Process: 211/2014-T

Date: October 29, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitration Case 211/2014-T addressed whether autonomous taxation (tributações autónomas) under Portuguese Corporate Income Tax (IRC) constitutes 'IRC' for purposes of tax credit and reimbursement provisions. The claimant, a SGPS company, contested €34,830.81 in autonomous taxation on vehicle expenses, representation costs, travel allowances, and undocumented expenses from fiscal year 2010. The core legal dispute centered on Article 45(1)(a) CIRC (later Article 23-A) and whether autonomous taxation should be treated equivalently to IRC proper. The claimant argued that Articles 1 and 3 CIRC define IRC exclusively as a tax on profits/income, never mentioning autonomous taxation in their repeated republications post-2002. The taxpayer contended that Article 12 CIRC (introducing autonomous taxation) does not redefine what IRC is, and that treating autonomous taxation as IRC would create systemic inconsistencies regarding tax credits, international double taxation relief, and special payment on account (PEC) deductions. Crucially, the claimant challenged the 2014 legislative amendment introducing Article 23-A CIRC as having innovative rather than interpretative character, arguing its retroactive application violated Article 103(3) of the Portuguese Constitution (prohibition of tax law retroactivity) and the principle of legitimate expectations inherent in the rule of law (Article 2 Constitution). The claimant referenced STA jurisprudence from 2012 (case 0830/11) supporting the interpretation that 'IRC' terminology historically excluded autonomous taxation. The arbitral tribunal was constituted under RJAT (Decree-Law 10/2011) with a sole arbitrator, following standard CAAD procedural timelines for reply, administrative file submission, and written submissions.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 211/2014 – T

I - REPORT

  1. On 1 March 2014, the company "A" – SGPS, S.A., holder of NIPC …, with registered office at Rua …, Lot .., Lisbon, (hereinafter referred to as the "Claimant") requested the constitution of an arbitral tribunal, pursuant to the provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as "RJAT").

  2. The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and notified on 5 March 2014, to the Tax and Customs Authority (hereinafter referred to as "TA" or the "Respondent").

  3. The Claimant seeks the ruling of the Arbitral Tribunal with a view to declaring the partial illegality of the self-assessment of Corporate Income Tax (including the state surcharge and state taxes) and the consequent municipal surcharge of the Fiscal Group "A" relating to the fiscal year 2010, with respect to the amount of € 34,830.81 (thirty-four thousand eight hundred and thirty euros and eighty-one cents), with the consequent annulment in this part, given the manifest illegality, with all legal consequences, namely the reimbursement to the Claimant of this amount, increased by indemnificatory interest at the legal rate counted from 1 September 2011 until full reimbursement.

  4. In the request for arbitral ruling, the Claimant chose not to designate an arbitrator. Pursuant to subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, with the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Board of CAAD designated as arbitrator of the single arbitral tribunal His Excellency Dr. Olívio Mota Amador who, within the applicable period, communicated his acceptance of the assignment.

  5. The parties were notified on 17 April 2014 of the designation of the arbitrator, and did not express any intention to challenge the arbitrator's designation, pursuant to the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

  6. In accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the RJAT, with the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 7 May 2014.

  7. On 6 June 2014, the Respondent, duly notified for this purpose, presented its Reply.

  8. The Respondent, on 15 July 2014, submitted the Tax Administrative Process.

  9. Written submissions were presented by the Claimant on 21 July 2014, and by the Respondent on 22 July 2014.

  10. The position of the Claimant, in accordance with the provisions of the petition for constitution of the Arbitral Tribunal and in the submissions, can be summarized in the conclusions, which we transcribe below:

A. It is unequivocal that the two provisions of the CIRC that define what corporate income tax is are Article 1 (more generic) and Article 3 thereof. Both explain what corporate income tax is, being absolutely coincident in this: a tax on profit/income, with no provision in any subparagraph of the taxable base of autonomous taxation in question here (charges or expenses of a certain type) or of any others.

B. And it is noted that these are provisions that have existed since the beginning of corporate income tax, but which have been subject to republication more than once long after autonomous taxation already existed (the last republications/reaffirmations occurred with Law No. 2/2014, of 16 January and, four years before, with Decree-Law No. 159/2009, of 13 July), and nevertheless they were not adapted to include in their definition of corporate income tax autonomous taxation: on the contrary, they always reaffirmed, on that occasion, the original definition of corporate income tax.

C. In turn and in contrast, Article 12 of the CIRC in the wording in effect since 2002 (and, from 2014, subparagraph a) of paragraph 1 of the new Article 23-A of the CIRC), do not have the mission or function of defining what corporate income tax is, hence they did not transform, outside their specific scope (material and temporal) of application, that which (autonomous taxation on expenses and charges) is not nor ever was, as results from the fundamental provisions specifically defining what corporate income tax is and which are contained in the respective code (cfr. cited Articles 1 and 3).

D. And it would be/would be grave and dangerous for the coherence and rationality of the tax system and, consequently, for those who safeguard (or should safeguard) it, if this is not/were not the case: if the definition of corporate income tax contained in Articles 1 and 3 of the CIRC is really superseded by a new definition of transversal/general application that would be drawn a contrario sensu from the wording of Article 12 of the CIRC in effect since 2002, then the systemic implications to be drawn from it are more than many and all contrary to the practice that has been peacefully followed from always by TA and taxpayers: cfr. the topic of the deduction of autonomous taxation as tax credits in corporate income tax (investment credits; for international double taxation; etc.); cfr. the topic of the deduction of autonomous taxation to PEC (special payment on account); etc.

E. It is further noted that the STA, in the judgment of 21 March 2012, delivered in case No. 0830/11, by reference to facts relating to 1996, i.e., prior to the current wording of Article 12 of the CIRC (in effect since 2002, having been introduced by Article 32 of Law No. 109-B/2001, of 27 December), saw in the expression corporate income tax, then used there (1996) exclusively, something that did not encompass autonomous taxation.

