IRC Tax Benefits for Interior Regions Under Article 43 EBF – CAAD Ruling 18/2015-T

ARBITRAL DECISION

I – STATEMENT OF FACTS

A – PARTIES

1. A., with NIF …, with registered office at ..., ..., … Viseu, hereinafter referred to as the Claimant or taxpayer, requested, pursuant to the terms and effects of Articles 2 and 10, both of Decree-Law No. 10/2011, of 20 January, the constitution of this Singular Arbitral Court.

2. TAX AND CUSTOMS AUTHORITY (which succeeded the Directorate-General for Tax, by means of Decree-Law No. 118/2011, of 15 December) hereinafter referred to as the Respondent or AT.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD, and the Arbitral Court was duly constituted on 09-01-2015, to examine and decide upon the subject matter of the present proceedings, and automatically notified the Tax and Customs Authority on 09-01-2015, as recorded in the respective minutes.

4. The Claimant did not appoint an arbitrator, wherefore, under the provisions of No. 1 of Article 6 and subsection b) of No. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council designated Dr. Paulo Ferreira Alves, with the appointment being accepted in accordance with legal provisions.

5. On 06-03-2015 both parties were duly notified of this designation and did not express any intention to refuse the appointment of the arbitrators, in accordance with Article 11, No. 1, subsections a) and b), of the Rules of Arbitration Procedure and Articles 6 and 7 of the Deontological Code.

6. In accordance with the provision of subsection c) of No. 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the singular arbitral tribunal is duly constituted on 10-03-2014, and is materially competent, pursuant to Articles 2, No. 1, subsection a), and 30, No. 1, of Decree-Law No. 10/2011, of 20 January.

7. Both parties agree to dispense with the meeting provided for in Article 18 of the Rules of Arbitration Procedure.

8. Both parties possess legal capacity and standing, are legitimate and are properly represented (Articles 4 and 10, No. 2, of the same statute and Article 1 of Ordinance No. 112-A/2011, of 22 March).

9. The proceedings are not affected by defects that would invalidate them.

B – CLAIM

1. The Claimant herein seeks a declaration of illegality of the tax assessment act for Corporate Income Tax No. 2014 ...33, and the refund of the tax and compensatory interest improperly assessed in the amount of € 22,966.98 (twenty-two thousand, nine hundred and sixty-six euros and ninety-eight cents).

C – GROUNDS OF CLAIM

1. In support of her request for arbitral pronouncement, the Claimant alleged, with a view to a partial declaration of illegality of the tax assessment act No. 2014 ...33, in summary, the following:

2. The Claimant argues that the disputed matter is delimited in the following question: whether the tax benefit provided for in Article 43 of the Statute of Tax Benefits (EBF) is or is not conditioned to the creation of job positions.

3. In this sense, the Claimant argues that Article 43 of the EBF does not condition the granting of benefits to the creation of job positions, and Decree-Law 55/2008, of 26 March, aims only to establish the regulatory rules necessary for the proper implementation of these incentive measures, under Article 43, No. 7 of the EBF.

4. Furthermore, the Claimant argues that the said Decree-Law does not establish as a condition of access for the beneficiary entities or their respective obligations to maintain a minimum number of job positions in order to enjoy the benefit.

5. The Claimant alleges that the AT's invocation of 75% of job positions as access requirements to the benefit in the said Decree-Law arises only to establish a rule to distinguish the principal activity from the secondary activity.

6. The Claimant understands that the authorization conferred in Article 43, No. 7 of the EBF, for regulation cannot lead to the creation of new access conditions that were not contemplated at least in the law, under penalty of violating the constitutional principle of legality in tax matters.

7. Furthermore, the Claimant maintains that if the Law of the Assembly of the Republic (or the respective legislative authorization law) had provided as a condition of access to the tax benefit the creation of job positions, it could be admitted that the definition of the minimum number of job positions would be left to regulation, but this is not the case here.

8. In this sense, the Claimant argues that the issue of job creation was an essential prerequisite for the application of the benefits, which would then be an obligation of the regulating legislator to define the minimum number of job positions, but it did not do so, because in the Claimant's view, in doing so it would exceed its regulatory competence to the extent that it would innovate on the material content of the tax benefit in clear violation of its competence in light of the principle of legality and the legislative reserve of the Assembly of the Republic enshrined constitutionally.

9. The Claimant alleges that there is no doubt that the rationale of the benefit is the recovery/development of interior zones, and the measures adopted focus on the creation of infrastructure and investments in productive activities, that is, the creation of infrastructure and investments in productive activities are chosen as a factor for the development of the interior as a direct form of creation of local wealth which, directly or indirectly, could eventually lead to the creation of job positions.

10. The Claimant argues that, as recognized in the report of the tax inspection, she exercises the sole activity in the region in question.

11. The Claimant alleges that she made an investment in the amount of € 2,962,897.79 in the construction of industrial facilities, acquired by leasing, located in the beneficiary area, more specifically at ..., Avenue ..., Parish of ..., Municipality of Viseu, for which she contracted local contractors, having transferred the operation of the facilities to company B where local persons currently work.

12. The Claimant concludes her arguments by alleging that it is manifest that the error in the additional Corporate Income Tax assessment is attributable to the Tax and Customs Administration, which should be ordered to refund the tax paid in excess and to pay the Claimant indemnitory interest in the amount to be determined.

D – RESPONSE OF THE RESPONDENT

1. The Respondent, duly notified for this purpose, filed her response in a timely manner, in which, in abbreviated summary, she alleged the following:

2. The Respondent contends for the legality of the disputed assessment, considering that it constitutes a correct application of the law to the facts.

3. The Respondent alleges that in compliance with the Internal Service Order No. OI… entered with the Code of Activities (CA) 1212110213 for the period of 2010, in an action to monitor Tax Benefits, a tax inspection was conducted on the taxpayer now Claimant.

