Process: 168/2018-T

Date: November 14, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral decision (Process 168/2018-T) addresses the controversial cessation of Portugal's Special Regime for Taxation of Groups of Companies (RETGS) under IRC (Corporate Income Tax) law. The claimant, A... S.A., challenged an additional IRC assessment of €251,693.49 resulting from the Tax Authority's determination that the group's special taxation regime must cease for fiscal year 2011. The cessation was triggered under Article 69(8)(b) of the IRC Code because one group member company (C... Lda.) had recorded fiscal losses in three preceding years and was not held 90% by the parent company for over two years. The claimant argued this provision violates the constitutional principle of proportionality, as it penalizes all 34 group companies for one member's non-compliance. The Tax Authority raised several procedural defenses: res judicata based on a prior arbitral decision (10/2017-T) concerning the same group cessation, potential lis pendens with parallel judicial proceedings, and material incompetence of the arbitral tribunal. The case illustrates critical issues in Portuguese group taxation: whether RETGS cessation can be challenged individually by group members when previously decided for the entire group, the constitutional limits of automatic regime termination affecting compliant companies, and the coordination between arbitral and judicial tax dispute resolution. The tribunal must determine whether prior decisions on group-level cessation bind individual member companies, and whether proportionality challenges to Article 69(8)(b) can succeed when the cessation affects companies that individually met all requirements but are penalized due to another group member's fiscal situation.

Full Decision

ARBITRAL DECISION

They agree in arbitral tribunal

I – Report

1. A..., S.A., holder of Tax Identification Number..., with registered office at ..., no...., in Lisbon, hereby requests the constitution of an arbitral tribunal, pursuant to Articles 2, no. 1, subparagraph a), and 10 of Decree-Law no. 10/2011, of 20 January, to review the legality of the tax acts relating to additional Corporate Income Tax (IRC) assessment and assessment of compensatory interest, in the total amount of € 251,693.49, as well as the act dismissing the administrative review petition filed against those assessment acts.

The request is grounded as follows.

The Claimant is a company integrated in the Special Regime for Taxation of Groups of Companies, with the parent company being Group B... SGPS, S.A.

Following several inspection actions initiated in 2015, the Tax Authority determined the cessation of the Special Regime for Taxation, with reference to the fiscal year 2011, in application of Article 69, no. 8, subparagraph b), of the IRC Code, having concluded that company C..., Lda., which was included in the scope of taxation, had recorded fiscal losses in the three preceding fiscal years and was not held in 90% by the parent company for more than two years.

The cessation of the Special Regime for Taxation of Groups of Companies resulted, with respect to the Claimant, in an additional IRC assessment, on an individual basis, in the amount of € 9,925.39, to which compensatory interest was added, as a result of the application of the general regime of taxation.

Having filed an administrative review petition against the additional assessment, which was dismissed, the Claimant filed a judicial challenge in the Lisbon Tax Court of that dismissal decision, as well as of the additional IRC assessment, but only with respect to the correction made in the context of autonomous taxation.

By contrast, the present request for arbitral tribunal pronouncement has as its object the decision dismissing the administrative review petition and the additional assessment in the part relating to the adjustment of the taxable profit of IRC resulting from the cessation of the Special Regime for Taxation of Groups of Companies, so the request concerns exclusively the applicability of that regime to the Claimant, as a member company of the Group, in the 2011 fiscal year.

The provision of Article 69, no. 8, subparagraph b), of the IRC Code is unconstitutional, by violation of the principle of proportionality, as it constitutes an unnecessary and excessive legal solution insofar as it imposes the cessation of the Special Regime for Taxation on the Claimant solely on the basis of the inclusion in the scope of the Regime of a company that reported fiscal losses in the years preceding the fiscal year.

The Tax Authority, in its reply, contends that the question of the cessation of the Special Regime for Taxation of Groups of Companies to Group B... was already subject to a decision with final judgment, within the scope of arbitral proceeding no. 10/2017-T, and that decision constitutes res judicata as to the matter under consideration in the present arbitral request. Alternatively, on that same ground, it alleges that there is a situation of legal impossibility of the claim being made, since the Special Regime for Taxation could only be applied to the Group and not to one of the companies that comprise it.