F. Whence the safe conclusion that the legislative amendment of 2014 embodied in the wording given to subparagraph a) of paragraph 1 of the new Article 23-A of the CIRC (former Article 45) has an innovative character and, consequently, can only be applied from then on. Whence still the necessary conclusion that it suffers from unconstitutionality, by violation of Article 103, paragraph 3, of the Constitution (prohibition of retroactivity of tax law), and by violation of the principle of protection of trust inherent in the rule of law principle (cfr. Article 2 of the Constitution),

G. the interpretation of the provision contained in subparagraph a) of paragraph 1 of Article 23-A of the CIRC, introduced by Law No. 2/2014, of 16 January, in the sense that the equation made there of autonomous taxation to corporate income tax would apply to fiscal years prior to 2014, for having, allegedly, the nature materially interpretative of the previous provision it replaced (the provision contained in subparagraph a) of paragraph 1 of Article 45 of the CIRC, and prior to 2010, Article 42), and which did not make such equation.

ON THE ARBITRAL DECISION DELIVERED IN CASE NO. 246/2013-T, AND OTHERS THAT ADOPTED THE VERY SAME REASONING

H. Contrary to what was sought by the intricate argumentation of the arbitral decision in question, conceptually, or de jure condendo, if one wishes, conferring on autonomous taxation for purposes of the said subparagraph a) of paragraph 1 of Article 45 of the CIRC, the same treatment given there to corporate income tax and surcharges, is at most a pure option of legislative policy, as opposed to any natural consequence of the logic or purpose associated with autonomous taxation overwhelmingly at issue here, as will be attempted to be shown below.

The argument of the (in)dispensability of the cost embodied in the expenses or charges on which autonomous taxation is levied (equivocation regarding the function of autonomous taxation overwhelmingly at issue here)

I. It is from the outset a contradiction in terms to invoke the requirement of indispensability when the very expense or charge on which autonomous taxation is levied is itself deductible/meets that requirement – if the principal, the expense, is deductible, the accessory, autonomous taxation, should also be.

J. And indeed, indispensability is not the problem, whether in the case of subsistence allowances (negotiated in many instances, besides, with unions), or in the case of entertainment expenses (in which the Director-General of the Tax and Customs Authority also incurs, according to recent newspaper reports), or still in the case of company vehicle fleets (which authorize that vehicles be taken home by employees of all hierarchical levels – as opposed to being parked at the company for service-related trips the next day –, thereby avoiding, in most cases, the unnecessary existence of a second vehicle, now acquired by the employee).

K. If subsistence allowances or entertainment expenses are paid objectively in excess of what would be strictly necessary, or if the employee of the most diverse hierarchical levels can (because the company agreed with him/her) use the vehicle beyond its use in the company's service, this does not mean that the indispensability of such charges disappears, totally or partially (besides, if that were really the problem, the immediate, logical and natural solution would be in the elimination of their total or partial deduction, not in the institution of autonomous taxation at issue here),

L. then, objectively also, in that excess they are part of the remuneration that in this form the company agreed, or is agreeing to pay, to have that employee in those functions.

M. No reason whatsoever, therefore, to say that this cost does not have business causation. It has as much as if in the monetary salary of that worker an additional amount were included, in replacement of the extinct (or reduced) subsistence allowance, entertainment expense or vehicle.

N. The problem, common to all these situations, is not, therefore, that of the business causation of the expenditure, but rather that of the taxation of this part of the salary in the sphere of those who receive these subsistence allowances possibly in excess, incur entertainment expenses in excess or benefit from a vehicle in the company's service in their personal life also: how to prove in concreto that in fact there is here partially a component of salary for the worker? And especially how to measure in concreto monetarily this possible part of the worker's salary for purposes of taxation in personal income tax? As a substitute for this taxation in personal income tax, autonomous taxation was created.

O. And this is nothing new. It is the raison d'être of autonomous taxation such as overwhelmingly at issue here, always known to TA: MARIA DOS PRAZERES LOUSA (economist-researcher at the Centre for Tax Studies, and former director of the Centre) correctly pointed to the deductibility of tax charges with taxation (such as our autonomous taxation) with this substitutive function of personal income tax, as was seen extensively in the petition for constitution of an Arbitral Tribunal, in a pioneering study and the only in-depth study produced to date in Portugal. This study, carried out by a senior official (from always) of the Tax Administration is, for this very reason (and by the temporal distance that separates it from the present dispute), particularly beyond suspicion (cfr., in particular, p 26, and p 60, point 7, of the said study, in Science and Tax Technique, No. 374, 1994).

P. Indeed, if instead of having the technical character of taxation on expenses, it had the technical character of special taxation under personal income tax at liberatory rates, in which the employer entity (company) would function as a substitute taxpayer, the ultimate effect would be the same and no one would doubt, either, that the gross part of the salary (i.e., including the tax also) constituted by this part of the worker's income delivered to the State as personal income tax, would be fiscally deductible, on par with all remaining amounts (component parts of the gross salary) charged to the worker by withholding at the source and likewise delivered to the State (the employer deducts in corporate income tax the gross salary, including, therefore, the component delivered to the State as withholding in personal income tax or in Social Security).

