Process: 22/2015-T

Date: November 8, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 22/2015-T addresses a critical Corporate Income Tax (IRC) dispute before the CAAD arbitral tribunal regarding the carryforward of tax losses following a business activity change. The claimant, A... S.A. (formerly B... SGPS, SA), challenged IRC additional assessments totaling €93,215.07 and €2,091.34 for fiscal years 2009 and 2010, plus compensatory interest. The core issue stems from a tax inspection that disallowed €204,742.07 in tax loss carryforwards from prior years for 2009, applying article 52, paragraph 8 of the CIRC. The Tax Authority determined that the company underwent a substantial change of activity when it transitioned from wholesale trade of household appliances (CAE 46430) - its original business since 1984 - to managing non-financial shareholdings (CAE 64202) in September 2009, transforming into a SGPS (holding company). The company ceased recording sales and inventory from 2009 onwards, definitively abandoning its commercial trading operations. Additionally, the inspection disallowed financial charges of €125,098.77 (2009) and €119,555.96 (2010) as non-deductible expenses under article 32, paragraph 2 of the Tax Benefits Statute, which the claimant accepted. The arbitral tribunal, composed of three arbitrators appointed by the CAAD Deontological Council, conducted hearings with witness testimony under article 18 of the RJAT. The case exemplifies how Portuguese tax law restricts loss carryforward rights when companies fundamentally alter their business activities, preventing tax benefits earned in one economic sector from being utilized in an unrelated business. The decision provides important guidance on interpreting 'substantial change in activity' under IRC rules and the procedural framework for challenging tax assessments through administrative arbitration.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sérgio de Matos and Carlos Lobo, appointed by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal:

I – REPORT

On 12 January 2015, A..., S.A., previously designated B..., SGPS, SA, with the NIPC ... and registered office at ..., ..., ..., ..., filed a request for the constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), aiming at the declaration of illegality of the acts of additional assessment of Corporate Income Tax (IRC) and respective compensatory interest with reference to the years 2009 and 2010, in the amounts of, respectively, €93,215.07 and €2,091.34.

To substantiate its request, the Claimant alleges, in summary, that the tax acts in question are vitiated by violation of law due to error in the interpretation of the law and its application to the facts.

On 13-01-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant did not proceed to appoint an arbitrator, wherefore, under the provisions of paragraph a) of no. 2 of article 6 and of paragraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 10-03-2015, the parties were notified of such appointments, having not expressed any intention to refuse any of them.

In accordance with the provision in paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 25-03-2015.

On 07-05-2015, the Respondent, duly notified for this purpose, filed its reply, defending itself by exception and by impugnation.

After the Claimant exercised the right of contradiction, the Tribunal decided the matter of exception, according to the terms contained in the order issued on 08-06-2015.

On 08-09-2015, the meeting referred to in article 18 of the RJAT was held, where witnesses presented by the parties were examined.

Having been granted a period for the presentation of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the issuance of the final decision, after the presentation of submissions by the Tax Authority (AT).

The Arbitral Tribunal is materially competent and is duly constituted, according to articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, according to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from nullities.

Thus, there is no obstacle to the examination of the merits of the case.

Everything considered, it is appropriate to issue

II. DECISION

A. FACTS

A.1. Facts established as proven

  1. The assessments which are the subject of the present proceedings were made following a tax inspection procedure, which made corrections to the fiscal result and taxable matter declared by the Claimant, as summarized in the following table:

  2. The corrections to the declared fiscal result stem from the disallowance as deductible expenses of the financial charges considered to be incurred with the acquisition of equity interests within the scope of the activity of "company managing social shareholdings", under the provisions, at the time, of article 32, no. 2, of the Tax Benefits Statute, and amount to €125,098.77 in the fiscal year 2009 and €119,555.96 in the fiscal year 2010.

  3. The corrections made directly to the taxable matter (as regards the year 2009) stem from the disallowance, for the determination of such matter, of tax losses carried forward from the previous year, in the amount of €204,742.07, in accordance with the understanding that there was a substantial change in the activity exercised, according to article 52, no. 8, of the Corporate Income Tax Code (CIRC).

  4. The tax inspection report was preceded by a draft notified to the Claimant and on which it exercised the right of hearing, expressing the understanding and acceptance of the corrections concerning the disallowance of financial charges.

  5. The tax inspection report contains, among other things, the following:

"The SP is currently registered for the activity of 'companies managing non-financial social shareholdings', activity code (CAE) 64202, with a secondary activity also registered in the registry as 'other business and management consultancy activities', CAE 70220. It should be noted that this registry is the one in force since September/October of 2009, since this was not the original object of the company established in 1984.

The SP began activity on 15-02-1984, having until September 2009 as its object the 'wholesale trade of household appliances, radio and television equipment' corresponding to CAE 46430. It is classified for VAT purposes under the normal quarterly regime (since 2011, and during the period to which this procedure refers it was classified under the normal monthly regime) and for Corporate Income Tax purposes, for the purposes of determining taxable income, it is classified under the general regime.

