CAAD Arbitration 180/2017-T: IRC Tax Benefit CFEI Self-Assessment Illegality Ruling

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president, designated by the other Arbitrators), Prof. Doctor António Martins and Prof. Doctor Sérgio Pontes, designated, respectively, by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 05-06-2017, agree as follows:

1. Report

A…, S.A., legal person number…, with registered office at Rua …, no.…, …, …-… Algés, hereinafter referred to as "A…" and B…, LDA., legal person number…, with registered office at …, Rua dos …, no.…, …-… …, hereinafter referred to as "B…"

jointly referred to as "Claimants", filed a petition for arbitral pronouncement with a view to declaring the illegality of the self-assessments relating to the tax year 2013 (that of A… relating to the fiscal group of which it was the parent company) as well as the decisions dismissing the administrative appeals they filed, regarding the amounts of € 752,172.52 and € 13,273.30, respectively, with their annulment.

The Claimants further request reimbursement of the aforementioned amounts, increased by compensatory interest accrued from 23-12-2016 and 22-12-2016, respectively.

The Respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The Claimant designated as Arbitrator Prof. Doctor António Martins, pursuant to article 6.º, no. 2, paragraph b), of the RJAT.

The petition for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 17-02-2017.

Pursuant to the provisions of paragraph b) of no. 2 of article 6.º and of no. 3 of the RJAT, and within the deadline provided for in no. 1 of article 13.º of the RJAT, the senior official of the Tax Administration Service designated Prof. Doctor Sérgio Pontes as Arbitrator.

The Arbitrators designated by the Parties designated for Arbitrator President Counselor Jorge Lopes de Sousa, who accepted the designation.

Pursuant to and for the purposes of the provisions of no. 7 of article 11.º of the RJAT, the President of CAAD informed the Parties of this designation on 19-05-2017.

Thus, in accordance with the requirements of no. 7 article 11.º of the RJAT, with the deadline provided for in no. 1 of article 13.º of the RJAT having elapsed without the Parties raising any objections, the Collective Arbitral Tribunal was constituted on 05-06-2017.

The Tax Authority and Customs Authority filed a Response, in which it defended that the petition for arbitral pronouncement should be judged unfounded.

By order of 25-07-2017, the holding of a meeting was waived and it was decided that the case would proceed with written submissions.

The Parties filed submissions.

The Arbitral Tribunal was regularly constituted and is competent.

The parties are duly represented, have legal personality and capacity and are legitimate (articles 4.º and 10.º, no. 2, of the same statute and article 1.º of Ordinance no. 112-A/2011, of 22 March).

There are no nullities or obstacles to consideration of the merits of the case.

2. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

• A… was, in 2013, the parent company of a group of companies to which the special taxation regime for groups of companies (RETGS) applies, which are engaged directly in the development of projects for the use of wind energy sources (hereinafter referred to as "Wind Energy Companies"), which includes B…;

• B…, in 2013, did not form part of the fiscal perimeter of the RETGS headed by A…;

• In the aforementioned tax year 2013 the Wind Energy Companies operated 31 wind farms, with a total installed capacity of 684 MW, corresponding to a market share of 13.6%;

• The electricity generation centers of the Wind Energy Companies in question were subject to the tariff regime of Decree-Law no. 189/88, of 27 May, in the version prior to the amendments made by Decree-Law no. 33-A/2005, of 16 February;

• Under article 5.º, no. 3, paragraph a) of Decree-Law no. 35/2013, of 28 February, the Wind Energy Companies in question exercised the option to benefit, for an additional period of seven years, from (i) a tariff corresponding to the market value, (ii) having as minimum and maximum limits the reference values of € 74 MWh and € 98 MWh;

• In the case of B…, the option to acquire tariff guarantee for an additional period of 7 years (beginning in 2020) corresponded to a payment and investment, in 2013, of € 66,366.52, and in the case of the other Wind Energy Companies, members of the Fiscal Group C…, corresponded to an investment and respective payment, also in 2013, of € 3,760,862.62;

• The Wind Energy Companies made communication of accession to the aforementioned regime before the end of March 2013 to the Government member responsible for the energy area, by means of declarations presented to the Directorate General of Energy and Geology ("DGEG") (documents nos. 8 and 9 and attached with the petition for arbitral pronouncement, whose contents are given as reproduced);

• The aforementioned declarations were not rejected;

• The Wind Energy Companies recognized in their financial statements the investment expenses made under this heading as an intangible asset under development;

• Based on the conviction that their accounting policies were adequate to the reality of the Wind Energy Companies, A… prepared its accounts and delivered on 19-05-2014 its consolidated declaration (RETGS) of Corporate Income Tax Model 22 relating to the tax year 2013 (document no. 1 attached with the petition for arbitral pronouncement, whose contents are given as reproduced), and at that moment proceeded to self-assess the aforementioned tax;

• B… delivered on 14-05-2014 its Corporate Income Tax declaration Model 22 relating to the tax year 2013 (document no. 2 attached with the petition for arbitral pronouncement, whose contents are given as reproduced), and at that moment proceeded to self-assess the aforementioned tax.