4. The Respondent states that the Claimant began on 13-05-2008 her main activity of "Real Estate Promotion (Development of building projects)", falling within code 41100 of the Classification of Economic Activities (CAE), and that it is also classified in the secondary activities of "Purchase and sale of real estate", in "Leasing of real estate" and in "Engineering and related technical activities", with CAE 68100; 68200 and 71120, respectively.

5. The Respondent further states that the Claimant is a Corporate Income Tax taxpayer pursuant to Article 2 of the Corporate Income Tax Code, with the taxation period coinciding with the calendar year and the determination of taxable matter according to the rules of the general regime, and belongs to the geographic taxation area of Viseu (2720), and in VAT it falls under the normal regime, non-exempt, with quarterly periodicity, the deduction method being that of actual allocation of all goods.

6. The Respondent further states that the Claimant is obliged to maintain organized accounting for the purpose of complying with the provisions of Articles 17 and 115 of the Corporate Income Tax Code (CIRC) and also with the provisions of Article 29, No. 1, subsection g) and Article 44, both of the Value Added Tax Code (CIVA).

7. The Respondent alleges that the Claimant on 2011-05-31 filed the Income Statement, form 22, for the tax year 2010 (ID: 2720-2011-C0454-20), where it was found that the tax due was calculated by applying to the taxable matter the reduced rate provided for in subsection b), No. 1, of Article 43 of the Statute of Tax Benefits (EBF), field 348 of section 10 of the Tax Return form 22.

8. Following this, the Tax Inspection Services (SIT), in order to assess the legality of the application of this rate, proceeded to verify the prerequisites necessary for the application of tax benefits for interior development.

9. From the analysis of the Claimant's classification, the following conclusions resulted for the Respondent:

10. "Thus, it is a condition for enjoying the benefits for interior development to have registered office or effective management in an area covered by the areas defined in Ordinance 1117/2009 (ordinance in force for the year under analysis) and to have 75% of payroll there.

11. – The tax domicile communicated to the tax administration by the taxpayer, pursuant to subsection b), No. 1, of Article 19 of the General Tax Law, was ... – ..., Viseu, a region which, as mentioned in the previous point, is recognized as a beneficiary area.

12. – From the consultation of Annex A, table 03-A, line A5008 of the Financial Statements/Additional Returns, for the period of 2010, it is verified that it has no expense recorded under "Personnel Costs", from which analysis it is deduced that either the company has no employees, or they work free of charge for the company. It is not shown, therefore, that any of the objectives and prerequisites of the benefits for interior development are met, that is:

13. The entity under analysis, having no workers, does not meet the objective of creating employment and fixing people in beneficiary areas.

14. Since it has no payroll, it does not meet the prerequisite required by subsection d) of No. 1 of Article 2 of Law 55/2008, that is, it does not locate its principal activity in beneficiary areas, since to do so, it should concentrate more than 75% of its payroll in those areas, as required by No. 2 of this same article.

15. The taxpayer, as previously mentioned, filed Form 10, the statement provided for in Article 119, No. 1, subsection c), of the Personal Income Tax Code, however, from its analysis, it is found that he did not declare any income paid in category A – Income from dependent employment, whereby it can be ascertained that the taxpayer has no employees assigned to his payroll.

16. In the case under examination, although the taxpayer has established himself in Viseu and begun activities in the period of 2008, he has not contributed to combating the depopulation of that region since no job positions were created, that is, he has no employees assigned to his payroll."

17. The Respondent alleges that because it has always been in the spirit of the legislator, since Law 171/99, of 18 September, to combat desertification and promote recovery and development in interior areas, namely by establishing measures to combat human depopulation and encouraging the accelerated recovery of interior zones, which focus on the creation of infrastructure, investment in productive activities, stimulus for the creation of stable employment and incentives for the installation of companies and the fixation of young people.

18. And in fact, one cannot agree with the allegation that new conditions of access to the benefit were created that were not contemplated at least in the law, when, since the beginning, stable job creation and the fixation of young people were prerequisites that were present in the creation of this incentive.

19. Furthermore, the Respondent argues that considering that the tax inspection report concluded that the Claimant does not meet that prerequisite for attribution of the interior development benefit, since the company has no employees assigned to its activity, it follows that it does not meet the objective of creating employment and fixing people in beneficiary areas, in accordance with the prerequisite required by subsection d) of No. 1 of Article 2 of Decree-Law 55/2008.

20. The Claimant's argument that new access conditions to the benefit were created, which would not have been contemplated at least in the law, is completely devoid of foundation.

21. The Respondent alleges that Law 171/99, of 18 September, created measures to combat desertification and promote recovery and development in interior areas.

22. The Respondent further argues that the Claimant is wrong, because this regime of benefits for interior development is based on the objective of combating human depopulation through measures that promote investment in productive activities, stimulus for the creation of stable employment and the fixation of young people.

23. The Respondent argues that the regime has the objective of preventing situations of tax evasion and fraud, the prerequisite that obliges taxpayers to have their registered office or effective management in those areas and, cumulatively, to concentrate in those areas more than 75% of their respective payroll, aims to prevent companies with registered offices in disadvantaged areas from concentrating their payroll, that is, the job positions assigned to their principal activity, in non-beneficiary areas of that benefit.

24. The Respondent alleges that where a tax benefit is concerned, the interpretation of the rules that contemplate it must be attended to with special care to the wording of the law, and the interpreter cannot ignore the last segment of the rule where the concentration of more than 75% of payroll in the beneficiary area is cumulatively required.

25. And if the legislator had not chosen that last prerequisite as an essential prerequisite, it would not have had it expressly included in the rule, as it unequivocally did.