The company is constituted in the form of a public limited company, with the company's share capital of €2,495,000.00, represented by 500,000 bearer shares, with a nominal value of €4.99 each, with the holders of such capital and respective proportion as shown in the table below:

[Table content]

1 Meanwhile with the name of C... SGPS, SA

This distribution of the shareholder participation is that which results from the operation of sale of the shares of A..., which were in the possession of the reference shareholders, to the company C... Lda, also controlled by the same shareholders.

That is to say, before that sale of shares referred to in point II.2 of this report, the shareholder distribution of the capital of SP was as shown in the table below:

[Table content]

From the information we gathered, in August 2011 the children of the reference shareholders (G... and H...) sold the remaining participation they held in the company to K... SGPS, SA, this one now concentrating 92% of the share capital of SP, with the remainder (8%) being treasury shares.

The current board of directors of the company is composed of the aforementioned, G... - NIF ... and H... - NIF....

The Official Accountant (TOC) of the Company is I..., NIF ..., who was also the contact person with the Tax and Customs Authority (AT) during the inspection procedure.

II.4 – Activity of the SP

As mentioned above, the company altered its corporate purpose in September 2009. Initially dedicated to the wholesale trade of household appliances, at the end of 2008 they would have decided to permanently abandon this area of business, with 2008 being the last year in which the company recorded sales and cost of sales. From 2009 onwards, there are no longer any references to inventories/merchandise in the financial statements of the company.

In parallel with its activity in the wholesale trade of household appliances, the company has held, since the late 1990s, a majority participation, almost total (99.97%) in the company L... SA, specialized in retail trade of household appliances, and initially L... was just another of the clients of the firm A..., SA.

As part of an internal restructuring of the group controlled by the brothers G... and H..., the SP was transformed into a SGPS on 30-09-2009.

On that same date the SP alienated warehouses and land that were on its assets to the company M... SA, whose shareholders were also the reference shareholders of SP.

Already as a SGPS, in the month of December 2009 the following facts occur:

(i) They acquire a 70% participation in the capital of the company Real Estate N... Lda;

(ii) They acquire a 99.74% participation in the capital of the company M... SA;

(iii) Their reference shareholders are altered, albeit indirectly, since the previous holders of the majority of the capital (H..., G... and spouses) alienate their participations to the firm C... Lda, which in turn is also held by the aforementioned shareholders.

Meanwhile, at the end of 2010, the SP alienated its participation in the company M... to the firm K... SGPS, SA.

Thus, currently the chain of shareholder participations of SP is as shown below, being clear that L..., via A..., is the central business of the group. In this chain of participations, we chose to also introduce the holders of the share capital of SP and their respective chain of participations so as to provide a view of the group as a whole.

[Chart content]

With reference to the year 2009, as mentioned above, the SP no longer recorded any income associated with the activity of household appliances trading, and the costs it recorded are connected with the activity meanwhile undertaken (management of social shareholdings), most of which are financial charges and related items, concerning old loans and bonds and others meanwhile undertaken, and it should also be mentioned that in terms of VAT, as the materially relevant values that the SP deducted throughout the year were not substantial, it ceased to deduct VAT from the October period of 2009, since it was on 30-09 that it altered its corporate purpose to SGPS. We then present some of the more relevant items from the profit and loss statement of SP between 2008 and 2011:

[Table content]

As can be seen in the table above, the company has been recognizing gains and losses in its investee companies through the use of the equity method (MEP). This fact did not occur in 2009[2 From the explanations gathered, taking into account the substantial losses of L... in that year, fundamentally associated with the closure of activity in Spain, those responsible chose not to reflect these results in the annual profit and loss statement of A..., making an adjustment to equity through the recognition of an impairment loss in that financial participation.], but insofar as such gains or losses do not compete for the determination of the taxable result, such fact does not have fiscal impact.

With reference to the main balance sheet items, the evolution of the company's accounts between the years 2008 to 2011 has been as shown in the table below:

[Table content]"

  1. It is also contained in the aforementioned Report the following:

"(i) With regard to remunerated assets, in the financial statements as of 31-12-2009 and 31-12-2010 the SP was not a creditor of any of the loans it made during the year to group companies and which accrued interest, simply because they had already been liquidated; but the reality is that during the year such loans occurred, the SP recorded income from the interest received and without making an adjustment that reflects this reality, the SP will end up harmed in the sense that by applying the circular in a restrictive manner, as of 31-12 there were no remunerated assets to exclude from the remunerated liabilities;

(ii) As of 31-12-2009 the SP held participations in three companies, and the determination of the financial charges to be disallowed was made proportionally to the acquisition price of each of them, and the purpose of detailing these values results from the fact that it is known that one of the participations will be sold less than a year later, from which it results that it will not be in a position to benefit from no. 2 of article 32 of the Tax Benefits Statute [4 In the case at hand there occurred a capital gain that competes for the determination of the taxable result (of the year 2010), as well as the connected financial charges.]; that is to say, according to the provisions of circular 7/2004, the financial charges of the year 2009 are to be disallowed, being subsequently attributed (credit) in the year of alienation;