• Subsequently to these dates the Claimants understood that the investment expenses generating the intangible asset they recognized, carried out in the period between July and December 2013, would be covered by the tax benefit relating to the Extraordinary Investment Tax Credit (CFEI) applicable to the 2013 tax year, whereby erroneous assessment of tax in excess would have occurred in the Models 22 presented above identified;

• In order to correct the errors they understood to exist in their self-assessments of Corporate Income Tax, the Claimants filed administrative appeals;

• The administrative appeals were dismissed by orders of 23-12-2016 (A…) and 22-12-2016 (B…) whose copies are found in documents nos. 3 and 4 attached with the petition for arbitral pronouncement, which are given as reproduced, which were notified on 28-12-2016;

• In the decision on the administrative appeal presented by A… reference is made to a memorandum in which, inter alia, the following is stated:

"The activity related to wind energy generation projects is regulated by Decree-Law no. 33-A/2005, of 16 February, which revised the factors for calculating the remuneration value for the supply of energy produced in renewable power plants delivered to the National Electricity System (SEN) grid, defining procedures for allocating available capacity in the same grid and deadlines for obtaining the establishment license for renewable power plants.

This statute updates the values contained in the electricity remuneration formula produced from renewable sources, guaranteeing their respective remuneration for a period considered sufficient to allow recovery of the investments made and expectation of minimum economic return for the promoters.

Subsequently, Decree-Law no. 35/2013 came to establish various new alternative remuneration regimes intended to apply after the initial periods of guaranteed remuneration, with the Appellant allegedly choosing the application, in the additional period of seven years, of a tariff with a value corresponding to market price, having as minimum and maximum limits the reference values of € 74 MWh and € 98 MWh, respectively.

II.1. Consideration as intangible asset:

The issue now raised concerns the payments made by the Appellant to D… (documented at pages 24 to 356) and, allegedly, considered as intangible asset, which would allow a deduction from taxable profit of 2013 of the alleged amount of € 752,172.52 (3,760,862.62*0.2) as Extraordinary Investment Tax Credit (CFEI), since under article 3.º of Decree-Law 49/2013, of 16 July, the deduction is made to the collection of the group up to the limit of i) 70% of that collection and ii) 70% of the collection that would be determined, in each tax year, by the company that made the eligible investment, should the RETGS not apply to it, cf. pages 14 and 20 to 23.

According to § 8 of NCRF 6, an asset is a resource that must meet the following conditions: 1) that it is controlled by an entity as a result of past events and (2) from which it is expected that economic benefits will flow to the entity.

Thus, for its recognition to be effected, it must be identifiable, controlled, and produce future economic benefits.

In this sense, it is found that pursuant to § 9 of the aforementioned Standard, exploitation licenses, as well as market shares and commercialization rights are considered intangible assets.

Despite the elements brought to the proceedings, the Appellant did not demonstrate the identifiability criterion, that is a) that it is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, leased or exchanged, either individually or together with a related contract, asset or liability; or b) that it results from contractual rights or other legal rights, whether those rights are transferable or separable from the entity or from other rights and obligations.

As this criterion is necessary to prove intangible assets under development, its nature was not therefore proven, as well as its correct accounting treatment.

Tax benefit to be deducted from the collection:

Law no. 49/2013, of 16 July, establishes an Extraordinary Investment Tax Credit (CFEI), which may benefit Corporate Income Tax taxpayers who engage primarily in an activity of a commercial, industrial or agricultural nature, which, cumulatively, have i) accounting organized in accordance with accounting normalization ii) whose profit is not determined by indirect methods and iii) whose fiscal and contributory situation is regularized, which is translated into a deduction to the collection of that tax;

Article 3.º of the aforementioned Law provides that "(…) The benefit to be granted corresponds to a deduction to Corporate Income Tax collection in the amount of 20% of investment expenses in assets affected by the operation, which are carried out between 1 June 2013 and 31 December 2013 (...)with the maximum eligible expenses of 5,000,000.00 per taxpayer and (...) up to 70% of the collection of this tax".

Excluding investment expenses in assets likely to be used in the personal sphere.

Regarding the 2013 period, the Appellant alleges that it determined an amount of eligible expenses of € 3,760,862.62, "investment expenses that qualify as intangible assets capable of being amortized accounting, under Circular no. 6/2013, amortization which should be accepted for tax purposes under article 16.º of Regulatory Decree no. 25/2009.

To prove the right to the benefit in question, the Appellant attaches:

1. Invoices relating to the investment made and payment evidence at pages 24 to 357;

2. Management Reports of the group companies at pages 359 to 916.

3. Declaration of non-existence of debts to Social Security at pages 918 to 940

4. Declaration of non-existence of debts to the Tax Authority and Customs Authority at pages 942 to 964.

Does not attach Annual Declaration of Accounting and Tax Information and Model 22 Declaration relating to the 2013 tax year.

Let us thus analyze the case at hand:

Pursuant to Circular no. 6/2013 eligible investment expenses are those that qualify as intangible assets capable of being amortized accounting, provided that such amortization is permitted for tax purposes, under article 16.º of Regulatory Decree no. 25/2009, of 14 September.

However, § 96 of NCRF 6 - Intangible assets, prescribes, "amortization should begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the intended manner".

Similarly to what was stated regarding tangible fixed assets, also for intangible assets the moments of accounting and tax recognition of amortizations may not coincide.

In accordance with the provisions of paragraph b) of no. 2 of article 1.º of DR 25/2009: "unless reasons duly justified and accepted by the Directorate General of Taxes, depreciations and amortizations are only considered: (...) b) regarding (...) intangible assets, from their acquisition or from the beginning of activity, if it is later, or, also, when these are elements specifically associated with obtaining income. from their use for that purpose".

If the use of the asset is to occur at a moment subsequent to acquisition, the moment relevant for purposes of amortization practiced will occur at a moment distinct from that relevant for tax purposes.

The appellant comes to state that "invoices issued by D…, SA are being recorded as intangible asset, ... that the asset will be capable of being used in 2021".