By way of exception, the Respondent further invokes that it is not documented that there is no lis pendens between the present proceeding and the judicial challenge filed before the Lisbon Tax Court, and raises the question of the material incompetence of the tribunal to review the request, considering that the challenge relating to the adjustment in IRC resulting from the cessation of the Special Regime for Taxation, together with the judicial challenge in the court concerning the assessment relating to autonomous taxation, implies that the arbitral tribunal, in the event of a favorable judgment, should rule on questions related to the execution of the judgment, which exceed its declaratory jurisdiction.

As to the merits, the Tax Administration defends the legality of the cessation of the Special Regime for Taxation of Groups of Companies based on the carrying forward of fiscal losses attributable to one of the group's companies and rejects the alleged unconstitutionality, by violation of the principle of proportionality, by referring to what was decided in the arbitral award rendered in Proceeding no. 10/2017-T.

2. Following the proceeding, the meeting referred to in Article 18 of the RJAT was waived and it was determined that final arguments be submitted within a successive period of ten days.

In arguments, the Claimant responded to the questions raised in the reply regarding exceptions, ruling in favor of their lack of merit, and as to the merits of the case maintained its previous position.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority in accordance with the applicable regulations.

Pursuant to the provision of subparagraph a) of no. 2 of Article 6 and subparagraph b) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.

The parties were duly and timely notified of such appointment and did not express a wish to challenge it, in accordance with the combined provisions of Article 11, no. 1, subparagraphs a) and b), of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provision of subparagraph c) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 14 June 2018.

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

The parties possess legal standing and capacity, are parties to the case and are represented (Articles 4 and 10, no. 2, of the same statute and 1 of Order no. 112-A/2011, of 22 March).

The proceeding is free of nullities.

Exceptions were raised regarding material incompetence of the arbitral tribunal, lis pendens, res judicata, and legal impossibility of the legal effect sought by the action.

These are the questions which it is appropriate to begin by analyzing.

II - Grounds for Decision

Matters of Fact

4. The facts relevant to the decision of the case that may be considered established are as follows.

The Claimant is a company which, with respect to the 2011 fiscal year, was integrated in the Special Regime for Taxation of Groups of Companies, which had as its parent company Group B... SGPS, S.A.;

The Special Regime for Taxation of Group B..., with reference to the 2011 fiscal year, was composed of 34 companies;

The tax inspection services of the Finance Directorate of ... conducted an inspection procedure on the parent company of the group (Group B... SGPS, SA), authorized by service order no. OI2015..., concerning the 2011 fiscal year, having as its main objective the verification of elements related to the classification of the income taxation of the taxpayer in the Special Regime for Taxation of Groups of Companies;

As a result of that inspection action, the Tax Administration determined the cessation of the Special Regime for Taxation, with respect to fiscal year 2011, and, as a result of the application of the general regime of taxation, proceeded to make additional IRC assessments, on an individual basis, in relation to the companies making up the Group;

The cessation of the Special Regime for Taxation of group B... was determined by the fact that company C..., which was part of the Group, had recorded, with respect to the 2008, 2009 and 2010 fiscal years, fiscal losses in the amounts of € 154,961.22, € 174,863.02 and € 213,827.29, respectively, and that the equity interest in that company was not held in 90% by the parent company for more than two years;

Group B... SGPS, S.A and 32 other companies making up the Group filed administrative review petitions seeking the administrative annulment of the additional IRC assessments;

The administrative review petition filed by D... was the subject of tacit dismissal, occurring on 19 December 2016, and the remaining petitions were dismissed expressly by decisions of the Finance Directorate of ... of 25, 26 and 27 October 2016;

As a result of the cessation of the Special Regime for Taxation, the Claimant was subject to an inspection action authorized by service order no. OI2015..., which resulted in an additional IRC assessment, in the amount of € 972,741.45 (assessment no. 2016...), as well as an assessment of compensatory interest, in the amount of € 34,469.74 (assessment no. 2016...);

The Claimant filed independently an administrative review petition against the additional assessment no. ...2016..., on 8 September 2016, which was dismissed by the decision of the Deputy Finance Director of Lisbon, of 19 December 2017, notified the next day;

