Process: 18/2016-T

Date: September 28, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This Portuguese tax arbitration case (Process 18/2016-T) addresses the application of the reduced Corporate Income Tax (IRC) rate under Article 43 of the Tax Benefits Statute (EBF) for companies operating in inland areas. The Claimant, a limited company based in Viseu, initially applied a 10% reduced IRC rate in its 2012 tax return (Model 22) instead of the standard 25% rate, claiming eligibility under the inland areas tax benefit. The Tax Authority initiated an inspection procedure in June 2015, challenging this application. The core dispute centers on whether Article 43 of the EBF requires job creation as a prerequisite for the reduced rate benefit. The Tax Authority argued that the Claimant did not meet requirements because it failed to directly create employment. The Claimant voluntarily corrected its 2012 Model 22 declaration during the inspection, changing from the 10% to 25% rate, though disagreeing with the Tax Authority's interpretation. The Claimant contended that Article 43 does not explicitly condition the benefit on job creation, and that Decree-Law No. 55/2008's interpretation requiring 75% of payroll in benefited areas violates the principle of legality and legislative reservation. The Tax Authority raised procedural exceptions, arguing the Arbitral Tribunal lacked material competence because mandatory gracious appeal procedures were not followed, and that the arbitration request was untimely, filed after the 90-day deadline under Article 10 of the Legal Regime for Tax Arbitration (RJAT). The Tax Authority defended its position by referencing the historical purpose of Law No. 171/99 to combat depopulation through job creation incentives, and argued that Decree-Law No. 55/2008's requirement that 75% of payroll be concentrated in benefited areas is a valid regulatory implementation. Since the Claimant had no payroll, it failed to meet access conditions. The case highlights the tension between literal interpretation of tax benefit provisions and regulatory implementation requirements.

Full Decision

ARBITRAL AWARD

Report

A - General

1.1. A…, LDA., with registered office at …, lot…, …, … – … …, with a share capital of €5,100.00 (five thousand one hundred euros), registered in the Commercial Registry Office of … under the unique registration number and collective person number …, filed on 19.01.2016, a request for the constitution of a singular arbitral tribunal in tax matters, which was accepted, seeking a declaration of illegality of the Corporate Income Tax assessment ("IRC") No. 2015 … (document presented with the application of 25.07.2016, replacing document No. 7 attached to the proceedings with the request for arbitral decision) with the consequent reimbursement of tax and compensatory interest unduly levied.

1.2. Pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph 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 of the Administrative Arbitration Centre (CAAD) designated Nuno Pombo as arbitrator, and the parties, after being duly notified, raised no objection to such designation.

1.3. By order of 05.02.2016, the Tax and Customs Administration (hereinafter referred to as "Respondent") appointed Ms. B… and Mr. C… to intervene in the present arbitral proceedings, in the name and representation of the Respondent.

1.4. In accordance with the provisions of paragraph 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 arbitral tribunal was constituted on 01.04.2016.

1.5. On the same day 01.04.2016, the head of the Respondent's service was notified to, if it so wished, present its reply and request the production of additional evidence within a period of 30 days.

1.6. On 29.04.2016, the Respondent filed its reply.

B - Position of the Claimant

1.7. The Claimant carries out its main activity, essentially, in the geographical area …, municipality of Viseu.

1.8. The Claimant on 27.05.2013 filed its income tax return form 22 for the financial year 2012, through which it applied to the taxable base the reduced rate provided for in paragraph b) of No. 1 of Article 43 of the Tax Benefits Statute ("EBF").

1.9. By letter from the Respondent No. … of 22.06.2015, the Claimant was notified that the Finance Directorate of … had initiated an internal partial inspection procedure concerning the IRC for 2012 and 2013.

1.10. The Claimant, although not agreeing with the understanding of the Finance Services of …, on 05.08.2015 voluntarily proceeded to amend the income tax return form 22 for the financial year 2012, correcting the tax it had calculated, applying the rate of 25% and no longer the rate of 10% corresponding to the benefit which it considers should be granted to it.

1.11. On 06.08.2015, the Claimant was notified of the result of the inspection action which concluded that the taxpayer does not meet the necessary requirements to benefit from the reduced rate of IRC.

1.12. The Respondent's conclusion that the Claimant does not meet the necessary requirements to enjoy the benefit of the reduced rate of IRC is based on the fact that the Claimant, through its activity, did not directly create any job, whereas, in the Claimant's view, Article 43 of the EBF does not condition the granting of this benefit to the creation of any job.

1.13. The Claimant considers that the provision of No. 2 of Article 2 of Decree-Law No. 55/2008, when interpreted to mean that the requirement to maintain more than 75% of the payroll in the benefited area is a mandatory condition for access to the tax benefit in question violates the principle of legality and the legislative reservation of the National Assembly.

