Process: 219/2016-T

Date: July 10, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 219/2016-T addresses the application of Portugal's General Anti-Abuse Clause (GAAC) under Article 38(2) of the General Tax Law (LGT) to IRC (Corporate Income Tax) assessments. The case involves a Portuguese cork manufacturer (A...) that created an Irish subsidiary (C...) to intermediate sales to US customers. The Portuguese Tax Authority (AT) determined that C... lacked economic substance and was established solely to divert taxable profits from Portugal to Ireland's lower tax regime. The AT identified several red flags: C... operated from a virtual office in Dublin provided by Regus, had only one employee who remained tax resident in Portugal until notified by AT, and conducted no genuine commercial activities. Invoicing analysis revealed that A... sold cork stoppers to C... at artificially low prices, which C... then invoiced to final customers (D..., L..., M...) at market rates, creating profit margins of €1.77 million (2011) and €1.54 million (2012) taxed in Ireland rather than Portugal. The AT applied the GAAC, arguing the arrangement constituted an artificial practice designed exclusively for tax avoidance without valid commercial justification. The taxpayer challenged the additional IRC assessments through CAAD arbitration, raising questions about the proper application of anti-abuse rules, the burden of proof for demonstrating economic substance, and procedural rights in tax arbitration. This case illustrates CAAD's jurisdiction over complex IRC disputes involving international tax planning structures, the evidentiary standards for invoking the GAAC, and taxpayers' rights to contest assessments and claim compensation for bank guarantee costs incurred during administrative and arbitral proceedings.

Full Decision

133. In turn, D... also debits monthly to the Claimant marketing expenses, telephone, accommodation and internet page design, travel to the USA, advertising and brand usage and L... debits to it administrative expenses, entertainment, travel, telephone and vehicle charges;

134. C... has been taxed in Ireland for the exercise of the activity of Wholesale Trade in Wood, Building Materials and Sanitary Equipment since 2008/11/06, but the facilities existing at the address of C... located in..., no..., in Dublin, correspond to a virtual office, a service commercialized by the company Regus and which consists of the reception of correspondence and telephone calls associated with an address of choice and which is provided to clients located in any part of the world and which intend to formally seat their company there without actually exercising any activity there, according to the Respondent.

135. C... was incorporated in Ireland on 2007-09-27 by the law firm/solicitors BB... (which has its headquarters at ...), having been appointed as administrators CC... and DD... (both solicitors) and the address for exercise of activity and administration indicated was the registered office of the aforementioned law firm/solicitors.

136. According to the financial statements obtained through the Irish tax authorities, the only supplier of C... in 2011 and 2012 was A... and its only customers were D..., L... and M..., to whom the entirety of its Sales Volume was intended.

137. The Irish company has only one female employee, X..., who exercises the function of administrator since 2008/11/06 jointly with EE..., also an administrator of A..., and, since 2009/03/26, also with I... (chairman of the Board of Administration of E... with tax domicile at ..., Portugal).

138. X... was listed until 2012/11/07 in the AT's registry as resident in Portugal, possessing tax domicile in Algés, being the owner of the property and having contracted a housing loan for acquisition of that property in 1999, which was declared as permanent own dwelling;

139. In the financial statements of C... income paid to X... is recorded in the year 2010 and following.

140. Simultaneously, it was verified that this person earned income in Portugal, in the same year, from category A paid by the Group company S..., the only entity that has been paying her income since 2001.

141. Notified, she alleged to be resident in the Republic of Ireland since 2009, and to work in C... as a resident director, but, nevertheless, changed, only at the time and in the sequence of that notification, her tax domicile to Ireland.

142. D... is a company registered in the State of California, created on 13/3/1981, held 100% by H..., whose president is I... and which has its headquarters at..., ..., ..., California.

143. D... confirmed having received the shipments of goods from A..., invoiced to C..., having sent supporting documentation and which permitted the AT to verify that there is a direct and unequivocal relationship between the invoicing A... – C... -D..., it being found that there are always two invoices issued for each actual transaction of goods that occurred, being that the dates of the invoices, the goods, references and quantities are exactly the same, varying, only, the price.