(iii) Also due to the fact set out above, it was decided to adjust the assets of the company as of 31-12-2010, including the financial participation (M...) which was alienated on 27-12-2010 and had been acquired on 30-12-2009; that is to say, for the purposes of quantifying the financial charges of the year 2010 attributable to this participation, we chose to consider that it existed as of the date of the balance sheet close, since in practice it was maintained throughout the year under pain of, failing to do so, harming the SP by distributing the financial charges only among those held as of 31-12;

(iv) Finally with respect to financial charges, it is important to first emphasize the concept of financial charge or of financial nature and which is contained in paragraph c) of no. 1 of article 23 of the Corporate Income Tax Code '...such as interest on borrowed capital applied in the operation, discounts, premiums, transfers, exchange differences, expenses with credit operations, debt collection and issuance of bonds and other securities ...'; from this and from our understanding of the spirit of article 32 of the Tax Benefits Statute, it is to be considered that in that concept of financial charges are included, namely, interest of a financial nature associated with loans, charges debited by financial institutions for the granting of credit, such as commissions, guarantees and also stamp duty connected with credit operations. On the other hand, default interest, determined in a judgment appealed to the supreme court of justice, due to the deferral/delay in payment of a debt, are not to be included in this notion of financial charges even though the SP had accounted for them as such.

III.1.1.1.3 - Calculation of financial charges to be disallowed

Using the methodology referred to in circular 7/2004 and having made the adjustments described above, we determined the amounts as shown in the following tables:

[Complex tables with calculations]

(1) With respect to the amounts declared by SP in the financial statements presented/submitted to the Tax Authority (year 2009) and in which this amount is €25,765,571.96, an adjustment was considered in the amount of 1.9 million euros as shown in (2), concerning the weighted average of loans granted during the year, in order to adjust to the factual reality that, in practical terms would not present this remunerated asset as of 31-12-2009; With respect to the year 2010 and with respect to the amounts declared by SP, two adjustments were made: identical to that mentioned above for 2009 (weighted average of loans granted during the year) only in the amount of €362,500 as will be demonstrated in (2) and, with respect to financial investments, we maintained the values of the participation (both acquisition and adjustments/impairments)[5 Amounts that were only reversed at the end of December 2010 and which, before reversal, had the following entries in the SNC accounts: 41117000 - €3,696,000 debtor and 41920003 - €372,096 creditor.] in the company M... which had been acquired on 30-12-2009 and was alienated on 27-12-2010, again for being more consistent with the reality for the purposes of the determination of the amount of financial charges connected with this participation and which are tax-deductible[6 That is, if we ignore this participation as of 31-12-2010, it means that the financial charges attributable to social shareholdings would be entirely distributed among the remaining participations and would be totally disallowed for tax purposes.];

(2) This value represents the sum of the loans granted (remunerated asset) weighted during the year and the values concerning bank deposits; With reference to the weighted calculation of the amounts of loans granted during the year, the value was determined as shown in the following tables:

[Tables]

(3) This value was obtained directly from the analytical trial balances as of 31-12 of the years 2009, 2010 and 2011 of SP, with the adjustments mentioned in (1) for the year 2010, and concerns the cost of acquisition of equity interests, including supplementary contributions, and has the detail as shown in the following tables:

[Tables]

(4) It corresponds to the balance of the accounting entry POC/SNC 41114100 and concerns adjustments to equity interests of the participation in L... through the use of the MEP.

(5) Other assets = Total assets – remunerated assets – equity interests (acquisition cost and MEP).

(6) Non-remunerated assets = Other assets + acquisition cost of equity interests.

(7) This value was taken from the financial statements of SP, as well as from the analytical trial balances and additional information gathered, and it should be noted that these are loans from credit institutions, with the exception of the year 2009 which also includes a remunerated loan from a group company (POC account 25211000) in the amount of 1.2 million euros.

(8) According to circular 7/2004, the first step of the method to be used for the purposes of allocating financial charges to social shareholdings, is to impute the remunerated liabilities of the SGPS to the remunerated loans granted by these to the participative companies (remunerated assets), as well as to other investments/assets generating interest, whereby, in the case at hand, the remunerated liabilities attributable to the remunerated loans granted are €2,025,864.37 and €362,500.00 respectively in 2009 and 2010; It should be noted that contrary to the year 2009 in which the SP recorded income from interest on bank deposits, such situation did not occur in 2010 and 2011, which is why we included in this item the values of bank deposits in 2009 and did not do so for 2010 and 2011.

(9) The value of the remunerated liabilities attributable to non-remunerated assets is obtained by subtraction from the total of the remunerated liabilities of the amount previously imputed to remunerated assets.

