Summary
Full Decision
ARBITRAL DECISION
Are in agreement in Arbitral Tribunal
I – Report
1. A..., S.A. – Branch in Portugal, with tax identification number ..., with registered office in ..., ..., ..., in Porto, requested the constitution of an arbitral tribunal, under the terms of articles 2.º, n.º 1, subparagraph a), and 10.º of Decree-Law n.º 10/2011, of 20 January, to assess the legality of the dismissal of the administrative review filed against the act of self-assessment of Corporate Income Tax (IRC) for the fiscal year 2014, insofar as it does not reflect the tax deduction of tax losses incurred in 2013 in the amount of € 1,779,377.05.
The request is based on the following grounds.
With the amendment of n.º 1 of article 75.º of the Corporate Income Tax Code, made by Law n.º 2/2014 of 16 January, with effects from 1 January 2014, the Applicant has the right to deduct from the taxable profit of 2014 the tax losses of previous fiscal years attributable to the business branch of gas commercialisation and related services to large customers that were borne by the Portuguese Branch of the Spanish company B..., S.L. (B...).
In fact, B... was divided in 2013 and the universality of its two business branches was transferred to A..., S.A., which retained the wholesale business (large customers/industrial customers) and C..., S.A., which retained the retail business, including the retail part belonging to the Branch of B... in Portugal.
The division was carried out under the tax neutrality regime provided for in Council Directive n.° 2009/133/EC, of 19 October 2009, which in Portugal finds its translation in articles 73.º to 78.º of the Corporate Income Tax Code.
In 2013, in accordance with the wording then in force of n.º 1 of article 75.º of the Corporate Income Tax Code, the deduction of tax losses from the wholesale business of the branch of B... in Portugal, which transferred to A..., S.A., was not yet possible without prior authorization from the Minister of Finance.
From 2014 onwards, this deduction became possible without the need for prior authorization, due to the new wording of this provision introduced by Law n.º 2/2014, of 16 January, which now provided: "[t]he tax losses of merged companies may be deducted from the taxable profits of the new company or of the incorporating company, under the terms and conditions established in article 52.º and until the end of the period referred to in n.º 1 of that same article, counted from the taxation period to which they relate."
However, the Tax Administration believes that in 2014 this new version of n.º 1 of article 75.º of the IRC does not apply, but without reason.
In effect, article 14.º of Law n.º 2/2014 provides that "[w]ithout prejudice to the provisions of article 8.º, this law applies to taxation periods that begin, or to tax events that occur, on or after 1 January 2014." And the tax event at issue occurs on 31 December 2014, in light of the principle of annuality provided in article 8.º, n.ºs 1 and 9, of the Corporate Income Tax Code by which the tax is "due for each taxation period, which coincides with the calendar year" and the "tax generating event is deemed to have occurred on the last day of the taxation period".
It is certain that no special provision restricts the temporal scope of application of the new wording of article 75.º, n.º 1, which results from article 14.º of the aforementioned Law n.º 2/2014 and the same result would be reached by force of the general rule contained in article 12.º, n.º 2, of the Civil Code which provides: "[when the law (...) directly provides for the content of certain legal relations, abstracting from the facts that gave rise to them, it shall be understood that the law encompasses the relations themselves already constituted, which subsist as of the date of its entry into force."
To the same effect points article 12.º of the General Tax Law, where it is stated that "[t]ax norms apply to facts occurring after their entry into force, and no retroactive taxes can be created (n.º 1) and "[i]f the tax event is of successive formation, the new law only applies to the period elapsed after its entry into force."
Therefore, both the dismissal of the administrative review and the self-assessment act of IRC for the fiscal year 2014 are tainted by the material defect of violation of law, since the deduction of tax losses of a permanent establishment transferred in a division process should not be prohibited from the Applicant's taxable profit.
The Tax Authority, in its response, argues that the new wording of article 75.º, n.º 1, of the Corporate Income Tax Code, regarding the transferability of tax losses, is only applicable to merger, division and asset contribution operations that occur after 1 January 2014, since it is an operation that constitutes the relevant tax event for the purpose of deducting losses.
And having the merger/division of B... retroactive its effects to 1 January 2013, the regime of transferability of losses that resulted from article 75.º, n.º 1, in the wording in force prior to the publication of Law n.º 2/2014, was still applicable, implying that the possibility of loss deduction had to be preceded by authorization from the Minister of Finance.
To the same effect pointing also the provision of article 12.º of the General Tax Law which establishes the principle according to which tax norms only apply to facts occurring after their entry into force.
The interpretation of article 75.º, n.º 1, in the wording resulting from Law n.º 2/2014, in the sense that it permits the deduction of tax losses from previous years, is unconstitutional due to violation of the principles of fiscal legality and tax equality, as well as the principles of the Rule of Law, the reserve of fiscal law and separation of powers.
It concludes for the rejection of the request.
2. No testimonial evidence was requested and, in the course of the proceedings, the meeting referred to in article 18.º of the Regulations was waived.
