Process: 198/2016-T

Date: January 16, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 198/2016-T examines whether autonomous taxation (tributações autónomas) under IRC Article 88 on passenger vehicle expenses (€37,188) and representation costs (€4,592) can be challenged when expenses serve an exclusively business purpose. The claimant company argued that autonomous taxation operates on a rebuttable presumption of non-business character under Article 73 of the General Tax Law (GTL), and successfully proving 'integral business character' (empresarialidade integral) should eliminate the tax obligation. The vehicles were assigned to sales representatives and managers as essential work tools for nationwide product promotion, while representation expenses constituted scheduled marketing events and professional seminars. The company sought annulment of the denied administrative review petition (reclamação graciosa) and compensatory interest (juros indemnizatórios) for alleged overpayment. The Tax Authority countered that autonomous taxation constitutes a non-rebuttable tax incidence rule, not a presumption, reflecting legislative policy to penalize certain expenses due to the difficulty of verifying their exclusive business purpose. Allowing rebuttal would violate tax legality and equality principles under Constitutional Articles 13 and 103. The case raises fundamental questions about the legal nature of autonomous taxation: whether it functions as an anti-abuse mechanism with rebuttable presumptions or as a definitive penalty tax regardless of actual business use. The distinction between 'empresarialidade integral' (full business use) and 'empresarialidade parcial' (partial business use) becomes critical, as does the evidentiary standard required—documentary versus testimonial proof. This decision impacts how Portuguese companies structure expense policies and challenge self-assessed autonomous taxation, particularly regarding the burden of proving exclusive business purpose and entitlement to compensatory interest when taxation is deemed excessive.

Full Decision

ARBITRAL DECISION

1. Report

A - General

1.1. A…, S.A., with unique registration number and collective person number…, with registered office at …, P.O. Box…, …-… … (hereinafter referred to as "Claimant"), filed, on 30.03.2016, a request for constitution of an arbitral tribunal in tax matters, which was accepted, seeking, on the one hand, the annulment of the decision denying the administrative review petition no. …2015…, filed by the Claimant as a reaction to the self-assessment act of Corporate Income Tax (hereinafter "CIT"), relating to the 2013 fiscal year, which was communicated to it by Official Notice … dated 30.12.2015 from the Tax Directorate of…, with the consequent reimbursement of the amount of tax unduly paid and, on the other hand, recognition of the right to compensatory interest for the unduly paid tax obligation.

1.2. Pursuant to the provisions of paragraph a) of no. 2 of Article 6 and of paragraph b) of no. 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council of the Administrative Arbitration Centre (CAAD) appointed the undersigned as arbitrator, and the Parties, after being duly notified, raised no objection to such appointment.

1.3. By order of 14.04.2016, the Tax and Customs Administration (hereinafter referred to as "Respondent") proceeded to appoint Dr. B… and Dr. C… to intervene in the present arbitral proceedings, in the name and representation of the Respondent.

1.4. In accordance with the provisions of paragraph c) of no. 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the arbitral tribunal was constituted on 13.06.2016.

1.5. On 14.06.2016, the highest-ranking official of the Respondent's service was notified to, if willing, submit a response within a period of 30 days and request the production of additional evidence and to attach to the proceedings a copy of the respective administrative file.

1.6. On 02.09.2016, the Respondent submitted its response.

B – Position of the Claimant

1.7. The Claimant, regarding the 2013 tax period, in the income declaration Form 22, ascertained the total amount of € 41,780.00 (forty-one thousand seven hundred eighty euros) relating to autonomous taxation, of which € 37,188.00 corresponding to expenses with light passenger vehicles and € 4,592.00 corresponding to representation expenses.

1.8. The expenses underlying the autonomous taxation in question were incurred with a clear and evident business purpose: the promotion of the products marketed by the Claimant.

1.9. The Claimant filed an Administrative Review Petition (numbered …2015…) for error in self-assessment, understanding that the said autonomous taxation had been unduly assessed, given the entirely business character of the expenses associated with it, and the same was denied.

1.10. Autonomous taxation, in the understanding of the Constitutional Court, functions as a mechanism of instantaneous taxation on certain expenses.

1.11. The legislator enumerated the expenses that should be subject to autonomous taxation, having for that purpose adopted a presumption of non-business character.

1.12. To determine whether an expense act is or is not subject to autonomous taxation, it must first be verified whether the type of expense in question is included in the list of Article 88 of the Corporate Income Tax Code (hereinafter, "CITC") and, if the answer is affirmative, there must then be an evaluation of the "integral business character" of that expense act, in which case the legal presumption is rebutted and, consequently, the susceptibility to autonomous taxation of such expenses is eliminated.

1.13. Since the subjection of certain expenses to autonomous taxation is based on the presumption of their non-business character, it cannot fail to be concluded that such presumption is susceptible to being rebutted, in accordance with the provisions of Article 73 of the General Tax Law (hereinafter, "GTL").

1.14. The Claimant further understands that the rules upon which autonomous taxation is based have an anti-abuse character, and therefore the rebuttal of presumptions must be admitted under penalty of violation of European Union Law.