And filed the present arbitral request following that dismissal decision;

Group B... SGPS, S.A. and 32 companies making up the Group filed, on 4 January 2017, an arbitral request, pursuant to Articles 2, no. 1, subparagraph a), and 10 of Decree-Law no. 10/2011, of 20 January, seeking the annulment of decisions dismissing administrative review petitions and annulment of additional IRC assessment acts following the cessation of the Special Regime for Taxation of Groups of Companies, which resulted in Proceeding no. 10/2017-T;

The request was judged entirely without merit by an arbitral decision of 3 September 2017;

The arbitral decision referred to in the preceding subparagraph L) has become final;

The Claimant was not part of the group of companies that filed the arbitral request referred to in the preceding subparagraph J).

The Tribunal formed its conviction as to the established facts on the basis of the documents attached to the petition and the administrative record attached by the Tax Authority with its reply.

The facts set out in subparagraphs K), L), M) and N) are within the tribunal's knowledge by virtue of the exercise of its functions.

It is not documented in the record that the Claimant filed a judicial challenge before the Lisbon Tax Court of the decision dismissing the administrative review petition and the additional IRC assessment.

Matters of Law

Preliminary Issues

5. The Tax Authority, defending itself by way of exception, raises the following four issues: (a) material incompetence of the arbitral tribunal with respect to part of the request that relates to the execution of judgments; (b) lis pendens between the present arbitral request and the judicial challenge filed before the Lisbon Tax Court, as the documentary evidence of the identifying elements of the request and cause of action formulated in that challenge is not provided; (c) exception of res judicata as a result of the decision regarding the cessation of the application of the special regime for taxation of groups of companies by the arbitral award rendered in Proceeding no. 10/2017; (d) and, subsidiarily, the legal impossibility of the legal effect sought by the present action due to the inapplicability of the special regime for taxation of groups of companies to a company on an individual basis.

These are the issues which it is appropriate to analyze first.

Material Incompetence of the Arbitral Tribunal

6. If correctly understood, the alleged material incompetence of the arbitral tribunal results from the fact that the Claimant filed an arbitral request concerning the decision dismissing the administrative review petition and the underlying assessments only with respect to the adjustment made in the context of IRC, as a result of the cessation of the application of the Special Regime for Taxation of Groups of Companies, and, at the same time, challenged before the Lisbon Tax Court the same administrative review petition decision and the IRC assessment regarding autonomous taxation, which is interpreted to mean that it is intended that the tribunal rule on requests for recognition of rights and matters relating to the execution of judgment, which would exceed its jurisdiction.

Now, in the arbitral request, the Claimant limited itself to requesting the annulment of the decision dismissing the administrative review petition and the additional IRC assessment acts. And such a request falls within the scope of the jurisdiction defined in subparagraph a) of no. 1 of Article 2 of the RJAT, since it refers to the "declaration of illegality of acts assessing taxes", which is understood to include second-level acts – as is the case with decisions dismissing administrative review petitions – when these have as their object the review of the legality of the tax act.

In stating, in the initial petition, that the request for arbitral tribunal pronouncement has in view the annulment of the decision dismissing the administrative review petition in the part relating to the adjustment made in the context of taxable profit of IRC resulting from the cessation of the Special Regime for Taxation, the Claimant intended solely to delineate the object of the dispute, in comparison with the judicial challenge presented before the Lisbon Tax Court, in order to demonstrate that, notwithstanding the concurrence of procedural means, there is no possibility of repetition of the case.

In this context, nothing allows the conclusion that the pronouncement of the arbitral tribunal, going beyond the declaration of illegality of the assessment acts and the decision dismissing the administrative review petition - which constitutes the object of the request – can issue any other judicial declaration relating to the acts and operations that must be carried out by the Administration in the event of a possible annulling judgment.

The argument is, consequently, without merit.

Lis Pendens

7. The Respondent further raises the issue of lis pendens between the present arbitral request and the judicial challenge filed before the Lisbon Tax Court on the ground that it is not documented that the request and cause of action formulated in those proceedings are not identical.