Q. It should further be added that the perfect parallel in terms of operating mechanics is with the contribution (deductible in corporate income tax) to social security charged to the employer entity (23.75%, which are added to the gross remuneration agreed with the worker), or the new 5% contribution charged to companies that contract the services of self-employed workers, starting from 80% concentration of their activity in the company's service (cfr. Articles 140 and 168, paragraph 7, of the Contributive Code): autonomous taxation also accrues (in this case with the function of substituting personal income tax, in a simplifying logic) to remuneration in kind (potential personal utility derived by the worker from the expenses in question) borne by the employer entity, i.e., it accrues to the gross cost that this (presumed) remuneration in kind of the worker has for the employer entity, just as the part of social security whose charge is (notwithstanding the utility of social security being for the worker) of the employer entity or of the company contracting the services, accrues to the cost with the worker's gross remuneration or services.

R. Now, the arbitral decision now under analysis (and the same ones that follow ipsis verbis its reasoning) commits to this effect the error, an "auxiliary" one to its main argument, of thinking that what would be at issue would be the indispensability of the cost and consequent legitimacy of its deduction in corporate income tax (as opposed to substituting the difficult taxation in personal income tax of part of the worker's remuneration package), hence that taxation would be, in this thesis, a tool which, as an alternative to the solution of preventing that deduction, would have been engineered (with higher rates than corporate income tax and everything! But none of this stopped the argumentation of the arbitral decision), hence still, in the idea of this arbitral decision, everything would have to do with the corporate income tax of those who bear autonomous taxation (and not with personal income tax or, more broadly, with the taxation of another person) – cfr. p 21 of the arbitral decision under analysis.

The main argument on which the (and greater error of) the arbitral decision now under analysis rests

S. The arbitral decision now under analysis (case No. 246/2013-T) takes, as a decisive conceptual argument to reach its conclusion that autonomous taxation would be corporate income tax, the idea that autonomous taxation and corporate income tax would be inseparable, in turn sustained by the assertion that the taxpayer would be faced with the alternative of (cfr. p 14 and, in its definitive and complete version, p 22 of the arbitral decision):

a) to eliminate the deduction of the charge or expense under corporate income tax and, in that case, to also eliminate autonomous taxation; or

b) to maintain the deduction of the charge or expense under corporate income tax and, in this other case to see autonomous taxation applied to such charge or expense.

T. Based on the thesis described above, the arbitral decision feels authorized to conclude that there is a situation of two sides of the same coin: as if (in this arbitral thesis) the company opts not to deduct the expense or charge it will have as a counterpart the elimination of autonomous taxation, then the cause of autonomous taxation such as overwhelmingly at issue here (on charges with vehicles, subsistence allowances and similar items and entertainment expenses) would still be rooted in corporate income tax.

U. Schematically, in its final form it is said and decreed in the arbitral decision now under analysis (and this is its main argument) that:

  • if the taxpayer opts not to deduct the expense or charge it will be free of autonomous taxation;
  • hence deduction of expenses versus autonomous taxation are umbilically linked;
  • hence autonomous taxation is still a manifestation of corporate income tax, it still has the function of taxing the profit of the company that bears the expenses subject to autonomous taxation.

V. This thesis on which rests the pivotal argument of the arbitral decision has no legal support whatsoever. One need only read the law (Article 88 of the CIRC) to immediately understand that autonomous taxation is not optional: regardless of what the taxpayer did with the expenses and charges in question in the context of the operation of determination of its taxable profit in corporate income tax, existing such expenses and charges there will exist autonomous taxation. Moreover, for certain expenses the taxpayer cannot even deduct them in the determination of its taxable profit in corporate income tax – this is the case with undocumented expenses and expenses from which offshore entities benefit –, and it is precisely in these cases that autonomous taxation is felt most strongly (cfr. Article 88, paragraphs 1, 2 and 8, of the CIRC).

X. And it would be absurd if such an option really existed (a true systemic anomaly). Taxpayers with expenses subject to autonomous taxation at rates higher than that of corporate income tax, which is currently 23% (or higher aggregate rate to which they are subject by reason of the addition of surcharges), would then systematically opt not to deduct the expense, since although this causes an increase in taxable profit in the amount of that expense, taxable at the rate of 23% in corporate income tax, they would thereby always avoid the higher rate of autonomous taxation on that expense (cfr. Article 88 of the CIRC, and the autonomous taxation therein provided inciding on variable remuneration or on indemnifications, with a rate of 35%, and autonomous taxation on vehicle charges which today has two brackets reaching 27.5% and 35%).

Blatant contradiction in the reasoning process of the arbitral decision

Z. The arbitral decision under analysis says in the second paragraph of its p 18, in full development of its argumentative discourse, that "a taxpayer who does not have, nor expects to have, taxable profit in corporate income tax [the taxpayer who has losses], will not be affected by the autonomous taxation at issue in this case" it being sufficient for him "simply not to deduct from his gains the expenses that trigger those."

AA. Whence the conclusion of the arbitral decision that such autonomous taxation would still be a way of taxing income (in this arbitral thesis, whoever does not have income/have losses, could easily avoid autonomous taxation, it being sufficient for him simply to opt not to deduct the expense that constitutes the basis of incidence of autonomous taxation): "Such taxation will be, from this point of view, a form (convoluted, it is true) of indirectly and through the expense, still taxing the income (effective or potential/future) of legal entities." (cfr. 4th paragraph of p 18 of the arbitral decision under analysis).

BB. But then, in the final part of the arbitral decision, at the end of its p 22 and beginning of p 23, it is rather stated thus: "(…) the legislator could act at two levels (separately or simultaneously): not accept the deductibility of some expenses in whole or in part and/or tax them autonomously. Faced with the historical finding of a high number of corporate income tax subjects with tax losses, the option for the generalization of autonomous taxation ended up being imposed".

CC. One is left with all this quite muddled: is it not part of the backbone of the arbitral decision's argumentative discourse the thesis that autonomous taxation is not imposed if the taxpayer, namely the taxpayer with tax losses, opts for non-recognition for tax purposes of the charges subject to such autonomous taxation? Does anything go, a thing and its opposite?

