IRC Interior Tax Benefit Under Article 43 EBF: Reduced Rate Eligibility Without Salary Costs

ARBITRAL DECISION

Parties

Claimant: A…, Unipessoal, Lda., NIPC PT…, with registered office at Rua…, nº…, …, …-… …

Respondent: Tax and Customs Authority (AT)

I. REPORT

a) On 28-03-2016, the Claimant submitted to CAAD a request seeking, under the Legal Framework for Tax Arbitration (RJAT), the constitution of a singular arbitral tribunal (TAS).

THE CLAIM

b) The Claimant requests the revocation of the decision that rejected a hierarchical appeal it filed against the decision that denied confirmation of a gracious complaint, procedures which it directed against the corporate income tax (IRC) assessment of 29.10.2014, No. 2014… and the interest assessment No. 2014…, in the total amount of 7,043.44 euros, tax and compensatory interest which it considers were unlawfully assessed for the tax period of 2011-01-01 to 2011-12-31.

c) An assessment whose annulment it also petitions and which resulted from the calculation of IRC, not at the reduced rate provided for in paragraph a) of No. 1 of article 43 of the EBF (ad valorem rate of 15%) but rather at the general rate, since, as a result of an inspection action, the AT notified it of an additional assessment.

THE CAUSE OF ACTION

d) The Claimant invokes that it meets all the requirements provided for in Nos. 1 and 2 of article 43 of the EBF in force at the date of the facts (revoked by Law No. 64-B/2011, of 30.12) and of No. 1 of article 2 of Decree-Law No. 55/2008, of 26.03.

e) And because it has its registered office and effective management in the geographical zone of… and exercises its activity in that geographical zone (a zone considered eligible for this benefit under Order No. 1117/2009, of 30.09), it understands that to benefit from the tax incentive, it is not necessary to have recorded dependent labor remuneration, with No. 2 of article 2 of Decree-Law No. 55/2008, of 26.03 not being applicable to it.

f) Arguing that the criterion here defined by the legislator, of 75% of the payroll "… uniquely defines a criterion that will allow automatically considering the criterion of exercising principal activity in the region as met, creating an irrebuttable presumption – does not exclude other situations that may meet the same criterion".

OF THE SINGULAR ARBITRAL TRIBUNAL (TAS)

g) The request for constitution of the TAS was accepted by the President of CAAD and automatically notified to the AT on 11-04-2016.

h) By the Ethics Council of CAAD, the signatory of this decision was appointed arbitrator, the parties being notified thereof on 25-05-2016. The parties did not express willingness to challenge the appointment, in accordance with article 11, No. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

i) The Singular Arbitral Tribunal (TAS) has been, since 13-06-2016, regularly constituted to hear and decide on the object of this dispute (articles 2, No. 1, paragraph a) and 30, No. 1, of the RJAT).

j) All these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 13-06-2016 which is hereby reproduced.

k) On 14-06-2016 the AT was notified in accordance with and for the purposes of article 17-1 of the RJAT. It responded on 21.07.2016. It also attached the PA comprising 1 computerized file with 186 sheets with 186 numbered and written pages.

l) The parties' meeting provided for in article 18 of the RJAT was not held nor did the parties produce written submissions as they waived these procedural formalities.

PROCEDURAL PREREQUISITES

m) Legitimacy, capacity and representation – The parties possess legal personality, legal capacity, are legitimate parties and are represented (articles 4 and 10, No. 2, of the RJAT and article 1 of Order No. 112-A/2011, of 22 March).

n) Principle of adversarial proceedings - The AT was notified in accordance with subsection k) of this Report. All procedural documents and all documents attached to the proceedings were made available to the respective counterparty in the CAAD Procedural Management System. Both parties were always notified of their attachment.

o) Dilatory exceptions - The arbitral procedure does not suffer from any defects and the request for arbitral pronouncement is timely as it was submitted within the period prescribed in paragraph a) of No. 1 of article 10 of the RJAT, as results from the undisputed fact that the decision rejecting the hierarchical appeal was notified by official letter dated 29.12.2015 and the present request for pronouncement was received by CAAD on 28-03-2016.

SUMMARY OF THE CLAIMANT'S POSITION

p) The Claimant disagrees with the interpretation that the AT adopted in the inspection report and in the grounds for rejection of the hierarchical appeal, of No. 2 of article 2 of Decree-Law No. 55/2008, of 26.03 (which regulates the exempting provisions of article 43 of the EBF as drafted in 2011), to the effect of considering as a necessary requirement to benefit from the tax incentive of article 43 - No. 1 paragraph a) of the EBF the "obligation to exercise its principal activity in the eligible areas, through concentration of more than 75% of the payroll".

q) It argues that, being a sole proprietorship company, it created at least one workplace (non-dependent), that of its sole manager, which it considers of little relevance, arguing that the "legal question of payroll is not a requirement, but rather the establishment of a presumption of exercise of principal activity, not excluding other facts subsumable to the same legal framework".

r) It understands that it meets particularly the requirement – challenged by the AT in the decision on the hierarchical appeal – of exercising principal activity in a region eligible for the application of the benefit of paragraph a) of No. 1 of article 43 of the EBF as then drafted, because: 1 – it has its registered office in…; 2 – it has no facilities anywhere else in national territory; 3 – its object is "construction and civil engineering, consulting, architecture, purchase and sale of real estate and resale of goods acquired for that purpose"; 4 – it exercises its activity through its sole manager and allowed his establishment in…; 5 – accounting is performed in…, by accountant located in…; 6 – it paid business contribution to the Municipality of…; 7 – it provided services and expert opinions and received fees from court proceedings in…; 8 – it provided consulting services for Angola, Mozambique and Guinea-Bissau, services which came to it from B… (…); 9 – it incurs expenses for vehicles, equipment and facilities and other expenses in the municipality of Viseu.

s) It invokes in favor of its point of view, regarding the non-application of the "payroll" requirement, the information …/2011 issued in process No. 2361/2011 of the IRC Services Division of the AT.

