Summary
Full Decision
ARBITRAL DECISION
Tax Arbitration Jurisprudence
Case no. 177/2019-T
Date of Decision: 2019-09-19
IRC
Value of Request: € 5,718,745.66
Subject Matter: IRC - Financing Costs. Limitation of Deductibility. Group of Companies. Application of Law in Time.
ARBITRAL DECISION (see full version in PDF)
The Arbitrators Dr. Jorge Lopes de Sousa (President Arbitrator, designated by the other Arbitrators), Prof. Dr. António Martins and Dr. Carla Castelo Trindade, designated by the Requesting Party and the Respondent Party, respectively, to form the Arbitral Tribunal, constituted on 29-05-2019, hereby agree as follows:
1. Report
A..., S.A., legal entity no. ..., with registered office at Rua ..., no. ..., ..., ...-..., ... (hereinafter referred to as "Requesting Party"), filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, paragraph a), 6, no. 2, paragraph b), and 10, nos. 1 and 2, of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), with a view to the annulment of the additional IRC assessment no. 2018..., of 31 October 2018, as well as the interest calculation statements no. 2018... and no. 2018... and the settlement adjustment statement no. 2018..., of 31 October 2018, relating to the 2014 tax year, establishing the total amount of € 5,718,745.66 to be paid, with payment deadline on 10 December 2018.
The Requesting Party also requests compensation for improper guarantee.
The PORTUGUESE TAX AND CUSTOMS AUTHORITY is the respondent.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Portuguese Tax and Customs Authority on 12-03-2019.
The signatories communicated their acceptance of the exercise of functions within the applicable period.
On 09-05-2019, the Parties were notified of the designation of the arbitrators, having shown no intention to refuse, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Code of Ethics.
Accordingly, in compliance with the provision of paragraph c) of no. 1 of article 11 of RJAT, the collective arbitral tribunal was constituted on 29-05-2019.
The Portuguese Tax and Customs Authority responded, defending the lack of merit of the request for arbitral ruling.
By order of 09-07-2019 it was decided to dispense with the holding of the meeting provided for in article 18 of RJAT and the production of arguments.
The arbitral tribunal was duly constituted and is competent.
The parties have legal personality and capacity, are legitimate (articles 4 and 10, no. 2, of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.
The process is not affected by any nullities.
It is necessary to decide.
2. Factual Matter
2.1. Proven Facts
The following facts are considered proven:
A) The Requesting Party A... SA, is the dominant company of a group of companies ("Group B...") which, in 2014, was also composed of the companies C..., SGPS, S.A. ("C..."), D... Unipessoal, Lda. ("D..."), E..., Lda., ("E..."), F..., S.A. ("F..."), G..., Lda. ("G..."), H..., Lda. ("H..."), Wind Park I..., S.A. ("PE I..."), Park of J..., S.A. ("PE J..."), K...- Wind Park K..., S.A. ("K..."), L..., S.A. ("L..."), M..., S.A. ("M..."), Wind Park of N..., Lda. ("PE N..."), O..., Lda. ("O..."), P..., Lda. ("P...") and Q..., S.A. ("Q...");
B) The B... group opted for the application of RETGS from the 2009 period onwards;
C) The dominant company, A... SA, communicated to the AT its option for the application of the limitation on deductibility of net financing costs of the group, on 18-03-2014, such option having had effect from 01-01-2014;
D) Through the internal inspection action carried out under OI 2018... to the Requesting Party, in its capacity as dominant company of Group B..., the SIT proceeded to reflect, in the group's results, namely in the model 22 statement, the corrections made to the following companies:
a) Corrections made to the controlled company K..., S.A (hereinafter "K..."):
In compliance with Service Order no. OI2016... of 09-05-2016, issued by the Finance Department of ..., an internal inspection procedure was carried out, relating to the 2014 period, to company K..., S.A (NIPC:...), having, following the inspection, corrections been made to the taxable income of this company which totaled € 99,925.76;
b) Corrections made to the controlled company D... LDA
In compliance with Service Order no. OI2018... of 15-05-2018, issued by the Large Taxpayers Unit, an internal inspection procedure was carried out, relating to the 2014 period, to company D... Unipessoal LDA (NIF...), having, following said inspection action, corrections been made to the taxable income of the aforementioned company which totaled € 6,420,292.24;
c) Corrections made to the controlled company C...– SGPS, S.A. (hereinafter "C..."):
In compliance with Service Order no. OI2015... of 17-09-2015, issued by the Finance Department of Lisbon, an internal inspection procedure was carried out, relating to the 2014 period, to company C... - SGPS S A (NIF...), having, following the inspection, corrections been made to the taxable income of this company which totaled € 15,378,472.99;
E) As a result of the corrections made to the taxable income of the companies individually considered, which amount to € 21,898,690.99, the Portuguese Tax and Customs Authority SIT made a correction to the group's taxable income in this amount, as set out in the following table:
F) In the Tax Inspection Report relating to the inspection of K..., which is attached as Annex I to the Report of Inspection of the Requesting Party, whose content is reproduced, the following is stated, among other things:
III - Description of Facts and Grounds for Purely Arithmetic Corrections to Taxable Matter.
Following analysis of the tax situation of the taxpayer, in conjunction with the depreciation and amortization schedules, it was verified that, in the years 2012, 2013 and 2014, company K..., S.A., NIPC: ..., recorded in the item Expenses/reversals of depreciation and amortization, values exceeding those acceptable for tax purposes, under article 34, no. 1 of CIRC, and such value was not added in field 719 of table 07 of the model 22 IRC statement for purposes of determining the taxable income of IRC.
Having analyzed the depreciation rates used by the company in light of Regulatory Decree 25/2009 of 14 September, we found the following:
(...)
• Depreciable assets are being recorded under the designation of "land" but registered with code 2470, which corresponds to Development projects, for which a maximum annual depreciation rate of 33.33% is provided, being depreciated at a rate of 5%, as described in the following table.
Land is not subject to deterioration, therefore expenses recorded under this heading are not deductible for IRC purposes.
• Depreciable assets are being recorded with code 2470, which corresponds to Development projects, for which a maximum annual depreciation rate of 33.33% is provided, being depreciated at a rate of 5%, as described in the following table:
Depreciation rates lower than minimum quotas are thus being practiced, and in accordance with the provision of article 18 of Regulatory Decree 25/2009 of 14 September, the minimum depreciation or amortization quotas that have not been recorded as expenses of the taxation period to which they relate cannot be deducted in subsequent taxation periods. Thus, since for this type of assets depreciation would have to be carried out over a minimum period of 3 years and a maximum of 6, the amounts recorded as depreciation from the year 2009 onwards for assets acquired in 2004 cannot be deducted for tax purposes.
