... appears, solely as an offshore invoicing centre, possibly used to circumvent exchange restrictions, and possibly tax restrictions, in Angola, in addition to enjoying the advantages inherent to the privileged jurisdiction where it is registered, and which, possibly, was imposed on the Applicant in function of the commercial relations in which it was inserted and which it sought to develop.
However, none of these circumstances is capable of being relevant under the regime of Article 23-A(1)(r) of the CIRC applicable.
Effectively, the Applicant knew, or should have known, that B... was resident outside Portuguese territory and subject therein to a clearly more favourable tax regime, and that the latter had not provided it with any services, noting that it is not even demonstrated that, generically, B... was authorized to operate in Angola.
Hence, the Applicant's consent to invoicing by B..., consciously or unconsciously (which from the perspective of the normative framework in question is irrelevant), corresponded to assuming a risk of the undemonstrable nature of the presuppositions of the tax regime to which it is subject.
What is concluded is not obstructed by what is alleged by the Applicant, according to which it was the Angolan citizen named F... who decided, on his own initiative and exclusive authority, to invoice the services at issue in these proceedings through a company, possibly his own, registered in the United Arab Emirates, all the more so since, as its counterparty is free to invoice as it sees fit, the Applicant is only obliged to pay what is owed for services or goods provided to it by whoever provides them, whereby it should, for proper compliance with Portuguese law (and probably also with Angolan law, but that is also not relevant for the case), the Applicant refuse payment of the invoicing by B... and demand invoicing by the actual service provider.
The Applicant's conclusion, according to which it proved that there was a real operation, also fails. Effectively, the situation sub iudice, in light of the facts proven, presents itself as a typical case of relative simulation, by fictitious interposition of persons.
Independently of the foregoing, and in summary, by not demonstrating, in the present case, that the operations to which the deducted charges correspond, relating to payments made to a natural or legal person resident outside Portuguese territory and subject therein to a clearly more favourable tax regime, were effectively carried out by the latter, the illegitimacy of such deduction is determined, as well as the subjection of such charges to separate taxation, and the arbitral jurisprudence cited by the Applicant does not apply to the case, in so far as in the cases judged therein the effectiveness of the operations was never at issue, but solely their normal character or non-exaggerated amount.
b. on financing costs free of charge to a subsidiary entity
The second question that arises in the present arbitral proceedings concerns the assessment of the legality of the corrections made by the Tax Authority with respect to the years 2013, 2014 and 2015, relating to financing costs of the Applicant imputable to free financing by the latter to a subsidiary, of which it held 99.1% of the share capital.
Under the substantiation made by the Tax Authority and underlying the corrections in question, the same are based on Article 23, subsection 1/c) (period of 2013) and 23(1) and 2/c) (periods of 2014 and 2015), both of the CIRC, in the wording applicable to the said periods, having, in summary, the Tax Authority understood that the charges at issue do not relate to foreign capital applied in the operation of the Applicant's economic activity.
The wording of the rule in question is as follows:
- Period of 2013:
"1 - Expenses are those that are demonstrably indispensable for the achievement of income subject to tax or for the maintenance of the productive source, in particular: (...)
c) Of a financial nature, such as interest on foreign capital applied in the operation, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;";
- Periods of 2014 and 2015:
"1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to CIT are deductible.
2 - The following expenses and losses are considered to be covered by the previous subsection, in particular:
c) Of a financial nature, such as interest on foreign capital applied in the operation, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;"
The matter in question was the subject of extensive appreciation and discussion, at the level of jurisprudence and doctrine, and regardless of the foregoing, it is considered that the starting point for the appreciation of any question to be decided relating to the matter in question should be, as formulated in the Judgment of the STA of 04-06-2014, rendered in case 01763/13, that "the relevance or otherwise of certain expenses as costs of the year would always have to be seen in concreto, case by case, depending on the peculiar business context in which they develop and the purposes they pursue".
Given this, "it is consolidated jurisprudence of the S.T.A. that in light of Article 23 of the C.I.R.C., costs with interest on bank loans contracted by a company and applied in the financing free of charge of companies associated with it are not to be considered as fiscally relevant".