SUMMARY OF THE RESPONDENT'S POSITION

t) Disagreeing with the Claimant's point of view, the Respondent argues for another reading of the law, particularly regarding No. 2 of article 2 of Decree-Law No. 55/2008, of 26 March, expressing that: "… there exists in that provision no presumption, but rather sine qua non conditions for access to the tax benefit in question". "One of these conditions is that the taxpayer who wishes to be a beneficiary must locate its principal activity in the eligible areas". "Because this is a subjective concept, the legislator understood it appropriate to specify what it considered principal activity located in the eligible zones in No. 2 of that article, doing so in the following manner: "It is considered that principal activity is located in the eligible zones when the taxpayers have their registered office or effective management in those areas and therein concentrate more than 75% of their respective payroll"".

u) The Respondent acknowledges that the Claimant "… has its principal activity at Rua…, nº…, …, in… …", but adds: "… in the tax period here in question, it presented no payroll" to then conclude: " … given the specific nature of the main activity carried out, that is, building construction, it is considered difficult to imagine a company of this nature exercising its activity without presenting any amount as "Personnel Expenses" or "Subcontracted Services"".

v) It further states: "… in order to allow for a deeper analysis, several clarifications were requested from the Claimant, namely: a) Indication of the sale(s) corresponding to €150,000.00 of Table …-A, Field A…, particularly to which work(s) it refers and its geographical location; b) Regarding the provision of services (Table …-A, Field A…) indication of the services that were provided, where and by whom, in the domestic market in the amount of €2,448.00 and in the extra-community market in the amount of €34,500.00"

w) From the Claimant's response the AT concludes that:

ü the value of the sales corresponds to the sale of a property in the parish of…, in … (urban real estate – Lot…, registered under article…), "which is to say in an area not covered by Order No. 117/2009, of 30 September, corrected by Rectification Declaration No. 79/2009, of 27 October";

ü The services provided in the domestic market, in the amount of €2,448.00, concern expert opinions carried out by the partner-manager, Eng. C…, in the context of court proceedings pending in the Court of….

ü Regarding the amount of services provided in the external market, in the amount of €34,500.00, concerns projects carried out for D…, E… and F....

x) From the facts set out in the preceding subsection the AT concludes as follows:

v "…we can conclude that of the total revenue, in the amount of €186,948.00, approximately 80% corresponding to the sale of a property located in a non-eligible zone";

v "And approximately 18.5% concerns projects which, notwithstanding having had the intermediation of B…, concern buildings located outside national territory and which were invoiced directly to E…, G…, F… and D….

v " … the services provided by the Claimant in the eligible zone in question and which were demonstrated during the inspection procedure, correspond to little more than 1%", and "even with the new invoices attached to the proceedings with the inspection report, they continue to be an insignificant part of the services overall".

y) It argues that the benefit of article 43 - 1- a) of the EBF is subject to the regime of "article 2, No. 2 of Decree-Law No. 55/2008 which … considers that principal activity is located in the eligible zones when the taxpayers have their registered office or effective management in those areas and therein concentrate more than 75% of their respective payroll.

z) It argues that companies may only benefit from such an incentive if they exercise their principal activity in one of the eligible areas. And it is only considered that they exercise their principal activity in one of those areas if: a) They have their registered office or effective management therein; and b) They establish more than 75% of their respective payroll therein.

aa) And that the definition of "payroll" is that provided by "article 14, No. 6 of Law No. 2/2007 … : "Payroll means the value of expenses incurred with personnel and recorded in the fiscal year as remuneration, wages or salaries."

bb) It invokes in favor of its reading of the law a judgment of the Administrative Court of Viseu in process …/12… BEVIS.

cc) It argues for the dismissal of the claim, with rejection of the requests.

II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE

An assessment shall be made as to whether the assessments in question suffer from any illegality that prevents their maintenance in the legal order.

What the AT considers, according to the tax inspection report and the grounds of the decision rejecting the hierarchical appeal, is as follows:

• The Claimant does not meet the objective of creating jobs and establishing people in the eligible areas, since it has no dependent workers;

• And because it has no dependent workers it does not "have payroll" and consequently does not meet the requirement exigible by paragraph d) of No. 1 of article 2 of Decree-Law No. 55/2008, of 26.03, that is, it does not locate its principal activity in the eligible areas, as it should concentrate in those areas more than 75% of the payroll, as required by No. 2 of article 2 of Decree-Law No. 55/2008, of 26.03.

There must also be analyzed, as to the specific case and the 2011 fiscal year of the Claimant, the relevance of what was determined in the hierarchical appeal procedure, which according to the AT:

v "… we can conclude that of the total revenue, in the amount of €186,948.00, approximately 80% corresponding to the sale of a property located in a non-eligible zone";

v "and approximately 18.5% concerns projects which, notwithstanding having had the intermediation of B…, concern buildings located outside national territory and which were invoiced directly to E…, G…, F… and D….

v " …the services provided by the Claimant in the eligible zone in question and which were demonstrated during the inspection procedure, correspond to little more than 1%", and "even with the new invoices attached to the proceedings with the inspection report, they continue to be an insignificant part of the services overall".