26. The Respondent argues that to effectively combat human depopulation, it will be necessary to create job positions and fix people, since only in this way is the prerequisite of the tax benefit under analysis met, of concentrating in an area considered beneficial more than 75% of payroll.

27. The Respondent concludes by requesting the acquittal of the AT from the claim, since there is no illegality in the assessment act nor legal ground that supports the Claimant's claim, which is therefore unfounded, the request for reimbursement of the amounts paid by the Claimant and the request for indemnitory interest.

E – FACTUAL FINDINGS

1. Before proceeding to examine these questions, it is necessary to present the factual matters relevant to their understanding and decision, which were determined on the basis of documentary evidence and taking into account the facts alleged.

2. Regarding factual matters of relevance, this tribunal considers the following facts as established, for the fiscal period of the year 2010:

3. The Respondent notified the Claimant of the Corporate Income Tax assessment act No. 2014 ...33, notified on 21 August 2014, which originated from the corrections proposed by the AT, following a tax inspection action (OI 2014…) entered with Code of Activities (CA) 1212110213 for the period of 2010, in the course of which a Tax Inspection Report dated 23 July 2014 was issued.

4. The assessment was based on the Tax Inspection Report and as a result the AT determined shortfall tax (Corporate Income Tax) in the amount of € 20,404.42.

5. Thus, in the context of Corporate Income Tax, the Tax Inspection Report proposed the application of the rates referred to in No. 1 of Article 87 of the Corporate Income Tax Code (12.50% up to 12,500.00 of taxable matter and 25.00% on the amount of taxable matter exceeding 12,500.00), instead of the rate applied (10.00%).

6. The Claimant was notified to exercise the right of hearing pursuant to Article 60 of the General Tax Law and Article 60 of the Code of Tax Administrative Procedure, through official notice No. 214 7561 R 004930 dated 01-07-2014, and on 14-07-2014 the Claimant exercised her right of hearing.

7. The Tax Inspection Report was dated 23-07-2014, and was notified to the Claimant by official notice of 24-07-2014.

8. On 21 August 2014 the Claimant was notified of the additional Corporate Income Tax assessment and compensatory interest No. 2014 ...33, in the amount of € 22,966.98.

9. The Claimant proceeded to pay the Corporate Income Tax assessment act No. 2014 ...33.

10. The Claimant began on 13-05-2008 the principal activity of "Real Estate Promotion (Development of building projects)", falling within code 41100 of the Classification of Economic Activities (CAE).

11. It is also classified in the secondary activities of "Purchase and sale of real estate", in "Leasing of real estate" and in "Engineering and related technical activities", with CAE 68100; 68200 and 71120, respectively.

12. The company registered on 2008-05-13 at the Commercial Registry Office of Viseu with the name "A.", with the number of registration/NIF …, and under the legal form of a limited partnership.

13. The corporate purpose of the Claimant consists of "Operation and leasing of real estate and real estate developments. Promotion of real estate and real estate developments. Purchase and sale of real estate and resale of those acquired for this purpose. Exchange of real estate".

14. It was established with capital of € 25,000.00 (twenty-five thousand euros), divided into two equal quotas, belonging to: C (NIF …) and D (NIF …).

15. Appointed as managers were Mr. E (NIF …) and Mr. F (NIF …), on 2008-10-23 it was decided to appoint Mr. G (NIF …) as manager and on 2009-10-16 Mr. E resigned from the position.

16. The managers of the company are Mr. F and Mr. G.

17. On 2008-11-21 the company proceeded to increase the capital by €25,000.00, subscribed in equal parts by shareholder "D" and by the entry of new shareholder "H", bringing the capital to €50,000.00.

18. As Official Accounting Technician (TOC) of the company, Mr. I was made responsible, with NIF ….

19. The Claimant is, pursuant to Article 2 of the Corporate Income Tax Code, a Corporate Income Tax taxpayer with the taxation period coinciding with the calendar year and the determination of taxable matter according to the rules of the general regime, and belongs to the geographic taxation area of Viseu (2720).

20. In VAT the Claimant falls under the normal regime, non-exempt, with quarterly periodicity, the deduction method being that of actual allocation of all goods.

21. The Claimant maintains organized accounting for the purpose of complying with the provisions of Articles 17 and 115 of the Corporate Income Tax Code (CIRC) and also with the provisions of Article 29, No. 1, subsection g) and Article 44, both of the Value Added Tax Code (CIVA).

22. On 2011-05-31, the Claimant filed the Income Statement, form 22, for the tax year 2010 (ID: 2720-2011-C0454-20), where the tax due was calculated by applying to the taxable matter the reduced rate provided for in subsection b), No. 1, of Article 43 of the Statute of Tax Benefits (EBF), field 348 of section 10 of the Tax Return form 22.

23. The Claimant made an investment in the amount of € 2,962,897.79 for the year 2010, in the construction of industrial facilities, acquired by leasing, located at ..., Avenue ..., Parish of ..., Municipality of Viseu, and transferred the operation of the facilities to company B.

24. The investment made in the construction of industrial facilities is located in the geographic area Dão-Lafões, municipality of Viseu.

25. The Claimant has its registered office and effective management at ..., ..., … Viseu, in the geographic area of Viseu.

26. The Claimant conducts its principal activity in the geographic area Dão-Lafões, municipality of Viseu.

27. The Claimant has no employees under employment contract.

28. Pursuant to Ordinance No. 1117/2009 of 30 September, the geographic area of Viseu belongs to the territorial areas benefiting from incentives to regions with interior development problems as provided for in Articles 6 and 7 of Decree-Law No. 55/2008, of 26 March.

F – UNPROVEN FACTS

1. From the facts of interest for the decision of the case, contained in the challenge, all those that are not contained in the factual account described above were not proven.