In accordance with the above, the following depreciation and amortization deductions practiced by the company in the years 2012, 2013 and 2014 are not deductible for tax purposes:
-
Under article 34, no. 1, paragraph b) of CIRC, the depreciation of the portion of real property that corresponds to land;
-
Under article 34, no. 1, paragraph d) of CIRC, the depreciation practiced beyond the maximum useful life period of the assets, which is what follows from the minimum depreciation or amortization quotas, determined under article 31-A, no. 4 of CIRC, that is, corresponding to half the maximum accepted rates.
We thus found that, with reference to the years 2012, 2013 and 2014, depreciation and amortization deductions not accepted for tax purposes were made in the amount of 99,925.76 €, in each of the years, the calculation of the amount described being set out in the following table:
(...)
IX - Right to Hearing
The taxpayer was sent Official Letter no. 1903 of 2016-08-25 from the Finance Department of ..., sent under registration RF ...PT, so that, within 15 days, under article 60 of LGT, if desired, exercise the right of hearing.
The taxpayer exercised the right of hearing in writing on 2016-09-06.
Right to Hearing – Arguments Defended by the Taxpayer and Reasoned Response
The arguments defended by the taxpayer, in the exercise of the right of hearing, are based on the following points:
- Land depreciation (paragraph b) of article 34, no. 1 of CIRC)
a. The taxpayer states that it is not, and never has been, the owner of any land;
b. That the amounts identified in the depreciation and amortization schedules under this heading refer to amounts spent on land during the park construction period with the obtaining of rights to use the land, indemnities and rents paid to landowners;
c. No supporting documents were presented to substantiate the allegations.
- Depreciation practiced beyond the maximum useful life period of assets (paragraph d) of article 34, no. 1 of CIRC)
a. The taxpayer states that the depreciation and amortization deductions practiced beyond the useful life period were added in field 775 of the respective model 22 IRC statements for the years under analysis, in addition to being identified in the respective depreciation and amortization schedules;
b. We verified in fact that the amounts are properly identified in the depreciation and amortization schedules in the column corresponding to non-accepted reversals and amortization;
c. However, this amount was not added for purposes of determining IRC taxable income, since depreciation and amortization deductions not accepted as expenses, under article 34, no. 1 of CIRC are added in field 719 of the model 22 IRC statement and this field in the taxpayer's model 22 statements for the years 2012, 2013 and 2014 has no value;
d. Field 775 of the model 22 IRC statement is intended to record amounts to be deducted from income calculated by accounting that are not expressly provided for in previous fields;
e. Thus, it is proven that the company did not deduct these amounts for purposes of calculating IRC taxable income for the years 2012, 2013 and 2014.
Conclusion:
From the above, the allegations presented do not present any evidence that contradicts what was stated, therefore the corrections proposed in chapter III of this report are maintained.
G) During the inspection of K..., in response to a request for clarification on the "amortization of land," an email message was sent to the tax inspection service contained in document no. 7 attached with the request for arbitral ruling, whose content is reproduced, in which the following is stated, among other things:
Dear Inspector
Further to the email below, we hereby inform you that:
K... is not, and has never been, the owner of any land,
The 2 wind parks it owns are located on land leased to third parties (private individuals, companies, unclaimed land), in relation to which it pays the respective rents
The amounts identified, in the amortization schedule, as land refer to amounts spent on land during the park construction period, such as obtaining the rights to use the land for the implementation of the parks and indemnities and rents paid to landowners during the park construction period.
At your disposal for any additional clarifications deemed necessary
H) K... submitted the model 22 statement for the 2014 tax year, contained in document no. 6 attached with the request for arbitral ruling, whose content is reproduced, in which no value is indicated in field 719 (relating to amounts "to be added" for determining taxable profit) and the amount of 196,363.88 is indicated in field 775 (relating to amounts to be deducted for determining taxable profit), which is the net amount indicated in the "Schedule of Reversals and Amortizations" as relating to "Non-accepted Reversals and Amortizations" calculated on the basis of the amount relating to the total of reversals and amortizations (208,366.37) less the amount of € 12,002.45, relating to "non-accepted reversals and amortizations" (document no. 19 attached with the request for arbitral ruling, whose content is reproduced);
I) In 2014, K... held in its assets 25 wind turbines, installed on leased land, identified in the property records contained in document no. 15 attached with the request for arbitral ruling, whose content is reproduced;
J) In the Simplified Business Information Statement ("IES") for 2014, submitted by K..., there is no record of accounting for any land (document no. 17 attached with the request for arbitral ruling, whose content is reproduced);
K) The K... Park (the "Park"), is located along approximately 10 km (document no. 8 attached with the request for arbitral ruling, whose content is reproduced);
L) The amounts referred to with the designation "land" recorded with code 2470 do not relate to land that is the property of K...;
M) K... incurred costs with the rights to use the land, incurred up to the initial phase of construction of K... Park, on the basis of lease agreements (documents nos. 9 to 14 attached with the request for arbitral ruling, whose contents are reproduced);
N) Among the corrections made in the TIR relating to the inspection of D..., contained in Annex III to the TIR relating to the Requesting Party, whose content is reproduced, corrections are included in the amount of € 5,220,292.54 relating to "Carryforward of net financing costs from previous taxation periods (art. 67)," and € 1,200,000.00 recorded in account "68881 – Indemnities," on which the TIR states, among other things, the following:
1.4.2 - Carryforward of Net Financing Costs from Previous Taxation Periods (art. 67)
The taxpayer further deducted from the 2014 taxable income, in field 795 [Carryforward of net financing costs from previous taxation periods (art. 67)] of table 07 of the DRmod22, the amount of € 5,220,292.24, relating to the carryforward of net financing costs not deducted from the taxable income of the year 2013.
However, paragraphs b) and c) of article 67, no. 5 of CIRC provide, by application to the case of financing costs incurred and non-deductible in years prior to the application of the regime, that the deduction should be made in the group's income, but up to the limit provided in no. 1 of that regulation, corresponding to the company to which they relate.
Thus, given that the net financing costs of the company for the year 2014 already exceed the limit provided in no. 1 of the same regulation, there is no margin for the deduction of net financing costs not deducted in prior periods, therefore the amount of € 5,220,292.24 incorrectly deducted from taxable income will be corrected, in accordance with paragraphs b) and c) of article 67, no. 5 of CIRC (see section III.2).