The principal question that arises in the present proceedings concerns the determination of whether the Claimant may or may not benefit from the tax incentive enshrined in paragraph a) of No. 1 of article 43 of the EBF, as amended by Decree-Law No. 108/2008, of 26 June.

The core of the question, apart from the aspects indicated above regarding the composition of the revenue obtained in 2011 by the Claimant, will reside in determining whether the regime of the final part of the norm contained in No. 2 of article 2 of Decree-Law No. 55/2008, of 26.03, aims only to clarify the content of the norm in paragraph d) of No. 1 of article 2 of Decree-Law No. 55/2008, of 26.03 which provides as follows: "locate their activity in the eligible areas" (which reproduces what is already referred to in paragraphs a) and b) of No. 1 of article 43 of the EBF: "… entities whose principal activity is located in the eligible areas"), or whether it constitutes a further constitutive element of the tax benefit established in article 43 of the EBF given the tenor of the wording of the norm: "It is considered that principal activity is located in the eligible zones when the taxpayers have their registered office or effective management in those areas and therein concentrate more than 75% of their respective payroll."

Simultaneously it may make sense to analyze whether, in this case, the concept of "payroll" should be adopted as encompassing only dependent labor remuneration or if account should be taken of other types of employment relationships, such as the case here, where there clearly exists non-dependent work, at least for the manager of the Claimant, as it is a sole proprietorship company.

III. ESTABLISHED AND UNESTABLISHED FACTS AND GROUNDS

Regarding matters of fact the Tribunal does not have to pronounce on everything alleged by the parties, but rather has the duty to select the facts relevant to the decision and distinguish the established facts from the unestablished facts (in accordance with article 123, No. 2, of the Administrative Tax Procedure Code and article 607, No. 3 of the Civil Procedure Code, applicable ex vi article 29, No. 1, paragraphs a) and e), of the RJAT).

In this manner, the facts pertinent to the judgment of the case are chosen and carved out according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (in accordance with previous article 511, No. 1, of the Civil Procedure Code, corresponding to the current article 596, applicable ex vi article 29, No. 1, paragraph e), of the RJAT).

Thus, taking into consideration the positions assumed by the parties, the documentary evidence and the PA attached to the proceedings, the following facts were considered proven, with relevance to the decision, as listed below, moreover uncontested by the parties, indicating the respective documents (proof by documents), as grounds.

Proven Facts

1. The Claimant proceeded with the registration of its constitution at the Commercial Registry Office of…, on 26-10-2000, having as registered office Rua…, nº…, …- … and has as its object: "construction and civil engineering, consulting, architecture, purchase and sale of real estate and resale of goods acquired for that purpose" – pages 137 to 139 and 147 of the PA – inspection report – and article 16 of the AT's response.

2. The Claimant exercises its principal activity at Rua…, nº…, …, in…, began its activity on 12-09-2000 being listed as principal activity "construction of residential and non-residential buildings", falling within code … of the CAE – article 16 of the AT's response and page 139 of the PA – inspection report.

3. The Claimant has organized accounting, has its registered office and effective management in the geographical zone of … where it develops its principal activity, zone listed in Order No. 1117/2009, of 30 September, considered an eligible territorial area for incentives to regions with interior problems in accordance with articles 6 and 7 of Decree-Law No. 55/2008, of 26 March – opening of the request for pronouncement, pages 139 to 141 and 147 of the PA – inspection report – and article 16 of the AT's response.

4. In compliance with Internal Service Order No. OI2014…, for the year 2011, an inspection procedure was undertaken, intended to control tax benefits, which culminated with the sending to the Claimant of the inspection report, on 21.10.2014, indicating corrections to the IRC collection of €6,959.28, concluding that the taxpayer "benefited from a rate reduction – of 15% - without meeting the conditions" – Nos. 1 and 2 of the request for pronouncement, articles 2 and 3 of the AT's response and pages 137 and 138 of the PA – inspection report.

5. The grounds for the correction to the IRC collection are as follows:

– page 147 of the PA – Inspection Report.

1. On a date not established the Claimant was notified of the IRC assessment of 29.10.2014, No. 2014… and the interest assessment No. 2014…, in the total amount of €7,043.44, with payment deadline of 29-12-2014 – Nos. 2 and 5 of the request for pronouncement and in accordance with IRC assessment, interest and reconciliation statements attached with the request for pronouncement.

2. Dissatisfied the Claimant filed a gracious complaint which was rejected and from this decision it initiated a hierarchical appeal procedure which was also rejected by order of the IRC Services Director of 27.11.2015, issued on information …/2015 and was notified to the Claimant by official letter dated 29.12.2015 – Nos. 7 and 8 of the request for pronouncement and page 109 of the PA.

3. From the grounds of the decision rejecting the hierarchical appeal there appears, in addition to what was mentioned in 5), the following regarding the 2011 fiscal year of the Claimant: 1 - the value of the sales corresponds to the sale of a property in the parish of…, in … (urban real estate – Lot…, registered under article…), "which is to say in an area not covered by Order No. 117/2009, of 30 September, corrected by Rectification Declaration No. 79/2009, of 27 October"; 2 - the services provided in the domestic market, in the amount of €2,448.00, concern expert opinions carried out by the partner-manager, Eng. C…, in the context of court proceedings pending in the Court of…. 3 - regarding the amount of services provided in the external market, in the amount of €34,500.00, concerns projects carried out for D…, E… and F…. – articles 20 to 24 of the AT's response and page 106 of the PA.