In arguments, the parties reiterated their previous positions.
3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority under the applicable regulations.
Pursuant to the terms of subparagraph a) of n.º 2 of article 6.º and subparagraph b) of n.º 1 of article 11.º of the Regulations, in the wording introduced by article 228.º of Law n.º 66-B/2012, of 31 December, the Ethics Council designated as arbitrators of the collective arbitral tribunal the undersigned signatories, who communicated their acceptance of the appointment within the applicable period.
The parties were duly and timely notified of this appointment and did not express a desire to refuse it, in accordance with the combined terms of article 11.º, n.º 1, subparagraphs a) and b), of the Regulations and articles 6.º and 7.º of the Code of Ethics.
Therefore, in accordance with what is prescribed in subparagraph c) of n.º 1 of article 11.º of the Regulations, in the wording introduced by article 228.º of Law n.º 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 26 March 2018.
The arbitral tribunal was regularly constituted and is materially competent, in light of what is prescribed in articles 2.º, n.º 1, subparagraph a), and 30.º, n.º 1, of Decree-Law n.º 10/2011, of 20 January.
The parties possess legal personality and capacity, are legitimised and are represented (articles 4.º and 10.º, n.º 2, of the same diploma and 1.º of Order n.º 112-A/2011, of 22 March).
The process is not affected by nullities and no exceptions have been raised.
It is incumbent to assess and decide.
II – Substantiation
4. The factual matter relevant for the decision of the case is as follows:
a) B..., S.L. (B...) was subject to division in 2013, having transferred its wholesale business branch (large customers/industrial customers) to A..., S.A. and its retail business branch (small customers) to C..., S.A., including the parts belonging to the Branch of B... in Portugal;
b) A..., S.A. received the part of the business of the branch in Portugal of B... allocated to the wholesale business including the tax losses determined in accordance with article 52.º of the IRC Code, in the total amount of € 7,736,421.96.
c) Under the legal regime in force in 2013, the Applicant requested authorization from the Minister of Finance for the transfer of tax losses associated with the activity transferred to it (wholesale business of the branch of B... in Portugal).
d) By official memorandum n.º..., of 1 January 2017, the Applicant was notified of the non-authorization for the use of the quota of tax losses referring to the fiscal year 2013.
e) On 29 May 2015, the Applicant submitted a Corporate Income Tax return Form 22 for the fiscal year 2014, without having considered in the calculation of taxable matter the deduction of tax losses resulting from the division of B..., S.L.
f) On 31 May 2017, the Applicant filed an administrative review against the act of self-assessment of Corporate Income Tax for 2014, requesting the deduction of tax losses calculated in 2013 resulting from the division of B..., S.L.
g) The administrative review was dismissed by order of 17 October 2017 by the service director of the Large Taxpayers Unit.
The Tribunal formed its conviction as to the proven facts based on the documents attached to the petition and those contained in the administrative file presented by the Tax Authority with its response.
Question of Law
5. The Applicant seeks the annulment of the decision dismissing the administrative review filed against the act of self-assessment of Corporate Income Tax for 2014 and, consequently, the annulment of that tax act insofar as it does not admit the deduction of tax losses that it assumed as a result of the division of B..., S.L.
It argues that by virtue of the new wording of article 75.º, n.º 1, of the Corporate Income Tax Code, introduced by Law n.º 2/2014, of 16 January, with effects from 1 January 2014, the Applicant has the right to deduct from the taxable profit of 2014 the tax losses from previous fiscal years attributable to the business branch of gas commercialisation and related services that resulted from the aforementioned division.
The aforementioned provision of article 75.º, n.º 1, of the Corporate Income Tax Code, in the wording resulting from Law n.º 2/2014, now provides as follows:
"The tax losses of merged companies may be deducted from the taxable profits of the new company or of the incorporating company, under the terms and conditions established in article 52.º and until the end of the period referred to in n.º 1 of that same article, counted from the taxation period to which they relate.
In the previous regime, the transferability of tax losses, under these conditions, was dependent on authorization from the Minister of Finance, by request of the interested parties submitted to the Tax Directorate-General by the end of the month following the request for registration of the merger at the commercial registry office, and the authorization was subject to the demonstration that the merger was carried out for valid economic reasons, such as the restructuring or rationalization of the activities of the companies involved.
Meanwhile, Law n.º 2/2014, which amended the aforementioned provision of article 75.º, n.º 1, of the Corporate Income Tax Code, in its article 14.º, under the heading "Production of effects", contains a material transitional law provision with the following content: "Without prejudice to the provisions of article 8.º, this law applies to taxation periods that begin, or to tax events that occur, on or after 1 January 2014."
The reservation made in the initial segment of the provision regarding article 8.º has no relevance for the assessment of the case, since it refers to the rate of Corporate Income Tax applicable according to the economic and financial assessment of the country, so what is most important to consider is the interpretation to be given to the rule of application of law in time when it orders the application of the new legal regime "to taxation periods that begin, or to tax events that occur, on or after 1 January 2014".