Lis pendens operates when a case is repeated while the prior one is still pending and has as its objective "to prevent the tribunal from being placed in the alternative of contradicting or reproducing a prior decision". It is understood that the case is repeated "when an action identical to another is brought as to the parties, the request and the cause of action", which means that it is required not only identity of procedural parties, but identity of request and cause of action, that is, identity as to the very object of the proceeding (Articles 580, no. 2, and 581, no. 1, of the CPC, ex vi Article 2, subparagraph e) of the CPPT).

The Claimant alleges that it filed a judicial challenge in the Lisbon Tax Court against the decision dismissing the administrative review petition, as well as of the additional IRC assessment, but only with respect to the correction made in the context of autonomous taxation, whereas the present request for arbitral tribunal pronouncement has as its object those same acts but in the part in which they generate the additional IRC assessment as an effect of the cessation of the Special Regime for Taxation of Groups of Companies.

What the Tax Administration comes to say on this point is that it is not proven that lis pendens does not exist since the Claimant did not attach any documentary evidence of the content of the judicial challenge that was filed. But if that demonstration is not made, it cannot be concluded that the exception of lis pendens applies, since this could only be upheld if there were evidence that the present action has the same object as the judicial challenge presented before the court of general jurisdiction.

There is therefore no exception of lis pendens.

Exception of Res Judicata

8. The Tax Authority invokes the effect of res judicata resulting from the arbitral decision rendered in Proceeding no. 10/2017-T, which concerned the review of the legality of the cessation of the application of the Special Regime for Taxation of Groups of Companies to Group B..., SGPS, S.A., following the arbitral request filed by the parent company and thirty-two other companies that made up the Group, alleging that there is a relationship of prejudiciality between that decision, which has become final, and the procedural object of the present arbitral request.

Although the Respondent characterizes res judicata as a matter of exception, it would appear that it does not intend to obtain the negative procedural effect of inadmissibility of the review of the case in a second action (which would correspond to the dilatory exception of res judicata and would require identity of procedural parties), but rather the positive effect of the authority of res judicata, serving to ensure the unmodifiability of a prior decision that has become final.

In fact, the effects of material res judicata may project themselves onto a subsequent procedural relationship via two routes: either through the invocation of a dilatory exception, which prevents the tribunal from ruling in another proceeding on the question of merits already previously decided, and which will result in the dismissal of the matter – negative effect (Article 577, subparagraph i), of the CPC ex vi Article 2, subparagraph e) of the CPPT); or through the invocation of the force of res judicata, which binds the tribunal to apply the definition of law that has become final as to a same question that arises again in another action – positive effect (Article 619, no. 1, of the CPC ex vi Article 2, subparagraph e) of the CPPT). In the first case, where there is total identity of the procedural object as to another previously decided (because it is a matter of the same claim), the tribunal need not issue any pronouncement and declares the matter closed; in the second case, the tribunal merely adopts the content of the prior decision as to the legal aspect that is covered by res judicata (regarding this distinction, Lebre de Freitas/Isabel Alexandre, Código de Processo Civil Anotado, 2nd vol., 3rd edition, p. 749).

In the case at hand, the Respondent, in basing the effect of res judicata on a relationship of prejudiciality between procedural objects, will have in view ensuring not the prohibition of repetition of judgment, which the law prevents through the dilatory exception, but the prohibition of contradiction, which is guaranteed through the authority of res judicata, but also through the prevalence of the first decision that has become final when the tribunal, in distinct proceedings, comes to issue contradictory decisions on the same claim (Article 625, no. 1, of the CPC ex vi Article 2, subparagraph e) of the CPPT).

And in these terms, the question need not be analyzed as a dilatory exception, but as a prerequisite or condition of the merits decision to be rendered, requiring consideration within the scope of substantive matters. The review of material res judicata also prejudices the examination of the alleged exception of legal impossibility of the legal effect sought by the present action, which was raised subsidiarily.

Substantive Issues

Authority of Res Judicata

9. The Respondent contends that the decision rendered in Proceeding no. 10/2017-T constitutes a prejudicial question in relation to the object of the present action insofar as the question of whether the requirements for applicability of the special regime for taxation of groups of companies integrated in Group B... were met was already submitted for judicial review in that proceeding.