1.15. The expenses with light passenger vehicles incurred by the Claimant constitute expenses inherent to the pursuit of its corporate object and, consequently, expenses with a strictly business purpose, since the vehicles are used by employees to whom commercial functions, advertising and presentation of the products marketed by the Claimant (sales representatives and managers) are entrusted, being precious work instruments for those who, by their functions, must perform constant movements throughout the country.

1.16. The representation expenses in question (rental of spaces for events, advertising, catering) fall within the communicational and marketing strategy previously defined and scheduled by the economic group to which the Claimant belongs, in accordance with internal regulations, aiming, through events such as "...", at acquiring customers and achieving sales.

1.17. Various seminars and courses for civil construction professionals were also held.

1.18. There is no private character whatsoever in the representation expenses in question, being objective and entirely business-related.

1.19. The Claimant further petitions, in accordance with Articles 43 and 100 of the GTL, the payment of compensatory interest since it paid tax in excess of what was due, payment that resulted from error attributable to the services.

C – Position of the Respondent

1.20. The Respondent, in its response, makes clear the understanding according to which the rules that establish autonomous taxation are undoubtedly tax incidence rules, not embodying any presumption whose rebuttal can be admitted.

1.21. At the origin of autonomous taxation on vehicles and representation expenses is not the presumption of lack of integral business character of the expenses, since if they were not in the general interest of the company, their deductibility would not even be accepted, due to non-fulfillment of the requirement of indispensability referred to in no. 1 of Article 23 of the CITC.

1.22. The rules that establish autonomous taxation of certain matters result from a legislative weighing of various factors, such as the virtual impossibility of assessing the nature of each specific expense and the difficulty of determining with certainty the true purpose of the expense and the exclusivity of that purpose.

1.23. Autonomous taxation are taxes that penalize certain expenses incurred by companies, and the deterrent and behavior modification intention of Tax Law should not be minimized.

1.24. Allowing the Claimant proof of the alleged integral business character of the expenses that authorize autonomous taxation constitutes a violation of the principle of tax legality, in the aspect of generality and abstraction, and of the principle of equality in the tax aspect, which derive from the provisions of Articles 13 and 103 of the Fundamental Law.

1.25. Furthermore, mere testimonial proof cannot be deemed sufficient, when the possibility that the law provides for the taxpayer to be exempted from the tax obligation in question is of a documentary nature.

1.26. Finally, the Respondent understands that compensatory interest is not due as there is no error attributable to the services.

D – Conclusion of Report and Case Management

1.27. On 28.11.2016, at 14:00, the meeting referred to in Article 18 of the RJAT took place, the witness presented was questioned, deadlines for the submission of statements were set and the date for the delivery of the decision was fixed, which was expected to take place by 17.01.2017.

1.28. On 07.12.2016, the Claimant submitted its statements, which corroborate what was sustained in the arbitral decision request, finding it strange that the Respondent, in its response, invoked the absence of adequate documentary evidence to rebut the presumption, when this argument had never been raised in the administrative phase nor any additional information or documentation requested in accordance with the principle of cooperation to which Article 75 of the GTL appeals, it being clear that what is being examined in the proceedings is the legality of the denial act as it was carried out, at the time to which the facts relate, by the Respondent.

1.29. On 13.12.2016, in turn, the Respondent submitted its counter-statements, which confirm what was previously stated in the response.

1.30. The arbitral tribunal is materially competent, in accordance with the provisions of Articles 2, no. 1, paragraph a) of the RJAT.

1.31. The Parties have legal personality and capacity and have standing in accordance with Article 4 and no. 2 of Article 10 of the RJAT, and Article 1 of Ordinance no. 112-A/2011, of 22 March.

1.32. The joinder of claims made in the present request for arbitral decision, in homage to the principle of procedural economy, is justified since Article 3 of the RJAT, by expressly admitting the possibility of "joinder of claims even though relating to different acts", accommodates, without hermeneutical abuse, the examination of a request that flows, in necessary terms, from the assessment that the arbitral tribunal reaches regarding the validity of the assessment directly contested.

1.33. The proceedings do not suffer from any nullity nor was any exception raised, so immediate consideration can be given to the merits of the case.

2. Matters of Fact

2.1. Proven Facts

The following facts are deemed proven:

2.1.1. The Claimant, regarding the 2013 tax period, in the income declaration Form 22, ascertained the total amount of € 41,780.00 (forty-one thousand seven hundred eighty euros) relating to autonomous taxation, of which € 37,188.00 corresponding to expenses with light passenger vehicles and € 4,592.00 corresponding to representation expenses (docs. 2 and 3, attached with the request for arbitral decision).

2.1.2. The Claimant filed an Administrative Review Petition (numbered …2015…) for error in self-assessment, understanding that the said autonomous taxation had been unduly assessed (doc. 4, attached with the request for arbitral decision).

2.1.3. The Administrative Review Petition referred to in 2.1.2. was denied, the arguments presented by the Claimant not having been accepted (doc. 1 attached with the request for arbitral decision).

2.1.4. The Claimant pursues, among others, the activity of marketing chemical products for construction (Article 1 of the request for arbitral decision).

2.1.5. The Claimant's employees assigned to the commercial and technical assistance function are accustomed to traveling to customers and potential customers (request for arbitral decision and testimony of the witness questioned).