144. The payments made to the Claimant by C... are ordered from the USA and come from a bank account opened in the name of that company at the same American bank with which D... works, having the latter also, provided proof of the same, to which, according to it, has access because they were executed by it.

145. It was thus proven that, according to the Respondent, C... does not possess economic substance, nor commercial justification, having been used solely for fiscal purposes, without any effective intervention in the transactions that occur between the Claimant and the companies of the Group that it supplies, D..., L... and M....

146. From the demonstrated factuality, it further results that the Claimant created the company C..., seated in Ireland, with the aim of carrying out sales to it at a lower price than that which reaches the actual recipient and which did not have genuine substance, genuine and material, since the result would be obtained without these operations and since the sales could be made directly to final customers, D..., L... and M..., without it being necessary to resort to these operations, which would make it so that the gain obtained in the sale would be taxed in Portugal at a higher rate of tax on income.

147. The creation of a circuit, merely documentary, of goods to Ireland, unaccompanied by their transport, constitutes, thus, according to the Respondent, an abusive instrument with the sole purpose of making great part of the profit generated by the activity circulate to Ireland, which without this artifice would be taxed at a higher rate (than the Portuguese Corporate Income Tax rate), and should, therefore, be considered as an abusive act, in accordance with what is established in art. 38, no. 2 of the LGT.

148. The AT, for purposes of substantiating the decision to apply the GAAC, further argues that it succeeded in proving all the elements on which the application of the GAAC depends:

149. As to the means element:

i. From the documents and facts analyzed, the economic irrationality of the creation of the company C... was demonstrated, with the only rational existing in that creation being fiscal, which leads to the conclusion that this entire set of operations had as its primary, if not sole, objective the obtaining of fiscal benefits, in clear abuse of right. Such legal act, the creation of the company in Ireland, thus took on an artificial nature;

ii. Indeed, the proof of fiscal motivation in contractual clauses is made with recourse to facts or elements of proof that allow the interpreter to extract, with reasonable certainty and according to criteria of reasonableness and normality;

iii. Without the establishment of the company seated in Ireland, the result that would be obtained, since the sales could be made directly to the final customers, D..., L... and M... would result in the entirety of the gain obtained in the sale being taxed in Portugal at a higher rate of tax on income;

iv. Therefore, the only rational existing in the establishment of the aforementioned Irish company is fiscal, which leads to the conclusion that this entire set of operations had as its primary, if not sole, objective the obtaining of fiscal benefits in clear abuse of right and the aforementioned creation was, thus, an artificial practice;

v. The Claimant failed to demonstrate genuine economic substance underlying the legal transactions sub judice;

vi. The lack of economic substance does not withstand a simple test, as the "commercial operations" carried out between the Claimant and the company of Irish law, that is, sales of cork stoppers; and through the elements (accounting and fiscal) obtained, relating to each of these two companies, for the years 2011 and 2012, it was found that, of the sales volume recorded in the financial statements in each of the cited two years by the Portuguese company (€15,964,859.00 and €14,985,030.00, respectively), €13,202,012.02 (year 2011) and €11,603,227.30 (year 2012) concern the invoicing of "A..." to "C...", but, regarding exclusively the stoppers which, subsequently, the latter company would "transmit", by analysis of the invoicing "issued" by "C..." to "D..." (D...), not for the same value, but for the amounts of €14,974,821.03 and €13,139,991.06, respectively, for the years 2011 and 2012.

vii. It being that this difference in values in the set of invoices issued in each of the phases referred to ("A..."/"C..." and "C..."/"D..."), that is, €1,772,807.01 (year 2011) and €1,536,763.76 (year 2012), translated in the supposed gain obtained by the Irish company in the "sales" made to D..., that must be taxed in Portugal, by disregard, not only of the "sales" made to "C..." by "A...", but, also, and, consequently, of the sales subsequently made by "C..." to "D...";

viii. As justification, it emphasizes the artificial character (without economic substance) first of the set of "sales" referred to, that is, those made, as referred to above, by "A..." to "C..." and, by inheritance/consequence, the equally artificial character of the "sales" subsequently made to "D..." by "C...", based on the "acquisitions of stoppers" made to "A...", in 2011 and 2012;

ix. Seeking a fiscal saving, through an operation in which no economically valid reasons are glimpsed for that same operation in itself considered, shall always, according to the Respondent, constitute a behavior prohibited by law.