(10) After obtaining the value of the remunerated liabilities attributable to the remaining assets (non-remunerated assets), we determined in a proportional manner the value of the remunerated liabilities attributable to equity interests (acquisition cost).

(11) In accordance with the explanations contained in point III.1.1.1.2 paragraph (iii) of this report, the amount of financial charges considered for the purposes of this adjustment was as shown in the calculations detailed in the following tables:

[Tables]

(12) Proportional allocation of financial charges to non-remunerated assets.

(13) Proportional allocation of financial charges allocated to non-remunerated assets, to equity interests (acquisition cost), and in the case at hand and because this detail, as explained previously, will be relevant for the year 2010, the financial charges related to/attributable to the acquisition of equity interests, concern proportionally to each of the financial participations as shown in the table below:

[Tables for L..., M..., N...]

(14) According to what is determined in circular 7/2004, with respect to the participation in M... which does not benefit from no. 2 of article 32 of the Tax Benefits Statute, the financial charges connected/attributable to its acquisition should be disallowed (which occurs in 2009), being subsequently granted (in 2010) – in the form of a deduction to the taxable result, the amount that had been disallowed (not accepted) for tax purposes; Thus, once the financial charges attributable to each participation have been determined, with reference to the year 2010 it is to accept as tax cost the proportional share of the financial charges attributable to the participation in M... (€62,556.58), as well as the proportional share that had been disallowed for it in 2009 (€32,594.38)."

  1. It is further stated there that:

"In the period under analysis the SP exercises the activity of company managing social shareholdings, has de facto social shareholdings and recorded financial charges resulting from financing incurred, whereby it is subject to the provisions of article 32 of the Tax Benefits Statute (EBF).

In light of the facts set out and insofar as the SP did not make any addition to the net result obtained from the financial charges connected with the acquisition of equity interests, the following corrections are proposed as shown in the demonstration below";

  • "we understand that despite from a formal perspective there having been de facto that alteration in the ownership of the capital, it can be said that, in substance, there was no alteration of the capital holders since the holders/shareholders of the company (C... Lda) that came to hold the SP B... SGPS SA, are the same previous holders of the share capital of SP, that is to say, the brothers H... and G... and their respective spouses, that is to say, indirectly the holders of the capital are the same.".

  1. Since the late 1990s, the Claimant exercised de facto two declared activities, the wholesale sale of household appliances and the management of a substantial portfolio of titles of a downstream company, with activity in the retail sale of household appliances, with income from those two activities.

  2. The Claimant exercised, both in the year 2008 and in the year 2009, the activity of management of social shareholdings.

  3. In the balance sheets incorporated in the annual tax returns of the Claimant, the financial assets corresponding to "equity interests in group companies" correspond to €20,385,770.12 in 2008, and €17,826,790.71 in 2009, in a total net asset of, respectively, €21,066,601.10 and €19,474,347.55.

  4. In the statement of results that is part of the aforementioned annual declaration, the 2008 income of the Claimant comprises €1,647,007.43 of "gains in group companies and associates", reflecting the impact of the participation in the capital of L..., SA..

  5. It is contained in the Claimant's Corporate Income Tax form 22 that which influences the determination of taxable profit capital gains of €485,901.71, resulting from the alienation of fixed assets that were allocated to the activity of marketing of household appliances.

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the facts proven and not proven

With respect to the facts, the Tribunal does not need to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven matter from the unproven (see art. 123, no. 2, of the Tax Procedure and Process Code (CPPT) and article 607, no. 3 of the Code of Civil Procedure (CPC), applicable by virtue of article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the pertinent facts for the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see former article 511, no. 1, of the CPC, corresponding to the current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the PA attached to the record, the above-listed facts were considered proven, with relevance to the decision, taking into account that, as stated in the Judgment of the Administrative Court of the South of 26-06-2014, issued in case 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

B. REGARDING THE LAW

The first issue that presents itself to be resolved by this Tribunal concerns the application of article 32/2 of the Tax Benefits Statute, made by the Tax Authority, in light of Circular no. 7/2004, of 30 March, of the Corporate Income Tax Directorate.

In this regard, the Claimant states, in summary, that there is "lack of adequate substantiation, both on the factual level and on the legal level, of those assessments, in this respect, (...) 'violation of the Constitution and of the law, insofar as the determination of the amount of non-deductible financial charges was made by reference to a Circular, which, in developing the content of a tax incidence norm, violates the principle of tax legality'"[2], citing as support the decision issued in case 24/2012-T of the CAAD.