2.1.6. The Claimant, at the time of the facts, had 20 (twenty) light passenger vehicles at its service, of which 14 (fourteen) assigned to employees with so-called commercial functions, 1 (one) to a technical assistance technician and 5 (five) to managers (doc. 6, attached with the request for arbitral decision).

2.1.7. The following expenses with light passenger vehicles at the service of the Claimant are subject to autonomous taxation: rent of respective operational leases; insurance; fuel and tolls (testimony of the witness and Article 35 of the statements presented by the Claimant).

2.1.8. The Claimant monitors the kilometers, fuel and tolls of the vehicles at its service and all expenses that the Claimant detects as not having a business purpose are not borne by it, being charged to the employees in question (testimony of the witness and Conclusion XII of the statements presented by the Claimant).

2.1.9. The conditions of use of the vehicles were communicated to the employees and are known to them (testimony of the witness and Article 44 of the statements presented by the Claimant).

2.1.10. The employees to whom the vehicles that the Claimant has at its service are delivered may (in the sense that it may be the case that they do) use them for non-business purposes, during vacation, holidays and weekends and, with all the more reason, on working days in which they have been working, without prejudice to the fact that, whenever this is detected, the expenses of fuel and tolls deemed non-business are charged to them (testimony of the witness and Article 43 of the statements presented by the Claimant).

2.1.11. The Claimant organizes promotional events regarding the presentation of products it markets, aimed at promoting the Claimant's brand, in particular "…" (docs. 7 to 9, attached with the request for arbitral decision).

2.1.12. The representation expenses to which the present proceedings allude refer to rental of spaces for events, advertising, catering (Article 136 of the request for arbitral decision).

2.2. Unproven Facts

There are no facts relevant to the examination of the merits of the case that have been deemed unproven.

2.3. Reasoning for the Determination of Matters of Fact

The facts were deemed proven on the basis of the documents attached to the proceedings by the Parties, the positions they assumed in the pleadings submitted and the testimony of the witness questioned.

3. Matters of Law

3.1. Questions to be Decided

It follows from what has been stated above that the questions to be examined are, fundamentally, the following:

a) To ascertain whether the rules that establish the autonomous taxation in question constitute presumptions, and if the answer is affirmative, whether they may be susceptible to rebuttal and, if the answer is affirmative, whether in the case at hand the Claimant succeeded in rebutting them; and

b) To clarify whether, should the request for a declaration of illegality of the denial of the administrative review petition filed by the Claimant be upheld with the consequent annulment of the CIT self-assessment directly contested, the Claimant may, within the scope of the present arbitral proceedings, obtain a judgment condemning the Respondent to payment of compensatory interest relating to the amount delivered by it to satisfy the unduly paid tax obligation.

3.2. Autonomous Taxation

a) General

The regime of autonomous taxation is the result of numerous legislative amendments. The subjection of certain expenses to autonomous taxation arose with Decree-Law no. 192/90, of 2 June, in a context of penalizing taxation of confidential or undocumented expenses incurred by companies.

It was only with the 2001 tax reform that autonomous taxation was extended to representation expenses and expenses with vehicles and, subsequently, to a very diverse set of matters in accordance with what is currently provided for in the CITC in Chapter IV relating to taxes, together with the State Surcharge[1].

Under the heading "Autonomous Taxation Rates", Article 88 of the CITC, in the wording in effect at the time of the facts and for what is relevant here, provided as follows:

3 - Expenses incurred or borne by taxpayers not subject to objective exemptions and who exercise, as their principal activity, activity of a commercial, industrial or agricultural nature, related to light passenger vehicles or mixed vehicles whose acquisition cost is equal to or less than the amount fixed in accordance with paragraph e) of no. 1 of Article 34, motorcycles or motorcycles, excluding vehicles powered exclusively by electric energy, are taxed autonomously at the rate of 10%.

4 - Expenses incurred or borne by the taxpayers mentioned in the previous number, related to light passenger vehicles or mixed vehicles whose acquisition cost exceeds the amount fixed in accordance with paragraph e) of no. 1 of Article 34, are taxed autonomously at the rate of 20%.

5 - Expenses related to light passenger vehicles, motorcycles and motorcycles are considered, namely, depreciations, rents or leases, insurance, maintenance and upkeep, fuel and taxes levied on their possession or use.

6 — Excluded from the provisions of no. 3 are expenses related to light passenger vehicles, motorcycles and motorcycles, assigned to the operation of public transport service, intended to be rented in the normal exercise of the activity of the taxpayer, as well as depreciations related to vehicles for which the agreement provided for in no. 9) of paragraph b) of no. 3 of Article 2 of the Personal Income Tax Code has been executed.

7 - Deductible expenses relating to representation expenses are taxed autonomously at the rate of 10%, considering as such, in particular, expenses borne with receptions, meals, travels, excursions and entertainment offered in the Country or abroad to customers or suppliers or to any other persons or entities.

The current wording is as follows:

3 — Expenses incurred or borne by taxpayers who do not benefit from objective exemptions and who exercise, as their principal activity, activity of a commercial, industrial or agricultural nature, related to light passenger vehicles, light cargo vehicles referred to in paragraph b) of no. 1 of Article 7 of the Vehicle Tax Code, motorcycles or motorcycles, excluding vehicles powered exclusively by electric energy, are taxed autonomously at the following rates:

a) 10% in the case of vehicles with an acquisition cost below (euro) 25,000;

b) 27.5% in the case of vehicles with an acquisition cost equal to or above (euro) 25,000 and below (euro) 35,000;

c) 35% in the case of vehicles with an acquisition cost equal to or above (euro) 35,000.