Date when the "intangible asset" will actually come into operation.

Thus, in the present case, despite allegations to the contrary, it was not fully demonstrated that it meets the requirements to be able to enjoy the benefit in question.

No. 1 of article 74.º of LGT determines that "The burden of proof of the facts constituting the rights of the tax administration or of the taxpayers falls on whoever invokes them".

It is also necessary to state that because the requirements of no.1 of article 43.º of LGT are not met in this case, the consideration of the right to compensatory interest is prejudiced.

III - PROPOSED DECISION

For the matter stated, it is proposed that it be dismissed, in accordance with the grounds of this memorandum.

IV - SUPPLEMENTARY INFORMATION

1. With the case proceedings completed and the controversial matter considered, the respective memorandum was provided and the corresponding draft decision of the petition made on 11.11.2016.

2. The appellant was notified of the draft decision by registered letter on 15.11.2016, by order no. … (pages 977 and 978), to exercise its right of prior hearing provided for in article 60.º of the General Tax Law, thus complying with what is established in no. 4 of the cited article and Law. With the notification, a photocopy of the draft decision was sent, as transcribed above.

3. For the exercise of that right, a period of 15 days was established, counted from the date of that notification.

4. The appellant comes to exercise the right of participation in the decision at pages 979 to 1618, contesting the draft dismissal in which the TA argues that the Appellant does not demonstrate the identifiability criterion, as a requirement for the recognition of an intangible asset if a) it is separable, i.e., capable of being separated or divided from the entity and sold, transferred, licensed, leased or exchanged, either individually or together with a contract, asset or liability identifiable related, independently of the entity's intention to do so; or b) it results from contractual rights or other legal rights, independently of those rights being transferable or separable from the entity or from other rights or obligations.

5. Recall that the Appellant intends to see reflected in the 2013 self-assessment the CFEI resulting from investments made by the companies (except by the Appellant and E…), between the months of July to December 2013 in the acquisition of the aforementioned intangible asset.

6. It further alleges that notwithstanding the discussion that may be raised by the first condition required for an asset to be considered identifiable, it will be irrelevant because the assets in question comply with the second condition and being carried out under Decree-Law 35/2013, the same flows unequivocally from a legal right attributed.

7. Additionally, and as proof of the identifiability criterion, producers who wish to adhere to one of the alternative remuneration regimes should have communicated by the end of March to the Government member responsible for the energy area, by means of declaration presented to the Directorate General of Energy and Geology (DGEG), evidence which is attached cf. Docs. 2.1 to 2.12, at pages 1001 to 1192 (see example pages 1001 to 1006).

8. With the reception of the declaration of accession, DGEG verified its compliance with the rules contained in the statute, having a period of 30 days to request any missing elements. After the deadline elapsed, the effects were immediately produced, with the legal right emerging.

9. From what is stated it is found that the Appellant attached the necessary evidence demonstrating compliance with the rules established by Decree-Law no. 35/2013, considering the accounting recognition of the intangible asset to be correct, as is capable of being verified by the Reports and Accounts contained in the proceedings of this appeal, at pages 359 to 916 (see example pages 361 to 367, 386 and 395).

10. All the more so that the same criterion was used by other entities such as is the case of Group F… which may be confirmed on the website (Doc., page 1201) and Group G… in the Notes to the annual consolidated financial statements of the Report and Accounts of 2015 of the Group (Doc.4, page 1204).

II.2. Tax benefit to be deducted from the collection:

1. With it being verified that the investments are considered as intangible assets and the fact that Circular no. 6/2013 refers to eligible investment expenses being those that "qualify as intangible assets capable of being amortized accounting provided that such amortization is permitted for tax purposes (..) and not departing from the tax rule from the accounting rule regarding the period in which the asset will be available for use, which will be the beginning of its use.

2. And that under Regulatory Decree 25/2009 "intangible assets are amortizable when subject to depreciation, namely by having a limited temporal validity" which, in the case at hand, is translated into access to an advantageous remuneration regime for a period of 7 years and which at the end of this period will have no value, there is no non-conformity for the application of the benefit in question.

3. The Appellant attaches the declarations IES and Model 22 of 2013 which were missing Docs. 5.1 to 5.14 and 6.1 to 6.15, respectively (see example page 1208 et seq.)

4. Notwithstanding, under article 5.º of Law no. 49/2013 of 16 July, "the CFEI is not cumulative, regarding the eligible expenses, with any other tax benefits of the same nature, provided in other statutes which analyzed the declarations mod. 22 delivered was not proven by the Appellant namely in relation to H…, at page 1585 of the proceedings and of the parent company at page. .

5. It is found that the Appellant did not comply with the provisions of article 6.º of the statute regarding the ancillary obligations having not demonstrated by "document to be integrated in the fiscal documentation process referred to in article 130.º of CIRC that identifies discriminately the relevant investment expenses, the respective amount and other elements considered relevant".

V – DECISION

Having considered the facts and grounds described above, it is proposed that it be definitively converted in the sense of dismissal of the petition, in accordance with the grounds previously described."

In the decision on the administrative appeal presented by B… reference is made to a memorandum in which, inter alia, the following is stated:

II.1. Consideration as intangible asset:

The issue now raised concerns the payments made by the Appellant to D… and, allegedly, considered as intangible asset, which would allow a deduction from taxable profit of 2013 of the alleged amount of € 13,273.30 as Extraordinary Investment Tax Credit (CFEI).

According to § 8 of NCRF 6, an asset is a resource that must meet the following conditions: 1) that it is controlled by an entity as a result of past events and (2) from which it is expected that economic benefits will flow to the entity.