1.4.3 - Expenses Not Accepted for Tax Purposes
The taxpayer improperly recognized as a tax expense the amount of € 1,200,000.00 recorded in account "68881 - Indemnities."
In the year 2014 D... agreed with the Municipal Chamber of ... that it would definitively waive the right to acquire free of charge a 5% interest in the capital stock of N... LDA, held in its entirety by the taxpayer, with the counterpart being the payment of € 1,200,000.00.
The taxpayer incorrectly considered that the payment made to CM..., as indemnity for the latter waiving the right it held, constituted an expense, having recognized it in accounting as such and that it was a tax-deductible expense.
In fact, this transaction, which resulted in the assumption of full right over the interest held in the capital stock of PET, given that by the agreement established the burden on this interest ended, is not in fact an expense but rather a cost related to the interest, which should be capitalized in its value and classified as an asset, and is not tax-deductible under article 23, no. 1 of CIRC.
In light of the above, the expense improperly recognized by the taxpayer is not accepted for tax purposes under article 23 of CIRC, therefore the amount of € 1,200,000.00 is added back to the taxable income (see section III.3).
(...)
III.2 - Carryforward of Net Financing Costs from Previous Taxation Periods (art. 67)
As referred to in the previous section, the taxpayer declared in field 795 [Carryforward of net financing costs from previous taxation periods (art. 67)] of Table 07 of DRMod22, the total of € 11,327,362.74, which breaks down as follows:
• The amount of € 6,107,070.50 (analyzed in section III.1);
• The amount of € 5,220,292.24 (analyzed in section III.2).
A. The Facts
Thus, in addition to the amount mentioned in the previous section, the taxpayer further incorrectly deducted from taxable income the amount of € 5,220,292.34 (DRmod 22 - table 07 - field 795 [Carryforward of net financing costs from previous taxation periods (art. 67)]) relating to the carryforward of net financing costs, not deducted from its taxable income for the year 2013.
In order to justify the adjustments made in DRmod22, the taxpayer was notified as follows: "Please itemize and justify these adjustments, presenting all supporting documentation for the calculation of those amounts, and demonstrate their tax deductibility, in particular under article 67 of CIRC."
In response, it presented the following justification, and the following table for calculating non-deductible net financing costs: "The adjustments entered in fields 743 and 795 of Table 07 of the Model 22 Income Statement result from the strict application of the provision of article 67 of the Corporate Income Tax Code, under the option exercised under its no. 6 (under which the net financing costs of the group of companies subject to the special regime for taxation of groups of companies are calculated), without prejudice to the exercise of the right to carryforward, over five taxation periods, of the excess net financing costs of a given taxation period, a right that, under the law, is not prejudiced by the aforementioned option of calculating those same costs from a group perspective. Thus, the amount entered in field 795 corresponds to the algebraic sum of the amounts entered in field 748 in the Model 22 statements relating to the 2013 and 2014 tax years."
B. Accounting-Tax Framework
Paragraphs b) and c) of article 67, no. 5 of CIRC provide:
"5 - In cases where there is a group of companies subject to the special regime provided for in article 69, the dominant company may opt, for purposes of determining the taxable profit of the group, for the application of the provisions of this article to the net financing costs of the group as follows:
"a) (...)
b) Net financing costs of group companies relating to taxation periods prior to the application of the regime and still not deducted can only be considered, under the terms of no. 2, up to the limit provided in no. 1 corresponding to the company to which they relate, calculated individually;
c) The portion of the unused limit, referred to in no. 3, by group companies in taxation periods prior to the application of the regime can only be added, under those terms, to the maximum deductible amount of net financing costs of the company to which they relate, calculated individually;"
As referred to in the previous section, the dominant company (A..., S.A) opted, under the terms of nos. 5 and 7 of article 67 of CIRC, for the application of the provisions of this article regarding the limitation on deductibility of financing costs in the group of companies, for purposes of determining taxable profit. Such option has effect from 01.01.2014.
Thus, the amount to be deducted in the year 2014, relating to financing costs not deducted in years prior to the application of the regime, should operate in the group's income, but up to the limit provided in no. 1 of the article, corresponding to the company to which they relate.
Now, the net financing costs of D..., calculated individually, as we have noted in the previous section (II 1.1), already exceed the limit provided in no. 1 of the aforementioned regulation, in the amount of € 6,107,070.50, with no margin remaining for the deduction of net financing costs not deducted in prior years. This situation determines that the taxpayer could not have deducted from the taxable income of the year 2014, the carryforward from the year 2013 in the amount of € 5,220,292.24.
It should be added that, in accordance with the instructions for completing the model 22 income statement (Order no. 15632/2014 of the Secretary of State for Tax Affairs) - IRC 2014, which state "Field 395 must be completed by the dominant company that has opted, for purposes of determining the taxable profit of the group, for the application of no. 5 of article 67 of CIRC to the group's net financing costs, when these exceed the limits provided for in that article," if, hypothetically, it were possible to use the carryforward of net financing costs, not deducted from the company's taxable income in the previous year, under the terms of paragraphs b) and c) of no. 5 of article 67 of IRC, this deduction would have to operate in the taxable income of the group, in field 395 of table 09 of the group's DRmod22, and not in the company's taxable income, as A... incorrectly did.
C. Conclusion
Thus, given that in 2014 the limit provided in no. 1 of article 67 is already exceeded, the carryforward of net financing costs not tax-deducted in the year 2013 of company D... cannot be used, correcting the amount of € 5,220,292.24 incorrectly deducted from taxable income, in accordance with paragraphs b) and c) of no. 5 of article 67 of CIRC.
III.3. - Expenses Not Accepted for Tax Purposes
1. The Facts
1.1 - Accounting Records
The taxpayer recorded as an expense € 1,200,000.00 in account "68881 - Indemnities," as a "payment" in that amount made to the Municipal Chamber of ... in 2014, under a contract executed in 2014 (Annex 1).
The accounting entry no. ... of 18-12-2014, shows the debit in account "68881 - Indemnities" and credit in account "2785002343 – A..., S.A", in the amount of € 1,200,000.00, and has the description "Purchase from the Chamber of ..." (Annex 2).
In summary, the transaction under analysis is described by the taxpayer as follows.