G – ISSUES FOR DECISION

1. Considering the positions of the parties assumed in the arguments presented, the central issue to be resolved is the following, which must therefore be examined and decided:

a. The allegation by the Claimant of a declaration of illegality of the tax assessment acts in the context of Corporate Income Tax No. 2014 ...33;

b. The Claimant further requests payment of indemnitory interest for the improper payment of tax.

H – ON THE LAW

1. Considering the positions of the parties assumed in the pleadings presented, the central issue to be resolved by this arbitral tribunal consists of examining the legality of the Corporate Income Tax assessment act No. 2014 ...33, for violation of law and erroneous interpretation and application of the criteria of the tax benefit provided for in Article 43 of the EBF, which resulted from a correction and application of the normal Corporate Income Tax rate for the year 2010, and the consequent non-application of the tax benefit.

2. The Claimant proceeded in filing her Corporate Income Tax declaration for the year 2010, by choosing the tax benefit provided for in Article 43, No. 1, subsection b) of the EBF, which results in the application of a reduced Corporate Income Tax rate, respectively 10% compared to the general rate of 12.5% and 25%.

3. The AT understood (synthetically) that the Claimant did not meet one of the requirements of Article 2, No. 2 of Decree-Law No. 55/2008 of 26 March 2008 to be able to benefit from the benefit of Article 43, No. 1, subsection b) of the EBF, respectively by not meeting one of the requirements that requires that the Beneficiary possess 75% of its payroll in the beneficiary area, and in this instance does not possess any payroll (dependent employees).

4. The Claimant alleged (synthetically) that possessing payroll (dependent employees) is not a necessary requirement nor is it provided for in Article 43 of the EBF to benefit from the reduced rate of 10% of Article 43, No. 1, subsection b).

5. In light of the above, it falls to this arbitral tribunal to address the following question (principal), which consists of determining whether it is one of the requirements/obligations, mandatory for the taxpayer to be able to benefit from the benefit provided for in Article 43, No. 1, subsection b) of the EBF, to comply with the provisions of Article 2, Nos. 1 and 2 of Decree-Law No. 108/2008, of 26 June, and in particular, what is provided for in No. 2 regarding the question of the requirement of having 75% of its payroll in the beneficiary area.

6. Given the above, this tribunal must decide with the following grounds.

7. The legal regime, its evolution, its legislative and economic-political context of the respective application and existence of the present Tax Benefit Related to Interior Development, for the fiscal period in question (year 2010), begins with the approval of Law 171/99 of 18 September aimed at combating desertification and promoting recovery and development in interior areas.

8. The legislative evolution of the present benefit was subsequently as follows, with the State Budget (OE) (Article 31 of Law 107-B/2003) for the year 2004 which kept in force Law 171/99 until the end of 2004.

9. Followed by the State Budget (Article 115 of Law 55-B/2004) for the year 2005 which kept in force until the end of 2006 Articles 1, 7, 8, 9, 10, 11 and 12 of the regime that established measures to combat desertification and promote recovery and development in interior areas, approved by Law 171/99, of 18 September.

10. And finally the State Budget of 2006 (Law 53-A/2006) finally revoked Law 171/99, of 18 September, but maintained the benefits related to interior development, now included in Article 39-B of the EBF, in force until the end of 2010.

11. In the same year, through the approval of Decree-Law No. 108/2008, of 26 June, the Statute of Tax Benefits, approved by Decree-Law No. 215/89, of 1 July, was amended and republished, which came to gather in its Article 43 (former Article 39-B) the set of Tax Benefits Related to Interior Development.

12. In terms of a historical interpretation, Article 1, No. 2 of Law 171/99, of 18 September, which created the said Benefit tells us that "The measures adopted focus on the creation of infrastructure, investment in productive activities, stimulus for the creation of stable employment and incentives for the installation of companies and the fixation of young people."

13. The statute of Law 171/99 of 18 September distinguished the respective benefits by various articles respectively in Articles 7 to 11. Pursuant to Article 2 of Law 171/99 of 18 September, it conferred powers on the Government to regulate the definition of the criteria and the delimitation of beneficiary territorial areas, which it did by means of Decree-Law 310/2001, which has as its object, as Article 1 tells us, "This Decree-Law aims to establish, under Article 13 of Law 171/99, of 18 September, the regulatory rules necessary for the proper implementation of the measures to encourage the accelerated recovery of Portuguese regions suffering from interior development problems, provided for in Articles 7 to 11 of the same statute, with the amendments contained in Article 54 of Law 30-C/2000, of 29 December."

14. With the legislative evolution referred to above, the tax benefits related to interior development for the year 2010 were contained in Article 43 of the EBF, which is transcribed as follows[1]:

15. 1 – To companies that conduct, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in interior areas, hereinafter referred to as "beneficiary areas", the following tax benefits are granted:

16. a) The Corporate Income Tax rate provided for in No. 1 of Article 80 of the respective Code is reduced to 15%, for entities whose principal activity is located in beneficiary areas;

17. b) In the case of installation of new entities, whose principal activity is located in beneficiary areas, the rate referred to in the previous number is reduced to 10% during the first five fiscal years of activity;

18. c) Reinstatements and depreciation relating to investment expenditures up to (euro) 500,000, excluding those relating to the acquisition of land and light passenger vehicles, for Corporate Income Tax taxpayers who conduct their principal activity in beneficiary areas may be deducted, for the purpose of determining taxable profit, with an increase of 30%;

19. d) Mandatory social contributions borne by the employer entity relating to net creation of permanent job positions in beneficiary areas are deducted, for the purpose of determining taxable profit, with an increase of 50%, only once per employee hired by that entity or by another entity with which special relations exist, pursuant to Article 58 of the Corporate Income Tax Code;

20. e) Tax losses determined in a given fiscal year pursuant to the Corporate Income Tax Code are deducted from taxable profits, if any, of one or more of the seven following fiscal years.