Indeed, repeatedly, the STA has affirmed that "In light of Article 23 of the CIRC, costs with interest and stamp duty on bank loans contracted by a company and applied in the financing free of charge of companies associated with it are not to be considered as fiscally relevant" and that "Since the appellant is not a SGPS (Financial Holding Company) nor covered by the group taxation regime, the financial charges it bore resulting from advances and supplementary contributions made to associated enterprises free of charge cannot be considered as fiscally deductible costs, as they are not indispensable for the achievement of profits of the appellant subject to tax or for its maintenance as a source of production thereof, within the meaning of Article 23 of the CIRC in the wording in force at the date of the facts".
This understanding has been reaffirmed by that Superior Court, over the years and to the present, having in the judgments of 19-04-2017 and 28-02-2018, rendered, respectively, in cases 0925/16 and 01206/17, been stated that:
- "I - Since the appellant is not a SGPS nor covered by the group taxation regime, the financial charges it bore resulting from advances and supplementary contributions made to associated enterprises free of charge cannot be considered as fiscally deductible costs, as they are not indispensable for the achievement of profits of the appellant subject to tax or for its maintenance as a source of production thereof, within the meaning of Article 23 of the CIRC in the wording in force at the date of the facts.
II - The appellant maintaining itself autonomously as a subject to CIT and the enterprises to it associated equally autonomous and equally subjects to taxation under CIT, the financial charges it bore resulting from advances and supplementary contributions made in favour of the enterprises to it associated cannot be considered as an essential cost for purposes of deductibility under CIT pursuant to the provision of Article 23 of the CIRC, as they are unrelated to the operation of its activity.";
- "I - Given that the appellant is a shareholder of the subsidiary company and can make supplementary contributions thereto, should it meet the legal requirements, which is not here in discussion, in its legal sphere the decision to make the supplementary contribution is not an exercise of its business activity because it does not also have as its object the management of shareholdings.
II - The shareholders' agreement it concluded and in compliance with which it came to carry out the supplementary contributions does not alter/expand the corporate purpose of the appellant, and, as it does not obtain legal framework therein, it is not development of the social activity of the appellant.
III - It is not a matter of assessing the merits of the management acts carried out by the appellant, but of verifying that, whatever financial operations it may carry out, outside its corporate purpose, they are not an act of management of its business activity, whereby it cannot charge against this the costs that such financial operation produces.
IV - The strengthening of the capital of the subsidiary company through supplementary contributions made by the appellant are not an exercise of the business activity of the appellant, whereby the costs incurred with these or because of the performance of such contributions are not costs deductible under CIT in light of Article 23 of the CIRC.".
For its part, relevant doctrine, as the Applicant sets out, emerged at various forums in critical form in relation to the jurisprudence noted, arguing that free financing of one company to another, its subsidiary, could still be considered as an exercise of the business activity of the former.
In the arbitral process 695/2015T, doctrine and previous jurisprudence on the matter are reviewed, analysis to which reference is made.
In summary, in the said arbitral judgment, as to the concept of asset and productive source, it is concluded that as to the question "Does a company holding that borrows and assigns those funds to subsidiary entities, charging them null or lower interest than it pays, develop its own activity or alien activity (i.e., perform management acts unrelated to its interest)?, it should be considered that "the deductibility of the interest borne by the holding company will depend on the fact that such financing contributed, according to normal rules of management, to increase the expectation of future benefits or to maintain the productive source (financial asset)".
It was thus understood, in that case, that when the holding company finances the subsidiaries (its financial assets), in the accounting of the holding company "the allocation of funds to the subsidiaries has as its counterpart the increase in the value of the investment accounted for in account "41-Financial Investments". The productive source that is financed, in which the position of the investor is strengthened is, primarily, the set of financial assets" of the holding company.
Further it was judged that "the productive source materializes itself legally and accountingly in the asset of the [holding company], which concentrates legally, economically and financially the characteristics of a productive source of the [holding company]: it is a set of assets previously acquired by this entity, which grants it rights over the subsidiaries, and from it are expected returns in the sphere of the acquirer.".
Also in the arbitral judgment in question, it was ultimately concluded that: "… the Tax Authority corrects only the interest differential and not the totality of interest paid by the [holding company]. …, this logic of tax adjustment appears to be misaligned. Wishing to question the differential in prices (interest rates) paid and charged, it would be the transfer pricing rules that should be applied, and not those of Article 23 of the CIRC".