It is based on an agreement entered into in 1999 with the Municipality of ..., which allowed it to hold a 5% interest, free of charge, in the capital stock of the company to be formed for the operation of wind parks in the municipality of ... (Wind Park of N..., Lda.);
The right of the Municipality of ... corresponded to an obligation (contingent liability) in the company that held the Wind Park of N..., Lda., D...;
D..., in order to relieve itself of this obligation, proposed to indemnify the Chamber of ...;
The Chamber of ..., agreed to - as set out in the Deliberation Proposal attached to the Agreement, which was subsequently confirmed by the Municipal Assembly - waive its right, in exchange for receipt of a monetary sum of € 1,200,000.00."
(...)
As the taxpayer informed, as negotiations between the shareholders of group B... and a business group based in Hong Kong were taking place in this period, for acquisition of group B... by the latter, D..., despite being the holder of the entire capital stock of PET, the burden of the CM ... being able to exercise its right to acquire 5% of the capital stock of PET free of charge weighed on this interest, therefore it entered into negotiations with the CM ... to end this obligation.
Thus, it was agreed that the CM ... would definitively waive the right to subscribe 5% of the capital of PET, and in return D... would pay the amount of € 1,200,000.00, which occurred, as can be verified by the payment receipts contained in Annex 7. This resulted in D... holding full and unencumbered ownership of the 5% interest in PET, which under the aforementioned terms would be assigned to CM....
The taxpayer chose to record this payment as an expense, considering it to be an indemnity paid to CM ... for the latter to waive the right it held over the company PET. As the taxpayer itself admitted, with negotiations for the sale of the group underway, the fact that this burden weighed on one of the group's companies conditioned the process and the value under negotiation.
2. Accounting-Tax Framework
As we will demonstrate below, this cost was improperly recorded as an expense, failing to meet the requirements for such classification as advocated in international accounting standards, and should instead be capitalized and added to the initial acquisition cost of the interest in PET, increasing the recorded value of the interest, which in substance corresponds to the transaction under analysis.
2.1 - Accounting Framework
The taxpayer, regarding this transaction, chose to record as an expense the amount of € 1,200,000.00, as payment of an indemnity to CM....
It is entirely inaccurate to characterize this transaction as an indemnity, given the definition of this term which refers to "giving or receiving compensation for injury or loss suffered; indemnifying," as well as, by way of example, all references in the Civil Code to this term that refer to compensation owed to someone for damage, breach of contract, violation of a right, etc., situations quite different from the one we are analyzing.
In fact, D... did not indemnify CM ... for any breach of contract, but rather the opposite; both agreed that the latter had a right to acquire 5% of the capital stock of PET, and that the former was willing to pay the amount of € 1,200,000.00 for that right not to be exercised. It was certainly not a payment of any indemnity.
In accordance with the notes attached to the company's financial statements, paragraph 1.1 (bases of presentation), these "were prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). IFRS includes the standards issued by the International Accounting Standards Board (IASB) as well as the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and their predecessor bodies."
For this reason, our analysis necessarily passes through compliance with the criteria for recognition of elements in financial statements advocated in international standards.
The Conceptual Framework for the Presentation and Preparation of Financial Statements of IASB 4 states that the recognition of elements of financial statements "is the process of incorporating into the balance sheet and income statement an item that meets the definition of an element and satisfies the recognition criteria established in paragraph 83 (...)" (paragraph 82).
Paragraph 83 establishes that "an item that meets the definition of a class should be recognized if:
a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and
b) the item has a cost or a value that can be measured reliably."
In this sense, the criteria defined for the recognition of expenses are set out in paragraphs 94 to 98, and define that:
Paragraph 94: "Expenses are recognized in the income statement when there has been a decrease in future economic benefits related to a decrease in an asset or an increase in a liability and that can be measured reliably. (...)";
Paragraph 95: "Expenses are recognized in the income statement on the basis of a direct association between the costs incurred and the obtaining of specific revenues. This process, generally referred to as the matching of costs with revenues, involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events; (...)";
Paragraph 97: "An expense is immediately recognized in the income statement when the expenditure produces no future economic benefit or when, and only if, the future economic benefits do not qualify, or cease to qualify, for recognition on the balance sheet as an asset."
On the other hand, we have the criteria for recognition of assets (paragraphs 89 and 90), which indicate the following:
• Paragraph 89: "An asset is recognized on the balance sheet when it is probable that future economic benefits will flow to the entity and the asset has a cost or a value that can be measured reliably".
• Paragraph 90: "An asset is not recognized on the balance sheet when the expenditure has been incurred in relation to which it is considered unlikely that economic benefits will flow to the entity beyond the current accounting period. Instead, such a transaction results in the recognition of an expense in the income statement. This treatment does not imply that management's intention, in incurring the expenditure, was other than to generate future economic benefits for the entity, or that management was ill-advised. The only implication is that the degree of certainty that economic benefits will flow to the entity beyond the current accounting period is insufficient to justify the recognition of an asset."
Thus, having in mind the criteria for recognition of expenses and assets, defined in IASB's conceptual framework, let us analyze the transaction carried out by the taxpayer.
An asset should be recognized when it is probable that future economic benefits will flow to the entity and the asset has a cost or a value that can be measured reliably.
Arising from this transaction, D... no longer has the contingency of having to give 5% of the interest in PET at any time, thus obtaining full right over the interest, and the amount of € 1,200,000.00 is measured reliably, since it resulted from an agreement between the interested parties.
It is also stated in paragraph 53 (IASB's conceptual framework), regarding the criteria for recognition of assets, that "The future economic benefits incorporated in an asset are the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. The potential may be a productive potential that forms part of the entity's operational activities. It may also take the form of convertibility into cash or cash equivalents or the ability to reduce cash outflows. (...)".
It follows from this premise, applied to the case at hand, that the payment by D... of the amount of € 1,200,000.00 to CM ..., allows a reduction of future cash outflows, given that it avoids the alienation of the 5% interest in PET, free of charge, in favor of CM....
In light of the above, it is clearly concluded that in the transaction in question, the payment of € 1,200,000.00 to CM ... meets the requirements for recognition of an asset, being a cost directly attributable to the acquisition and control of the financial interest that D... holds in Wind Park of N..., therefore the following sets out its characterization and classification as an asset.
International Accounting Standard 27 - Consolidated and Separate Financial Statements determines that the financial statements of investments in subsidiaries must be accounted for either by the cost method or in accordance with IAS 39 (Financial Instruments: Recognition and Measurement).
The cost method consists of accounting for an investment in which it is recognized at cost at the date of acquisition. Generally, costs related to the initial acquisition may be considered to include all costs that the entity incurs to acquire an asset that allows it to have full disposal of it.