4. The Claimant, by reference to the year 2011, has no facilities anywhere else in national territory; exercises its activity through its sole manager and allowed his establishment in…; its accounting is performed in…, by accountant located in…; paid IRC business contribution to the Municipality of…; provided various services and expert opinions and received fees from court proceedings in…; provided consulting services for Angola, Mozambique and Guinea-Bissau, services which came to it from B… (…) and incurs expenses for vehicles, office equipment and facilities, in addition to other expenses in the municipality of Viseu – subsections of No. 37 of the request for pronouncement, documents 1, 3 and 5 attached with the request for pronouncement and article 30 of the AT's response.

5. The Claimant did not make payment of the IRC and interest assessed – No. 3 of the request for pronouncement.

6. The Claimant is a sole proprietorship limited liability company, has no dependent workers and has only an unpaid manager who is its sole partner – No. 26 of the request for pronouncement, inspection report – pages 131 to 150 of the PA.

7. On 28-03-2016, the Claimant submitted to CAAD the present request for pronouncement – registration of entry in the SGP of the request for pronouncement.

Unestablished Facts

There exists no other factuality alleged that was not considered proven and that is relevant to the composition of the procedural dispute.

IV. ANALYSIS OF THE QUESTIONS FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO RESOLVE

As to the substantive question, article 43 of the EBF, in force at the date of the facts, reads under the heading "tax benefits relating to interior regions" (we highlight in bold the provisions that are directly at issue):

1 - Companies that directly and principally exercise an economic activity of an agricultural, commercial, industrial or service provision nature in interior areas, hereinafter designated "eligible areas", are granted the following tax benefits:

a) The IRC 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 the eligible areas;

b) In the case of establishment of new entities, whose principal activity is located in the eligible areas, the rate referred to in the preceding number is reduced to 10% during the first five fiscal years of activity;

c) Depreciations and amortizations relating to investment expenses up to €500,000, excluding those concerning the acquisition of land and light passenger vehicles, of IRC taxpayers who exercise their principal activity in the eligible areas may be deducted, for determining taxable income, with a 30% increase;

d) Compulsory social charges borne by the employer entity relating to the net creation of jobs, for an indefinite period, in the eligible areas are deducted, for determining taxable income, with a 50% increase, a single time per worker hired by that entity or by another entity with which there are special relations, in accordance with article 58 of the IRC Code;

e) Tax losses determined in a given fiscal year in accordance with the IRC Code are deducted from taxable profits, if any, from one or more of the seven subsequent fiscal years.

2 - Conditions for benefiting from the tax benefits provided for in the preceding number are:

a) The determination of taxable income being made using direct evaluation methods;

b) To have regularized tax status;

c) Not to have unpaid wages;

d) Not to result from a spin-off carried out in the two years preceding the benefit.

3 - The following acquisitions are exempt from payment of municipal tax on the transfer of real estate:

a) By young people, aged between 18 and 35 years, of real estate or autonomous fraction of urban real estate located in the eligible areas, intended exclusively as a first own and permanent residence, provided that the value on which the tax would be levied does not exceed the maximum values of housing at controlled costs, plus 50%;

b) Of real estate or autonomous fractions of urban real estate, provided they are located in the eligible areas and durably dedicated to the business activity of companies.

4 - The exemptions provided for in the preceding 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 statement containing that the declarant has not previously benefited from an identical benefit.

5 - The exemptions provided for in No. 3 are dependent on authorization from the deliberative body of the respective municipality.

6 - For purposes of this article, eligible areas are delimited according to criteria that take into account, particularly, low population density, the compensation or shortage index or the inequality of social, economic and cultural opportunities.

7 - The definition of criteria and the delimitation of eligible territorial areas, in accordance with the preceding number, as well as all regulatory norms necessary for the proper implementation of this article, are established by order of the Minister of Finance.

8 - The tax benefits provided for in this article are not cumulative with other benefits of an identical nature, without prejudice to the option for another more favorable one".

In turn Decree-Law No. 55/2008, of 26.03 has the following wording (highlighting the part of interest here, it being noted that where reference is made to "article 39-B of the EBF" should be understood as "article 43 of the EBF"):

With the addition of article 39-B to the Tax Benefits Statute by Law No. 53-A/2006, of 29 December, amended by Law No. 67-A/2007, of 31 December, various incentive measures were renewed for accelerated recovery of Portuguese regions suffering from interior problems, having been substituted the regime contained in Law No. 171/99, of 18 September, as amended by Law No. 55-B/2004, of 30 December.

The conditions are thus in place for the Government to proceed with regulation of the norms necessary for proper implementation of article 39-B of the Tax Benefits Statute.

In these terms, this decree-law disciplines the conditions for access of eligible entities, the entities responsible for granting the incentives, the obligations to which eligible entities are subject, as well as the consequences in case of non-compliance.

The National Association of Portuguese Municipalities was consulted.

Thus:

Under the authority of paragraph a) of No. 1 of article 198 of the Constitution, the Government decrees as follows:

CHAPTER I

Object and conditions of access

Article 1

Object

This decree-law aims to establish the regulatory norms necessary for proper implementation of accelerated recovery incentive measures for Portuguese regions suffering from interior problems, under No. 7 of article 39-B of the Tax Benefits Statute, approved by Decree-Law No. 215/89, of 1 July.