21. 2 – The conditions for enjoying the tax benefits provided for in the previous number are:

a) The determination of taxable profit is made using direct evaluation methods;

1. b) To have regularized tax status;

2. c) To have no overdue wages;

3. d) Not to result from a division carried out in the two years prior to enjoyment of the benefits.

4. 3 – Acquisitions are exempt from payment of municipal tax on onerous transfers of real estate as follows:

5. a) By young people, between 18 and 35 years of age, of a property or autonomous fraction of an urban property located in beneficiary areas, intended exclusively for first permanent residence, provided that the value on which the tax would be levied does not exceed the maximum values for controlled cost housing, increased by 50%;

6. b) Of properties or autonomous fractions of urban properties, provided that they are located in beneficiary areas and permanently assigned to the activity of companies.

7. 4 – The exemptions provided for in the previous number apply only if the acquisitions are duly reported to the tax service of the area where the real estate to be acquired is located, by means of a declaration stating that the declarant has not previously benefited from an identical benefit.

8. 5 – The exemptions provided for in No. 3 are dependent on authorization by the deliberative body of the respective municipality.

9. 6 – For the purposes of this article, beneficiary areas are delimited in accordance with criteria that pay special attention to low population density, compensation index or fiscal deficit and inequality of social, economic and cultural opportunities.

10. 7 – The definition of criteria and the delimitation of beneficiary territorial areas, pursuant to the previous number, as well as all regulatory rules necessary for the proper implementation of this article, are established by ordinance of the Minister of Finance.

11. 8 – The tax benefits provided for in this article are not cumulative with other benefits of identical nature, without prejudice to the choice of another more favorable one.

12. And pursuant to Article 43, No. 7 of the EBF, Decree-Law No. 55/2008 of 26 March 2008 came to regulate the conditions of access to the benefit as its Article 1 (Purpose) tells us: "This Decree-Law aims to establish the regulatory rules necessary for the proper implementation of the measures to encourage the accelerated recovery of Portuguese regions suffering from interior development problems, under No. 7 of Article 39-B of the Statute of Tax Benefits, approved by Decree-Law No. 215/89, of 1 July."

13. Equally pursuant to Article 43, No. 7 of the EBF, Ordinance No. 1117/2009 of 30 September came to delimit beneficiary territorial areas.

14. Comparatively as to the benefit sought by the now Claimant which remains with the same terms, although with different wording, in Article 43, No. 1 and No. 1, subsection b) of the EBF in relation to what was found in Article 7, No. 1 and 2 of Law 171/99.

15. It is thus concluded that there was no change in the scope and object of the said tax benefit, even with its legislative amendments.

16. The benefit has consisted, since its creation, in the application of a reduced Corporate Income Tax rate, whose principal activity is located in beneficiary areas, respectively 10% in the first five years of activity in the case of installation of new entities and 15% in the remaining years or situations.

17. The analysis that this tribunal makes of the tax benefits related to interior development, which the Claimant alleges she is entitled to, provided for in No. 1, subsection b) of Article 43, results that it is a tax benefit that covers companies that conduct, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in interior areas, designated as "beneficiary areas", and whose principal activity is located in those beneficiary areas.

18. Furthermore, it tells us that the conditions for enjoying (Article 43, No. 2) are: subsection a) The determination of taxable profit is made using direct evaluation methods; b) To have regularized tax status; c) To have no overdue wages; d) Not to result from a division carried out in the two years prior to enjoyment of the benefits.

19. The conditions are complemented, but not expanded or increased, by the regulatory rules necessary for proper implementation provided for in Decree-Law No. 55/2008 of 26 March 2008, in its Article 2, No. 1: "beneficiary entities must meet the following access conditions: a) To be legally established and to comply with the legal conditions necessary for the exercise of their activity; b) To have regularized status before the tax administration, social security and the respective municipality; c) To have organized accounting, in accordance with the Official Accounting Plan; d) To locate their principal activity in beneficiary areas;"

20. Concluded by Article 2, No. 2 of Decree-Law No. 55/2008 of 26 March 2008: "It is considered that the principal activity is located in beneficiary areas when the subjects have their registered office or effective management in those areas and there is concentrated more than 75% of their respective payroll."

21. From the normative provision described above, it results that Article 43 of the EBF expressly defines that the benefit applies to entities whose principal activity is located in beneficiary areas, leaving the definition of the regulatory rules necessary for proper implementation to the responsibility of the Government, which it did through the Decree-Law.

22. On the interpretation of Tax Rules, for the case sub judice, Article 11 of the General Tax Law tells us, which establishes the essential rules for the interpretation of tax laws, which it does in the following terms:

23. Article 11

24. Interpretation

25. In determining the meaning of tax rules and in the qualification of facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

26. Whenever in tax rules terms peculiar to other branches of law are used, these shall be interpreted in the same sense as they have there, unless something else follows directly from the law.

27. Persisting doubt about the meaning of the applicable rules of incidence, account must be taken of the economic substance of the tax facts.

28. Gaps resulting from tax rules covered by the legislative reserve of the Assembly of the Republic are not susceptible to analogical integration.

29. To this provision, it is necessary equally to resort to the general principles of interpretation of laws, to which No. 1 of Article 11 of the General Tax Law refers, which are established in Article 9 of the Civil Code, which establishes the following:

30. Article 9

31. Interpretation of law

32. Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative intention, taking especially into account the unity of the legal system, the circumstances in which the law was drawn up and the specific conditions of the time in which it is applied.

33. However, the interpreter cannot consider the legislative intention that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

34. In fixing the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and knew how to express his intention in adequate terms.

35. In the case of the Statute of Tax Benefits, an extensive interpretation is admitted for rules that establish tax benefits, as Article 10 of the EBF tells us: "Rules that establish tax benefits are not susceptible to analogical integration, but admit extensive interpretation."