In the transaction under analysis, all types of charges related to the acquisition of the interest, even if they do not occur on the same date, are attributable to the initial acquisition cost. Thus, the charge that the taxpayer recorded in 2014 is attributable to the initial acquisition cost at the time of obtaining control of the company Wind Park of N..., in the year 2005, since at this date the company was already aware that this charge would materialize, and it is not possible to record it solely on the grounds that it was not yet quantifiable.
Also, IAS 39 - Financial Instruments - Recognition and Measurement, defines transaction costs, which may be applied to this transaction, with the necessary adaptations, as "... incremental costs that are directly attributable to the acquisition, issuance or disposal of a financial asset or a financial liability. An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument."
Thus, as was explained in detail in the previous section (1.3 - description of the transaction), the taxpayer made in the year 2014 a payment of € 1,200,000.00 to the Municipal Chamber of ..., in compliance with a contract of 1999, which stipulated that the latter could acquire free of charge a 5% interest in Wind Park of N.... That is, when D... acquired control of PET in the year 2005, it was already aware of this charge, but did not recognize it at that date, since it could not yet quantify the amount, capitalizing it in the acquisition cost of the interest.
2.2 - Tax Framework
As stated, the taxpayer chose to record an expense, which it considered as tax-deductible, but which as previously demonstrated does not meet the criteria for recognition of an expense as advocated by International Accounting Standards. It is an asset that increased the value of the financial interest it held in Wind Park of N..., Lda.
In light of tax law, article 23, no. 1 of CIRC states that "For determining taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or secure income subject to
Under the general regime for taxation of legal entities, profit is the basis for taxation of a company. Under article 3, no. 1, paragraph a) of CIRC, IRC applies to the profit of commercial companies or civil companies in commercial form.
The profit referred to in article 3 of CIRC is the taxable profit, which consists of the difference between the values of net assets at the end and at the beginning of the taxation period, with the corrections established in that code.
Under article 17, no. 1 of CIRC, "the taxable profit of legal entities (...) is constituted by the algebraic sum of the net result of the period and the positive and negative patrimony variations verified in the same period and not reflected in that result, determined on the basis of accounting and eventually corrected in accordance with this Code."
Additionally, article 3, no. 2 of CIRC determines that profit, on which IRC is levied, consists of the difference between the values of net assets at the end and at the beginning of the taxation period, therefore, as D... has recorded an expense improperly, the profit subject to IRC being influenced incorrectly by this fact, the correction will be made in the amount of € 1,200,000.00.
Now, bearing in mind the above, it is evident that the recording of the aforementioned expense does not comply with accounting standardization, which would require the recording of an asset and, for that reason, its eligibility, as an expense, cannot be assessed in light of the regulation that constitutes the general rule of deductible expenses, or otherwise for IRC purposes, set out in article 23 of CIRC.
In fact, that regulation, while not establishing a precise definition of the concept of tax expense - but dealing, however, only with tax expenses - rather lists a non-exhaustive list of tax-deductible expenses, considering as expenses for tax purposes those that are borne by the entity to obtain or secure income subject to IRC.
Thus, this concept will include expenses that meet the general requirements necessary for tax deductibility, of which the following stand out: material evidence, indispensability, the connection of expenses with revenues and the effectiveness of the expenses incurred.
In light of the above, it must be concluded that the assessment of the deductibility of expenses will be made precisely, and ab initio, on the basis of whether they can constitute, or not, expenses. In the disputed situation, and as we have shown extensively, we are not in the presence of an expense due to the error underlying its accounting record, but rather of an asset. In that measure, the relevance that the taxpayer seeks to attribute to the expense, incorrectly recorded as such, is placed in crisis by article 23 itself, since any assessment of its eligibility cannot be made once we are in the presence of an asset, which should have been accounted for as such and never as an expense.
In this way, and in light of the provision of article 23 of the Corporate Income Tax Code, the conditions are not met for the expense, improperly accounted for from an accounting perspective, to be relevant for purposes of determining taxable income, a reality that determines that it should be subject to correction for purposes of calculating that income.
3. Conclusion
D... improperly affected the net result of the exercise in the amount of € 1,200,000.00, recorded as an expense relating to the payment made to the Municipal Chamber of ..., as a result of the agreement established between the parties to end the right that the latter held to acquire free of charge 5% of the capital stock of Wind Park of N..., LDA (company held entirely by D...).
The taxpayer incorrectly considered that the "payment" it made to CM..., as indemnity for the latter waiving the right it held, constituted an expense, having recognized it in accounting as such and that it was a tax-deductible expense.
In fact, this transaction, which resulted in the assumption of full right over the interest held in the capital stock of PET, given that by the agreement established the burden on this interest ended, is not in fact an expense but rather a cost related to the interest (which would have to be capitalized in its value and classified as an asset), and is not tax-deductible under article 23, no. 1 of CIRC.
In light of the above, the expense improperly recognized by the taxpayer is not accepted for tax purposes under article 23 of CIRC, therefore the amount of € 1,200,000.00 is added back to taxable income.
O) Among the corrections made in the TIR relating to the inspection of C... SGPS, S.A, which is contained in Annex II to the TIR relating to the Requesting Party, whose content is reproduced, a correction is included relating to "deductibility of financing costs mentioned in the Model 22 statement of 2014," on which the TIR states, among other things, the following:
III - DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER
From the analytical balance sheets, account extracts and other elements provided by the taxpayer, the following information was extracted:
a) In the year under analysis, the company's accounts show the following remunerated loans:
Q.II. Loans Obtained
b) In the year under analysis, the company incurred the following financing costs.
Q.III. Financing Costs Incurred
The loans granted by D... are described as covering treasury shortfalls (as per contracts provided).
The loans granted by A... (parent company) are in the nature of capital contributions.
c) In the year under analysis, the company did not grant any remunerated loans.
The company's accounts show the following amounts for non-remunerated loans granted to company D..., Lda.
Q.IV. Loans Granted
From the amount entered in line 795 of Table 7 of M.22
Given the quantitative and qualitative nature of the financings described above, it was important to understand the source of the deduction in the amount of 14,369,632.64 € entered in line 795 - carryforward of net financing costs from previous taxation periods, of Table 7 of the Model 22 statement of the year, as well as the amount of 8,557,394.65 € added in line 746 – limitation on deductibility of net financing costs, of the same Table 7.