Article 2

Conditions of access for eligible entities

1 - Without prejudice to what is provided for in article 39-B of the Tax Benefits Statute, eligible entities must meet the following conditions of access:

a) Be legally established and meet the legal conditions necessary to exercise their activity;

b) Be in regularized situation with respect to the tax authority, social security and the respective municipality;

c) Have organized accounting, in accordance with the Official Accounting Plan;

d) Locate their principal activity in the eligible areas;

e) Undertake, in the cases of incentives provided for in paragraph c) of No. 1 and in paragraph b) of No. 3, both of article 39-B of the Tax Benefits Statute, to maintain the investment carried out dedicated to their respective activity, as well as to maintain their geographical location, for a minimum period of five years counting from the date of full completion of the investment;

f) Undertake, in the case of incentives provided for in paragraph d) of No. 1 of article 39-B of the Tax Benefits Statute, to maintain the new jobs for a minimum period of five years counting from the date of their creation;

g) Inform the responsible entity referred to in article 3 of this decree-law of the attribution of any other incentive or the submission of an application for the same purpose;

h) Obtain previously, in the case of the incentive provided for in paragraphs a) and b) of No. 3 of article 39-B of the Tax Benefits Statute, the authorization referred to in No. 5 of that same article.

2 - It is considered that principal activity is located in the eligible zones when the taxpayers have their registered office or effective management in those areas and therein concentrate more than 75% of their respective payroll.

Article 3

Responsible entities

The following are responsible entities for attribution of the incentives, as well as for their inspection and control:

a) In the case of incentives provided for in paragraphs a), b), c) and e) of No. 1 and in No. 3 of article 39-B of the Tax Benefits Statute, the General Directorate of Taxes;

b) In the case of the incentive provided for in paragraph d) of No. 1 of article 39-B of the Tax Benefits Statute, the General Directorate of Taxes, in coordination with the Social Security Institute, I.P.

Article 4

Obligations of eligible entities

1 - Eligible entities are subject to the following obligations:

a) Maintain regularized status with respect to the tax authority, social security and the respective municipality;

b) Provide all elements related to the granting of the incentive that may be requested by the responsible entity referred to in article 3;

c) Communicate to the responsible entity referred to in article 3 any alteration or occurrence that may call into question the assumptions underlying the attribution of the incentive;

d) Maintain the legal conditions necessary to exercise their respective activity;

e) Maintain organized accounting in accordance with the Official Accounting Plan;

f) Maintain properly organized in the company all documents capable of proving the declarations made upon attribution of the incentive.

2 - In the case of incentives provided for in paragraph c) of No. 1 and in paragraph b) of No. 3 of article 39-B of the Tax Benefits Statute, the eligible entity likewise undertakes not to transfer, lease, alienate, dedicate to another activity or relocate the investment, in whole or in part, for five years counting from the date of full completion of the investment.

3 - In the case of incentives provided for in paragraph d) of No. 1 of article 39-B of the Tax Benefits Statute, the eligible entity undertakes to maintain the jobs for a minimum period of five years counting from the date of their creation.

Article 5

Non-compliance

1 - Non-compliance with any of the obligations defined in the preceding article, as well as the provision of false information, implies the loss of the benefits enjoyed, with eligible entities obligated, within 30 days of respective notification, to payment of amounts corresponding to uncollected revenue, plus any compensatory interest calculated at the legal rate in force plus 3 percentage points.

2 - Regarding the incentive provided for in paragraph c) of No. 1 of article 39-B of the Tax Benefits Statute, should the non-compliance referred to in No. 2 of the preceding article occur, the eligible entity must, in the tax return for the fiscal year in which it occurs, add the corporate income tax that ceased to be assessed, plus the corresponding compensatory interest.

CHAPTER II

Determination of eligible territorial areas

Article 6

Eligible territorial areas

1 - For purposes of implementing the accelerated recovery incentive measures for regions suffering from interior problems, defined in article 39-B of the Tax Benefits Statute, those identified in Order No. 1467-A/2001, of 31 December are considered as eligible territorial areas for facts verified in 2007 and 2008.

2 - For subsequent years, it is incumbent upon the Minister of Finance, together with the members of Government responsible for local administration and regional planning, to regulate by order the eligible territorial areas, which will be identified based on the indicators defined in this decree-law, constructed with the latest statistical data made available by the National Statistics Institute.

Article 7

Criteria for determining areas

1 - The eligible territorial areas are those corresponding to:

a) Councils selected in an integrated perspective of balanced regional development, taking into particular consideration the following criteria:

i) Population density;

ii) The level of production and income;

iii) The level of purchasing power;

b) Parishes of councils not considered in the preceding paragraph, whose resident population is located mainly in the territorial units Serra and Baixo Guadiana defined in the Regional Land Use Plan for the Algarve.

2 - The application of the criteria referred to in the preceding number should ensure the continuity of the eligible zone on the mainland of Portugal.

CHAPTER III

Final and transitional provisions

Article 8

Community provisions

1 - The provisions that prove necessary to ensure, throughout the implementation period, full compliance with the European Commission decision regarding the incentives in question, particularly concerning their application to different economic activities, shall be the subject of a joint order of the government members of the Finance area and Labor and Social Solidarity.

2 - To the incentive measures regulated by this decree-law the rules established by Order No. 170/2002, of 28 February apply, pending approval of the order referred to in the preceding number.