36. And in this sense the Supreme Court of Administrative Justice decided in Decision of 15-05-2000, page 024873: "Rules that establish tax benefits are not susceptible to analogical interpretation, but admit extensive interpretation. There is an extensive interpretation when the solution for a particular hypothesis is not contained in the text of the law, but is covered by its spirit. There is an analogical application when the solution for a particular hypothesis is found neither in the letter nor in the spirit of the rule."

37. And of relevance the Supreme Court of Administrative Justice in Decision of 04-02-2003, page 026098: "the text of the law itself and, where necessary, in an interpretive capacity, its spirit, since, as carefully emphasized in the impugned judicial decision, by reference to the always useful and often decisive purpose or legal scope stated in the preamble of the respective statute that established it, the new wording of the questioned provision of the Corporate Income Tax Code established, what was intended was, in fact, to channel the wealth generated to new investments in order to promote the growth of the business sector and the consequent development of the sector so that more wealth corresponds to an increase in productivity, job positions and economic growth of the country."

38. In the said Decree-Law No. 55/2008 of 26 March 2008, and using the term provided there in Article 2, No. 2, "consider" that principal activity is conducted in the beneficiary area when the subject has registered office or effective management in those areas and concentrates more than 75% of their respective payroll there.

39. This is clearly an anti-abuse rule/presumption, with a view to preventing situations of tax evasion and abusive tax planning, given that Article 2, No. 2, establishes an effective presumption and at the same time aims to ensure that companies with registered offices in disadvantaged areas do not concentrate their payroll, assigned to their principal activity, in non-beneficiary areas of that benefit, which may be rebutted or set aside by the AT or by the taxpayer, when it is shown to be necessary.

40. The elements of Article 2, No. 2, cannot be interpreted as mandatory conditions, that is, it is not provided for in Article 43 of the EBF, nor is it in the letter of the law of Article 2, No. 2, that it be a mandatory condition to enjoy the benefit that the taxpayer has in the beneficiary geographic area its registered office and effective management and that it also has 75% of its payroll in that area or that it has payroll.

41. This normative provision cannot be seen as a mandatory requirement, because requirements can only be (in this situation) created within the scope of the State Budget Law approved by the Assembly of the Republic, as we shall verify.

42. It is rather a way of preventing an abuse or improper use of the benefit, in the sense that to determine in an efficient and anti-abuse manner the location of the entity's principal activity, recourse is had to its registered office or effective management and the location of its payroll.

43. The Decree-Law considers that the principal activity in the beneficiary area is conducted there if it possesses 75% of payroll there, this is from the start a rebuttable presumption.

44. It cannot be considered that by not having employees, it does not meet one of the objectives of the benefit related to interior development, which consists of the creation of employment in beneficiary areas, since that objective of the benefit is not exclusive or sole, there being other benefits such as the creation of infrastructure.

45. If the legislator intended that what is stipulated in Article 2, No. 2, constituted a mandatory condition, it would have done so within the scope of the various Laws and respective State Budgets that created and successively approved the tax benefit for interior development, and would not have done it within the scope of a Decree-Law to regulate the rules necessary for its proper implementation.

46. Pursuant to the general rules of interpretation of law and in particular pursuant to Article 10 of the EBF, an extensive interpretation must be made, indeed the benefit covers all companies that conduct their principal activity in the geographic area, and does not expressly limit this scope, it must be interpreted to cover all companies that have or do not have their registered office or effective management and possess or do not possess payroll in those geographic areas – as long as they conduct their principal activity in the beneficiary geographic area.

47. Of course the AT reserves the right to proceed with corrections, as it did in the present case, if it considers that the taxpayer does not meet the requirements of Article 2, No. 2, or to resort to the general anti-abuse clause of Article 38, No. 2 of the General Tax Law.

48. But the taxpayer also has the right to decide not to accept the administrative position, and it will therefore be up to the courts to resolve the dispute, demonstrating the necessary evidence to show that it conducts its principal activity in the beneficiary area.

49. Resorting to a historical interpretation, the creation of the benefit by Law 171/99 of 18 September was not dependent on the creation or existence of employees, or payroll, and its regulatory rules necessary for the proper implementation of the measures to encourage accelerated recovery of Portuguese regions suffering from interior development problems, provided for in Articles 7 to 11 of Law 171/99 of 18 September, were established by Decree-Law 310/2001 of 10 December, and neither did they provide for it. Both statutes make no reference as a condition of access to possessing payroll, or the creation of a job position within the beneficiary to enjoy any of the benefits provided for, with the exception of those specifically applicable for the creation of job positions (Articles 9 and 10).

50. It is equally important in interpretation to take into account the constitutional rules of legislative reserve, since the said Law benefit for interior development of Article 43 of the EBF, approved by the State Budget Law, approved by the Assembly of the Republic pursuant to subsection g) of Article 161 of the Constitution, created a legislative authorization in Article 43, No. 7 of the EBF, for the definition of the criteria and the delimitation of geographic areas, as well as the regulatory rules necessary for the proper implementation of the benefit.

51. Tax Benefits must have their prerequisites expressly listed in the Law approved by the Assembly of the Republic, being constitutionally limited by the Law approved by the Assembly of the Republic, only the prerequisites provided for in that law can be applied to the Taxpayer.

52. It is the exclusive competence of the Assembly of the Republic, except where authorization is given to the Government, to establish the "creation of taxes and the tax system and the general regime of rates and other financial contributions in favor of public entities," Article 165, No. 1, subsection i) of the Constitution of the Portuguese Republic, but also the determination of their essential elements listed in Article 106 of the Constitution, encompassing tax benefits.

53. Constitutionally the principle of legality of administration postulates two fundamental principles, (i) the principle of supremacy or prevalence of law, and (ii) the principle of legislative reserve.

54. Parliamentary law is the privileged expression of the democratic principle and the most appropriate and safe instrument for defining the regimes of certain matters.