Having considered the various arguments of the antagonistic positions presented above, there is a preference for the understanding that the financing of a company to a subsidiary thereof, of which it held 99.1% of the share capital, should be deemed as integrating the scope of the business activity of the former.
Indeed, it will be obvious, it is believed, that in such a situation the "health" of the financial position of the subsidiary company is of capital importance for the holding company, as it will be obvious that the good economic performance of the subsidiary is capable of generating gains subject to CIT for the holding company, either at the level of the increase in the economic value of the shareholdings, with the consequent increase in the assets and financial robustness of the holding company, and all the advantages in terms of market that ensue therefrom, or at the level of the possible generation of dividends and/or capital gains.
Accordingly, it is not considered that there is reason to question that the provision of financial means, in a case like that of the proceedings, by a holding company to a subsidiary thereof, is, as a rule, unrelated to the business interest of the former.
With regard to the existence and quantification of the interest rate applied, with the aforementioned arbitral judgment rendered in case 695/2015T of the CAAD, it is considered that the question should be, in the situations at issue, assessed in light of the transfer pricing regime, regulated in Article 63 of the CIRC, and not in light of the necessity of expenses, regulated in Article 23 of the same Code.
Nevertheless, and as seen, in light of the 2013 wording of the rule to be applied (Article 23(1)(c) of the CIRC then in force), the jurisprudence of the STA on the matter is clear and reiterated, in the sense that "the financial charges (...) borne as a result of advances and supplementary contributions made in favour of the associated enterprises cannot be considered as an essential cost for purposes of deductibility under CIT pursuant to the provision of Article 23 of the CIRC, as they are unrelated to the operation of its activity.".
Indeed, it is considered that the tax problem of the grant of loans by holding companies to subsidiary companies, in situations like that of the present proceedings, resides, not in the lack of business interest in the operation, but rather in the possibility of such interests being pursued in an abusive manner, allowing the transfer of results between the companies involved, in a manner not permitted by law, and moreover, Article 63 of the CIRC expressly refers to such situations, by including in its provisions "financial operations".
Nevertheless, the courts in general, and also the arbitral courts, it is considered, are bound by the duty to take "into consideration all cases that deserve analogous treatment, in order to obtain a uniform interpretation and application of the law." (Article 8(3) of the Civil Code).
On the other hand, pursuant to Article 25(2) of the LRAT, "The arbitral decision on the merits of the claim made, which puts an end to the arbitral proceedings, is still subject to appeal to the Supreme Administrative Court when it is in opposition, as to the same fundamental question of law, with a judgment rendered by the Central Administrative Court or the Supreme Administrative Court.".
Hence, a decision, in the matter sub iudice, that goes against the jurisprudence established by the STA on the matter, where there is, as there is, identity of the facts and the law to be applied thereto, between the present case and those already judged both by the STA and by the Central Administrative Courts, would not only be subject to appeal under Article 25(2) of the LRAT, but would, with a high degree of probability, be capable of being revoked by that High Court.
Thus, and in summary, it is not believed that it would have any utility, on the contrary (it would give rise to unnecessary and superfluous additional procedural processing), this Tribunal to conclude otherwise, as far as the corrections now in question are concerned, relating to the year 2013, than that repeatedly reaffirmed by the Superior state Courts, that is, that the financial charges borne by the Applicant with the financing of its subsidiary do not find accommodation, as far as their deductibility is concerned, in the provision of Article 23 of the CIRC applicable, as it is not ascertained that the corporate purpose of the Applicant embraces the holding and management of shareholdings.
As far as the corrections now further in question are concerned, relating to the years 2014 and 2015, it is considered possible to conclude otherwise.
In fact, in the year 2014, the rule in question in the present proceedings, Article 23 of the CIRC, was altered in its wording in a significant and intentional manner, coming to refer as the general criterion of deductibility of expenses, that these have been incurred "to obtain or guarantee income subject to CIT", when previously it provided in the sense of the necessity of the same being "demonstrably indispensable for the achievement of income subject to tax or for the maintenance of the productive source".
As results, unequivocally, from the "Draft Reform" of the IRC Code, the alteration introduced was in the sense of making it clear that "the criterion of indispensability was created to prevent the tax consideration of expenses that are not inscribed in the scope of the activity of companies subject to CIT" is intended to exclude the "charges that were incurred in the pursuit of alien interests, notably those of shareholders".