4 — (Repealed)

5 — Expenses related to light passenger vehicles, motorcycles and motorcycles are considered, namely, depreciations, rents or leases, insurance, maintenance and upkeep, fuel and taxes levied on their possession or use.

6 — Excluded from the provisions of no. 3 are expenses related to:

a) Light passenger vehicles, motorcycles and motorcycles, assigned to the operation of public transport service, intended to be rented in the normal exercise of the activity of the taxpayer; and

b) Motor vehicles for which the agreement provided for in no. 9) of paragraph b) of no. 3 of Article 2 of the Personal Income Tax Code has been executed.

7 - Deductible expenses relating to representation expenses are taxed autonomously at the rate of 10%, considering as such, in particular, expenses borne with receptions, meals, travels, excursions and entertainment offered in the Country or abroad to customers or suppliers or to any other persons or entities.

17 - In the case of hybrid light passenger vehicles with plug-in, the rates referred to in paragraphs a), b) and c) of no. 3 are, respectively, of 5%, 10% and 17.5%.

18 - In the case of light passenger vehicles powered by LPG or CNG, the rates referred to in paragraphs a), b) and c) of no. 3 are, respectively, of 7.5%, 15% and 27.5%.

b) The Legal Nature of Autonomous Taxation

When speaking of autonomous taxation, it is convenient from the outset to bear in mind that a set of disparate situations is at issue, which will encompass, at least, three distinct types, namely:

- Autonomous taxation of certain income (e.g., nos. 3, 5 and 6 of the PITC);

- Autonomous taxation of certain deductible expenses (e.g., nos. 3 and 4 of Article 88 of the CITC);

- Autonomous taxation of other expenses regardless of their deductibility (e.g., Articles 1 and 2 of Article 88 of the CITC).

This analytical effort, given the disparity and heterogeneity of the situations covered, shows that it is not advisable to attempt to reconcile them to their own and unitary legal nature[2]. In a simplified reading, one would say that these rules gravitate around two main concerns: that of avoiding tax evasion (undocumented expenses, payments to non-residents subject to a clearly more favorable tax regime, travel allowances and vehicle expenses) and that of noting the impossibility of assessing, with certainty, the indispensability of the expense in the face of the provisions of Article 23 of the CITC (representation expenses)[3].

The existence of autonomous taxation is explained by "the need to prevent and avoid that, through these expenses, companies proceed to disguised distribution of profits, as profits of the company, as well as to combat fraud and tax evasion that such expenses present"[4]. With them "the legislator seeks to respond to the admittedly difficult question of the tax regime of expenses that are located in a zone of intersection of the personal sphere and the business sphere, so as to avoid in-kind remuneration more attractive for exclusively fiscal reasons or the concealed distribution of profits (…) A kind of presumption is created here that these costs do not have a business purpose (…) In summary, the cost is deductible, but autonomous taxation reduces its tax advantage, since here the tax base is not a net income, but, rather, a cost transformed – exceptionally – into an object of taxation"[5].

The objective appears to be to attempt to prevent (attenuating or eliminating the "advantage" resulting from them in CIT) that, through such expenses, the taxpayer uses for non-business purposes assets that generated fiscally deductible costs; or that payments are made to third parties with evasion of taxes that would be due by them. The realization of such expenses implies an additional tax burden for those who incur them because the law presumes that, thus, another person ceases to pay tax[6].

There are those who see in the rules that impose autonomous taxation, at least those relating to confidential expenses and those relating to vehicles, presumptions. Others, however, see in them rules of incidence, defining the scope of application of a genuine tax, directly affecting the expense.

c) Autonomous Taxation as an Expression of the Establishment of Legal Presumptions?

As seen, it seems possible to detect here the presence of a kind of presumption that the costs associated with autonomous taxation, or some of them at least, do not have a business purpose or, as we would say, an exclusive business purpose[7].

Also at the CAAD the question has been examined and there are not a few decisions that have concluded in the sense that autonomous taxation has a presumptive nature.

It is worth noting what is stated with lapidary clarity in the Arbitral Decision of Case no. 628/2014-T:

"From the perspective that has just been expounded, the autonomous taxation under examination would then have materially underlying a presumption of "partial" business character of the expenses on which it bears, in light of the above-noted circumstance that such expenses are located in a gray area separating what is business expense, productive, from what is private expense, consumption, and that, notoriously, in many cases, the expense will indeed in reality have a dual nature (partly business, partly personal).

Confronted with such difficulty, the legislator, instead of simply excluding their deductibility, or reversing the burden of proof of the business character of the expenses in question (imposing, for example, the demonstration that "they do not have an abnormal character or an excessive amount", as it does in Articles 65/1 and 88/8 of the CITC), chose to establish the currently in force regime, which, nevertheless, has precisely the same foundation, the same purpose, and the same type of result, as other forms used in other typical situations of the regime (in this case) of CIT.