ON THE ARBITRAL DECISION DELIVERED IN CASE NO. 255/2013-T

DD. Beyond the same equivocation regarding the business causation of the cost, to which we will not return here, regarding this second strain of thesis relating to the qualification of autonomous taxation as corporate income tax, contained in the arbitral decision delivered in case No. 255/2013-T, it is still important to recall that, contrary to what is stated there, autonomous taxation is owed by title of autonomous taxation, with the use of this same name and registered in field of model 22 with this same name, distinct from another field of model 22 reserved exclusively for corporate income tax, these two distinct taxation being provided in the same diploma for purely administrative simplification reasons that are materialized at the level of timings and joint declarative model, as has already been recognized by the Tax and Customs Authority itself.

EE. As for saying that in taxing expenses that reduce taxable profit "one can discern there a form of taxation of that same taxable profit" (p 53 of the arbitral decision in case No. 255/2013-T), one goes purely and simply too far. All indirect taxation, on consumption and expenses that reduce taxable profit, could with this very broad conceptual mesh be then seen as corporate income tax, as a form of taxation of taxable profit.

FF. The error of analysis begins further upstream, besides: expenses that reduce taxable profit (as if this were a logically prior reality to the expenses)? Or expenses that enter and should enter into the process of determination that reveals taxable profit? This is not a mere question of semantics and says much of the spirit that animates this second arbitral decision now under analysis.

GG. Neither NCRFs nor the principles and the conceptual structure of the System of Standardization of Accounting point in the slightest to an assimilation between corporate income tax and autonomous taxation, nor does this last arbitral decision manage to substantiate the contrary assertion that it makes in this regard.

HH. To this last effect it should further be noted that the accounting principle of the prevalence of substance over form points exactly in the opposite direction: as autonomous taxation is a substantive tax distinct from corporate income tax (and with a function or objective distinct from that, which is that of corporate income tax, to tax the income of the respective taxpayer) it should not be put in the bag specifically designed for income taxes of the respective taxpayer (and nor even in formal terms do they become corporate income tax – they are, have, the distinct name of "autonomous taxation").

II. Finally, as was well seen in the final part of the dissenting vote declaration of the arbitral decision now under analysis (case No. 255/2013-T), "(…) it should be further added, regarding the accounting framework, that accounting has a functional or instrumental function for its users: it provides information about the position and financial performance of entities or companies, information that is useful for the making of economic or management decisions by different users. Now, the recognition of facts with accounting relevance is made considering the nature of those facts. Given that autonomous taxation has a nature distinct from corporate income tax, it falls to accounting to express that difference in its entries and financial statements.".

  1. The position of the Respondent, expressed in the reply and in the submissions, can be summarized in the conclusions, which we transcribe below:

"A. To date, there are twelve arbitral decisions that conclude that autonomous taxation levied on charges deductible in corporate income tax are included in said regime, being, therefore, owed by title of this tax, being covered by the provision of Article 45, paragraph 1, subparagraph a) of the CIRC, wording introduced by Law No. 55-A/2010, of 31 December, not constituting charges deductible for purposes of determination of taxable profit, "it should, consequently, reject the present arbitral action".

B. To the reasoning contained in the aforementioned arbitral decisions is added that the value resulting from the application of autonomous taxation, contained in Article 88 of the CIRC, is not, nor has ever been, capable of being deducted for purposes of determination of taxable profit of legal entities.

C. In the same measure that other taxes borne by taxpayers are not deductible from taxable profit, neither are taxes levied on expenses in relation to which the legislator and, above all, the law excluded from deductibility.

D. In reality, formally, autonomous taxation is corporate income tax, presenting itself as a component thereof, a complement thereof.

E. Parallel to this, from the reading of Judgments 617/2012 and 85/2013, rendered by the Constitutional Court, it is not derived that autonomous taxation is, effectively, a tax distinct from corporate income tax, which, from the outset, justifies its non-deductibility in the determination of taxable profit, in accordance with the provision of Article 45/1, a) of the CIRC.

F. Both the legislator and the law, in Article 12 of the CIRC, consider autonomous taxation a component of corporate income tax.

G. In this sense, autonomous taxation should be paid by taxpayers under the terms and deadlines respectively provided in Articles 89 and following and 104 and following of the CIRC, which, moreover, refer, in an undifferentiated manner, both to corporate income tax on profit, and to autonomous taxation under corporate income tax.

H. The new wording of Article 23-A/1 subparagraph a), introduced by Law No. 2/2014, of 16 January, has a manifest clarifying scope for the future regarding the following fact: autonomous taxation is a component included in the charges borne by title of corporate income tax.

I. Indeed, this clarifying scope follows the line (1) of the only possible interpretation of the previous Article 45, paragraph 1, subparagraph a) of the CIRC which, even before the introduction of that new wording, existed, as well as follows the line (2) of thinking (and of will) of the legislator that until then had been developing, namely that the charges of autonomous taxation are not deductible for purposes of determination of taxable profit of companies.

J. What the legislator intended was merely to eliminate doubts that can come to occur in the future, so it is devoid of meaning to assert that it is an innovative law, since that, contrary to what the Claimant contends, such normative introduction follows the line of reasoning of the previous Article 45, paragraph 1, subparagraph a) of the CIRC.

K. The interpretation of the provision contained in Article 23-A, paragraph 1, subparagraph a) of the CIRC, wording introduced by Law No. 2/2014, of 16 January, does not suffer from unconstitutionality, given that Articles 2 and 103, paragraph 3 of the CRP have not been violated.

L. Both from a teleological, systematic and functional perspective, autonomous taxation is an authentic addition to corporate income tax, and this is because, by the nature of things, a tax cannot be deductible from itself.