Thus, for its recognition to be effected, it must be identifiable, controlled, and produce future economic benefits.

In this sense, it is found that pursuant to § 9 of the aforementioned Standard, exploitation licenses, as well as market shares and commercialization rights are considered intangible assets.

Despite the elements brought to the proceedings, the Appellant did not demonstrate the identifiability criterion, that is a) that it is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, leased or exchanged, either individually or together with a related contract, asset or liability; or b) that it results from contractual rights or other legal rights, whether those rights are transferable or separable from the entity or from other rights and obligations.

As this criterion is necessary to prove intangible assets under development, its nature was not therefore proven, as well as its correct accounting treatment.

II.2. Tax benefit to be deducted from the collection

Law no. 49/2013, of 16 July, establishes an Extraordinary Investment Tax Credit (CFEI), which may benefit Corporate Income Tax taxpayers who engage primarily in an activity of a commercial, industrial or agricultural nature, which, cumulatively, have i) accounting organized in accordance with accounting normalization, ii) whose profit is not determined by indirect methods and iii) whose fiscal and contributory situation is regularized, which is translated into a deduction to the collection of that tax;

Article 3.º of the aforementioned Law provides that "The benefit to be granted corresponds to a deduction to Corporate Income Tax collection in the amount of 20% of investment expenses in assets affected by the operation, which are carried out between 1 June 2013 and 31 December 2013 (...)with the maximum eligible expenses of 5,000,000.00 per taxpayer and (...) up to 70% of the collection of this tax".

Excluding investment expenses in assets likely to be used in the personal sphere.

Regarding the 2013 period, the Appellant alleges that it determined an amount of eligible expenses of € 66,366.52, "investment expenses that qualify as intangible assets capable of being amortized accounting, under Circular no. 6/2013, amortization which should be accepted for tax purposes under article 16.º of Regulatory Decree no. 25/2009.

To prove the right to the benefit in question, the Appellant attaches:

1. Annual Declaration of Accounting and Tax Information and Model 22 Declaration relating to the 2013 tax year (Docs.4 and 5);

2. Declaration of non-existence of debts to Social Security (Doc.6);

3. Declaration of non-existence of debts to the Tax Authority and Customs Authority (Doc.7).

Let us thus analyze the case at hand:

Pursuant to Circular no. 6/2013 eligible investment expenses are those that qualify as intangible assets capable of being amortized accounting, provided that such amortization is permitted for tax purposes, under article 16.º of Regulatory Decree no. 25/2009, of 14 September.

However, § 96 of NCRF 6 - Intangible assets, prescribes, "amortization should begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the intended manner".

Similarly to what was stated regarding tangible fixed assets, also for intangible assets the moments of accounting and tax recognition of amortizations may not coincide.

In accordance with the provisions of paragraph b) of no. 2 of article 1.º of DR 25/2009: "unless reasons duly justified and accepted by the Directorate General of Taxes, depreciations and amortizations are only considered: (...) b) regarding (...)intangible assets, from their acquisition or from the beginning of activity, if it is later, or, also, when these are elements specifically associated with obtaining income. from their use for that purpose".

If the use of the asset is to occur at a moment subsequent to acquisition, the moment relevant for purposes of amortization practiced will occur at a moment distinct from that relevant for tax purposes.

The appellant comes to state that "invoices issued by D…, SA are being recorded as intangible asset, ... that the asset will be capable of being used in 2021".

Date when the "intangible asset" will actually come into operation.

Thus, in the present case, despite allegations to the contrary, it was not fully demonstrated that it meets the requirements to be able to enjoy the benefit in question.

No. 1 of article 74.º of LGT determines that "The burden of proof of the facts constituting the rights of the tax administration or of the taxpayers falls on whoever invokes them".

It is also necessary to state that because the requirements of no.1 of article 43.º of LGT are not met in this case, the consideration of the right to compensatory interest is prejudiced.

III - PROPOSED DECISION

For the matter stated, it is proposed that it be dismissed, in accordance with the grounds of this memorandum.

IV - SUPPLEMENTARY INFORMATION

1. With the case proceedings completed and the controversial matter considered, the respective memorandum was provided and the corresponding draft decision of the petition made on 09.11.2016.

2. The appellant was notified of the draft decision by registered letter by order no. … of 15.11.2016 (pages 108 and 109), to exercise its right of prior hearing provided for in article 60.º of the General Tax Law, thus complying with what is established in no. 4 of the cited article and Law. With the notification, a photocopy of the draft decision was sent, as transcribed above.

3. For the exercise of that right, a period of 15 days was established, counted from the date of that notification.

4. The appellant comes to exercise the right of participation in the decision at pages 110 to 162, contesting the draft dismissal in which the TA argues that the Appellant does not demonstrate the identifiability criterion, as a requirement for the recognition of an intangible asset if a) it is separable, i.e., capable of being separated or divided from the entity and sold, transferred, licensed, leased or exchanged, either individually or together with a contract, asset or liability identifiable related, independently of the entity's intention to do so; or b) it results from contractual rights or other legal rights, independently of those rights being transferable or separable from the entity or from other rights or obligations.

5. Recall that the Appellant intends to see reflected in the 2013 self-assessment the CFEI resulting from investments made by the company, between the months of July to December 2013, in the acquisition of the aforementioned intangible asset.

6. It further alleges that notwithstanding the discussion that may be raised by the first condition required for an asset to be considered identifiable, it will be irrelevant because the assets in question comply with the second condition and being carried out under Decree-Law 35/2013, the same flows unequivocally from a legal right attributed.