150. As to the intellectual element:

x. The structuring of the business set up by the Claimant, in addition to being directed specifically to the obtaining of fiscal advantage, was furthermore and simultaneously, endowed with an anomalous and artificial form, in consideration of the economic ends sought by it, notwithstanding the acts and legal transactions that compose this structure are, in themselves, valid and lawful, and correspond to the effective will of the taxpayer, consisting of a set of sales operations to a company seated in a country with income tax rates significantly lower (Ireland at the rate of 12.5%), with the aim of placing there much of the profit generated by the activity, which without this artifice would be taxed at a higher rate (in Portugal at the rate of 25%);

xi. In truth, C... issues sales invoices in the same quantities and with higher values, to D..., L... and M...;

xii. In the present situation, given all the circumstances described above, it is easily concluded that the motivation of the taxpayers is only comprehensible in light of the fiscal advantage obtained, in which a large share of the profit is imputed to C..., seated in a country with income tax rates significantly lower;

xiii. For which reason it concludes that, if the sales were made directly to D..., L... and M... the income would be taxed in Portugal;

xiv. All the facts enumerated to satiety by the AT, demonstrate, on the contrary, that the objective sought was solely the obtaining of fiscal advantage (translated into an economic benefit equivalent to the difference in rates of 25% to 12.5%, in the amounts of 221,600.87€ in 2011, and 192,095.46€ in 2012), there having not been demonstrated by the Claimant that the operations in question were demonstrably carried out for economically justifiable reasons;

xv. The Respondent makes a quotation of Gustavo Lopes Courinha to conclude that the proof required by the AT cannot be unequivocal proof, as that would be equivalent to "diabolical proof". Now, unequivocal proof would always have to be an express confession by the Claimant, that is, something not within the sphere of the AT, hence the proof to be gathered by the AT is summed up to "circumstantial evidence", which has indeed been gathered in the case at hand;

xvi. In fact, the elements gathered in the inspection proceedings demonstrate, beyond any reasonable doubt, that in the present case there is a preponderance of fiscal motivation over non-fiscal motivation, given the weakness of the arguments invoked by the Claimant, which fail to dispel the evidence that the Claimants had no other advantage but fiscal advantage;

xvii. In light of all that has been set out, the Respondent AT concluded that there was no presentation of plausible justification for the fact that the Portuguese company, which effectively exercises all the activity, sustains itself with operating margins of 3.61% and 3.99%, in 2011 and 2012, while the Irish company, without generating any added value and not possessing any corporate structure, reaps operating margins of 13.4% and 13.2%, in 2011 and 2012;

xviii. The AT does not consider abusive the establishment of C..., but rather the set of business transactions repeatedly practiced between the Claimant, C..., D..., L... and M..., which aim at the relocation of profits to Ireland;

xix. Thus, the arguments invoked, allied with the fiscal advantage, do not permit any other conclusion, in light of worldly logic and experience, but the effective fulfillment of the burden of proof that fell to the respondent and, consequently, the verification in the case at hand of the intellectual element;

xx. Therefore, given the logical and chronological sequence in which the legal transactions in question were concluded, the same permits that this set of business transactions be considered as a scheme conceived and executed as a means or tool for the obtaining of tax avoidance with manifest abuse of the legal forms utilized.