C - Position of the Respondent

1.14. The Respondent, in its reply, first of all raises the material incompetence of the Arbitral Tribunal to assess the request for a declaration of illegality of the corporate income tax self-assessment act, since it imposed the mandatory precedence of a gracious appeal as provided for in No. 1 of Article 131 of the Tax Procedure and Process Code (CPPT), applicable by virtue of No. 1 of Article 2 of the Legal Regime for Tax Arbitration (RJAT) and of paragraph a) of Regulatory Decree 112-A/2011, of 22 March.

1.15. Also by way of exception, the Respondent defends the untimeliness of the request for arbitral decision, as it considers it was presented after the expiry of the 90-day period provided for in paragraph a) of No. 1 of Article 10 of the RJAT.

1.16. The reduced IRC rate regime in discussion was initially established in Article 7 of Law No. 171/99, of 18 September, a statute which referred, in its Article 13, to a decree-law to be approved by the Government, the regulatory provisions necessary for its proper implementation.

1.17. That statute, promoting the fight against human depopulation, aimed, among other measures, to stimulate job creation.

1.18. It cannot be said that the provision of No. 2 of Article 2 of Decree-Law No. 55/2008, when interpreted to mean that the requirement to maintain more than 75% of the payroll in the benefited area is a mandatory condition for access to the tax benefit in question violates the principle of legality and the legislative reservation of the National Assembly, since it is Law No. 53-A/2006 itself which determines that the fiscal benefits relating to inland areas provided for in the then Article 39-B of the EBF would be subject to the rules provided for in Decree-Law No. 310/2001, which was to be repealed by Decree-Law No. 55/2008.

1.19. Now, the right to the tax benefit set out in Article 43 of the EBF is thus dependent on the verification of requirements whose definition is not comprised in the more general rule contained in this normative provision, as expressly implied by No. 7 of the aforementioned article.

1.20. Therefore, it is Article 43 itself of the EBF which, while determining the general rule in its No. 1, assumes that it requires regulatory provisions for its "proper implementation" in its No. 7, and it does not make sense for the interpreter to want to apply No. 1 and, at the same time, intend to see No. 7 of the same provision ignored.

1.21. No. 2 of Article 2 of Decree-Law No. 55/2008 provides that "The main activity shall be considered to be located in the benefited areas when the subjects have their registered office or effective management in such areas and more than 75% of their respective payroll is concentrated therein."

1.22. It follows therefore that whether by reference to the literal wording of the provision, or the historical element, or its ratio, an entity that does not hold payroll – as is the case of the Claimant – does not meet the condition of access to the tax benefit provided for in paragraph b) of No. 1 of Article 43 of the EBF.

D - Conclusion of the Report and Preliminary Ruling

1.23. In light of the exceptions raised by the Respondent in its reply, by order of 13.06.2016, the Arbitral Tribunal granted the Claimant a period within which, if it so wished, it could comment on them.

1.24. The Claimant considers that the Arbitral Tribunal is materially competent to know the request since the self-assessment to which the proceedings refer is based on the amendment of the income tax return form 22 for the financial year 2012, which is in accordance with the corrections promoted by the Respondent during the inspection action to which it was subject, and it is therefore evident that the Respondent has already taken a position on the contested self-assessment.

1.25. The Claimant also considers that the request for constitution of an arbitral tribunal is not untimely, since the 90-day period provided for in paragraph a) of No. 1 of Article 10 of the RJAT began on 20.10.2015, and ended on 19.01.2016, the date on which the request was filed.

1.26. By application of 25.07.2016, the Claimant notes the manifest error into which it had involuntarily fallen by having attached to the proceedings the corporate income tax assessment notice for 2011 and not for 2012, requesting the replacement of document No. 7 attached with the request for arbitral decision with the document submitted with the present application, which is the corporate income tax assessment for 2012, and also requesting the correction of the value of the economic interest of the present proceedings to € 2,189.46 (two thousand one hundred eighty-nine euros and forty-six cents).

1.27. By order of 20.09.2016, the Arbitral Tribunal dispensed with the hearing provided for in Article 18 of the RJAT, as it was its understanding that the parties had brought to the proceedings all the factual elements necessary and sufficient for the pronouncement of the decision, which was expected to take place by 30.09.2016, and the parties did not express their intention to present submissions.

1.28. The parties have legal personality and capacity and have standing under Article 4 and No. 2 of Article 10 of the RJAT, and Article 1 of Regulatory Decree No. 112-A/2011, of 22 March.

1.29. The proceedings do not suffer from any defect.

1.30. The Respondent raised, however, the exceptions of untimeliness of the request and material incompetence of the arbitral tribunal to know it, and it is therefore necessary to assess them immediately.

The Exception of Untimeliness of the Request for Constitution of the Arbitral Tribunal

Paragraph a) of No. 1 of Article 10 of the RJAT provides that the request for constitution of an arbitral tribunal must be submitted within a period of 90 days, counted from the facts provided for in Nos. 1 and 2 of Article 102 of the CPPT, as regards acts susceptible to autonomous challenge.

In the case at hand, the relevant fact for the purpose of counting is the end of the period for voluntary payment of the tax obligation legally notified to the taxpayer.