7. Additionally, and as proof of the identifiability criterion, producers who wish to adhere to one of the alternative remuneration regimes should have communicated by the end of March to the Government member responsible for the energy area, by means of declaration presented to the Directorate General of Energy and Geology (DGEG), evidence which is attached cf. Doc. 2 at pages 124 to 128).

8. With the reception of the declaration of accession, DGEG verified its compliance with the rules contained in the statute, having a period of 30 days to request any missing elements. After the deadline elapsed, the effects were immediately produced, with the legal right emerging.

9. From what is stated it is found that the Appellant attached the necessary evidence demonstrating compliance with the rules established by Decree-Law no. 35/2013, considering the accounting recognition of the intangible asset to be correct, as is capable of being verified by the Reports and Accounts contained in the proceedings of this appeal, at pages 27 to 31 and 32 to 48.

10. All the more so that the same criterion was used by other entities such as is the case of Group F… which may be confirmed on the website (Doc.3, page 129) and Group G… in the Notes to the annual consolidated financial statements of the Report and Accounts of 2015 of the Group (Doc.4, page 130).

II.2. Tax benefit to be deducted from the collection:

1. With it being verified that the investments are considered as intangible assets and the fact that Circular no. 6/2013 refers to eligible investment expenses being those that "qualify as intangible assets capable of being amortized accounting provided that such amortization is permitted for tax purposes (..) and not departing from the tax rule from the accounting rule regarding the period in which the asset will be available for use, which will be the beginning of its use.

2. And that under Regulatory Decree 25/2009 "intangible assets are amortizable when subject to depreciation, namely by having a limited temporal validity" which, in the case at hand, is translated into access to an advantageous remuneration regime for a period of 7 years and which at the end of this period will have no value, there is no non-conformity for the application of the benefit in question.

3. It is found that the Appellant did not comply with the provisions of article 6.º of the statute regarding the ancillary obligations having not demonstrated by "document to be integrated in the fiscal documentation process referred to in article 130.º of CIRC that identifies discriminately the relevant investment expenses, the respective amount and other elements considered relevant".

V - DECISION

Having considered the facts and grounds described above, it is proposed that it be definitively converted in the sense of dismissal of the petition, in accordance with the grounds previously described.

Company H… LDA, integrated in the fiscal group of C…, presented the model 22 declaration relating to the 2013 tax year which appears in document no. 24 attached with the petition for arbitral pronouncement, whose contents are given as reproduced, in which it is stated, in field 355 of table 10, that it benefited from tax benefits in the amount of € 180,375.00;

The amount of tax benefits indicated in the preceding paragraph relates to the investment in the total value of € 901,875.00, which are referred to in the invoices in the amounts of € 631,312.50 and € 270,562.50, which appear in document no. 33 attached with the petition for arbitral pronouncement, whose contents are given as reproduced, relating to expenses with supplies made by company I…;

The Claimants paid the self-assessed tax (documents nos. 34 and 35 attached with the petition for arbitral pronouncement, whose contents are given as reproduced);

On 19-03-2017, the Claimants filed the petition for constitution of an arbitral tribunal which gave rise to this case.

2.2. Facts Not Proven and Reasoning of the Decision on Factual Matters

The facts were given as proven based on the documents submitted by the Claimants and on the administrative record.

There is no controversy about the facts relevant to the decision of the case.

3. Legal Matters

3.1. Questions of Legality That Are the Subject of the Case and Questions Raised by the Tax Authority and Customs Authority in Its Response

The Claimants requested a declaration of illegality of the self-assessments relating to the 2013 tax year, as well as of the decisions dismissing the administrative appeals they filed.

The relevant reasoning in situations of self-assessment in which an administrative appeal was filed that was dismissed is that contained in the decision dismissing the appeal (directly or by reference).

In fact, in situations of self-assessment followed by an administrative appeal in which an express decision is rendered, what remains in the legal order is the position of the Tax Authority and Customs Authority before the taxpayer, which is defined by the decision on the appeal, in the part where the legality of the self-assessment was subject to consideration by the Tax Authority and Customs Authority.

Consequently, the question posed to the Tribunal is whether the illegality of the self-assessment should be declared or whether it should be maintained in the legal order based on the grounds invoked in the appeal decision and only those, as it is settled case law, post hoc reasoning is irrelevant.

In fact, in a case concerning mere legality, the legality of the challenged act must be assessed as it occurred, with the reasoning used in it, other possible reasoning that could serve as support for other acts with decision content totally or partially coinciding with the act performed being irrelevant.

Therefore, the Tribunal cannot, on finding that an illegal ground was invoked as support for the decision dismissing the appeal, assess whether it should have been dismissed for other reasons. [1]

For this reason, it is in the light of the reasoning of the appeal dismissal decision that the question of the legality or illegality of the self-assessment must be assessed.

A different question from this is whether, in the case of concluding that the self-assessment is illegal in the light of the grounds invoked in the decision dismissing the appeal, but other possible grounds are detected, which were not invoked in it, but may be invoked in a new viable act in the execution of judgment, the court should or should not determine the substantive consequences of the illegality (namely regarding reimbursement of amounts) as if those new grounds did not exist or should abstain from deciding on such matter, leaving for the execution of judgment the definition of the reconstitution of the legal situation in question. [2]

For this reason, in the case at hand, where what is at issue is assessing whether or not the maintenance in the legal order of the self-assessments for the reasons the Tax Authority and Customs Authority invoked to maintain them is justified.