Article 9

Repealing provision

Decree-Law No. 310/2001, of 10 December is repealed.

Article 10

Effective date

This decree-law takes effect from 1 January 2007.

First, we must determine what type of tax benefit is at issue in this case, in light of the Tax Benefits Statute.

We are dealing with a matter that falls within the scope of No. 1 of article 8 of the General Tax Law and not within No. 2 of article 8 of the General Tax Law.

In this line of thought, it does not appear that the interpreter should reason, thereafter, as if there were not at issue a "rate", albeit reduced, a matter within the legislative competence of the Assembly of the Republic. That is, it must be taken into account that, even if it is a tax benefit dependent on recognition, this recognition always has "merely declarative effect, unless the law provides otherwise".

In other words, it is in the law (including laws of legislative authorization) emanating from the AR that the scope of tax benefits must be found and not in any norms issued by the Government or the Tax Authority that aim only to regulate, understood as "control", the normal functioning of the tax benefits. But such regulations can never have such scope that, in practical terms, they obstruct or so reduce the benefit as to call it into question. It is in this dimension that the act regulating the tax benefit at issue here must be read.

We are dealing with the tax benefit of paragraph a) of No. 1 of article 43 of the EBF: Companies that directly and principally exercise an economic activity of an agricultural, commercial, industrial or service provision nature in interior areas, hereinafter designated "eligible areas", are granted the following tax benefits:

a) The IRC 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 the eligible areas.

The benefit at issue is a rate reduction (No. 2 of article 2 of the EBF). An automatic rate reduction, that is, one that results directly and immediately from the law (No. 1 of article 5 of the EBF), for the reason that the taxpayer, without more, includes in its tax return the reduced "ad valorem" IRC rate of 15% that applies to the tax base and thus obtains a collection. And, with this operation embodied in its Form 22, calculates the IRC collection. It is the taxpayer, in light of the law, in light of the tenor of article 43 of the EBF (as only this norm emanates from the AR, by legislative authorization to the Government), in compliance with the principle of legality set out in No. 1 of article 8 of the General Tax Law, that directly applies the exempting norm.

Naturally the taxpayer must take into account all the other norms and orientations that aim to control, regulate, prevent abuse, in short to ensure the best compliance and effectiveness of the exempting norm, issued directly by the AR or by its duly delimited authorization.

Being the benefit at issue an automatic one, it results directly from the law emanating from the Assembly of the Republic.

From the proven facts it results:

• The Claimant proceeded with the registration of its constitution at the Commercial Registry Office of…, on 26-10-2000, having as registered office Rua…, nº…, … - … and has as its object: "construction and civil engineering, consulting, architecture, purchase and sale of real estate and resale of goods acquired for that purpose".

• The Claimant exercises its principal activity at Rua…, nº…, …, in …, began it on 12-09-2000 being listed as principal activity "construction of residential and non-residential buildings", falling within code… of the CAE.

• The Claimant has organized accounting, has its registered office and effective management in the geographical zone of … where it develops its principal activity, zone listed in Order No. 1117/2009, of 30 September, considered an eligible territorial area for incentives to regions with interior problems in accordance with articles 6 and 7 of Decree-Law No. 55/2008, of 26 March.

Before the facts considered established, it is now necessary to assess, immediately, the grounds underlying the decision rejecting the hierarchical appeal and mediately those which support the assessment(s) now at issue.

Grounds for the Assessment(s)

According to the tenor of the Inspection Report the following are the grounds underlying the IRC assessment(s) at issue:

• The Claimant does not meet the objective of creating jobs and establishing people in the eligible areas, since it has no dependent workers;

• And because it has no dependent workers it does not "have payroll" and consequently does not meet the requirement exigible by paragraph d) of No. 1 of article 2 of Decree-Law No. 55/2008, of 26.03, that is, it does not locate its principal activity in the eligible areas, as it should concentrate in those areas more than 75% of the payroll, as required by No. 2 of article 2 of Decree-Law No. 55/2008, of 26.03.

That is, what is at issue, according to the AT's position, is merely non-compliance by the Claimant with the requirement of No. 2 of article 2 of Decree-Law No. 55/2008, of 26 March.

It appears to us that it is not justified. Indeed,

First, it will be necessary to verify that when, in fiscal legal texts, mention is made of "principal activity", the first assertion that comes to the interpreter's mind is that which results from the taxpayer's register, that is, the distinction made in the declaration of registration/commencement of activity between "principal activity" and "secondary activity" (see item 8 of the declaration model available on the AT's website).

But as it seems obvious this separation will have to do with mere statistical questions, for two reasons: the first results from the very text of the fiscal model indicated above where it is clearly apparent that what is intended is the integration of activities according to the CAE; the second results from the fact that, for IRC purposes, in terms of tax liability, it is irrelevant whether the revenue results from a principal activity or a secondary activity, according to registration in the taxpayer's register.

That is, from our point of view, it will not be possible to consider that when the exempting norms of article 43 of the EBF speak of "principal activity", we must consider that we are dealing, only, with revenue or costs generated and motivated by the development of the activity specifically indicated in the declaration of commencement of activity as such.

For the fact is that, in the case at hand, (and certainly in almost all commercial companies) the object of its activity extends far beyond what in formal terms it is possible to place in the space reserved for the activities pursued in the declaration of commencement of activity.