It is considered, however, that in the case, there is not, from the outset, an identity with the situation sub iudice in the aforementioned case, insofar as there the Claimant argued against the "Circular no. 7/2004, of 30 March, because it considered that the new regime concerning financial charges is applicable in tax periods beginning after 1 January 2003, even though they relate to financing incurred before that date", which was heeded by the Tribunal, which considered that "based on no. 2 of article 31 of the Tax Benefits Statute, financial charges incurred with the acquisition of equity interests do not compete for the formation of taxable profit, the Tax Authority applied Circular 7/2004, of 30 March, under which the new regime is applicable in tax periods beginning after 1 January 2003, even though they relate to financing incurred before that date;", and it is certain that in the present case the Claimant does not demonstrate, nor even alleges, that the application of the new regime is in question with respect to financing incurred before 1 January 2013.

On the other hand, following the aforementioned arbitral decision, the Constitutional Court has come to understand, in its Judgment 42/2014[3], that:

"we do not find grounds to affirm the parametric relevance of the normative meaning adopted by the Tax Administration and set out in the aforementioned circular, in terms of supporting the formation of binding effects for individuals – which is not confused with its irrelevance in the formation of the will of taxpayers, nor with reinforced persuasive force, by virtue of the executive privileges conferred on the Administration – and, above all, that constitute criteria or normative standard shaping the judicial action of the Courts, when called upon to assess disputes in the respective field of regulation (see Jorge Miranda, Manual de Direito Constitucional, Tome V, 4th edition, 2010, p. 226). This has also been the understanding adopted by the Supreme Administrative Court, examples of which are the Judgments of 16/01/2002, issued in case no. 26638, and of 7/07/2004, issued in case no. 1784/03 (both available at www.dgsi.pt), marking equally other legal orders, such as the German and Italian (thus, João Taborda da Gama, ob. cit., p. 161, note 8, and Ana Paula Dourado, ob. cit., pp. 726, note 2178, and 727)."

Furthermore, already in Judgment 583/2009 of the same Court[4], it was written that:

"There is, however, another obstructive question that must be appreciated and to which the appellant and the appellee have already, in advance, given their contribution. It is the question of whether the prescriptive content of the aforementioned 'Circular' constitutes an appropriate subject for recourse to concrete review of constitutionality. (…)

Since Judgment no. 26/85 (published in the Official Gazette, II Series, of 26 April 1985), the Constitutional Court, in order to proceed with the identification of the appropriate subject of constitutional review processes, has been adopting a concept of norm functionally adequate to the system of control that the Constitution entrusts to it. This concept of norm includes acts of public power that contain a 'rule of conduct' for individuals or for the Administration, a 'criterion of decision' for the latter or for the judge or, in general, a 'standard of assessment of behavior'. But, as it is a concept of control finalistically ordered to ensure the system of legal protection typical of the constitutional democratic rule-of-law state, it is not enough that the instrument in question binds the Administration to adopt, in the practice of individual and concrete acts of application and as long as it does not alter it, a certain criterion that it has established. It is necessary that this criterion be endowed with binding force also for the other subject of the relationship (normative heteronomy) and constitute a parameter that the judge cannot fail to consider unless he makes on it an instrumental judgment of invalidity. If the 'criterion of decision' is of administrative origin and only binds within the administrative service from which it emanates, there is no need for the type of legal protection and affirmation of the supremacy of the Constitution that justifies the intervention of the Constitutional Court.

Now, a problem frequently posed in tax law is the relevance of so-called administrative guidance. As Casalta Nabais states, Direito Fiscal, 5th ed., page 201 (although stating that this does not detract from them the quality of legal norms):

'[…] they are internal regulations which, since they have as their addressee only the tax administration, only this is bound by them, and they are therefore only binding for bodies hierarchically below the body author of the same.

Therefore, they are not binding either for individuals or for the courts. And this whether they are organizational regulations, which define rules applicable to the internal functioning of the tax administration, creating working methods or modes of action, whether they are interpretative regulations, which proceed to the interpretation of legal provisions (or regulatory).

It is true that they densify, make explicit or develop legal provisions, previously defining the content of the acts to be performed by the tax administration when applying them. But this does not convert them into a validity standard for the acts they support. In fact, the assessment of the legality of the acts of the tax administration must be made through direct comparison with the corresponding legal norm and not with the internal regulation, which was interposed between the norm and the act'.

Such acts, in which 'circulars' stand out, emanate from the power of self-organization and the hierarchical power of the Administration. They contain generic service orders and it is for this reason and only within the respective subjective scope (of the hierarchical relationship) that compliance is assured. They incorporate future action guidelines, transmitted in writing to all subordinates of the administrative authority that issued them. They are standardized decision-making modes, adopted to rationalize and simplify the functioning of services. Although they may indirectly protect the legal certainty of taxpayers and ensure equal treatment through uniform application of the law, they do not regulate the matter they concern in relation to these, nor do they constitute a decision rule for the courts.