M. From always, the intention expressed by the legislator was that of non-deductibility of autonomous taxation, also because its objective was to avoid a certain circular effect, that is, the permission for the tax to allow itself to be deducted from itself, thereby avoiding the emptying of the core of Article 88 of the CIRC.

N. Autonomous taxation is functionally interwoven in corporate income tax, and that, parallel to this, there is a provision (88/14 of the CIRC) that makes the rate of autonomous taxation depend on the circumstance of whether or not the taxpayer presents a tax loss.

O. Indeed, permitting the concurrence for the determination of taxable profit of the Claimant would lead to the very liquidation of autonomous taxation reducing, consequently, the liquidation of corporate income tax to be paid, in direct confrontation with its immediate purpose, namely the discouragement of the use of certain assets and services of mixed use.

P. Autonomous taxation assumes a clear anti-abuse nature, since with them it is intended to prevent abusive use of certain expenses and distribution of dividends and in fraud of the provisions that aim to reach the actual income of taxpayers, pursuing, by this route, the objective of reaching the contributory capacity revealed by actual income."

II – PROCEEDINGS

  1. The arbitral tribunal is materially competent and is regularly constituted, in accordance with Articles 2, paragraph 1, subparagraph a), 5, paragraph 2, and 6, paragraph 1 of the RJAT.

The parties have legal personality and capacity, are legitimate and are duly represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011 of 22 March.

The case does not suffer from any defects that would invalidate it.

In these terms, there is no obstacle to the consideration of the merits of the case.

III – FACTUAL MATTERS

  1. Proved facts

13.1. Based on the tax administrative process and on the documentary evidence submitted to the case file, the following facts are considered proved:

A) The Claimant is a commercial company with registered office in national territory, which carries out the activity of other auxiliary activities of financial services, except insurance and pensions (Main CAE …), is registered with the … (…) Finance Department of Lisbon, being considered a "taxpayer of high economic and fiscal relevance", within the meaning of the provision in Article 68, paragraph 8 of the General Tax Law, and is subject to corporate income tax by force of the provision contained in subparagraph c) in paragraph 1 of Article 2 of the CIRC, combined with the provisions of Articles 3 to 5 of the same legal instrument, being the parent company of a fiscal group taxed in accordance with the provisions of the Special Tax Treatment Regime for Groups of Companies (RETGS).

B) The Claimant, on 31 May 2011, proceeded to the submission of the Corporate Income Tax Income Statement Model 22 relating to the fiscal year 2010.

C) In the said self-assessment of corporate income tax for fiscal year 2010, the Claimant also proceeded to the self-assessment of autonomous taxation provided for in Article 88 of the CIRC, in a total, in final terms, of €125,563.75.

D) The total value of autonomous taxation, identified in the preceding subparagraph (€125,563.75), corresponds to:

i) autonomous taxation on vehicle charges, in the amount of €112,053.36;

ii) autonomous taxation on entertainment expenses, in the amount of €3,640.20;

iii) autonomous taxation on subsistence allowances (€9,450.98) and use of own vehicle (€326.57), in the total amount of €9,777.55

iv) autonomous taxation on undocumented expenses, in the amount of €92.64.

E) The charge borne with the said autonomous taxation was not considered fiscally deductible under corporate income tax and, therefore, it is a question of corporate income tax (in the value of € 31,390.94) and the consequent surcharges (municipal surcharge in the value of €1,536.92 and state surcharge in the value of €1,902.95) in a total of €34,830.81.

F) The autonomous taxation of fiscal year 2010, like the corporate income tax also self-assessed, is fully paid.

G) On 30 May 2013, the now Claimant submitted to the Director of Finance of Lisbon a complaint through grace against the said self-assessment of corporate income tax, municipal surcharge and state surcharge relating to fiscal year 2010.

H) The Claimant was notified by TA, through letter No. …, of 19 November 2013, of the draft decision of the complaint through grace and its respective reasoning, contained in Information No. …/2013. The now Claimant did not exercise his right to a hearing.

I) On 4 December 2013, the now Claimant was notified, by means of letter No. …, of 2 December 2013, of the decision handed down on 26 November 2013, by His Excellency the Head of Division for Tax Management and Assistance of the Unit of Large Taxpayers which dismissed the complaint through grace.

13.2. The facts stated in the preceding paragraph constitute uncontested matter and documented in the case file.

  1. Unproved facts

There are no facts relevant to the decision that have not been proved.

IV – MATTERS OF LAW

  1. In light of the foregoing in the preceding numbers, the issues to be considered in the present case are:

i) The merits of the petition, that is, to know whether the sums paid under autonomous taxation by a corporate income tax subject should be considered a deductible charge for purposes of determining taxable profit on which such tax is levied;

ii) The recognition of the right to indemnificatory interest claimed by the Claimant.

  1. The factual matter is established (vd., supra No. 13) and we will now determine the applicable Law to the underlying facts in accordance with the issues already stated (vd., supra No. 15).

  2. In the present case, the parties indicated twelve arbitral decisions that ruled on this matter of merits. These are arbitral decisions Nos. 187/2013-T, 209/2013-T, 210-2013-T, 246/2013-T, 255/2013-T, 260/2013-T, 282/2013-T, 298/2013-T, 6/2014-T, 59/2014-T, 37/2014-T and 163/2014-T. All the arbitral decisions cited above, despite natural differences in systematization and argumentation presented, ruled against the petitions and refused the tax deductibility of charges borne with autonomous taxation for purposes of determining taxable profit of legal entities.

  3. The arbitrator of the present case was part of the collective tribunal that delivered the arbitral decision in case No. 187/2013-T referred to in the preceding number.

  4. In case No. 36/2014-T the arbitrator of the present case delivered a decision in a single arbitral tribunal on a question identical to that presented in the present case and also ruled against the petition and refused the tax deductibility of charges borne with autonomous taxation for purposes of determining taxable profit of legal entities.