In the case there is a very large difference between the object of the Claimant, namely:

"construction and civil engineering, consulting, architecture, purchase and sale of real estate and resale of goods acquired for that purpose",

and what appears as principal activity in the taxpayer's register, namely:

"construction of residential and non-residential buildings".

The expression "principal activity" appears in legislative texts, as to this benefit, as having the same scope as the expression "directly and principally", expressed in No. 1 of article 43 of the EBF.

It appears to us that the legislator, in expressing "principal activity", as relevant for the application of the tax benefit, means the exercise, by the company, of all the activities contained in its corporate object, in the geographical area of the company's registered office and from the company's registered office, its physical operational base. For only with this broad reading is an absurd reading of the law avoided, which would be to disregard all the activities exercised and encompassed in the corporate object that it was not possible to express, due to lack of space, in the declaration of commencement of activity.

This reading of the law appears to us to be the one that best serves the objectives for which the tax benefit was created, which are, using the words of the Inspection Report: "the combat against human depopulation through measures that promote investment in productive activities, the stimulus to stable job creation and establishment of youth"

The AT, in the Inspection Report, does not call into question, in this case, the following:

· the Claimant has its registered office and effective management in the geographical zone of…;

· the Claimant exercises its principal activity in the zone of…;

· the Claimant meets the requirements of the body of No. 1 and No. 2 both of article 43 of the EBF and of paragraphs a) to c) of No. 1 of article 2 of Decree-Law No. 55/2008, of 26 March.

Nor does it call into question the requirement of paragraph d) of No. 1 of article 2 of Decree-Law No. 55/2008, of 26 March, in immediate terms. It only calls it into question because the Claimant does not have "payroll", that is, dependent labor remuneration.

It appears to us evident that the norm of No. 2 of article 2 of Decree-Law No. 55/2008, of 26 March, as it is drafted, aims only to clarify, for entities that develop activity in more than one zone, through branches or agencies, that it is considered that their principal activity is located in that:

ü Where it has its registered office or effective management;

ü And provided that it therein concentrates more than 75% of its respective payroll, if it has dependent workers.

In the case at hand, the AT does not call into question the assumption for application of the norm: which would be to call into question, dissent, from the fact that the Claimant does not exercise its principal activity only or essentially in (and from) the area considered eligible for the tax benefit (its registered office).

On the other hand, we do not see how the benefit of the repealed article 43 of the EBF can be dependent on job creation, understanding this objective as only integrated with the creation of dependent work positions (subordinated work).

It is arguable that the legislator, in not placing in the letter of the law this objective in a clear and objective manner (the requirement of creation only of dependent work relationships with a view to combating human depopulation, stimulus to stable job creation and establishment of youth) did not intend to alter the previous regime.

Even if the norm of No. 2 of article 2 of Decree-Law No. 55/2008, of 26 March were applicable to entities that have no dependent workers, the expression "payroll" as integrating only dependent subordinated labor remuneration is arguable and appears to lead to an unacceptable and absurd situation, which will be the fact of disregarding the creation of independent work positions.

It is well known that today dependent work relationships are increasingly unstable and the creation of independent work positions is surely a way to achieve the same objectives: combat against human depopulation, stimulus to stable job creation and establishment of youth.

Indeed, in the case at hand, the Claimant, as a sole proprietorship company, in which management is exercised by the sole partner, created at least one independent workplace for this partner-manager. It established him much more to the geographical area, if he was not already resident in the area. Its business activity, even though exercised through operations carried out physically outside the area eligible for the tax benefit, will capture resources which, in one way or another, will remain in the zone of the company's center of activities and potentially applicable there.

In creating at least one independent workplace for its partner-manager, the Claimant creates job stimulus as stable as if it created 1 dependent work position (given the current flexibility of labor law and economic and social instability), and may contribute, with identical intensity, to combating human depopulation of the interior.

It would be absurd the reading of the law that considered that were this company to have a dependent worker it could access the tax benefit at issue here, but by creating an independent workplace for its sole partner-manager (that being the practical purpose of many sole proprietorship companies) it can no longer access it.

We must, therefore, conclude, under penalty of the reading of the law leading to a result that is not in accordance with the economic and social reality of the country, that the norm of No. 2 of article 2 of Decree-Law No. 55/2008, of 26 March, does not apply to entities which, by their nature (as is the case with the Claimant, a sole proprietorship company which is created, in practical terms, as a tool for the work of the sole partner-manager himself), do not hire subordinated workers and aims only to determine the location where the principal activity of those entities is situated that wish to benefit from these benefits, because they exercise it in more than one area, through branches or agencies, in addition to the registered office that must be in the eligible area.

What in essence will be important to determine is whether the requirement of No. 1 of article 43 of the EBF is truly met. And in the case, as mentioned above it is fully met, which results from the coinciding position of the parties.

The Claimant exercises directly and principally various activities, from its registered office or center of activities, established in the geographical area of…, eligible for the application of the tax benefit at issue. When in paragraph a) of No. 1 of article 43 of the EBF the expression "principal activity" is used, the criterion embodied in the body of the exempting norm itself is not being altered or restricted, merely reproduced.

In this conformity, the claim for annulment of the assessment(s) is upheld.

Grounds of the Decision Rejecting the Hierarchical Appeal

To the grounds mentioned above, which served as support for the Inspection Report and subsequent IRC and interest assessments, is added in the consideration of the Hierarchical Appeal the following regarding the Claimant's revenue in 2011:

• The value of the sales corresponds to the sale of a property in the parish of…, in … (urban real estate – Lot…, registered under article…), "which is to say in an area not covered by Order No. 117/2009, of 30 September, corrected by Rectification Declaration No. 79/2009, of 27 October".