The fact that the Tax Administration is bound (no. 1 of article 68-A of the General Tax Law) by the general guidance contained in circulars that are in force at the time of the tax event and has the duty to convert the binding information or other type of understanding provided to taxpayers into administrative circulars, in certain circumstances (no. 3 of article 68 of the GTL), does not alter this perspective because it does not transform that content into a norm with external efficacy. It is certain that the administered party may invoke, in confrontation with the administration, the content of the publicized administrative guidance and, if appropriate, assert it before the courts, even with sacrifice of the principle of legality (see Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, Lei Geral Tributária, commented and annotated, 3rd ed., page 344). But it is under the principle of good faith and legal certainty, not by its normative value, that the content of the circulars prevails. The administered party only complies with them if and insofar as it suits him, for the same reasons that justify that he may invoke binding individual information that favors him (article 59, no. 3, paragraph e) and article 68 of the GTL).

Consequently, lacking heteronomous binding force for individuals and not being imposed on the judge except by the doctrinal value it may possess, the prescriptions contained in the 'circulars' of the Tax Administration do not constitute norms for the purposes of the system of constitutional review control within the jurisdiction of the Constitutional Court.".

Thus, and in light of the above, which is hereby endorsed, the Claimant's claim of unconstitutionality should be dismissed.

The Claimant further states, but without specifying in any way, "that no facts capable of supporting the conclusion that in 2009 and in 2010 (insofar as it is relevant here) financial charges were incurred with the acquisition of equity interests that should be disallowed as costs or expenses in the determination of the fiscal result were exposed.", and that "adequate legal provisions supporting the methodology for calculating the financial charges attributable to the acquisition of equity interests were not invoked.".

With due respect, it is understood that the Claimant is not right.

In fact, as follows from point 6 of the facts, in the tax inspection report facts are set out capable of supporting the conclusions drawn there, and legal provisions are invoked (namely article 32/2 of the Tax Benefits Statute, as well as article 23/1/c) of the Corporate Income Tax Code, beyond which, by reference, results from the circular mentioned in the substantiation), adequate to support the methodology for calculation applied.

This allegation of the Claimant is therefore unfounded.

The Claimant further argues against the corrections resulting from the disallowance of tax losses carried forward, relating to the fiscal year 2008, in the amount of €204,742.07, based on a substantial change in the activity exercised.

Article 47/8 of the Corporate Income Tax Code provides (current article 52 of the Corporate Income Tax Code following the entry into force of Decree-Law no. 159/2009, of 13 July) that tax losses determined in a given tax period cease to be deducted according to the terms provided in no. 1 when "it is verified, as of the date of the end of the tax period in which the deduction is made, that, in relation to that to which the losses relate, the corporate purpose of the entity to which it concerns was modified or the nature of the activity previously exercised was substantially altered or that there was an alteration of the ownership of at least 50% of the share capital or the majority of voting rights".

As the Tax Authority correctly states, to avail itself of such norm, it should demonstrate that:

  • in the fiscal year in which the tax loss carried forward by the Claimant was generated, the activity exercised was substantially different from the activity exercised in 2009; and/or

  • there was an alteration of more than 50% of the ownership of the share capital.

With respect to this latter requirement, the Tax Authority argues, in the arbitral proceedings, that there was a formal alteration of more than 50% of the ownership of the share capital.

However, and as the Tax Authority itself states, also in the tax inspection report it is stated that:

"despite from a formal perspective there having been de facto that alteration in the ownership of the capital, it can be said that, in substance, there was no alteration of the capital holders since the holders/shareholders of the company (C... Lda) that came to hold the SP B... SGPS SA, are the same previous holders of the share capital of SP, that is to say, the brothers H... and G... and their respective spouses, that is to say, indirectly the holders of the capital are the same.".

From this it follows that, contrary to what the Tax Authority now seeks in the arbitral proceedings, it was not – and rightly so, it should be noted, given the material concern revealed, in this respect, by the tax inspection report – the basis of the corrections made was the alteration of more than 50% of the ownership of the share capital.

Thus, and independent of anything else, the Tax Authority cannot, at this stage, seek new grounds for the corrections that are contested by the Claimant.

Indeed, as has been repeatedly affirmed by the Supreme Administrative Court, "It is exclusively in light of the substantiation disclosed by the Tax Authority when making the additional assessment of VAT that the legality of that tax act must be assessed."[5], whereby the Tribunal must adhere, in the assessment of the legality of the act in question, to the grounds, both factual and legal, disclosed therein.

It remains, thus, to assess whether in the fiscal year in which the tax loss carried forward by the Claimant was generated, the activity exercised was substantially different from the activity exercised in 2009.

In this regard, attention should be paid, from the outset, to the following table contained in the tax inspection report:

[Table]

As can be verified, in the year 2008, the gains derived from social shareholdings amounted to €1,647,007.43, constituting a substantial part of the total income of the Claimant, and being almost three times more than that derived from sales and provision of services of the other of the activities exercised by the Claimant.

Thus it is demonstrated, it is believed, that there was no substantial alteration of the activity exercised by the Claimant, since the activity that was maintained was already its principal one.