55. The principle of general legislative reserve means that certain material domains must be reserved for regulation by Law, enacted by parliament.

56. The legislative reserve in tax matters attributes exclusive competence to the Assembly of the Republic or to the Government under its authorization to produce the tax laws that will govern in the country.

57. Rules that attribute tax benefits, creating exceptional regimes, are a decision on the distribution of tax burdens and are therefore subject to legislative reserve.

58. But legislative authorization laws must define the object, meaning, extent and duration of the authorization, Article 165, No. 2 of the Constitution.

59. It is not permissible for a mere regulatory rule to innovatively establish general and abstract criteria that allow the fixing of the amount on which it will fall.

60. Given the above, it follows that the interpretation of the Decree-Law is limited in the sense of limiting or increasing the scope of the conditions provided for in Article 43 of the EBF, because this would fall within the scope of creation of Tax Benefits, which is only the responsibility of the Assembly of the Republic, whereby the conditions of access to the tax benefit of Article 43, if met, guarantee the taxpayer's access to the Benefit.

61. This arbitral tribunal does not have competence to decide whether the Decree-Law violates or not the constitutional principle of legislative reserve, however it has competence to interpret the legislative rules, taking into account these constitutional principles.

62. But it is noted that the hierarchical rules of sources of law should also be taken into account in interpretation, and parliamentary law is hierarchically superior to Decree-Law No. 55/2008 of 26 March 2008, whereby the latter cannot contract or alter the meaning of parliamentary law.

63. And thus, in this sense, Decree-Law No. 55/2008 of 26 March 2008 should be interpreted as a rule that within the legislative authorization conferred and which comes to complement Article 43 of the EBF, cannot in this sense create new requirements or limit access to the benefit, beyond what is already provided for in Article 43 of the EBF.[2]

64. Since it is not provided for in Article 43 of the EBF, the requirement of possessing payroll by the taxpayer, the article 2, No. 2 cannot be interpreted as a new access requirement to the benefit, but rather as a rule for proper implementation, which presumes certain behavior of the taxpayer, so that there is proper implementation and to prevent abuse of right.

65. Therefore, such a rule can be set aside if the taxpayer demonstrates that it meets the fundamental requirement, which is the conduct of principal economic activity in the beneficiary area.

66. Therefore, no other interpretation can be made, as it would be limited by the constitutional principle of legislative reserve, which Article 2, No. 2 is a rebuttable presumption, and not a mandatory condition of the benefit, since in this case it would be interpreting the article beyond its competence, as that obligation would be violating the constitutional principle of legislative reserve by the same creating or limiting tax and in this case a tax benefit, and beyond the scope of the legislative authorization conferred in Article 43, No. 7.

67. In light of the factual grounds already proven, it has been established that the Claimant has as principal activity "Real Estate Promotion (Development of building projects)", and invested in the beneficiary area in the year 2010 the aforementioned sum, this investment being represented as its principal activity that year.

68. The taxpayer conducted its principal activity in the beneficiary geographic area and had its registered office in the same area, fulfilled one of the principal objectives of the benefit for interior development which is the creation of infrastructure. The interpretation of a rule that attributes a tax benefit must be made taking into account the economic policy it expresses and the consequences that will result from that same interpretation. Within the limits created by the formulation of the legal text, the interpretation should be preferred that will operate the consequences desired by the legislator.[3]

69. The interpretation of the present tax benefit was explained in the analysis of all the statutes through which the benefit was implemented, beginning this analysis with Law 171/99 of 18 September, which brought it for the first time.

70. In this sense, in interpreting these criteria, complemented by Decree-Law No. 55/2008 of 26 March 2008 and Ordinance No. 1117/2009 of 30 September, these statutes must be applied and interpreted as regulatory rules and not as new benefit access criteria, and as anti-abuse rules.

71. Thus, Decree-Law No. 55/2008 of 26 March 2008 and Ordinance No. 1117/2009 of 30 September cannot create or alter the said benefit, because it would violate constitutional principles of legislative reserve, whereby the interpretation of the same must be done in this sense.

72. Whereby, it cannot be interpreted, in the sense of being mandatory for the enjoyment of the benefit, the creation or possession of a mass of employees in the geographic area, when the scope of the requirements in Article 43, No. 1, is the conduct of principal economic activity of an agricultural, commercial and industrial nature and service provision, in the beneficiary geographic area.

73. The legislator was quite clear that the objective of this benefit is to develop the interior, whether through the creation of employment, whether through the investment in infrastructure.

74. Article 43 does not rule out the possibility and permits, companies with registered office or effective management outside a beneficiary area, to enjoy the benefit if their principal activity is conducted in the beneficiary area.

75. Article 2, No. 2 complements and should be interpreted in the sense of legal certainty and access to the respective benefit, that is, it is presumed that principal activity in the geographic area for the purposes of Article 43 of the EBF is verified when the taxpayer has its registered office in that area and 75% of its payroll.

76. This presumption may be set aside by the AT in situations to the contrary, where it is verified that although the taxpayer has its registered office and payroll in the beneficiary geographic area, it conducts its principal activity in the non-beneficiary geographic area.

77. And in the same sense, it is not forbidden for the taxpayer to demonstrate to the AT that its principal activity is conducted in the beneficiary geographic area, even if its registered office or effective management or payroll is located outside that area.

78. Because the objective of tax benefits related to interior development is the development of the Interior, through investment, creation of infrastructure and creation of job positions, not being limited exclusively to the creation of job positions, but rather to a broad range of economic activities, and limiting these activities to only those that directly create job positions within their company, is not the objective provided for in Article 43, nor results from the tenor of the creation of this benefit, taking into account the analysis and interpretation of all the statutes that created and established this benefit.