The question which arises, at this level of analysis, as was already clarified (cf. supra 8.), relates to the authority of res judicata.

Understood in this substantive plane, res judicata prevents "that in a new proceeding the judge can validly rule differently as to the law, situation or specific legal position defined by a prior decision, and therefore fail to recognize in whole or in part the rights recognized and protected by it" (cf. Manuel de Andrade, Noções Elementares de Processo Civil, Coimbra, 1976, p. 317).

On the other hand, it has been understood that the authority of res judicata, differently from the exception of res judicata, can function independently of the verification of the threefold identity of parties, request and cause of action to which Article 581 of the CPC ex vi Article 2, subparagraph e) of the CPPT refers, having as its prerequisite, not the identity between legal relationships - which aims to prevent the same legal relationship from being successively submitted for judicial review - but a relationship of prejudiciality which operates when the grounds of the final decision condition the review of the object of a subsequent action (cf. decisions of the Supreme Court of Justice of 23 November 2011, Proceeding no. 644/08, of 6 March 2008, Proceeding no. 08B402, and of 13 December 2007, Proceeding no. 07A3739).

As to the objective scope of res judicata, the prevailing understanding also points to a broad interpretation according to which res judicata does not cover only the operative part of the decision, but all the matter reviewed including the grounds for the decision (cf. decisions of the Supreme Court of Justice of 7 May 2015, Proceeding no. 15698/04 and of 21 March 2013, Proceeding no. 3210/07). In this sense, Teixeira de Sousa stresses that "it is not the decision, as the conclusion of the judicial syllogism, that acquires the value of res judicata, but the syllogism itself considered in its entirety: res judicata relates to the decision as the conclusion of certain grounds and reaches these grounds as the prerequisites of that decision" (Estudos sobre o novo processo civil, Lisbon, 1997, pp. 578-579).

10. In the case at hand, the Claimant formulates a request for arbitral tribunal pronouncement having as its object the additional IRC assessment, on an autonomous and individual basis, which resulted from the application of the general regime of taxation of legal entities, following the cessation in relation to the corporate group to which it belongs of the Special Regime for Taxation referred to in Article 69 of the IRC Code.

The parent company (Group B... SGPS, S.A.) and thirty-two other companies that made up the Group had already filed an arbitral request, under the Legal Regime for Administrative Arbitration in Tax Matters, seeking the contentious annulment of additional IRC assessment acts (as well as of the acts dismissing the corresponding administrative review petitions), in which the violation of the principle of proportionality was raised and which the arbitral tribunal judged entirely without merit by a decision rendered in Proceeding no. 10/2017-T.

The Claimant, which belonged to the same Group of Companies, did not form part of the group of companies that, in coalition, filed the arbitral request and came to formulate the present arbitral request at a later time, seeking to obtain through the declaration of illegality of the act dismissing the administrative review petition and the tax assessment act, the application of the special regime for taxation of groups of companies to its specific case. It alleged to that end that the Tax Administration's decision to cease the application of the special regime for taxation of groups of companies, as an effect of the rule of Article 69, no. 8, subparagraph b), of the IRC Code, is unconstitutional, by violation of the principle of proportionality, as it constitutes an unnecessary and excessive legal solution.

11. As is known, the Special Regime for Taxation of Groups of Companies has come to recognize corporate groups as an autonomous legal and tax reality, allowing that, notwithstanding the legal individuality of their respective constituent elements, it is the group as a whole that becomes the point of reference for tax rights and obligations, ensuring a possible reduction of the overall tax burden, through the compensation and communication of taxable profits and fiscal losses among the companies. That is the general principle that results from Article 69 of the IRC Code, which delineates the legal-tax concept of the group of companies and defines the requirements relating to inter-company relationships and the grouped companies themselves on which submission to the Special Regime for Taxation depends.

One of the requirements relating to grouped companies is that they cannot have recorded losses in the three years preceding the start of application of the special regime for taxation, which is only no longer relevant if the interest is already held by the parent company for more than two years (Article 69, no. 4, subparagraph c) of the CIRC, the law fixing as a consequence of non-compliance with this requirement the cessation of the special regime for taxation and considering its effects as of the end of the fiscal year preceding its occurrence (Article 69, no. 8, subparagraph b), and no. 9, subparagraph c) of the CIRC.