In light of such criterion, and of what was set out previously, it is not considered that one can deem that the grant of financing by a holding company to a subsidiary company, in situations like those of the proceedings (99.1% shareholding), can be qualified as not inscribed in the activity of the holding company, and as such have the expenses underlying such operation qualified as non-deductible, in light of Article 23 of the CIRC applicable.
Moreover, the jurisprudence of the Superior Courts of the state tax jurisdiction, on the matter in question, issued, all that which is known, in light of the previous wording of the rule in question, which, as seen, was altered, ultimately reconducted the question to the mere inclusion of the activity of holding and management of shareholdings in the corporate purpose of the holding companies, as results, transparently, from the comparison of the judgments of the STA of 21-02-2018 and 30-05-2018, both rendered in case 0473/13, and 28-02-2018, rendered in case 01206/17.
Now, the corporate purpose does not limit the lawfulness of the legal acts of companies, nor their legal capacity, nor, much less, the subjection to tax of the profits of such acts or activities, Article 6(4) of the Commercial Code providing that "Contractual clauses and corporate resolutions that fix a given purpose for the company or prohibit the practice of certain acts do not limit the capacity of the company, but place the organs of the company under the duty not to exceed that purpose or not to practice those acts.", from which it results that the practice by a company of acts of commerce that are not comprised in its purpose is not prohibited, nor, consequently, and per se, unlawful.
Thus, and even though alien to the corporate purpose, such acts or activities are capable of "obtaining or guaranteeing income subject to CIT" of the companies, whereby no reason is seen to exclude the expenses, resulting from those same acts or activities, in light of the wording of Article 23(1) of the CIRC, in force in 2014 and 2015, solely because they cannot be, formally, traced to the corporate purpose of the taxpayer.
In view of the foregoing, and having in account that, as referred above, the known jurisprudence of the STA and of the Central Courts on the matter was rendered in the context of the wording of Article 23 of the CIRC, in force until 31-12-2013, it is considered that the corrections in question, relating to the periods of 2014 and 2015, in considering non-deductible the financial charges borne by the Applicant with loans granted to its subsidiary, albeit free of charge, violates the provision of Article 23(1) of the CIRC, being, as such, vitiated by error of law and should, therefore, be annulled, the arbitral request proceeding, in that part.
In its submissions, the Applicant finally requests that "recognition be given to the right to indemnity interest calculated at the legal rate from the date of correction of the tax until the date of its full reimbursement.".
Nevertheless, the fact is that in the initial Request, which delimits the object of the present action, the Applicant did not formulate any request in that regard.
On the other hand, indemnity interest is due from the date of the unduly paid tax, and not "from the date of the correction of the tax until the date of its full reimbursement.", and it is certain that it does not result from the proceedings, above all because nothing has been alleged in that sense, that the payment of the tax corresponding to the part of the assessments which are now partially annulled has been made, whereby, without prejudice to in the execution of the judgment the said presuppositions being verified, the right sought by the Applicant cannot be recognized in the present seat.
C. DECISION
In light of the foregoing, this Arbitral Tribunal decides to find the arbitral request partially well-founded and, in consequence:
Partially annul the acts of assessment No. 2017... and No. 2017..., relating, respectively, to the years 2014 and 2015 of the Applicant, and respective compensatory interest assessments, as well as of the act of dismissal of the administrative review of the appeal concerning those acts, in the part relating to the disregard as expenses of the financial charges borne by the Applicant with the financing of its subsidiary H...;
Condemn the parties to pay the costs of the proceedings, in proportion to their respective failure, fixing the amount at €2,200.00, payable by the Applicant, and €248.00, payable by the Respondent.
D. Value of the proceedings
The value of the proceedings is fixed at €67,966.80, pursuant to Article 97-A, subsection 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of subsection 1 of Article 29 of the LRAT and subsection 3 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The amount of the arbitration fee is fixed at €2,448.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective failure, since the request was partially well-founded, pursuant to Articles 12, subsection 2, and 22, subsection 4, both of the LRAT, and Article 4, subsection 5, of the said Regulation.
Notify the parties.
Lisbon, 14 February 2019
The Presiding Arbitrator
(José Pedro Carvalho)
The Arbitrator Member
(Sofia Ricardo Borges)
The Arbitrator Member
(Ana Teixeira de Sousa)
Frequently Asked Questions
Automatically Created