Thus, from the known fact that is the realization of a certain type of expenses, the legislator draws the unknown fact, which is the assessment of the degree of business affectation of the product of such expenses.

And it will be this unknown fact, presumed by the legislator, that triggers and justifies the autonomous taxation in question in the present proceedings. Indeed, it was by presuming that the expenses on which autonomous taxation bears have, as a rule, mixed affectation, and that there is, therefore, an unjustified benefit in their full deduction, that the legislator began, in a first phase, by limiting the percentage of those that it admitted as deductible. Subsequently, for reasons that will matter little to the case, but that will involve budgetary constraints, on the one hand, and the need to ensure the taxation of any benefits that individuals could derive from such expenses, the legislator adopted the current model of autonomous taxation of the expenses that now concern us. But this did not exclude, but rather complemented, that primitive motivation to tax, adequately, the income of legal persons, distorted by the deduction of expenses that the legislator presumes to have non-entirely business affectation. That is: the budgetary and, possibly, fringe benefits taxation purposes that may underlie the current regime of autonomous taxation that concerns us, do not exclude, but rather are based on, the aforementioned presumption of "partial business character" of the expenses on which they fall (and, complementarily, on the distortion of CIT taxation resulting from it)."

Now, being in the presence of a presumption, it is concluded that the possibility of it being rebutted cannot be excluded, in accordance with the provisions of no. 2 of Article 350 of the Civil Code and Article 73 of the GTL.

There are those who maintain that autonomous taxation, or at least some of it, such as those that claim our attention, are part of the list of specific anti-abuse rules[8]. They constitute a way of preventing certain abusive actions, which the "normal" functioning of the taxation system was incapable of preventing, and that other ways of combating such actions, including ways more burdensome for the taxpayer, were possible[9]. Some of them aim, pure and simply, to penalize presumptively evasive or fraudulent conduct of taxpayers, embodying a mechanism, as stated, of anti-abuse[10].

Autonomous taxation is, to a certain extent, a "form of taxation of legal persons that arises from the recognition of the growing incapacity to tax their income solely on the basis of the traditional axis of CIT"[11], not establishing any rebuttable presumption for the purposes of the provisions of Article 73 of the GTL. Although it may be recognized that one of the purposes of the rules that impose them is to associate with certain expenses a presumed partial business character, the intention of the legislator is not exhausted in that ratio.

Along this line of reasoning, autonomous taxation emerges tailored as genuine "indirect and instantaneous taxes that tax the expense and not the income and that clearly distinguish themselves from CIT (…) not even relating to the achievement of a positive result. (…) the expenses on which autonomous taxation bears constitute instantaneous tax facts or single obligation facts[12].

The legislative choice for autonomous taxation does not establish a rebuttable presumption by application of Article 73 of the GTL. Having underlying a presumptive assessment of the difficulty of rigorous control of certain cases, the legislator chooses to typify situations, translated in practice into the reduction of the amount of costs deductible in the determination of taxable income[13]. Article 88 of the CITC does not establish a presumption of partial "business character"[14].

Note what can be read in the Arbitral Decision of Case no. 52/2016-T:

"Regarding the possibility of rebuttal of the presumption, having analyzed the reasoning underlying the decision of the arbitral tribunal rendered in case no. 628/2014-T cited by the Claimant, we depart from the understanding expressed there in this measure: in fact, Article 88 of the CITC does not establish a presumption of partial "business character". If it did, it would undoubtedly be rebuttable under Article 73 of the GTL.

What happens is that the autonomous taxation of Article 88 of the CITC, without establishing it, are based on, i.e., seek their ratio (or part of it) in a presumption of partial "business character".

But this is not its only ratio, in particular, in what matters to the case at hand. Underlying autonomous taxation is also the choice of the legislator to tax in CIT instead of taxing in PIT in the sphere of the beneficiaries of the expenses in which the company incurred.

Which is not without significance.

If one understood that the company could and succeeded in rebutting the said presumption, it was necessary to find a way to tax the patrimonial increase that had resulted from the realization and such expenses for the respective beneficiaries. By way of example, if the Personal Income Tax Code contained a rule that, in that case, allowed for consideration and forced the inclusion, in the sphere of the beneficiaries, of the costs incurred by companies as taxable income.

This, by what we have already set forth above regarding the various reasons why – agree or not – the legislator introduced autonomous taxation: they are, in fact, specific anti-abuse measures, introduced in a context of broad legislative discretion: the legislator can decide what it considers a deductible expense (in CIT as in VAT) and what it does not, as well as what, for the reasons already stated, it accepts as an expense on the one hand, but taxes on the other.

And, note, the abuse that the autonomous taxation system intends to prevent is not only that which may occur in CIT in the company that incurs the expense, but also that which may occur in income tax for the beneficiary of the expense.

We consider, therefore, that the rule of Article 88 of the CITC, being based, in part, on a presumption, in fact does not establish any presumption that, therefore, is rebuttable in accordance with Article 73 of the GTL."

Having reached this point, it is necessary to take a position.

d) Position Adopted

The already cited lesson of Saldanha Sanches on this subject appears to us decisive. We do not believe it is reasonable to ignore that we are faced with a "kind of presumption" that these costs do not have an exclusive business purpose. However, to say "kind of presumption" and "presumption" should not mean the same reality. They should not be entirely foreign, alien to each other, but neither will they benefit from the same conceptual identity nor will they be exactly synonymous.