Specific legal provisions subsist that regulate the taxation regime, among which the following stand out: the duty to submit a periodic income statement in which the taxable profit of the group is determined, as well as the submission of individual periodic income statements (Articles 70, 117, no. 1, subparagraph b), and 120, no. 6, subparagraph b) of the CIRC and the rules relating to the determination of taxable profit and the deduction of fiscal losses (Article 71 of the CIRC). In this particular respect, the provision in Article 70 of the CIRC is relevant, by which profit is calculated by the parent company through the algebraic sum of taxable profits and fiscal losses determined by each of the companies included in the group's scope, and in Article 71 of the CIRC, which allows that fiscal losses of covered companies may be deducted from the group's taxable profit (on all these aspects, cf. José Engrácia Antunes, "Tributação de grupos de sociedades", Fiscalidade, no. 45, January-March 2011, pp. 7-9).

12. Being that the applicable legal regime, it would be difficult to conceive that the judicial decision of lack of merit in an action brought by one or more of the grouped companies that has as its object the cessation of the special regime for taxation could be reversed with respect to one or more other companies of the same group as an effect of the bringing of another action that has the same object.

In fact, the regime of joint taxation of groups of companies corresponds to a specific taxation regime that, in its general outlines, abstracts from the legal individuality of each of the entities that constitute the group and is based on very different prerequisites from the general system of taxation of companies.

It is a regime in which the taxpaying capacity of the group is quantified together and will be subject to a single taxation in the context of income tax, from which results that the taxable profit of the group is determined by the sum of the positive and negative results that are determined in the individual periodic statements of each of the companies belonging to the group. Being further required that the group assume, for that purpose, certain characteristics and particularities that the fiscal legislator itself comes to define (cf. Gonçalo Avelãs Nunes, Tributação de grupos de sociedades pelo lucro consolidado em sede de IRC, Coimbra, 2001, pp. 45 and 48).

This means that a company of the group, individually considered, cannot claim that the taxable income be calculated in accordance with the rules for determining the taxable profit of the group, when the Special Regime for Taxation no longer applies to the group that this entity is part of. In fact, and as a general matter, what characterizes the mechanism of taxation of groups of companies is the quantification of the result of the aggregate through the compensation of individual results among the various grouped companies, so that the unit constituted by the group's companies ceases to be considered for the purposes of quantification and assessment operations of the tax when the tax regime that justified in concreto that model of taxation has ceased.

Now, in the case at hand, what is found is that, not only was the cessation of the Special Regime for Taxation of Groups of Companies declared with respect to fiscal year 2011, but also that legal situation was consolidated in the legal order as an effect of the judicial decision rendered in Proceeding no. 10/2017-T.

In fact, in that proceeding, the arbitral tribunal, by decision of 3 September 2017, judged entirely without merit the arbitral request relating to the additional IRC assessments that resulted from the cessation of the specific taxation regime, within the scope of the action brought by the parent company and thirty-two grouped companies, and did not fail to review, in its grounds, the alleged violation of the principle of proportionality, both in the perspective of proportionality as a principle shaping administrative activity, and on the plane of normative constitutionality, by reference to Article 69, no. 1, subparagraph b), of the IRC Code, which imposes as a consequence the cessation of the special regime the situation listed in subparagraph c) of no. 4 of that article.

The arbitral decision acquires in this context the force of res judicata, preventing that in a second action, brought individually by a company of the group, the question of applicability with respect to that company of the special regime for taxation that previously prevailed for the group as a tax unit can be discussed. There subsists here a clear relationship of prejudiciality between the decision that has become final and the review of the object of the present arbitral request, insofar as, having been confirmed, by a final decision, the cessation of the special regime for taxation of groups of companies, a prerequisite becomes already defined that becomes indisputable and necessarily conditions the review of that same question in an action brought subsequently.

And in these terms, it not being possible, as an effect of the authority of res judicata, to re-examine the question of the cessation of the special regime for taxation, the possibility is also precluded of submitting the situation of the Claimant, as a grouped company, to that same Special Regime for Taxation.