• The services provided in the domestic market, in the amount of €2,448.00, concern expert opinions carried out by the partner-manager, Eng. C…, in the context of court proceedings pending in the Court of….

• Regarding the amount of services provided in the external market, in the amount of €34,500.00, concerns projects carried out for D…, E… and F….

And it is concluded:

• "… we can conclude that of the total revenue, in the amount of €186,948.00, approximately 80% corresponding to the sale of a property located in a non-eligible zone";

• "and approximately 18.5% concerns projects which, notwithstanding having had the intermediation of B… de Viseu, concern buildings located outside national territory and which were invoiced directly to E…, G…, F… and D….

• " …the services provided by the Claimant in the eligible zone in question and which were demonstrated during the inspection procedure, correspond to little more than 1%", and "even with the new invoices attached to the proceedings with the inspection report, they continue to be an insignificant part of the services overall".

On the other hand, the Claimant succeeded in proving in this proceedings the following:

"The Claimant, by reference to the year 2011, has no facilities anywhere else in national territory; exercises its activity through its sole manager and allowed his establishment in…; its accounting is performed in…, by accountant located in…; paid IRC business contribution to the Municipality of…; provided various services and expert opinions and received fees from court proceedings in…; provided consulting services for Angola, Mozambique and Guinea-Bissau, services which came to it from B…(…) and incurs expenses for vehicles, office equipment and facilities, in addition to other expenses in the municipality of Viseu".

It appears to us that also in this part the Respondent is not justified. If we examine closely:

• Real estate sold in… which generated revenue of €186,948.00.

This is a single operation, a single act. It was not established how and under what conditions this asset entered the Claimant's patrimony. It appears from the proceedings that the Claimant has two properties, one urban and one rustic. It was not established whether they were purchased with the profit from the sale of this property.

On the other hand, paragraph a) of No. 1 of article 43 of the EBF has the following wording: "The IRC 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 the eligible areas".

The activity of a company, for selling a property outside the area of its registered office or providing services outside the area of its registered office, particularly abroad, does not, for that reason, cease to be located at its registered office.

We must here consider the rule of No. 1 of article 4 of the IRC Code, as we are dealing with an exempting norm at the IRC level.

Were it a matter of the purchase of a property outside the geographical area of … (eligible for the benefit) the reasoning expounded by the AT would have basis. But what is at issue is the opposite. It is the sale of a property located outside the area of … in order, naturally, to apply the profit obtained there to the acquisition of assets or realization of expenses to be carried out essentially in the eligible area.

We understand that the fact that the property is located outside the eligible area will be even irrelevant, if the seller has its registered office in the eligible area and exercises its activity there in terms of having its physical facilities there, its operational base, suggesting that it is in that area that it will realize expenses and make investments with the proceeds of the profits obtained by the company.

• Services provided in the external market, in the amount of €34,500.00.

These revenues concern projects carried out for D…, E… and F….

However, it was proven from the outset that these services were awarded to the Claimant through "B… (…)", an entity with registered office in the geographical area of the district of Viseu.

The considerations we expressed above regarding the reading we adopt of the expression of the exempting norm at issue apply here: "…entities whose principal activity is located in the eligible areas".

To have a reading of the exempting norm to the effect that these entities cannot practice any acts that generate revenue outside the geographical area, under penalty of losing access to the benefits, appears to us to lead to an absurdity, that is, a reading of the law, contrary to the purposes of its creation: "combat against human depopulation through measures that promote investment in productive activities, the stimulus to stable job creation and establishment of youth".

The objective will be to establish companies that generate profit, through business done in national or international territory and that can bring the positive results of those dealings to the area, which will certainly be reinvested, thus furthering all the purposes of the attribution of the tax benefits at issue.

In the case, in our humble opinion, it appears clear that it should at least be relevant the fact that the contracting entity is itself even established in the eligible area (B…).

In these terms, the request for pronouncement is upheld, as the decision on the hierarchical appeal is not in conformity with the norm of paragraph a) of No. 1 of article 43 of the EBF in force at the date of the tax act impugned, and with No. 1 of article 4 of the IRC Code, the request for annulment of the assessment(s) also being upheld for the same reason.

V. DISPOSITIF

In accordance with and on the grounds set out above:

• The claim for annulment of the decision on the hierarchical appeal is upheld (order of the IRC Services Director of 27.11.2015, issued on information …/2015, notified to the Claimant by official letter dated 29.12.2015);

• The claim for annulment of the IRC assessment of 29.10.2014, No. 2014… and the interest assessment No. 2014…, in the total amount of €7,043.44, is upheld;

• The decision and assessments are annulled.

Value of the case: in accordance with the provisions of article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and paragraph a) of No. 1 of article 97-A of the Administrative Tax Procedure Code), the value of the case is fixed at €7,043.44.

Costs: in accordance with the provisions of article 22, No. 4, of the RJAT, the amount of costs is fixed at €612.00 according to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Notify.

Lisbon, 30 August 2016

Singular Arbitral Tribunal (TAS),

Augusto Vieira

Text prepared by computer in accordance with the provisions of article 131, No. 5, of the Civil Procedure Code, applicable by reference of article 29 of the RJAT.

The drafting of this decision is governed by the orthography prior to the 1990 Orthographic Agreement.