Examining the decisions dismissing the appeals and the information to which they refer, it is concluded that:

– the Tax Authority and Customs Authority accepted the position of the Claimants in arguing that the amounts paid during the 2013 tax year as compensation for accession to the remuneration regime provided in paragraph a) of no. 2 of article 5.º of Decree-Law no. 35/2013 of 28 February, should be recognized accounting as an intangible asset: «From what is stated it is found that the Appellant attached the necessary evidence demonstrating compliance with the rules established by Decree-Law no. 35/2013, considering the accounting recognition of the intangible asset to be correct» (points 9 and 10 of the memorandums);

– regarding the possibility that those compensations could benefit from the CFEI, the Tax Authority and Customs Authority understood that the «access to an advantageous remuneration regime for a period of 7 years and which at the end of this period will have no value» satisfies the requirement made in Regulatory Decree no. 25/2009, of 14 September, that "intangible assets are amortizable when subject to depreciation, namely by having a limited temporal validity", by «there is no non-conformity for the application of the benefit in question» (points 11 and 12 of the memorandums).

However, the Tax Authority and Customs Authority understood that the application of the benefit should be refused, for the following reasons:

– as regards B…, because «it did not comply with the provisions of article 6.º of the statute regarding the ancillary obligations having not demonstrated by "document to be integrated in the fiscal documentation process referred to in article 130.º of CIRC that identifies discriminately the relevant investment expenses, the respective amount and other elements considered relevant" (point 13 of the Memorandum on which the decision dismissing the appeal was based);

– as regards A…, for the same reason and also because, «under article 5.º of Law no. 49/2013 of 16 July, "the CFEI is not cumulative, regarding the eligible expenses, with any other tax benefits of the same nature, provided in other statutes which analyzed the declarations mod. 22 delivered was not proven by the Appellant namely in relation to H…» (points 13, 14 and 15 of the Memorandum on which the decision dismissing the appeal was based)

It is thus found that the two questions raised by the Tax Authority and Customs Authority in its Response, which are those of «recognition and qualification as intangible asset» and admissibility of application of the CFEI to this type of asset, which had already been answered affirmatively in the decisions on the appeals, were not invoked as an obstacle to their granting.

In fact, although such possible obstacles to granting the appeals had been raised in the draft decisions, they were abandoned in the final decisions, by stating that it is verified «that the Appellant attached the necessary evidence demonstrating compliance with the rules established by Decree-Law no. 35/2013, considering the accounting recognition of the intangible asset to be correct» and that «there is no non-conformity for the application of the benefit in question».

For this reason, as the reasoning of the dismissal acts is that which was ultimately invoked, and post hoc reasoning is irrelevant, it cannot in this case aimed at assessing the legality of the appeal decisions and the reasoning they gave to the self-assessments reassess such matters, and it should be taken as established that there was appropriate recognition of the aforementioned compensations paid in 2013 as intangible assets and, regarding the possibility of application of the CFEI to such assets, «there is no non-conformity for the application of the benefit in question».

Thus, the questions of illegality that are important to assess in this case, are only those of whether the Tax Authority and Customs Authority is correct in invoking the grounds it invoked to dismiss the appeals.

3.2. Question of Non-Compliance with Ancillary Obligations Required in Article 6.º of the CFEI

With regard to both appeals, the Tax Authority and Customs Authority invokes non-compliance with ancillary obligations required by article 6.º of the CFEI (Law no. 49/2013, of 16 July).

Article 130.º of the CIRC establishes that «Corporate Income Tax taxpayers (…) are obliged to maintain in good order, for a period of 10 years, a fiscal documentation process relating to each tax period, which must be constituted by the deadline for submission of the declaration referred to in paragraph c) of no. 1 of article 117.º, with the accounting and tax elements to be defined by order of the Minister of Finance».

Article 6.º of the CFEI, establishes that «the deduction provided for in article 3.º is justified by document to be integrated in the fiscal documentation process referred to in article 130.º of the Corporate Income Tax Code that identifies discriminately the relevant investment expenses, the respective amount and other elements considered relevant».

The Claimants argue, in short, that this formal requirement cannot be applied in the case of a benefit that was not actually deducted in the period.

In fact, as the Claimants point out, it is «the deduction» that must be justified by document to be integrated in the fiscal documentation process, so that the Tax Authority and Customs Authority can adequately control its legality.

Thus, the ancillary obligation provided for in no. 1 of article 6.º of the CFEI has, naturally, as its subject-matter situations in which the deduction occurred by the taxpayer in its self-assessment.

In cases, as in the present one, in which the deduction has not yet occurred, it would not even have been possible to comply with that ancillary obligation.

On the other hand, as the Claimants argue, the obligation provided for in article 6.º of the CFEI must be considered a formality ad probationem, which can be waived in tax procedures by any means of proof.

In fact, it is manifest that that ancillary obligation does not constitute a requirement for the application of the benefit, being imposed only to permit the Tax Authority and Customs Authority to control the legality of the deduction the taxpayer may have made.

Being so, in appeal procedures, proof of the verification of the requirements of the benefit by any means of proof is admissible, as results from article 72.º of the LGT, which establishes that «the instructing body can use, for knowing the facts necessary to the decision of the procedure, all means of proof admitted by law», a rule which is in keeping with article 364.º of the Civil Code.

In the case at hand, the Claimants presented sufficient documentation to verify and control the application of the benefit, as the Tax Authority and Customs Authority itself recognized, in the final decisions on the appeals of each of the Claimants, by saying that «they attached the necessary evidence demonstrating compliance with the rules established by Decree-Law no. 35/2013, considering the accounting recognition of the intangible asset to be correct»

For this reason, it must be concluded that the requirement of proof of the requirements of the application of the benefit was satisfied, whereby the Tax Authority and Customs Authority is not correct in dismissing the appeals on this ground.