The Claimant's claim, seeking to obtain the contentious annulment of the decision dismissing the administrative review petition and the additional IRC assessment in order that the taxable income be determined in accordance with that special regime, thus proves to be entirely without merit.

Matters of Prejudiced Knowledge

13. The claim being without merit on the ground of the authority of res judicata, the examination of the constitutionality question that constituted the grounds for the request is prejudiced.

III – Decision

In view of the foregoing, it is decided to judge the arbitral request entirely without merit.

Value of the Case

The Claimant indicated as the value of the case the amount of € 251,693.49, which was not contested by the Respondent and corresponds to the value of the assessment that it sought to challenge, so that the value of the case is fixed at that amount.

Costs

Pursuant to Articles 12, no. 2, and 24, no. 4, of the RJAT, and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to that Regulation, the amount of costs is fixed at € 4,896.00, which shall be borne by the Claimant.

Notify.

Lisbon, 14 November 2018

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

The Arbitrator Member

Francisco Nicolau Domingos

The Arbitrator Member

Vera Figueiredo

Frequently Asked Questions

Automatically Created

What is the Special Taxation Regime for Groups of Companies (RETGS) under Portuguese IRC?
The Special Regime for Taxation of Groups of Companies (RETGS) under Portuguese IRC allows a group of companies meeting specific ownership and structural requirements to be taxed as a single entity rather than individually. This regime permits consolidation of taxable profits and losses across group members, with the parent company filing a consolidated tax return. To qualify, the parent company must hold at least 90% of subsidiary capital for more than one year, and various control and participation requirements must be satisfied continuously throughout the taxation period.
Under what conditions does Article 69(8)(b) of the IRC Code require cessation of the RETGS group taxation regime?
Article 69(8)(b) of the IRC Code mandates cessation of the RETGS regime when a company included in the group's scope has recorded fiscal losses in the three preceding fiscal years and has not been held at least 90% by the parent company for more than two years. This cessation applies to the entire group, not just the non-compliant company. The provision aims to prevent groups from including loss-making companies solely for tax consolidation benefits without demonstrating stable, long-term integration. Cessation triggers retrospective individual taxation for all group members for that fiscal year, resulting in additional assessments and compensatory interest.
Can the cessation of the RETGS regime be challenged as unconstitutional on proportionality grounds?
Yes, the cessation of RETGS can be challenged as unconstitutional on proportionality grounds, as argued in this case. The claimant contended that Article 69(8)(b) violates the constitutional principle of proportionality because it imposes an excessive and unnecessary sanction—terminating the entire group regime and penalizing all compliant member companies solely because one company reported losses and failed ownership duration requirements. The proportionality challenge argues that less restrictive alternatives exist, such as excluding only the non-compliant company from the regime rather than terminating benefits for the entire group. However, such constitutional challenges face the precedent of prior arbitral decisions upholding the provision's validity.
What happens to individual companies' IRC liability when the Special Group Taxation Regime ceases?
When the RETGS regime ceases, each company that was part of the group taxation is individually assessed for IRC as if the special regime had never applied for that fiscal year. The Tax Authority recalculates each company's taxable profit on a standalone basis, applying the general taxation regime. This typically results in additional IRC assessments for companies that benefited from group loss consolidation, plus compensatory interest for the delay in payment. Companies lose the advantages of offsetting profits against other group members' losses and must account for their individual tax position. The cessation has retrospective effect for the fiscal year in question, requiring complete recalculation of tax liabilities.
Does a prior arbitral decision on RETGS cessation for a group affect subsequent claims by individual group members?
Yes, a prior arbitral decision on RETGS cessation for the entire group creates significant legal implications for subsequent claims by individual group members. The Tax Authority argued that arbitral proceeding 10/2017-T, which already decided the group cessation issue, constitutes res judicata—a matter already definitively judged—preventing relitigation of the same cessation decision. Additionally, the Tax Authority contended there is legal impossibility of the claim because RETGS applies to the group as a whole, not to individual companies separately, meaning an individual member cannot challenge group-level cessation independently. This raises fundamental questions about whether group taxation decisions bind all members collectively or whether individual companies retain independent standing to challenge regime cessation affecting their own tax liabilities separately from group-level determinations.