In fact, we do not subscribe entirely to the assertion that "from the known fact that is the realization of a certain type of expenses, the legislator draws the unknown fact, which is the assessment of the degree of business affectation of the product of such expenses"[15]. Even if we accept that the rules that establish autonomous taxation are based on a presumption, or that they rest on a presumption, as stated in the Arbitral Decision of Case no. 52/2016-T, we do not see in them the distinctive features of the presumptions referred to in Articles 349 et seq. of the Civil Code.

Therefore, autonomous taxation, in our view, does not establish presumptions in the proper sense, but does not fail to invoke the respective concept in its formulation. We believe that it was this dimension of a certain hybrid nature that justified the suggestive but fluid and rather imprecise expression of Saldanha Sanches: "kind of presumption".

Without prejudice to the ontological excursus that autonomous taxation may merit, and the advantage that may result from the effort to grasp its essence, it is important not to lose sight of the concrete case at hand.

Now, what we have before us is to ascertain whether the expenses borne by the Claimant with light passenger vehicles that it has at its service and with the representation expenses that it ascertained in its income declaration (Form 22) can be exempted from autonomous taxation. Let us see then.

i) Of expenses relating to light passenger vehicles

The Claimant believes that the expenses incurred with light passenger vehicles have the objective of promoting its products, being an instrument of work of its employees. It therefore considers that the business character of such expenses is demonstrated, and that it should be concluded that they are not subject to autonomous taxation.

With due respect, the business character of such expenses has never been in question. It is indeed this business character that justifies the deductibility of such expenses in accordance with the provisions of Article 23 of the CITC, and such expenses have been deducted without any objection to that deduction.

The problem, therefore, appears to be another. The Claimant itself appears to identify it correctly. To determine whether an expense act is or is not subject to autonomous taxation, the following two operations must be carried out:

Ø ascertain whether the expense act in question is included in the list of Article 88 of the CITC;

Ø and, if the answer is affirmative, determine the "integral business character" of that expense act, eliminating the subjection to autonomous taxation if it is demonstrated that the expense in question is entirely business-related[16].

There is no doubt that the expenses with light passenger vehicles are included in the list of Article 88 CITC. Therefore, the "integral business character" of those same expenses must now be determined. Note that in this statement the concept of business character appears qualified and the adjective used is this: "integral".

In fact, the Claimant, drawing from the Arbitral Decision of Case no. 628/2014-T, agrees that "it must be concluded that the presumption of 'partial business character' should be considered as covered by the possibility of rebuttal generically enshrined in Article 350/2 of the Civil Code and 73 of the GTL"[17].

Therefore, if there is a presumption – in a technical-legal sense or only in an approximate sense – rebuttal will necessarily pass through the demonstration that expenses with light passenger vehicles serve only the interest of the company, are assigned exclusively to the pursuit of the activities of the business entity. Note that it is not enough to say that the vehicles are at the service of the company (if they were not, obviously, it would not even be possible to consider the possibility of their expenses being deducted, eroding the taxable base for lack of verification of the necessary indispensability). It is necessary to demonstrate that they are only at the service of the company, that employees in question cannot use them for other purposes, foremost personal purposes.

Now, what was demonstrated was exactly the opposite. The vehicles, being work instruments of the Claimant's employees to whom they are entrusted, can be used by them for personal purposes, namely during vacation, holidays and weekends. However, when the Claimant detects the use of the vehicles for non-business purposes, the respective expenses are not borne by the Claimant, but rather charged to the employee in question. But it is important to ask whether this will be the control required to enable the taxpayer to be exempted from autonomous taxation. We believe it is not. First and foremost, because the scrutiny of the nature of vehicle use can only be done on the basis of comparison with the expenses they generate, namely fuel and tolls. That is, it must be recognized that, however rigorous one wishes to be, not all uses that escape the business scope that are at the basis of their allocation can be detected and charged to the respective employees, for the simple reason that not all can be detected.

Moreover, fuel and tolls – which we admit can be charged to employees when they refer to travel of a personal nature (those that are detected, it is insisted) – are not the only vehicle expenses subject to autonomous taxation. We must also consider others, such as the rents of operational leases and insurance. As is clear, the partition of these costs, distinguishing in them the fraction that should be considered business from what has an extra-business nature is, at a minimum, impracticable, if not practically impossible.

Now, the autonomous taxation of which we are concerned is, therefore, the answer to this practical difficulty or impossibility. A pragmatic and legitimate answer in terms of legislative policy, in light of the most obvious alternative that was intended to be avoided: the non-deductibility of the respective expenses.

We cannot forget that the legislator's purpose was to allow the deduction of expenses with light passenger vehicles, subjecting them, as compensation, to autonomous taxation when the integral business character of the respective expenses could not be demonstrated.

In conclusion, the Claimant's claim to have the expenses it borne with light passenger vehicles at its service exempted from autonomous taxation has no legal basis.

ii) Of expenses relating to representation expenses

What was said regarding expenses borne with light passenger vehicles benefits the analysis that must be made on representation expenses, which are expenses borne for representation of the company before third parties (customers, suppliers and others).