  5. The subjection of the same matter of merits in a new case can always lead to the modification of the position previously adopted, because from the new contradictory argument new deepening of the analysis and a reweighing of the matter of law can result.

  6. From the present case file, despite the respect that the argumentative effort evidenced by the Claimant merits, there do not result elements that justify the alteration of the position that I subscribed in the arbitral decisions delivered in cases Nos. 187/2013-T and 36/2014-T.

  7. The matter of merits posed in the present case consists of knowing whether the sums paid under autonomous taxation by a corporate income tax subject should be considered a deductible charge for purposes of determining taxable profit on which such tax is levied.

  8. Autonomous taxation encompasses a diverse set of situations that can be grouped into three types: (i) Autonomous taxation of certain income (ii) Autonomous taxation of certain deductible charges (iii) Autonomous taxation of non-deductible expenses.

In the present case the autonomous taxation of certain deductible charges is at issue (vd., subparagraph D) of No. 13.1)

It is important to note that Article 45, paragraph 1, subparagraph a), of the CIRC provided:

"The following charges are not deductible for purposes of determining taxable profit, even when recorded as expenses of the taxation period;

a) Corporate income tax and any other taxes that directly or indirectly levy on profits;"

Faced with the general principle of deductibility of charges and due to the absence of express reference to autonomous taxation in subparagraph a) of paragraph 1 of Article 45 of the CIRC, there arises doubt as to whether autonomous taxation is or is not included in the exception of non-deductibility provided for in the cited provision.

The amendment to the Corporate Income Tax Code, effected by Law No. 2/2014, of 16 January, repealed Article 45 of the CIRC and now establishes in Article 23-A of the CIRC the following:

"The following charges are not deductible for purposes of determining taxable profit, even when recorded as expenses of the taxation period:

a) Corporate income tax, including autonomous taxation, and any other taxes that directly or indirectly levy on profits".

  1. We continue to defend the interweaving existing between autonomous taxation and corporate income tax, in the following terms contained in the arbitral decision delivered in case No. 187/2013-T:

"It is understood, thus, in sum, that one thing is the type of taxable fact that underlies a certain imposition. Another thing is the title by which such imposition is owed, ultimately the cause of the tax obligation. And in the case of autonomous taxation under corporate income tax, that cause, the title by which the tax is required, will be, still, corporate income tax.

In this sense, consideration must be given, beyond everything else, to the fact that the legal regime of autonomous taxation in question only makes sense in the context of taxation under corporate income tax. That is, detached from the legal regime of this tax, they will, completely, lack meaning. Their existence, their purpose, their explanation, ultimately, their juridicity, is only comprehensible and acceptable within the framework of the legal regime of corporate income tax.

In fact, the autonomous taxation now under analysis, belong, systematically, to corporate income tax, and not to VAT (as was seen), to IS, or to any new tax. For although it can be accepted that the taxable fact impositive will be each of the singular legally typified expenses, the fact is that these are not, qua tale, the final object of the taxation, the reality that it is intended to be taxed with the tax. If this were so, obviously, all expenses realized by all subjects would be taxed, and not just some of them. That is, autonomous taxation of the kind that now concerns us are strongly linked to the subjects of the respective income tax, and, more specifically, to the economic activity carried out by them.

This aspect becomes even more evident, if one considers another fundamental given: the circumstance that autonomous taxation that now concerns us only incides on deductible expenses!

This circumstance, it is believed, is elucidative of the interweaving existing between those and corporate income tax (in the case), and justificative not only of their inclusion in the CIRC, but, equally, of their integration, of full right, as part of the legal regime of corporate income tax.

In fact, not only only the expenses realized by corporate income tax subjects that are subject to autonomous taxation imposition in such context, as such expenses will only be so if those subjects elect them as deductible expenses in the determination of the taxable matter of such tax.

The framework thus drawn is, it is believed, substantially distinct from what would be a tax that levied on certain expenses, objectively considered, appearing that the quality and the option of the taxpayer have here a relevance, if not greater, at least equal to the expense that triggers the tax imposition.

Besides, it can always be said that if the corporate income tax subject opts not to deduct to taxable profit for purposes of that tax the charges corresponding to the expenses subject to autonomous taxation, he will not have to bear this, which will be demonstrative of what was pointed out above, that is, that the cause of autonomous taxation lies, still and ultimately, in the regime of corporate income tax."[1].

  1. It is further added the fact that Article 45 of the CIRC is situated in a context of broad legislative discretion in accordance with what is set forth in the arbitral decision delivered in cases Nos. 187/2013-T:

"... in the definition of what are deductible or non-deductible charges for tax purposes, the tax legislator enjoys broad freedom of determination. Hence, it cannot be said that it is forbidden to the legislator, by the "nature" of autonomous taxation, to exclude it from deductible charges for tax purposes.

It is understood, in this manner, that it will be legitimate to the legislator to include or exclude autonomous taxation that concerns us from that category of deductible charges for tax purposes, independently of the "nature" that doctrine or jurisprudence may detect. The question, properly situated, will be then to determine what is the intention of the legislator, expressed in the legislative text, comprehended in its entirety. And under this prism, the combination of the content of Article 12 of the CIRC with Article 45/1/a) of the same, will leave little doubt, regarding the legislative understanding that autonomous taxation, if not constituting corporate income tax stricto sensu, will certainly integrate the regime of that tax, and will be owed by that title.

It is further added that no principle obstacle exists to the legislator isolating certain types of income and levying them at specific, or differentiated rates, as occurs, for example, in the cases provided for in paragraph 4 of the current CIRC.

Equally, no principle obstacle exists for the tax in question to be owed, liquidated and paid, not in function of a period (more or less long) of taxation, but by force of the occurrence of instantaneous facts, as already occurs, for example, in the cases of withholding at the source with a definitive character (cfr. Article 94/3 of the CIRC).