When the company's external auditor was questioned by email (...pt), we were informed of the following:
"In 2014, the group exercised the option provided for in no. 5 of article 67° of CIRC. In 2014, the group not only had no non-deductible financial expenses but presented sufficient slack to absorb the financial expenses not deducted (and as such taxed) in 2013."
"Now, in accordance with paragraph no. 22 of Circular no. 5/2015, "... Having exercised the option provided for in no. 5 of article 67.° ..., there should still be, if applicable, correction of the taxable profit of the group for the effect of the application of the option established therein.". However, field 395 of the group statement did not allow adjustments with a negative sign, which made it impossible to apply in practice nos. 21 to 23 of that Circular, despite the group having effectively exercised that option. In light of the above, the group, unable to correct in the group statement the adjustment relating to financial expenses, opted to do so in the individual statements, in order to comply with the provision of the Circular, in particular in its aforementioned paragraph no. 22."
"In this way, the amount entered in field 795 of the Model 22 statement corresponds to the sum of (i) the financial expenses added in field 748 of the Model 22 statement of 2013, 5,812,237.99 €, with (ii) the financial expenses added in field 748 of the same statement relating to the year 2014, 8,557,394.65 €."
Of the Deductibility of Financing Costs Mentioned in the Model 22 Statement of 2014
• Of the financial expenses added in field 748 of the M.22 statement for 2013 - 5,812,237.99€
The amount to be deducted in 2014, relating to financing costs of prior periods (as in the case at hand) under paragraph b) of no. 5 of article 67 does not benefit from the "group" limit but would only go up to the limit provided for in no. 1 of article 67 of CIRC, corresponding to the company to which they relate - C... - calculated individually, which implies that, first, one must consider whether there is slack in 2014 for expenses from prior periods.
It so happens that, in the 2014 tax year, the company incurred financing costs in the amount of 9,566,235.00 €, which, given that it did not present positive results in the 2014 tax year (EBITDA), no amounts from prior years are deductible, since the limit of 1,000,000.00 € provided for in paragraph a) of no. 1 of article 67 of CIRC was used by the taxpayer with financing costs from its own year, with no slack for expenses from prior periods.
• Of the financial expenses added in field 748 of the M.22 statement for 2014 - 8,557,394.65
The total of financing costs incurred by the company in the year 2014 was 9,566,235.00 €.
The value of financing costs resulting from the application of no. 5 of article 67 of CIRC - the net financing costs of the group, when these exceed the limits provided for in that article, should not be entered in the Model 22 statement of the participating company, as the deduction materializes in the sphere of the dominant company and consequently in the Model 22 statement of the group of companies.
Note - The Model 22 statement of the year 2014 of the consolidated group presents a result that reflects the value of financing costs considered deductible in 2014 by C....
Even if this were not the case, it would not be possible to deduct the financing costs under analysis due to the limitation already provided in article 23 of CIRC - which deals with the deductibility of only expenses (financing) incurred in a way to obtain or secure income subject to IRC. If in the old wording the concept of "indispensability" was present, it subsists (and is given emphasis) the need (on the part of the taxpayer) and obligation (on the part of the AT) to verify whether there exists a causal link between the expenses incurred (the expenditure) and the obtaining of income subject to IRC.
In light of the above, if the financing obtained were based on the obtaining of taxable income in the sphere of the SGPS, namely those resulting from the provision of services to the participating companies within the scope of the functions of an SGPS (Decree-Law no. 495/85, of 30 December - Legal regime of SGPS), the expenses originating in it will meet the requirements for their deductibility – examples of these financings would be those that served, for example, to purchase administrative equipment for the SGPS (STA, 26/06/2001, case no. 4783/01, Rapporteur: Valente Torrão).
If this were not the case, it would be unnecessary to mention the need for these expenses to be incurred to obtain or secure income subject to IRC, leaving management discretion to select the expenses to be incurred by the company, regardless of their beneficiary and/or the objective of that expense.
In a manner consistent with the above described, under article 67 of CIRC (for purposes of calculating deductible expenses), some income components were excluded for tax purposes, such as distributed profits or reserves, capital gains or losses, components that do not contribute to the taxable profit of the taxpayer - paragraph d) of article 67, no. 13 of CIRC.
If financing expenses incurred with loans to participating companies do not generate other income than that which, through the participation exemption regime, do not contribute to taxable profit (and are therefore not subject to any taxation), they will not be deductible. For the same reason, income (dividends, capital gains) that do not contribute to the formation of taxable profit cannot be part of the tax concept of EBITDA, since deductible expenses in the sphere of any company are only those incurred to obtain or secure income subject to IRC - the deductible expenses that pass the test of article 23 of CIRC - we thus have that, for purposes of article 67 of CIRC (which limits their deductibility to a certain value), we could not include as a component of EBITDA income without associated deductible expenses, which would allow the deductibility of financing expenses, in an amount far exceeding the income subject to IRC of the SGPS.
In light of the above, it is verified that the totality of financing costs incurred in the 2014 tax year and financing costs not deducted in the 2013 tax year, had a negative impact on the taxable profit of the year in the amount of 15,378,472.99 € (5,812,237.99 € (2013) + 9,566,235.00 € (2014)).
Therefore, not being deductible, the following corrections to the taxable profit of the 2014 tax year result:
P) Regarding the TIR relating to C... SGPS, S.A, an opinion was issued by the Team Leader, with which the Finance Director of Lisbon expressed agreement, in which the following is stated, among other things:
OPINION OF THE TEAM LEADER
I confirm the content of this Inspection Report.
This inspection procedure results in corrections to financing costs deducted by the taxpayer in the tax year under analysis, in the total amount of € 15,378,472.99.
As duly substantiated in chapter III of the attached report, the taxpayer improperly proceeded, under article 23° of CIRC - which supersedes the provision of article 67° of CIRC - , to the deduction of the total amount of financing costs incurred and recognized in the financial statements of the 2014 tax year in the amount of € 9,566,235.00, as well as financing costs not deducted in the 2013 tax year, in the amount of € 5,812,237.99.
The taxpayer was notified under articles 60 of LGT and RCPITA for the exercise of prior hearing, but after the deadline has elapsed and to this date, it was found that the taxpayer did not exercise the right of hearing.
In light of the above, the following was carried out:
-
Preparation of the correction document in accordance with the corrections determined in the report;
-
Filing of the competent Notice of Action, which should be sent to the Finance Service of Oeiras –... ... (...).
Under and for purposes of article 62, no. 2 of RCPITA and article 77 of LGT, I propose the notification of the taxpayer of the result of this inspection action.