The Applicant argues that the norm applies to the taxation period of 2014, having regard to the principle of annuality of the tax, since Corporate Income Tax is due for taxation periods that coincide with the calendar year and the tax generating event is deemed to have occurred on the last day of the taxation period (article 8.º, n.ºs 1 and 9 of the Corporate Income Tax Code), further noting that the tax loss which is sought to be deducted has not yet expired.
The question cannot be viewed, however, in this straightforward manner.
The transmission of tax losses pursuant to article 75.º, n.º 1, of the Corporate Income Tax Code, as results from the above transcription, is effected "under the terms and conditions established in article 52.º and until the end of the period referred to in n.º 1 of that same article, counted from the taxation period to which they relate". And pursuant to n.º 1 of that article 52.º, "tax losses ascertained in a given taxation period (...) are deducted from taxable profits, if any, of one or more of the 12 subsequent taxation periods", with n.º 2 adding that the "deduction to be made in each of the taxation periods cannot exceed the amount corresponding to 70% of the respective taxable profit".
As explained by António Rocha Mendes, the mechanism of deduction from the profit of a given fiscal year of tax losses determined in previous fiscal years aims to attenuate the negative impact of the application of the principle of annuality of the tax. Nevertheless, the deduction is subject to three different limits: of a temporal nature, in that it can only occur until the 12th subsequent taxation period; of a subjective nature, insofar as only companies that obtain negative results can carry forward those losses; and of a quantitative nature, considering that the deduction to be made cannot exceed 70% of the taxable profit ascertained in that same fiscal period, with any excess being carried forward to subsequent taxation periods.
On the other hand, the law does not permit the taxpayer to obtain the benefit of the carryforward in the same year in which the losses are ascertained - which would be equivalent to the refunding of tax losses - but only admits the carryforward to future periods, that is, to subsequent taxation periods – with the limits already previously considered -, meaning that the deduction is always dependent on the obtaining of income in the future (IRC and Corporate Reorganizations, Lisbon, 2016, pages 118 to 123).
Being this the legal regime of the deduction of tax losses, by effect of the aforementioned articulation between articles 75.º, n.º 1, and 52.º, n.º 1, of the Corporate Income Tax Code, it seems clear that the aforementioned material transitional law provision permits the application of the amendments introduced by that law to the taxation period relating to 2014, but not necessarily the deduction of tax losses resulting from the merger of companies, since that deduction – as has been shown –, being able to encompass losses determined in previous fiscal years, can only be reflected in subsequent taxation periods.
The normative interpretation that the Applicant proposes would have as a consequence the very abrogation of the legal regime in force regarding the deduction of tax losses, permitting the taxpayer - to the detriment of what is established in article 52.º, n.º 1 - to deduct in 2014 tax losses from previous fiscal years.
Now, article 14.º of Law n.º 2/2014 determines that the legislative amendments resulting from that law produce effects from 1 January 2014, but the fact is that the regime introduced by article 75.º, n.º 1, of the Corporate Income Tax Code, regarding the transmission of tax losses, is applicable to the taxation period of 2014 but only as regards losses determined in that year and which are only deductible from taxable profits obtained in subsequent taxation periods.
There is therefore no problem whatsoever regarding the application of law in time. What occurs is that the legal regime resulting from the combined provisions of articles 52.º, n.º 1, and 75.º, n.º 1, of the Corporate Income Tax Code prevents the deduction in 2014 of tax losses determined in 2013.
On the other hand, the interpretation advocated by the Applicant would imply that companies that significantly altered their activity or their purpose (cf. wording of article 52.º prior to 1 January 2014) could come to obtain the deduction of losses which during the previous fiscal years had been denied to them by the legislator. In short, and in the absence of an express provision that safeguards that effect, it will be impossible, by means of interpretation, to reopen legal situations already consolidated in the national legal system.
The arbitral request is thus shown to be unfounded.
Prejudiced Claims
Given the lack of merit of the principal request, the assessment of the claims for reimbursement of amounts paid as tax and for payment of indemnifying interest is prejudiced.
III – Decision
Therefore, in agreement in arbitral tribunal:
a) To judge the arbitral request unfounded and to maintain the decision dismissing the administrative review;
b) To judge the assessment of the other claims to be prejudiced.
Value of the Case
The Applicant indicated as the value of the case the amount of € 1,779,377.05, which was not contested by the Respondent, and corresponds to the value of the assessment which it sought to oppose (article 97.º, n.º 1, subparagraph a), of the Code of Tax Procedure).
Costs
Pursuant to articles 12.º, n.º 2, and 24.º, n.º 4, of the Regulations, and 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to that Regulation, the amount of costs is fixed at € 23,562.00, which shall be borne by the Applicant.
Notify.
Lisbon, 20 July 2018
The President of the Arbitral Tribunal
Carlos Fernandes Cadilha
Arbitrator Member
Cristiana Leitão Campos
Arbitrator Member
Miguel Carrasqueira Baptista
Frequently Asked Questions
Automatically Created