Now, the end of the period for voluntary payment of the tax obligation is, as shown by the corporate income tax assessment notice for 2012, document attached to the proceedings by the application of 25.07.2016, 12.10.2016. Thus, the period for submission of the request for constitution of an arbitral tribunal ended on 11.01.2016, since 10.01.2016 was a Sunday.

As the request for constitution of an arbitral tribunal was submitted on 19.01.2016, the Arbitral Tribunal cannot but conclude that it is untimely.

Since the request is untimely, the Arbitral Tribunal cannot know it, and therefore the analysis of the exception of material incompetence of the Arbitral Tribunal is unnecessary.

Decision

In accordance with the grounds set out above, the Arbitral Tribunal decides to uphold the dilatory exception of untimeliness of the request for arbitral decision, consequently dismissing the Respondent from the instance under the provisions of paragraph e) of No. 1 of Article 278 of the Civil Procedure Code, applicable by virtue of No. 1 of Article 29 of the RJAT.

Value of the Proceedings

In accordance with the provisions of No. 2 of Article 306 of the CPC, paragraph a) of No. 1 of Article 97-A of the CPPT and also No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 2,189.46 (two thousand one hundred eighty-nine euros and forty-six cents).

Costs

For the purposes of the provisions of No. 2 of Article 12 and No. 4 of Article 22 of the RJAT and No. 4 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 612.00 (six hundred and twelve euros), in accordance with Table I annexed to said Regulation, to be borne entirely by the Claimant.

Lisbon, 28 September 2016

The Arbitrator

(Nuno Pombo)

Text prepared by computer, pursuant to No. 5 of Article 131 of the CPC, applicable by reference in paragraph e) of No. 1 of Decree-Law No. 10/2011, of 20 January, and in accordance with the spelling prior to the aforementioned Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

What is the reduced IRC tax rate under Article 43 of the Portuguese Tax Benefits Statute (EBF) for companies in inland areas?
Article 43 of the Portuguese Tax Benefits Statute (EBF) provides a reduced Corporate Income Tax (IRC) rate of 10% for companies whose main activity is located in inland areas classified as economically disadvantaged. This compares to the standard IRC rate of 25%. To qualify, companies must have their registered office or effective management in these benefited areas and, according to Decree-Law No. 55/2008, maintain more than 75% of their payroll in such areas. The benefit aims to stimulate economic development and combat depopulation in interior regions of Portugal.
Can the Portuguese Tax Authority challenge a taxpayer's application of the reduced IRC rate after a Model 22 declaration is submitted?
Yes, the Portuguese Tax Authority can challenge a taxpayer's application of the reduced IRC rate even after the Model 22 declaration has been submitted. The Tax Authority may initiate an inspection procedure to verify compliance with the requirements for tax benefits claimed in the return. In this case, the Tax Authority launched an internal partial inspection procedure in June 2015 concerning the 2012 and 2013 tax years, examining whether the taxpayer properly applied the reduced rate under Article 43 of the EBF. During inspections, the Tax Authority can conclude that claimed benefits were improperly applied and require corrections.
What are the deadlines for filing an arbitration request at CAAD to contest an IRC tax assessment?
Under Article 10(a) of the Legal Regime for Tax Arbitration (RJAT), taxpayers have 90 days to file an arbitration request at CAAD (Administrative Arbitration Centre) to contest an IRC tax assessment. This deadline is counted from the notification of the contested act or the date the tacit decision is formed. However, for self-assessments, mandatory gracious appeal procedures may apply first under Article 131 of the Tax Procedure and Process Code (CPPT). The untimeliness of the request is a procedural exception that can result in dismissal of the arbitration proceedings if the 90-day period has expired.
What happens if a taxpayer voluntarily submits a corrected Model 22 declaration during a tax inspection procedure?
When a taxpayer voluntarily submits a corrected Model 22 declaration during a tax inspection procedure, it constitutes a self-assessment act that replaces the original declaration. In this case, the Claimant voluntarily corrected its 2012 Model 22 on August 5, 2015, changing from the 10% reduced rate to the 25% standard rate, despite disagreeing with the Tax Authority's interpretation. This voluntary correction, made under pressure of the inspection, creates procedural complexities regarding which act is contestable and whether mandatory gracious appeal procedures apply before seeking arbitration, as the correction is technically a taxpayer-initiated self-assessment rather than a direct Tax Authority assessment.
How does the expiry of the right of action (caducidade do direito de ação) affect tax arbitration proceedings at CAAD?
The expiry of the right of action (caducidade do direito de ação) is a fatal procedural defect that prevents the arbitral tribunal from examining the merits of the case. If the 90-day deadline for filing an arbitration request at CAAD has expired, the tribunal lacks competence to proceed, regardless of the substantive merits. In this case, the Tax Authority raised untimeliness as a preliminary exception, arguing the request was filed after the statutory deadline. If proven, this would result in dismissal of the proceedings. The tribunal must first rule on this procedural exception through a preliminary decision before addressing substantive issues regarding the application of Article 43 of the EBF.