3.3. Question of Lack of Proof of Non-Cumulation of Benefits by A…

The Tax Authority and Customs Authority understood, in the decision on the appeal presented by A…, that the benefit of the CFEI should be refused because, «under article 5.º of Law no. 49/2013 of 16 July, "the CFEI is not cumulative, regarding the eligible expenses, with any other tax benefits of the same nature, provided in other statutes which analyzed the declarations mod. 22 delivered was not proven by the Appellant namely in relation to H…» (points 13, 14 and 15 of the Memorandum on which the decision dismissing the appeal was based).

A… argues in this case, in short, as follows:

– it was not given any opportunity «to show that also in the case of H… this requirement was not infringed, because its questioning by the TA only appeared in the final decision dismissing the appeal»;

– «as is possible to verify through reading of table 10, and also of annex D, of the individual Model 22 Declaration of company H… relating to the 2013 tax year (previously attached as Doc. no. 24) and reflexively in the Model 22 Declaration of the Fiscal Group in which it is inserted relating to the 2013 tax year (previously attached as Doc. no. 1), H… (and consequently the Fiscal Group) benefited in the 2013 tax year from the tax benefit relating to the CFEI in the amount of €180,375.00»;

– «as reflected in Doc. no. 33 which is hereby attached, the benefit in question concerns a total investment in the amount of € 901,875.00 made by H… in the acquisition of wind towers during the 2013 tax year (see also Doc. no. 32)»;

– «From what is stated, it is concluded that the eligible expense for the tax benefit relating to the CFEI determined by company H… has nothing to do with the addition to its intangible asset of the investment made in order to extend the guaranteed tariff for an additional period of seven years, there being no thus prejudice to compliance with article 5.º of the CFEI regime».

The Tax Authority and Customs Authority does not contest these statements or the documentary evidence on which it is based, whereby it should be considered proven that there was no application of any benefit to the expenses with payment of the compensations that are at issue in this case.

On the other hand, having doubts about this invoked possibility of cumulation of benefits regarding the same expenses, the Tax Authority and Customs Authority should have requested clarification from the Claimant under no. 3, paragraph d) of article 59.º of the LGT, which imposed on it the inquisitorial principle, enunciated in article 58.º of the same Law, whereby it cannot be considered justified that it had dismissed the appeal on this ground.

For this reason, this obstacle to Claimant A… being able to benefit from the CFEI benefit regarding these compensations is also not present.

3.4. Annulment of Self-Assessments

From what is stated, it is concluded that the self-assessments are defective with illegality, in not having considered for purposes of the CFEI the amounts paid during the 2013 tax year as compensation for accession to the remuneration regime provided in paragraph a) of no. 2 of article 5.º of Decree-Law no. 35/2013 of 28 February.

The decisions dismissing the appeals are also illegal, in having considered that the obstacles invoked in them occurred, preventing the Claimants from benefiting from the benefit.

Thus, the self-assessments and the decisions on the appeals are defective with vices of violation of law, by error as to legal prerequisites, which, in accordance with no. 1 of article 163.º of the Code of Administrative Procedure, justify the annulment of the appeal dismissal decisions and the partial annulment of the self-assessments, in the parts corresponding to the non-relevance for purposes of the CFEI of the amounts paid in the 2013 tax year, for purposes of those compensations.

4. Reimbursement of Amounts Paid and Compensatory Interest

The Claimants request reimbursement of the amounts of € 752,172.52 (A…) and 13,273.30 (B…) which they paid in excess, due to not having considered the expenses with compensations paid in 2013 for purposes of the CFEI.

The Claimants request this from 23-12-2016 and 22-12-2016, the dates of the respective decisions dismissing the appeals they filed.

In accordance with the provisions of paragraph b) of article 24.º of the RJAT, the arbitral decision on the merits of the claim for which no appeal or challenge is available binds the Tax Administration from the end of the deadline provided for the appeal or challenge, and this must, in the exact terms of the procedural nature of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the spontaneous execution of the decisions of tax courts, «restore the situation that would have existed if the tax act subject of the arbitral decision had not been practiced, adopting the necessary acts and operations for that purpose», which is in keeping with what is provided for in article 100.º of the LGT [applicable by force of the provisions of paragraph a) of no. 1 of article 29.º of the RJAT] which establishes that «the tax administration is obliged, in case of full or partial success of an appeal, judicial challenge or appeal in favor of the taxpayer, to immediate and complete restoration of the legality of the act or situation that was the subject of the dispute, including the payment of compensatory interest, if applicable, from the end of the deadline for execution of the decision».

Although article 2.º, no. 1, paragraphs a) and b), of the RJAT uses the expression «declaration of illegality» to define the competence of the arbitral tribunals operating in the CAAD, making no reference to condemnatory decisions, it should be understood that the powers which, in a process of judicial challenge, are attributed to tax courts are included in its competencies, being this the interpretation which is in keeping with the sense of the legislative authorization on which the Government based itself for approving the RJAT, in which it proclaims, as a first directive, that «the tax arbitral process must constitute an alternative procedural means to the process of judicial challenge and to the action for the recognition of a right or legitimate interest in tax matters».