Q) Following the inspections, the Portuguese Tax and Customs Authority issued IRC assessment no. 2018..., as well as the compensatory interest calculation statements nos. 2018... and no. 2018... and the settlement adjustment statement no. 2018..., relating to the 2014 tax year, determining the total amount of € 5,718,745.66 to be paid, with payment deadline on 10-12-2018 (document no. 2 attached with the request for arbitral ruling, whose content is reproduced);
R) The computer application of the Portuguese Tax and Customs Authority for completing the model 22 statement for the 2014 tax year of the group did not allow, in field 395, the insertion of adjustments with a negative sign (in favor of the taxpayer), which is why the Requesting Party made the adjustments resulting from the application of no. 5 of article 67 of CIRC in the individual statements of C... and D...;
S) The Requesting Party provided a bank guarantee to suspend the coercive collection ...2018..., which was instituted for the coercive collection of the assessment contested in this process (documents nos. 3 and 4 attached with the request for arbitral ruling, whose contents are reproduced);
T) On 11-03-2019, the Requesting Party submitted the request for arbitral ruling that gave rise to this process.
2.2. Unproven Facts and Justification of the Decision on the Factual Matter
It was not proven that K... is the owner of any land nor that the expense in the amount of € 87,923.31 indicated with code 2470, relating to development projects, relates to land amortization.
In fact, the property records attached to the case file show that K...'s wind turbines are installed on leased land.
Moreover, as the titularity of land ownership is a fact known to the Portuguese Tax and Customs Authority, the fact that the latter has not presented any evidence that K... was the owner of land corroborates the Requesting Party's assertions.
3. Question of the Correction to the Taxable Matter of K... Relating to Depreciation Relating to "Land"
The company K... recorded in the item Expenses/reversals of depreciation and amortization, in the years 2012, 2013 and 2014, depreciation in the amount of € 87,923.31, relating to assets designated as "land," but registered with code 2470, which corresponds to Development projects.
The Portuguese Tax and Customs Authority understood that, as land, as a rule, does not suffer deterioration, expenses for depreciation are not accepted, which led to the dismissal of tax deductibility.
However, as results from the factual matter established, it was not proven that K... was the owner of any land.
On the other hand, the assertions that the Requesting Party makes that such amount refers to sums spent during the park construction period, namely with obtaining rights to use the land, indemnities and rents paid to landowners, appear credible.
In fact, these assertions are not contradicted by any evidence and are corroborated by the lease agreements attached to the case file.
Moreover, as the Portuguese Tax and Customs Authority has the generality of real rights over land, which appears in the property matrices, the fact that it has not been able to identify any right over land held by K... points to the conclusion that such amount does not relate to land depreciation.
Thus, the evidence produced points to the conclusion that land depreciation does not underlie that amount.
Therefore, the correction made is based on "facts" that do not correspond to reality (being a matter of land depreciation), and thus suffers from a defect of error regarding the factual presuppositions, which constitutes a defect of violation of law and justifies the annulment of the assessment in the respective part, under article 163, no. 1, of the Administrative Procedure Code subsidiarily applicable under article 2, paragraph c), of LGT.
4. Question of the Correction to the Taxable Matter of K... Relating to Depreciation Practiced Beyond the Maximum Useful Life Period
The Parties are in agreement as to the fact that depreciation was carried out by K... beyond the maximum useful life period of the depreciated assets and that, to that extent, cannot be relevant for determining taxable profit.
The amount of such depreciation not relevant for determining taxable profit is € 12,002.45.
In exercising the right of hearing, K... clarified that depreciation and amortization deductions practiced beyond the useful life period were added in field 775 of the respective model 22 IRC statements, in addition to being identified in the respective depreciation and amortization schedules.
The Portuguese Tax and Customs Authority confirmed that "the amounts are properly identified in the depreciation and amortization schedules in the column corresponding to non-accepted reversals and amortization," but made a correction because "this amount was not added for purposes of determining IRC taxable income, since depreciation and amortization deductions not accepted as expenses, under article 34, no. 1 of CIRC, are added in field 719 of the model 22 IRC statement, and this field in the taxpayer's model 22 statements for the years 2012, 2013 and 2014 has no value" and "field 775 of the model 22 IRC statement is intended to record amounts to be deducted from income calculated by accounting that are not expressly provided for in previous fields."
As results from the factual matter established, K... indicated no value in field 719 (relating to amounts "to be added" for determining taxable profit), but indicated in field 775 (relating to amounts to be deducted for determining taxable profit) the amount of € 196,363.88, which is the net amount indicated in the "Schedule of Reversals and Amortizations" as relating to "Non-accepted Reversals and Amortizations" calculated on the basis of the total amount of reversals and amortizations (208,366.37) less the amount of € 12,002.45, relating to "non-accepted reversals and amortizations."
That is, although it has not indicated in field 719 the amount of € 12,002.45 relating to the portion of depreciation not accepted, K... did not consider that amount as an expense, as it reduced that amount from the total value of reversals and amortizations that it indicated in field 775.
Although the interpretation of the amortization schedule is not absolutely clear, the Portuguese Tax and Customs Authority recognizes that "the amounts are properly identified in the depreciation and amortization schedules in the column corresponding to non-accepted reversals and amortization" and does not argue that what is alleged by the Requesting Party does not correspond to reality, having made the correction, as follows from the justification contained in the TIR, only because the Requesting Party has not indicated value in field 719 (relating to amounts "to be added" for determining taxable profit). However, since the Requesting Party indicated in field 775 (relating to amounts to be deducted for determining taxable profit) not the total value of depreciation and amortization (208,366.37) but the amount of € 196,363.88, which corresponds to that total value less the amount of amortizations exceeding the maximum useful life period of depreciated assets (€ 12,002.45), it is concluded that the expense that K... considered relating to reversals and amortization was precisely what should be considered in the amount of € 196,363.88.
As material truth is relevant for purposes of determining taxable profit (as appears from article 58 of LGT) and not the formal correction of completion of the model 22 statement, it must be concluded that the correction made regarding these non-accepted amortizations has no legal basis, as the amount that should be considered as an expense was precisely what was considered.
Therefore, the assessment contested suffers from a defect of violation of law, due to error regarding the factual and legal presuppositions as to this correction, which justifies the annulment of the assessment in the corresponding part, under article 163, no. 1, of the Administrative Procedure Code subsidiarily applicable under article 2, paragraph c), of LGT.