Autonomous taxation relating to representation expenses is based on the difficulty of assessing with certainty the true purpose of the expense and the exclusivity of that purpose, as the Respondent states. In fact, it is difficult to conduct a rigorous separation between business and leisure scope, so the expense will be a cost of the company, but will be subject to autonomous taxation attempting to reach what in the event exceeds the business objectives[18].

One should not, in theory, reject the possibility of demonstrating the full business character of the expense borne with a given event. However, this principle statement cannot disregard the necessary precautions with such demonstration, especially when it does not refer to a particular event but to the totality of representation expenses ascertained.

In our view, it is not enough to sustain that a company develops its activity in a certain sector and that it organizes promotional events for the brand it markets for the costs of such meetings to escape autonomous taxation. Such demonstration will be sufficient to ascertain the business character of the initiative in question. However, for a given representation expense to be able to move away from the scope of subjection of the respective autonomous taxation, it is necessary to demonstrate that the event in question had not only an exclusive business purpose but also that all those who took part in it, giving rise to the expense, fall within the criterion that should objectively be chosen as the reasonably determining one for that exclusive business character.

As is clear, such demonstration is of very difficult realization. Once again: autonomous taxation arises precisely to seek a balance that can compensate for the deductibility of these same representation expenses.

In the judgment of this tribunal, the Claimant did not succeed in making the aforementioned demonstration, and therefore, also here, the Claimant's request cannot be upheld.

3.3. Of Compensatory Interest

The impugned act, as has been attempted to be demonstrated, does not suffer from any illegality. Thus, the prerequisites for compensatory interest to be paid are not met.

Decision

In accordance with the reasons set forth above, the arbitral tribunal decides:

a) To dismiss the request for declaration of illegality of the denial of the administrative review petition filed, maintaining, therefore, the CIT self-assessment act that gave rise to it;

b) To dismiss the request for condemnation of the Respondent to payment of compensatory interest.

Value of the Proceedings

In accordance with the provisions of no. 2 of Article 306 of the CPC, Article 97-A of the CPPT and also no. 2 of Article 3 of the Costs Regulation in Tax Arbitration Proceedings, the value of the case is set at € 41,780.00 (forty-one thousand seven hundred eighty euros).

Costs

For the purposes of the provisions of no. 2 of Article 12 and no. 4 of Article 22 of the RJAT and no. 4 of Article 4 of the Costs Regulation in Tax Arbitration Proceedings, the amount of costs is set at € 2,142.00 (two thousand one hundred forty-two euros), in accordance with Table I attached to said Regulation, to be borne entirely by the Claimant.

[signature on next page]

Lisbon, 16 January 2017

The Arbitrator

_______________________________

(Nuno Pombo)

Text prepared by computer, in accordance with no. 5 of Article 131 of the CPC, applicable by referral of paragraph e) of no. 1 of Article 29 of Decree-Law no. 10/2011, of 20 January and with the spelling prior to said Orthographic Agreement of 1990.

[1] See Arbitral Decision no. 52/2016-T.

[2] See Arbitral Decision no. 628/2014-T.

[3] Cf. CLOTILDE CELORICO PALMA, Autonomous Taxation Seen by the Constitutional Court: Commentary to the Constitutional Court Decision no. 310/2012, of 20 June 2012, in Journal of Public Finance and Tax Law, Coimbra, year 5 no. 2 (Summer 2012), p. 245.

[4] See CASALTA NABAIS, Tax Law, 6th ed., Almedina, October 2010, p. 614.

[5] See SALDANHA SANCHES, Manual of Tax Law, 3rd edition, 2007, p. 407.

[6] See RUI DUARTE MORAIS, Notes on CIT, Almedina, 2009, p. 203.

[7] Cf. SALDANHA SANCHES, Manual of Tax Law, 3rd edition, 2007, p. 407.

[8] Cf. Arbitral Decision no. 628/2014-T and ALEXANDRE FERREIRA, Autonomous Taxation – Characterization and Deductibility of Expenses, in Tax Arbitration no. 2, Jan. 2015, CAAD, p. 40.

[9] Cf. Arbitral Decision no. 628/2014-T.

[10] See GUILHERME W. D'OLIVEIRA MARTINS, On the Deductibility of Autonomous Taxation for Purposes of Determining Taxable Profit, in Tax Arbitration no. 2, Jan. 2015, CAAD, pp. 33 et seq.

[11] Ibid, ibid, p. 34.

[12] Cf. CLOTILDE CELORICO PALMA, ibid, p. 247.

[13] Cf. Dissenting opinion in Arbitral Decision of Case no. 628/2014-T.

[14] See Arbitral Decision of Case no. 52/2016-T.

[15] Arbitral Decision of Case no. 628/2014-T.

[16] Cf. Article 39 of the request for arbitral decision.

[17] Cf. Article 63 of the request for arbitral decision.

[18] Cf. Supreme Administrative Court Decision of 06.04.2016 (Case 01613/15).