Besides, nor does the result, apparently so counterintuitive and impressive, that payment of tax can be owed by way of autonomous taxation that now concerns us, even in the case of inexistence of a (positive) income at the end of the taxation period, is avis rara in the regime of corporate income tax."[2].

  1. Furthermore, autonomous taxation constitutes a form of preventing certain abusive conduct, which according to the arbitral decision delivered in case No. 187/2013-T is the following:

"This anti-abuse character of autonomous taxation, will be not only coherent with its "anti-systemic" nature (as happens with all provisions of this kind), as with a presumptive nature, pointed out by both Prof. Saldanha Sanches and by jurisprudence that cites him.

In this prism, autonomous taxation now under analysis, will then materially underlie a presumption of "partial" businessality of the expenses on which they incide, in function of the above-noted circumstance that such expenses are situated in a gray line that separates what is business expense, productive, from what is private expense, of consumption, and that, notoriously, in many cases, the expense will even in reality have a dual nature (part business, part private).

Confronted with this difficulty, the legislator, instead of simply eliminating its deductibility, or reversing the burden of proof of the businessality of the expenses in question (imposing, for example, demonstration that "they do not have an abnormal character or an exaggerated amount.", as it does in Article 65/1 of the CIRC), opted to establish the regime currently in force, 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 the case) of corporate income tax.

This presumption of "partial businessality", should, in coherence, be considered as encompassed by the possibility of elision arising from art. 73 of the LGT, whether by the taxpayer, or by the Tax Administration.

What appears, moreover, to accord with a proportional and adequate distribution of the burden of proof, in the measure that inciding autonomous taxation in question on expenses of businessality not evident a priori, it will be the taxpayer who will be better positioned to demonstrate that such requirement is verified in concreto.

For its part, the Tax Administration itself, if it so understands and considers that the case justifies the inherent expenditure of means, will always be able to demonstrate that, regarding the expenses in question, and even though autonomous taxation has incided on them, the general requirement of Article 23/1 of the CIRC is not verified, namely their indispensability for the realization of income subject to tax or for the maintenance of the source of production.

Thus, and in sum, the autonomous taxation whose charges the Claimants seek to have subtracted from their taxable profit, can be regarded as a species of consensual anti-abuse provision, in which the legislator proposes to the taxpayer one of three alternatives, namely:

a) not to deduct the expense;

b) to deduct but pay autonomous taxation, dispensing, whether itself or the Tax Administration from discussing the question of the businessality of the expense;

c) to prove the full businessality of the expense, and deduct it fully, not bearing autonomous taxation.

Besides, the recognition of this presumptive nature, will, beyond everything else, be a safeguard of its constitutionality, in the measure that it is guaranteed the possibility of its full deduction by the taxpayer, or its non-deduction, depending on whether the presumption underlying them is, in each case, rebutted."[3]

  1. It further adds the fact that Article 23-A of the CIRC, introduced by Law No. 2/2014, of 16 January, expressly establishes the non-deductibility of autonomous taxation under corporate income tax, but that does not mean that from the previous legal regime (Article 45 of the CIRC) the same conclusion did not result and, therefore, applicable to legal situations constituted under the old law.

In sum, the legislator understood, and now, expressly, continues to understand that autonomous taxation integrates corporate income tax, if not as an exclusively strict tax, at least in terms of being part of the same unitary tax regime.

  1. In these terms, the arbitral tribunal understands that the autonomous taxation contained in the case file was covered by the provision of subparagraph a) of paragraph 1 of Article 45 of the CIRC in the wording in force until 31 December 2013 and that, in consequence, the amounts paid with reference to such autonomous taxation do not constitute deductible charges for purposes of determining taxable profit, the petition for declaration of partial illegality of the self-assessment act of corporate income tax regarding fiscal year 2010 should fail.

  2. The Claimant also makes a petition for indemnificatory interest. In accordance with the provision in Article 43, paragraph 1, of the LGT, indemnificatory interest is owed when it is determined, in a complaint through grace or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount higher than that legally owed. Paragraph 2 of the same article also considers there to be error attributable to the services in cases where, despite the liquidation being effected on the basis of the taxpayer's statement, the latter followed, in its completion, the generic guidance of the tax administration.

Article 24, paragraph 5, of the RJAT provides that "the payment of interest, regardless of its nature, is owed, under the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process"

In the present case the partial illegality of the self-assessment act does not occur, whereby the petition of the Claimant for indemnificatory interest does not proceed.

V – DECISION

In accordance with the foregoing, it is decided:

a) To rule against the petition for arbitral ruling;

b) To rule against the petition for payment of indemnificatory interest filed by the Claimant.

The value of the case is set at € 34,830.81 (thirty-four thousand eight hundred and thirty euros and eighty-one cents), in accordance with the provision in Article 97-A, paragraph 1, subparagraph a), of the CPPT, applicable by force of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and of paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The arbitration fee is set at €1,836.00 (one thousand eight hundred and thirty-six euros), in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings (RCPAT), to be paid in full by the Claimant, in accordance with Article 22, paragraph 4, of the RJAT

Notify the parties.

Lisbon, Centre for Administrative Arbitration, 29 October 2014

The Arbitrator

Olívio Mota Amador

Text prepared on computer, in accordance with paragraph 5 of Article 131 of the CPC, applicable by reference of subparagraph e) of paragraph 1 of Decree-Law No. 10/2011, of 20/01.

The text of this decision is governed by the old spelling.