151. As to the normative element:

xxi. To this element lies at its base the nonconformity of the result obtained with the ratio legis, the spirit or purpose of the law and of the legislator, the principles of the Corporate Income Tax Code and the Portuguese Tax System, since in the genesis of anti-abuse measures lies the obtaining of tax equality and justice in the distribution of tax burdens, being this a reflexive exercise, of demonstrating that, notwithstanding the letter of the law permitting the act or transaction carried out to provide the desired fiscal effects, the intention of the law and/or of the Law rejects its obtaining, and as such, the result obtained;

xxii. Gustavo Lopes Courinha emphasizes that "The fiscal disregard of such acts or transactions will only succeed when, combining all the aforementioned elements, it is demonstrated that the fiscal effect obtained (always in attention to the non-fiscal effects identically obtained) merits a judgment of disapproval by the Law".

xxiii. Also as to this element, the same is verified in the case sub judice, insofar as both the Constitution as well as the Fiscal Law presuppose taxation according to capacity to contribute, even when that taxation affects tax facts at the outset excluded, such as the result of the alienation of corporate stakes;

xxiv. The principle of capacity to contribute stands out from the fiscal system, a corollary of the principle of equality, provided broadly in article 104 of the Constitution of the Portuguese Republic, which implies equal payment of tax before equal capacity to contribute, as well as greater payment of tax in function of greater capacity to contribute;

xxv. The reason for being of anti-abuse norms is founded on the necessity of establishing adequate reaction means to guarantee the fulfillment of the principle of equality in the distribution of the tax burden and in the pursuit of satisfaction of the financial needs of the State and other public entities (in accordance with art. 103, no. 1 of the Constitution);

xxvi. With effect, if the sales were made directly to D..., L... and M... the income would be taxed in Portugal;

xxvii. The subsuming of the concrete case to the norm was carried out on the basis of a critical analysis and combined, according to judgments of common experience and social normality of the facts and elements gathered that, with reasonable certainty, reveal the abusive nature of the taxpayer's tax planning.

152. As to the result element:

xxviii. As referred to in no. 2 of article 38 of the LGT, the acts or legal transactions "anomalous" should be "...essential or primarily directed...to the reduction, elimination or deferral in time of taxes that would be due as a result of facts, acts or legal transactions of identical economic purpose, or to the obtaining of fiscal advantages that would not be achieved, totally or partially, without use of these means...". resulting from the definition proposed by Gustavo Lopes Courinha, "...by fiscal advantage there should be understood any situation by which, by virtue of the practice of a certain act, a tax burden more favorable to the taxpayer is obtained than that which would result from the practice of normal acts and of equivalent economic effect, subject to taxation.";

xxix. At the heart of the GAAC is effectively an operation of comparison of the act or acts to be disregarded with those that represent the normal or coherent way to achieve the economic-legal result achieved, including the legal transactions that best fulfill or that have become most usual in the pursuit of that result;

xxx. The result element consists of the fiscal advantage achieved through the relocation of gains from Portugal to Ireland, and creating a lesser taxation, translated into an economic benefit equivalent to the difference in rates of 25% to 12.5% in the amounts of 221,600.87€ in 2011 and 192,095.46€ in 2012;

xxxi. As to this requirement, it is important to demonstrate that through its acts (anomalous or unusual), already described above, the Claimant succeeded in obtaining the elimination of taxes that would be due and, as well, demonstrate the equivalence of the economic effects with the effects of the normal taxed act;

xxxii. Thus, what the Claimant intended with the conclusion of the legal transaction in question was the elimination of taxes;

xxxiii. The motivation of the Claimant consisted in the creation, with artificial character of a company in Ireland, on 27 September 2007, without any activity, which permitted the creation of a circuit of documentary sales, demonstrates that the interposition of the "Irish company" solely aims the taking advantage of the more favorable fiscal regime of that country as regards taxation of profits, supported exclusively in "issuance of invoices" having as customer of the products mentioned therein the company C..., seated there.

153. As to the sanctioning element:

xxxiv. This consists of considering ineffective within the tax scope the income transferred to Ireland through simulation of sales to the company C..., rather taxing the legal transaction considered usual to obtain the economic effect in question, as provided for in no. 2 of article 38 of the LGT.

xxxv. Thus, one must proceed to the taxation of income obtained by C..., as if it were obtained in Portugal by company A..., in accordance with art. 17, no. 1 and art. 20, both of the Corporate Income Tax Code;

154. The Claimant failed, neither in the administrative phase (prior hearing), nor in the arbitral phase, to bring to the discussion any fact or argument that averts the correct interpretation carried out by the AT.