This will not be prevented by the circumstance, noted in the tax inspection report, that there was a "transformation of the company into a SGPS", and, consequently, that "the company, with reference to 31-12-2009, altered its corporate purpose in relation to the period (2008) to which the losses it sought to avail itself (deduct) relate".

Indeed, it is understood that the alteration of activity relevant for the purposes of the norm in question (article 47/8 of the Corporate Income Tax Code in the applicable wording) will be a material alteration, at the level of the concrete economic activity exercised by the taxpayer, and not merely formal, resulting from that which in terms of registrations, of any kind, was declared, which follows not only from the expression "substantial", used by the normative in question, which points from the outset to an intention of prevalence of substance over form, but also from the general principle contained in article 11/3 of the General Tax Law.

As was written in the Judgment of the Supreme Administrative Court of 28-11-2012, issued in case 0558/11:

"the deduction of losses will no longer be applicable when it is verified, as of the date of the end of the tax period in which the deduction is made, that the corporate purpose of the entity to which it concerns was modified or the nature of the activity previously exercised was substantially altered.

As underscored by RUI DUARTE MORAIS, in 'Notes to the Corporate Income Tax Code', Almedina, page 165 et seq., «... if the loss of a given fiscal year can be offset by the profit of the following period, the 'offsetting' will be made entirely in this year. If not, in the course of the subsequent fiscal years, within the aforementioned temporal limit, after which the losses still not 'offset' cannot be, further deducted», but there are limitations to this right of carryforward of losses, such as alterations in the ownership of the share capital or in the activity pursued by a company, since, as is also underscored in that work, «... the abuses detected (acquisition of companies – often without any activity - with substantial tax losses that could be carried forward, which then came to exercise another activity, very profitable [or the same activity, but in a totally different corporate context], taking advantage of the benefit resulting from the deduction of the previously accumulated losses), led to the introduction of no. 8 of art. 47, according to which the possibility of deduction of losses ceases to be applicable when there has been an alteration of the corporate purpose of the entity in question or the nature of the activity previously exercised has been substantially altered or there has been an alteration of the ownership of at least 50% of the share capital or the majority of voting rights. This prohibition can be waived by decision of the Minister of Finance, at the request of the interested party, if there is 'recognized economic interest'.

Thus, in addition to the legal identity, the law requires continuity in the activity exercised - the activity in which the loss was obtained must be, substantially, identical to the activity to which the profit is to be offset against.

Therefore, in the examination of this question, consideration must be given, in a comprehensive manner, to the nature of the economic activity developed in the fiscal year in which the loss was obtained and the economic activity developed in the fiscal year in which the taxable profit was obtained, in order to ascertain whether there was a substantial alteration relevant for the purposes of application of the aforementioned normative."

Thus, considering that there was no, in the case, alteration of the economic activity exercised, the tax acts which are the subject of the present proceedings will be vitiated, insofar as they were based on the occurrence of such alteration, by error in the factual premises, when disallowing the tax losses carried forward, relating to the fiscal year 2008, in the amount of €204,742.07, and, consequently, by error in law, and should, as such, be annulled, and the arbitral request should proceed, in this respect.

C. DECISION

In these terms, this Arbitral Tribunal decides:

a) To judge partially upheld the arbitral request filed and, in consequence, to partially annul the acts of additional assessment of Corporate Income Tax (IRC) and respective compensatory interest with reference to the years 2009 and 2010, insofar as it concerns the disallowance of the tax losses carried forward to the fiscal year 2008, in the amount of €204,742.07;

b) To judge unfounded, in the remaining part, the arbitral request filed;

c) To condemn the parties to the costs of the proceedings, in proportion to their respective failure in their claims, setting at €1,680.00 the amount to be borne by the Claimant and at €1,074.00 the amount to be borne by the Respondent.

D. Value of the proceedings

The value of the proceedings is fixed at €95,306.41, according to article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €2,754.00, according to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective failure in their claims, as set out above, once the request was partially upheld, according to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.

Notify.

Lisbon

8 November 2015

The Presiding Arbitrator

(José Pedro Carvalho - Reporting Arbitrator)

The Alternate Arbitrator

(Sérgio de Matos)

The Alternate Arbitrator

(Carlos Lobo)

[1] Available at www.dgsi.pt, as with the remaining case law cited without mention of source.

[2] See article 29 of the Initial Request.

[3] Available at www.tribunalconstitucional.pt.

[4] Idem.

[5] Judgment of the Supreme Administrative Court of 23-09-2015, issued in case 01034/11.