[1] Vd., Arbitral Decision 187/2013-T, pp. 22, published on the internet on the CAAD website at https://caad.org.pt

[2] Vd., Arbitral Decision 187/2013-T, pp. 24, published on the internet on the CAAD website at https://caad.org.pt

[3] Vd., Arbitral Decision 187/2013-T, pp. 28, published on the internet on the CAAD website at https://caad.org.pt

Frequently Asked Questions

Automatically Created

What is autonomous taxation (tributação autónoma) on vehicle expenses and representation costs under Portuguese IRC?
Autonomous taxation (tributação autónoma) on vehicle expenses and representation costs under Portuguese IRC is a separate tax levied on specific corporate expenditures regardless of whether the company has taxable profits. Introduced by Article 12 CIRC (now regulated under Article 88 CIRC), these autonomous taxes apply fixed rates to vehicle-related charges, entertainment and representation expenses, travel allowances (ajudas de custo), and undocumented expenses. The taxation serves both revenue-raising and anti-abuse purposes, targeting expenses with potential personal consumption elements. Rates vary based on vehicle type, expense category, and documentation quality. Critically, autonomous taxation is calculated independently of the company's profit or loss position, making it payable even when the corporation has no taxable income. The legal controversy centers on whether these autonomous taxes constitute 'IRC' proper for purposes of tax credit provisions and reimbursement entitlements under Article 45 (now 23-A) CIRC.
Can a taxpayer challenge IRC self-assessments involving autonomous taxation at the CAAD tax arbitration tribunal?
Yes, taxpayers can challenge IRC self-assessments involving autonomous taxation at the CAAD (Centro de Arbitragem Administrativa) tax arbitration tribunal. Under the RJAT (Legal Framework for Arbitration in Tax Matters, Decree-Law 10/2011), companies may request arbitration for disputes concerning IRC, including autonomous taxation components. The procedure requires submitting an arbitration request identifying the contested tax amount, legal grounds, and desired remedy. Case 211/2014-T demonstrates this process: the claimant filed on March 1, 2014, the President of CAAD accepted the request and notified the Tax Authority by March 5, and the tribunal was constituted by May 7, 2014. Taxpayers can choose to designate an arbitrator or allow CAAD's Deontological Board to appoint one. The Tax Authority submits its reply (typically within 60 days) and the administrative tax file. Both parties then present written submissions before the tribunal issues its decision. This alternative dispute resolution mechanism offers faster resolution than traditional administrative courts.
How does Portuguese tax law treat undocumented expenses (despesas não documentadas) for corporate income tax purposes?
Portuguese tax law treats undocumented expenses (despesas não documentadas) for IRC purposes with particular severity under autonomous taxation rules. Article 88(3) CIRC (formerly Article 12) imposes autonomous taxation at significantly higher rates—historically 50% or more—on expenses lacking proper documentary support (invoices, receipts, or equivalent proof). This punitive rate reflects the presumption that undocumented expenses may not be genuine business costs or may involve tax evasion. Beyond autonomous taxation, undocumented expenses face restrictions under Article 23 CIRC regarding deductibility for calculating taxable profit: costs must be documented, relate to the company's activity, and not be expressly excluded by law. The dual penalty—high autonomous taxation rates plus potential non-deductibility—creates strong incentives for maintaining comprehensive expense documentation. In arbitration Case 211/2014-T, the claimant challenged autonomous taxation on undocumented expenses as part of €34,830.81 contested, arguing about the legal classification of such taxation rather than the substantive requirement for documentation itself.
What legal grounds exist to contest autonomous taxation on travel allowances (ajudas de custo) in IRC?
Legal grounds to contest autonomous taxation on travel allowances (ajudas de custo) in IRC include: (1) Classification arguments—challenging whether autonomous taxation qualifies as 'IRC' under Articles 1 and 3 CIRC, which define IRC as a tax on profits/income without mentioning autonomous taxation; (2) Constitutional grounds—Article 103(3) Portuguese Constitution prohibits retroactive tax laws, applicable when legislation purportedly 'clarifies' that autonomous taxation was always IRC; (3) Legitimate expectations principle—Article 2 Constitution's rule of law principle protects taxpayers from retroactive reinterpretation of settled tax treatment; (4) Factual compliance—demonstrating that travel allowances met legal requirements (business purpose, proper limits, adequate documentation) but were still subject to autonomous taxation; (5) Rate application errors—challenging incorrect autonomous taxation rates or calculation bases; (6) Legislative interpretation—arguing that Article 12 CIRC (establishing autonomous taxation) operates within limited scope without redefining IRC's fundamental nature. Case 211/2014-T exemplifies these arguments, particularly emphasizing that the 2014 Article 23-A amendment had innovative rather than interpretative character, thus requiring prospective-only application.
What is the procedure for requesting tax arbitration at CAAD to annul an IRC self-assessment and claim indemnity interest?
The procedure for requesting tax arbitration at CAAD to annul an IRC self-assessment and claim indemnity interest involves: (1) Filing a written arbitration request with CAAD under Articles 2 and 10 RJAT, identifying the taxpayer (NIPC, registered office), contested tax act (self-assessment year and amount), legal grounds for illegality, and desired relief including indemnity interest calculated from the payment date; (2) CAAD's President reviews and accepts the request, notifying the Tax Authority typically within days; (3) The taxpayer may designate an arbitrator or allow CAAD's Deontological Board to appoint one under Article 11 RJAT; (4) Parties have the right to challenge arbitrator designation within the applicable period (Articles 6-7 Deontological Code); (5) The tribunal is formally constituted once arbitrator acceptance is confirmed; (6) The Tax Authority submits its reply (typically 60 days) and the administrative tax file; (7) Both parties present written submissions addressing factual and legal issues; (8) The tribunal issues a binding decision. In Case 211/2014-T, this process spanned March 1 (request) to May 7, 2014 (constitution). Indemnity interest is calculated at the legal rate from the tax payment date until full reimbursement if the taxpayer prevails.