155. If the carrying out of sales of merchandise produced by the Claimant is "the core of its activity", it is not understood, or even explained the reason why such sales would be carried out by an Irish company, which according to information obtained from Irish entities generates no value to the product, nor possesses any productive structure.

156. It thus appears that the prerequisites are met for the use of the GAAC provided for in no. 2 of art. 38 of the LGT.

157. The "commercial operations" carried out between the Claimant and the company of Irish law C..., and through the elements (accounting and fiscal) obtained, relating to each of these two companies, for the years 2011 and 2012, it was found that, of the sales volume recorded in the financial statements in each of the cited two years by the Portuguese company (€15,964,859.00 and €14,985,030.00, respectively), €13,202,012.02 (year 2011) and €11,603,227.30 (year 2012) concern the invoicing of "A..." to C..., but, regarding exclusively the stoppers which, subsequently, the latter company would "transmit", by analysis of the invoicing "issued" by C... to D... (D...), not for the same value, but for the amounts of €14,974,821.03 and €13,139,991.06, respectively, for the years 2011 and 2012;

158. It being that this difference in values in the set of invoices issued in each of the phases referred to (Claimant/C... and C.../D...), that is, €1,772,807.01 (year 2011) and €1,536,763.76 (year 2012), translated in the supposed gain obtained by the Irish company (C...) in the "sales" made to D..., that must be taxed in Portugal, by disregard, not only of the "sales" made to C... by the Claimant, but also and, consequently of the sales subsequently made by C... to D...;

II. PURIFICATION OF THE PROCEEDINGS

159. The parties possess legal personality and capacity, are legitimate and are duly represented (arts. 4 and 10, no. 2 of the RJAT and 1 of Ordinance no. 112-A/2011, of 22 March).

160. The Arbitral Tribunal is regularly constituted and is materially competent to know of the claim (art. 2, no. 1, paragraph a) of the RJAT).

161. The process does not suffer from any nullity.

162. Two preliminary issues were raised, one by each of the parties, of which it is necessary to know before the decision:

A. Preliminary Issue Raised by the Respondent:

163. The AT in its response raised the untimeliness of the arbitral claim and the lapse of the right of action, both in relation to the Corporate Income Tax 2011 and that of 2012, alleging that:

i. As of the date of filing of the claim at the CAAD, 11/04/2016, the 90-day period provided for in paragraph a) of no. 1 of art. 10 of the RJAT had already elapsed, with the consequent lapse of the right of action;

ii. According to the Respondent, it is important to distinguish the Corporate Income Tax assessment here contested, whose supporting statement with no. 2015..., of 12/11/2015, was notified to the Claimant on 19/11/2015, through electronic notification via CTT (as that is the date of access of the Claimant to its electronic mailbox), from the settlement statement adjustment, whose supporting statement, with no. 2015..., sets out the final balance resulting from the annulment of the previous assessment through the due compensation movements, notified to the Claimant also on 19/11/2015, through electronic notification via CTT;

164. The object of the arbitral claim is, as could not otherwise be, the tax act of additional assessment that is reflected in the demonstrative statement of the tax assessment, containing the discrimination of the various items underlying the calculation of the tax and the compensatory interest owed [document continues but is cut off in source material]