79. It clearly results from the letter of the law that this benefit aims at various objectives although connected, are not cumulative, in the sense that to obtain the Benefit it is not necessary that activity in the beneficiary area be necessarily conducted so as to comply with all the objectives, these being: creation of infrastructure; investment in productive activities; stimulus for the creation of stable employment; and incentives for the installation of companies and the fixation of young people.

80. In these same terms it does not result from any of the rules since Law 171/99 of 18 September that it be mandatory to benefit from the said benefit the creation of job positions and or the existence of job positions in the company.

81. What is in fact necessary, and within the spirit of the law, and within the general rules of anti-abuse rules, that the said activity conducted by the taxpayer so as to be able to benefit from the said benefit is an activity conducted within the beneficiary areas.

82. It has been proven that the taxpayer established itself in Viseu and conducted its principal activity there, through the construction of infrastructure in the geographic area of Viseu, for which it hired a third party entity for its construction.

83. Furthermore, it is said that certain behavior of the taxpayer was promoted to the detriment of the loss of tax revenue and the limitation of the principle of tax equality, which in this situation consists of the development of areas more affected in the interior, where the taxpayer could have not chosen to invest its capital (in that area) without the incentive of the tax benefit.

84. That is, with a clear compliance with Article 43, No. 1, subsection b), by the Claimant conducting its principal activity in the beneficiary area, through investment in the creation of infrastructure, one of the objectives of the benefit for interior development, because the creation of employment is not a mandatory requirement although it is one of the objectives sought, just as is the creation of infrastructure.

85. Given the above, there is no other conclusion than that the taxpayer sets aside the presumption by demonstrating unequivocally that it conducted its principal activity in accordance with the objective provided for in Article 43 of the EBF, and from the interpretation and analysis of the objective of the said benefit.

86. As to the requirements of Article 43, No. 2 and Decree-Law No. 55/2008 of 26 March 2008, in light of the positions of the parties, it is verified that the same are duly met by the Claimant, whereby it has the right to the benefit provided for in Article 43, No. 1, subsection b).

87. In these terms, it is decided on the declaration of illegality of the tax assessment act in the context of Corporate Income Tax No. 2014 ...33, for violation of law and error of law directly attributable to the Respondent (AT).

I – INDEMNITORY INTEREST

1. The Claimant further requests payment of indemnitory interest.

2. Given the above, the Corporate Income Tax assessment, in the part covered by the annulment, which will be decreed, results from errors of fact and law attributable exclusively to the tax administration, to the extent that the Claimant fulfilled her duty of declaration and were committed by that authority and the latter could not be unaware of different understandings.

3. In truth, it being demonstrated that the Claimant paid the disputed tax in an amount superior to what is due, by force of the provisions of Articles 61 of the Code of Tax Administrative Procedure and 43 of the General Tax Law, the Claimant is entitled to the indemnitory interest due, interest to be counted from the date of payment of the undue tax (annulled), counting the period for such payment from the beginning of the period for the voluntary execution of the present decision (Article 61, Nos. 2 to 5, of the Code of Tax Administrative Procedure), all at the rate determined in accordance with the provision of No. 4 of Article 43 of the General Tax Law.

4. The Claimant's claim is granted.

J – DECISION

Therefore, having considered all of the above, this Arbitral Tribunal decides:

I. To allow the claim for declaration of illegality of the tax assessment acts in the context of Corporate Income Tax No. 2014 ...33, and the refund of the tax and compensatory interest improperly assessed in the amount of € 22,966.98 (twenty-two thousand, nine hundred and sixty-six euros and ninety-eight cents).

II. To order the Respondent to refund to the Claimant this amount improperly assessed and paid, plus the payment of accrued indemnitory interest relating to the period between 16 October 2014 to be calculated on the amount of € 22,966.98, as well as the payment of accruing indemnitory interest as of that last date, all in accordance with Nos. 2 to 5 of Article 61 of the Code of Tax Administrative Procedure and at the rate determined in accordance with the provision of No. 4 of Article 43 of the General Tax Law until full reimbursement.

III. The value of the proceedings is fixed at € 22,966.98 based on the value of the assessment, taking into account the economic value of the proceedings assessed by the value of the tax assessments impugned, and accordingly the costs are fixed in the respective amount of € 1,224.00 (one thousand two hundred and twenty-four euros), to be borne by the Respondent in accordance with Article 12, No. 2 of the Tax Arbitration Regime, Article 4 of the Rules of Tax Arbitration Procedure and Table I attached thereto. – No. 10 of Article 35, and Nos. 1, 4 and 5 of Article 43 of the General Tax Law, Articles 5, No. 1, subsection a) of the Rules of Tax Court Procedure, 97-A, No. 1, subsection a) of the Code of Tax Administrative Procedure and 559 of the Code of Civil Procedure).

Let it be notified.

Lisbon, 09 June 2015.

The Arbitrator

Paulo Renato Ferreira Alves

[1] Corresponds to Article 39-B, as amended in the EBF which was in force prior to the republication of the same by Decree-Law No. 108/2008, of 26/06 and Revoked by Article 146 of Law No. 64-B/2011, of 30 December.

[2] In this sense the decision of case 273/2013-T of CAAD is referred to: "Well, pursuant to No. 2 of Article 103 of the Constitution, 'taxes are created by law, which determines the incidence, the rate, the tax benefits and the guarantees of taxpayers'. To the extent that Decree-Law No. 55/2008, of 26 March, was not preceded by any legislative authorization to dispose of matters not reserved to the Assembly of the Republic (to the extent that it creates a rule of incidence), it is affected by unconstitutionality due to violation of the provision of subsection i) of Article 165 of the Constitution. Otherwise, the principles of protection of confidence and legal certainty of taxpayers would be seriously violated."

[3] Saldanha Sanches, Manual of Tax Law, 3rd Edition, Coimbra Publisher, page 464.