5. Question of the Non-acceptance of Financing Costs Relating to the Year 2013, in the Amount of € 11,032,530.23
5.1. Positions of the Parties
The Requesting Party deducted from the group's taxable income, in the 2014 tax year, financing costs borne in the 2013 tax year, in the amount of € 11,032,530.23.
The aforementioned amount consists of the sum of the amounts of two corrections made by the Portuguese Tax and Customs Authority relating to financing costs borne in the 2013 tax year by two companies in the group of which the Requesting Party is the dominant company:
– the amount of € 5,812,237.99 relates to C...;
– the amount of € 5,220,292.54, relates to D....
In making such deductions, the Requesting Party applied the provision of article 67, no. 5, of CIRC, in the wording introduced by Law no. 2/2014, of 16 January, which came to allow that "in cases where there is a group of companies subject to the special regime provided for in article 69, the dominant company may opt, for purposes of determining the taxable profit of the group, for the application of the provision of this article to the net financing costs of the group."
The Requesting Party made such option, but the Portuguese Tax and Customs Authority understood that, regarding financing costs borne in the 2013 tax year, the limit of deductible net financing costs is not determined on the basis of the group's result, with the "limit provided for in no. 1 of article 67 of CIRC, corresponding to the company to which they relate" (...) calculated individually, which implies that, first, one must consider whether there is slack in 2014 for expenses from prior periods."
Observing that the net financing costs of C... and D..., relating to the 2014 tax year, calculated individually, already exceeded the limit provided for in no. 1 of article 67, the Portuguese Tax and Customs Authority concluded that there was no margin for the deduction of net financing costs not deducted in prior years.
The Requesting Party contends in this process that, following the option it made under no. 5 of article 67, in the 2014 wording, the deduction of 2013 financing costs of the aforementioned companies should be made taking into account the fiscal result of the Group in the 2014 tax year, as such group was already constituted, for purposes of RETGS, in that same year of 2013.
The Requesting Party contends, in summary, the following:
– there is at issue a succession of laws relating to the limitation of deductibility of financing costs that arises at a moment when a certain economic group – specifically, Group B... – benefited from the application of RETGS;
– the logic underlying RETGS is that of aggregated taxation of the group, being based therefore on the consideration of the economic reality of the group of companies as a true unit;
– no. 5 of article 67 of CIRC, in the wording of Law no. 2/2014, "establishes in a relatively complete manner the tax treatment to be granted to financing costs that have been calculated prior to the application of RETGS and after the option for the application of that regime";
– after the entry into force of article 67, no. 5, of CIRC, the same treatment was given to financial expenses borne in the years 2013 and 2014;
– what is at issue is the application of the new wording of a norm, as found in 2014, to the financial expenses of the group existing at that date;
– the law of 2014 applies immediately, with prospective effect, to a right already constituted in 2013, which materializes in the possibility of carrying forward to subsequent years the amount of the excess of financial expenses still not deducted when the new wording entered into force;
– even if this were a retroactive application, it would be constitutionally admissible because it is favorable to the taxpayer;
– once the option for the application of RETGS and the calculation of limits on deductibility in accordance with the net financing costs of the group has been exercised, the taxable profit of each company within the group is affected by the limitation imposed by article 67, no. 5, paragraph a), of CIRC;
– accordingly, article 70 of CIRC was amended, now determining that the taxable profit of the group, once the option for the provision of no. 5 of article 67 has been exercised, could be calculated in a manner to adjust the algebraic sum of the profits and losses for the effect resulting from that option;
– no special provision, in particular, of transitional law, expressly provides for the treatment to be given to financing expenses already calculated in the year 2013 and which, by exceeding the limits of individual deductibility – in the wording and numbering of the norm in force in that year – could be considered in determining the taxable profit of one or more of the five subsequent taxation periods (cf. article 67, no. 2, of CIRC);
– the legislator did not wish to distinguish the deductibility of net financing costs depending on the year in which they were incurred – provided that, naturally, they had already been within the scope of the application of RETGS;
– no. 5 of article 67 of CIRC only makes a distinction between financing costs prior and subsequent to the application of RETGS;
– the financing expenses incurred in the year 2013 by C... and D... were already generated in the Group, i.e., when the "regime was applicable";
– by referring to taxation periods prior to the application of the "regime," the paragraphs in question refer to the regime alluded to in the body of no. 5 of article 67, that is, RETGS, and not the rules limiting the deductibility of financing costs, which is also concluded from the comparison of the rules with those of carryforward of tax losses;
– the amendment to article 67 of IRC and the provision for its application to RETGS aimed at discouraging "substitution behaviors and reorganizations motivated exclusively by the need to adapt business reality to its directives" and the Requesting Party complied scrupulously with such spirit, in that it maintained the financing structure it had before the Reform (until 2013), in the post-Reform scenario of IRC (in 2014 and subsequent years);
– under the principle, fundamental, of fiscal legality, it is necessary to conclude that the portion of the non-deductible limit – and therefore carryforward – of financing expenses incurred in 2013 (year in which RETGS was in force for all companies), must be deductible at the group level in the 2014 tax year, under penalty of, by understanding otherwise – as the AT ultimately intends – adopting a normative interpretation of article 67, no. 5, that violates the principle of legality, inherent in articles 103 and 165, paragraph i), of CRP.
The Portuguese Tax and Customs Authority maintains the understanding adopted in the inspections of C... and D....
5.2. Appraisal of the Question
Articles 67 and 70 of CIRC, in the wording of Law no. 66-B/2012, of 31 December, establish the following, as relevant here:
Article 67
Limitation on Deductibility of Financing Costs
1 — Net financing costs are deductible up to the greater of the following limits:
a) € 3,000,000; or
b) 30 % of the result before depreciation, net financing costs and taxes. (...)
2 — Net financing costs not deductible under the previous number may still be considered in determining taxable profit in one or more of the five subsequent taxation periods, together with the financial expenses of that same period, observing the limitations provided for in the previous number.
3 — Whenever the amount of financing costs deducted is less than 30 % of the result before depreciation, net financing costs and taxes, the unused portion of this limit accrues to the maximum deductible amount, under the same provision, in each of the five subsequent taxation periods, until its full use.
4 — In the case of entities taxed under the special regime for taxation of groups of companies, the provisions of this article apply to each of the companies in the group.
(...)
8 — For purposes of this article, net financing costs are understood as amounts due or associated with the remuneration of borrowed capital, in particular interest on bank overdrafts and loans obtained at short and long term, interest on bonds and other similar securities, amortization of discounts or premiums related to loans obtained, amortization of accessory costs inc
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