The process of judicial challenge, although being essentially a process for annulment of tax acts, admits condemnation of the Tax Administration in the payment of compensatory interest, as is clear from article 43.º, no. 1, of the LGT, in which it is established that «compensatory interest is due when it is determined, in administrative appeal or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due» and of article 61.º, no. 4 of the CPPT (in the version given by Law no. 55-A/2010, of 31 December, which corresponds to no. 2 in the original version), which «if the decision that recognized the right to compensatory interest is judicial, the payment deadline is counted from the beginning of the deadline for its spontaneous execution».

Thus, no. 5 of article 24.º of the RJAT, by saying that «payment of interest is due, independent of its nature, on the terms provided for in general tax law and in the Code of Procedure and Tax Process», should be understood as permitting recognition of the right to compensatory interest in the arbitral process.

It is thus necessary to assess the requests for reimbursement of the amounts unduly paid, increased by compensatory interest.

It being proven that the expenses with compensations paid in 2013 were not considered for purposes of CFEI, to which corresponded payment of Corporate Income Tax in excess in the amounts € 752,172.52 (A…) and 13,273.30 (B…), these Claimants have the right to reimbursement of the respective amounts they paid in excess.

As concerns compensatory interest, the substantive regime is regulated in article 43.º of the LGT, which establishes, for what is relevant here, the following:

Article 43.º

Unduly Paid Tax Obligation

1 – Compensatory interest is due when it is determined, in administrative appeal or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due.

2 – Error attributable to the services is also considered to exist in the case in which, although the assessment is made based on the declaration of the taxpayer, the latter followed, in its completion, generic guidance from the tax administration, duly published.

As concerns the self-assessments, which were effected by the Claimants, their errors are not attributable to the Tax Authority and Customs Authority, there being, consequently, no right to compensatory interest derived from their practice, in the light of the provisions of no. 1 of this article 43.º.

However, the same does not occur with the decisions on the appeals, as the claims of the Claimants should have been granted and the non-granting of the claims is attributable to the Tax Authority and Customs Authority.

This case of the Tax Authority and Customs Authority maintaining a situation of illegality, instead of restoring legality, should be framed, by mere declarative interpretation, in no. 1 of article 43.º of the LGT, as it is a situation in which there is an adequate causal nexus between an error attributable to the services and the maintenance of unduly paid amount and the omission to restore legality when the action that would restore it should be practiced should be equated with the action. [3]

Consequently, the Claimants have the right to compensatory interest, under the terms of articles 43.º, no. 1, of the LGT and 61.º of the CPPT, from 24-12-2016, as regards A… and from 23-12-2016, as regards B…, days following the dates on which the appeals should have been granted.

Compensatory interest is due until the respective reimbursements are made, at the legal default rate, under the terms of articles 43.º, nos. 1, and 35.º, no. 10 of the LGT, of article 24.º, no. 1, of the RJAT, of article 61.º, nos. 3 and 4, of the CPPT, of article 559.º of the Civil Code and Ordinance no. 291/2003, of 8 April (or any other or others that alter the legal rate).

5. Decision

On these grounds, the Arbitral Tribunal agrees to:

• Judge the petition for arbitral pronouncement to be well-founded;

• Annul the self-assessments made by the Claimants, for the amounts of € 752,172.52 (A…) and 13,273.30 (B…) which they self-assessed in excess, of tax relating to the amounts they paid in the 2013 tax year as compensation for accession to the remuneration regime provided in paragraph a) of no. 2 of article 5.º of Decree-Law no. 35/2013 of 28 February;

• Annul the decisions dismissing the appeals;

• Judge the requests for reimbursement of € 752,172.52 to A… and 13,273.30 to B… to be well-founded and condemn the Tax Authority and Customs Authority to make the respective payments;

• Judge the request for payment of compensatory interest to be well-founded and condemn the Tax Authority and Customs Authority to pay it from 24-12-2016 as regards A… and from 23-12-2016 as regards B…, calculated on the basis of the amounts to be reimbursed to each of the Claimants, until the respective reimbursements are made.

8. Value of the Case

In accordance with the provisions of article 306.º, no. 2, of the CPC and 97.º-A, no. 1, paragraph a), of the CPPT and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Processes, the value of the case is set at € 765,445.82.

Lisbon, 12-09-2017

The Arbitrators

(Jorge Lopes de Sousa)

(António Martins)

(Sérgio Pontes)

[1] Essentially in this sense, the following decisions of the Supreme Administrative Court may be seen, regarding a parallel situation that arises in contentious appeal processes:

• of 10-11-98, of the Plenary, rendered in appeal no. 32702, published in Appendix to the Official Journal of 12-4-2001, page 1207;

• of 19-06-2002, case no. 47787, published in Appendix to the Official Journal of 10-2-2004, page 4289;

• of 09-10-2002, case no. 600/02;

• of 12-03-2003, case no. 1661/02.

In similar sense, may be seen:

• MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479, where he states that it is «irrelevant that the Administration comes, already pending the contentious appeal, to invoke as determining reasons other motives, not set forth in the act», and volume II, 9th edition, page 1329, where he writes that «the appealed authority cannot (...), in the response to the appeal, justify the practice of the appealed act by reasons different from those that appear in its express reasoning»;

• MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where he writes that «the reasons objectively existing but which were not expressly raised, as grounds for the act, cannot be taken into account in assessing its legality».

[2] In this sense, among others, may be seen the arbitral decision of 13-07-2016, rendered in case no. 4/2016-T.

[3] ANTUNES VARELA, On General Obligations, 10th edition, page 528:

«Omission, as a purely negative attitude, cannot physically or materially generate the damage suffered by the injured party; but it is understood that omission is the cause of the damage, whenever there is the special legal duty to practice an act which, certainly or very probably, would have prevented the completion of that damage».