Frequently Asked Questions

Automatically Created

Can a company carry forward tax losses after changing its business activity under Portuguese IRC rules?
Under Portuguese IRC rules, a company generally cannot carry forward tax losses after a substantial change of business activity. Article 52, paragraph 8 of the Corporate Income Tax Code (CIRC) specifically prohibits the deduction of prior-year tax losses when there has been a substantial change in the activity exercised by the company. This restriction aims to prevent taxpayers from acquiring loss-making companies solely to offset profits from completely different business operations. In Process 22/2015-T, the Tax Authority applied this rule when a company transitioned from wholesale trade of household appliances to managing shareholdings as a SGPS holding company, disallowing €204,742.07 in loss carryforwards. The rationale is that tax losses generated in one economic activity should not provide tax benefits for an entirely different business venture, as this would constitute an improper tax advantage and distort the fiscal system.
What are the legal requirements for deducting prior tax losses when a company undergoes an activity change?
The legal requirements for deducting prior tax losses when a company undergoes an activity change are governed by article 52 of the CIRC. To maintain the right to carry forward tax losses, the company must demonstrate continuity in its core business activity - the same activity that generated those losses must still be substantially operating. A 'substantial change of activity' that triggers loss of carryforward rights occurs when the company fundamentally alters its business purpose, economic sector, or operational model. Factors examined include: changes in the CAE (Economic Activity Code) registration, cessation of previous commercial operations (such as no longer recording sales, inventory, or cost of goods sold), transformation of corporate legal form (e.g., converting to a SGPS holding company), and the nature of income sources. In Process 22/2015-T, the company definitively abandoned wholesale trading operations in 2008-2009, ceased all inventory management, and restructured as a shareholding management entity - changes the Tax Authority deemed substantial enough to disallow prior loss deductions under article 52, paragraph 8.
How does the CAAD arbitral tribunal assess disputes over IRC additional tax assessments and compensatory interest?
The CAAD (Centro de Arbitragem Administrativa) arbitral tribunal assesses IRC additional tax assessment disputes through a formal arbitration process under the RJAT (Legal Regime of Arbitration in Tax Matters, Decree-Law 10/2011). The procedure involves: (1) filing a request for arbitral tribunal constitution by the taxpayer within the legal deadline; (2) automatic notification to the Tax Authority; (3) appointment of arbitrators (either by parties or by the CAAD Deontological Council); (4) formal constitution of the tribunal once all arbitrators accept; (5) submission of the Tax Authority's reply defending by exception and impugnation; (6) right of contradiction by the claimant; (7) preliminary decisions on procedural exceptions; (8) evidentiary hearing under article 18 RJAT with witness examination; (9) written submissions by both parties; and (10) issuance of the final arbitral decision within 30 days. The tribunal examines both procedural regularity (competence, legal personality, legitimacy, representation) and substantive merits, reviewing whether tax assessments violate law through erroneous legal interpretation or factual application. Compensatory interest assessments are reviewed alongside principal tax amounts as they constitute accessory obligations dependent on the validity of the underlying assessment.
What constitutes a change of activity for purposes of limiting tax loss carryforward under the Portuguese Corporate Income Tax Code?
A 'change of activity' for purposes of limiting tax loss carryforward under Portuguese CIRC article 52, paragraph 8 constitutes a substantial transformation of the company's core business operations and economic purpose. It is not merely a minor adjustment or expansion but a fundamental shift from one business sector to another unrelated activity. In Process 22/2015-T, the tribunal examined a transition from wholesale trade of household appliances (CAE 46430) - involving purchasing, storing, and reselling physical merchandise - to managing non-financial shareholdings (CAE 64202) as a SGPS holding company. Key indicators of substantial change include: (1) permanent cessation of previous commercial activities (the company stopped recording sales and cost of sales after 2008); (2) elimination of operational assets (no more inventory/merchandise in financial statements from 2009); (3) official change in CAE registration codes; (4) transformation of legal corporate form and purpose (conversion to SGPS status); (5) complete shift in income generation model (from trading margins to financial holdings management). The determination is qualitative and substance-based, examining whether the new activity bears any meaningful economic continuity with the prior business that generated the tax losses sought to be carried forward.
What procedural steps are involved in challenging an IRC additional tax assessment through tax arbitration in Portugal?
Challenging an IRC additional tax assessment through tax arbitration in Portugal involves several procedural steps under the RJAT framework. First, the taxpayer must file a request for constitution of an arbitral tribunal with the CAAD within the statutory time limit (generally within 90 days after notification of the tax assessment or exhaustion of administrative remedies). The request must specify the contested acts, amounts involved, legal grounds (typically violation of law through erroneous interpretation or application), and desired relief (declaration of illegality). Upon filing, the CAAD automatically notifies the Tax Authority, which has a defined period to submit its reply (typically 30 days), defending by exception (procedural defects) and by impugnation (substantive merits). If parties don't appoint arbitrators, the CAAD Deontological Council designates them. After formal constitution, parties may exercise the right of contradiction to the opposing side's submissions. The tribunal decides preliminary exceptions before proceeding to merits. An evidentiary hearing (article 18 RJAT) allows witness examination and document presentation. Both parties then submit written conclusions. The tribunal must issue its decision within the legally prescribed timeframe (typically 30 days after final submissions). Process 22/2015-T exemplifies this complete procedural trajectory, from initial filing through hearing to final decision phase.