Frequently Asked Questions

Automatically Created

What are autonomous taxations (tributações autónomas) on passenger vehicle expenses and representation costs under Portuguese IRC?
Autonomous taxations (tributações autónomas) under Portuguese IRC are additional taxes imposed on specific categories of expenses incurred by companies, regardless of whether these expenses are deductible for corporate income tax purposes. Article 88 of the Corporate Income Tax Code (CIRC) establishes autonomous taxation on light passenger vehicle expenses and representation costs at specified rates. Unlike regular IRC taxation on profits, autonomous taxation applies directly to the gross amount of certain expenses, functioning as an immediate levy on expenditure categories deemed susceptible to personal or non-business use. The Tax Authority views these as definitive tax incidence rules designed to discourage certain spending patterns, while taxpayers argue they constitute rebuttable presumptions of non-business character under Article 73 GTL. The taxation applies even when expenses meet general deductibility requirements, creating a dual-layer taxation system aimed at preventing abuse and capturing revenue from expenditures with potential mixed personal-business character.
Can a company challenge the self-assessment of autonomous taxation through a gracious complaint (reclamação graciosa) and arbitration?
Yes, Portuguese companies can challenge self-assessed autonomous taxation through a two-stage administrative and judicial process. First, taxpayers may file a gracious complaint (reclamação graciosa) with the Tax Authority under Article 78 of the Tax Procedure Code (CPPT) for alleged errors in self-assessment, including autonomous taxation on expenses with proven integral business character. If the administrative review petition is denied—as occurred in Process 198/2016-T—taxpayers can escalate to arbitration through the Administrative Arbitration Centre (CAAD) under Decree-Law 10/2011. The arbitration request must be filed within 90 days of notification of the administrative denial. CAAD provides a faster, binding alternative to regular tax courts for resolving disputes involving autonomous taxation, including questions about whether expenses possess the 'integral business character' that might exempt them from such taxation. The process allows companies to seek both annulment of the tax assessment and compensatory interest for amounts unduly paid.
How does CAAD Process 198/2016-T address the presumption of business purpose for company car and representation expenses?
CAAD Process 198/2016-T presents contrasting interpretations of the legal foundation for autonomous taxation on vehicle and representation expenses. The claimant company argues that autonomous taxation operates on a legislative presumption that certain expenses lack integral business character (empresarialidade integral), which Article 73 GTL permits taxpayers to rebut through proof. The company contends that vehicles assigned exclusively to sales representatives for product promotion and representation expenses forming part of documented marketing strategies demonstrate purely business purpose, thus rebutting the presumption and eliminating autonomous taxation liability. Conversely, the Tax Authority maintains that Article 88 CIRC establishes definitive tax incidence rules, not rebuttable presumptions. The Respondent argues that autonomous taxation reflects legislative recognition of the practical impossibility of verifying the exclusive business nature of each expense and serves a deterrent function against potentially abusive expenditures. This dispute centers on whether taxpayers can overcome autonomous taxation through factual proof of business purpose or whether the taxation applies categorically regardless of actual use, representing a fundamental question about the legal nature and constitutional validity of autonomous taxation mechanisms.
What is the distinction between full and partial business use (empresarialidade integral vs parcial) in autonomous taxation under IRC?
The distinction between 'empresarialidade integral' (full/integral business character) and 'empresarialidade parcial' (partial business character) is central to autonomous taxation disputes under Portuguese IRC. Empresarialidade integral refers to expenses incurred exclusively and entirely for business purposes, with no personal use component whatsoever—such as vehicles assigned to sales staff for client visits or representation expenses for documented customer acquisition events. The claimant's theory holds that proving integral business character rebuts the legal presumption underlying autonomous taxation, eliminating the tax obligation entirely. Empresarialidade parcial acknowledges mixed-use scenarios where expenses serve both business and potential personal purposes, justifying autonomous taxation as a mechanism to capture the non-business component. The Tax Authority rejects this distinction for autonomous taxation purposes, arguing that Article 88 CIRC applies categorically to enumerated expense types regardless of actual use patterns. This conceptual divide determines whether companies can avoid autonomous taxation through rigorous documentation of exclusive business deployment or must accept it as an unavoidable cost of incurring certain expense categories, fundamentally affecting corporate tax planning and expense policy design.
Is a taxpayer entitled to compensatory interest (juros indemnizatórios) when autonomous taxation on business expenses is deemed unduly paid?
Compensatory interest (juros indemnizatórios) for unduly paid autonomous taxation depends on establishing that overpayment resulted from error attributable to the Tax Authority under Articles 43 and 100 of the General Tax Law. In Process 198/2016-T, the claimant argues entitlement to compensatory interest because the autonomous taxation on expenses with proven integral business character constitutes excessive tax payment caused by the Tax Authority's erroneous denial of the administrative review petition. The company contends that once integral business character is demonstrated, the taxation becomes legally undue, triggering the right to interest from the payment date until reimbursement. The Tax Authority counters that no compensatory interest is owed because no attributable error occurred—if autonomous taxation rules apply categorically regardless of business purpose, the self-assessment was correct and the denial proper. The compensatory interest question thus hinges on the primary dispute: if autonomous taxation constitutes a rebuttable presumption and the taxpayer successfully proves exclusive business use, the payment becomes unduly exacted through administrative error; if autonomous taxation represents definitive incidence rules, no error exists and no compensatory interest accrues. The interest rate and calculation follow Article 43 GTL provisions for undue tax payments attributable to tax services.