Frequently Asked Questions

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What is the General Anti-Abuse Clause (Cláusula Geral Anti-Abuso) under Article 38(2) of the Portuguese General Tax Law?
The General Anti-Abuse Clause (Cláusula Geral Anti-Abuso - GAAC) under Article 38(2) of the Portuguese General Tax Law (Lei Geral Tributária) allows tax authorities to disregard legal acts or transactions that are primarily designed to obtain tax benefits in an abusive manner. To apply the GAAC, the Tax Authority must prove: (1) the existence of legal acts or transactions that lack economic substance or commercial justification; (2) that the primary or exclusive purpose was obtaining tax advantages; and (3) that the arrangement is artificial or contrary to the spirit and purpose of tax law. The burden of proof rests with the Tax Authority to demonstrate all these elements with reasonable certainty based on objective facts and circumstances.
Can additional IRC (Corporate Income Tax) assessments be challenged through tax arbitration at CAAD?
Yes, additional IRC (Corporate Income Tax) assessments can be challenged through tax arbitration at CAAD (Centro de Arbitragem Administrativa). Portuguese law grants taxpayers the right to choose between judicial courts and CAAD arbitration for contesting tax assessments, including those based on the General Anti-Abuse Clause. CAAD has full jurisdiction to review the legality and merits of IRC assessments, examine the factual and legal grounds invoked by the Tax Authority, evaluate whether procedural requirements were met, and determine if compensatory interest was correctly calculated. Arbitration at CAAD offers advantages including faster resolution (typically 6-12 months versus several years in courts), specialized arbitrators with tax law expertise, and reduced formalism compared to judicial proceedings.
What are the legal grounds for annulling additional IRC tax assessments and compensatory interest in Portugal?
Legal grounds for annulling additional IRC tax assessments and compensatory interest in Portugal include: (1) substantive errors such as incorrect application of the General Anti-Abuse Clause, insufficient proof of tax avoidance purpose, failure to demonstrate lack of economic substance, or misapplication of IRC tax rates and rules; (2) procedural violations including inadequate notification, denial of the right to be heard (direito de audição prévia), insufficient reasoning in the assessment decision, or failure to provide access to the administrative file; (3) errors in calculating compensatory interest, such as incorrect interest rates, wrong calculation periods, or applying interest when the initial assessment was unlawful; and (4) violation of constitutional principles including proportionality, legal certainty, protection of legitimate expectations, or equal treatment. The taxpayer bears the burden of proving procedural violations, while the Tax Authority must prove the factual basis for applying substantive tax rules.
How does the CAAD arbitration procedure work for disputes involving the General Anti-Abuse Clause in corporate taxation?
The CAAD arbitration procedure for disputes involving the General Anti-Abuse Clause in corporate taxation follows these stages: (1) Filing: The taxpayer submits an arbitration request within 90 days of the final administrative decision, paying the initial arbitration fee and providing bank guarantees if suspending enforcement; (2) Preliminary phase: CAAD verifies jurisdiction and admissibility, appoints arbitrators (typically one or three depending on the amount in dispute), and the Tax Authority submits its response; (3) Evidence phase: Parties submit documents, witness testimony, and expert reports; the burden of proving artificial arrangements and tax avoidance intent rests with the Tax Authority; (4) Hearing: Oral arguments may be held, though documentary evidence often suffices in complex tax cases; (5) Decision: The arbitral tribunal issues a reasoned award within legally prescribed deadlines (typically 6 months, extendable); and (6) Enforcement: Awards are binding and enforceable like court judgments, with limited grounds for annulment in judicial courts. Throughout the process, parties maintain full procedural rights including contradiction, evidence presentation, and legal representation.
What compensation can taxpayers claim for bank guarantee costs when contesting IRC assessments at CAAD?
Taxpayers who successfully contest IRC assessments at CAAD can claim compensation for bank guarantee costs (comissões de garantia bancária) incurred to suspend tax enforcement during administrative and arbitral proceedings. Portuguese law recognizes that when tax assessments are annulled or reduced, the taxpayer should not bear financial costs resulting from unlawful tax collection attempts. Compensable costs include: (1) bank guarantee issuance fees and commissions paid to financial institutions; (2) ongoing maintenance fees for the guarantee period; (3) any collateral costs directly resulting from providing guarantees. To claim compensation, taxpayers must: prove the guarantees were necessary to suspend enforcement of the contested assessment; demonstrate the amounts paid to banks with supporting documentation; show a causal link between the unlawful assessment and the guarantee costs; and file the claim within applicable limitation periods. The compensation amount equals actual documented costs, and the Tax Authority must pay if the assessment is fully or partially annulled, as the taxpayer should be restored to the position they would have occupied absent the unlawful tax demand.