IRC Withholding Tax on Dividends Under Portugal-Netherlands Tax Treaty – CAAD Case 221/2017-T

Arbitral Decision

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. António Pragal Colaço and Dr. Gonçalo Cid Peixeiro (arbitrators vogais), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 02-06-2017, agree as follows:

1. Report

A…, S.A., taxpayer no.…, with registered office at Rua …, no.…, …, …-… Vila Nova de Famalicão, came, under article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters or "RJAT"), to submit a request for arbitral pronouncement seeking the declaration of illegality of the following acts of additional assessment of withholding tax on IRC and corresponding compensatory interest, relating to the fiscal year 2013:

i. Assessment no. 2016 … (document identification 2016…) of IRC, in the amount of € 142,452.05, dated 25-11-2016, with payment deadline of 23-01-2017;

ii. Assessment no. 2016 … (document identification no. 2016…) of IRC, in the amount of € 93,892.53, dated 25-11-2016, with payment deadline of 23-01-2017.

The AUTHORITY FOR TAX AND CUSTOMS is the respondent.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Authority for Tax and Customs on 31-03-2017.

Pursuant to the provisions of paragraph (a) of no. 2 of article 6 and paragraph (b) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable period.

On 18-05-2017 the parties were duly notified of this appointment, having manifested no intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs (a) and (b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in conformity with the provisions of paragraph (c) of no. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 02-06-2017.

The Authority for Tax and Customs submitted a response in which it argued that the request should be dismissed.

On 07-09-2017 a meeting was held in which witness evidence was produced and it was decided that the proceeding would continue with optional written pleadings.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, no. 1, paragraph (a), and 10, no. 1, of the RJAT, and is competent.

The parties are duly represented, have legal personality and capacity and have standing (articles 4 and 10, no. 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceeding is free from nullities.

2. Factual Matter

2.1. Proven Facts

Based on the elements contained in the file and in the administrative proceeding joined to the records, the following facts are deemed proven:

a) The Applicant is a commercial company whose business involves the importation, exportation and trade of equipment and printing media supports; provision of support services to companies in the printing sector, manufacture of various machines for specific use in the printing and related sectors, registered with the AT under the following CAE codes: 46690; 28992; 74900.

b) In the course of its commercial activity, the invoice no. …-1 was issued by company B…, in the amount of 832,500.00 €, in the name of the present Applicant, being properly registered and accounted for in its accounting;

c) The amount covered by this invoice was paid by the Applicant to B… in two instalments, namely: the first, in the amount of 500,000.00 €, on 24-04-2013 and the second in the amount of 332,500.00 € on 08-07-2013;

d) B… is a non-resident entity, with registered office in the Netherlands;

e) The issuance of invoice no. …-1 and the respective payment constitute the consideration for services provided by B… to the Applicant, as a result of the relationship initiated through the contract signed by the parties on 20.02.2013, a copy of which is contained in document no. 4, attached to the request for arbitral pronouncement, the contents of which are hereby reproduced;

f) Pursuant to the contract signed by the parties, B… undertook, before A…, to provide services relating to its non-patented technological knowledge for the exclusive purposes of production, assembly and implementation of labeling systems;

g) B… further undertook to provide technical services at the premises of A…, within the scope of the productive activity of the Applicant;

h) The parties agreed that the services to be provided would be limited to the application of the labeling systems, with A… being expressly prohibited from applying them in the production of other goods or provision of other services;

i) Pursuant to the contract, for the provision of the services described, the obligation was established for A… to pay B… the fixed amount of € 832,500.00;

j) In execution of the contract, B… made available its technicians who traveled to the Applicant's premises, indicating to it equipment to be acquired, the appropriate labor that should be hired, training personnel and suggesting specialized services that should be contracted in electronics and software and providing technical information in the startup phase of the production process;

k) At the date the contract was concluded, the Applicant's workforce did not have the capacity and technical knowledge to, by itself, implement and produce machines with labeling systems;

l) In the early stages of the manufacturing process implementation, in the year 2013, 2 or 3 technicians from B… frequently came to the Applicant's premises to provide technical support, being there 3 or 4 days;

m) The services provided by B…'s personnel were under the contract referred to, as, to avoid unpleasant surprises and given the considerable amounts involved, the Applicant contracted a "turnkey" service;

n) The remuneration and travel and accommodation expenses of B…'s personnel who were at the Applicant's premises were borne by B…, with no other invoice being issued to the Applicant, beyond those referred to;

o) The presence of B…'s technicians at the Applicant's premises continued until around the first quarter of 2014;

p) When the contract was concluded, the Applicant could not predict how many machines it would produce using the technology acquired from B…;

q) The Authority for Tax and Customs carried out a tax inspection of the Applicant under Service Order no. OI2015…, in which the Tax Inspection Report was prepared, which is contained in the administrative proceeding, the contents of which are hereby reproduced, which refers, among other things, to the following:

Failure to withhold on income paid to non-residents - Technology Transfer

III.1 - Fundamental concepts underlying international double taxation

Studying international double taxation involves an approach to the rules of international tax law.

International tax law is the branch of law that integrates norms that create and regulate the legal positions of taxpayers, having as its object the regulation of situations in which more than one tax legal order with powers to tax are in contact. In essence, it regulates situations where there is international double taxation involving taxpayers with different tax residences.

International double taxation exists when there is the incidence of comparable taxes in two or more States, in relation to the same taxpayer, tax event and identical time periods. In this situation, there is a tax reality that is linked to the tax order of more than one state by connection elements.

Connection elements are the relations or links existing between the taxpayers of the tax, the objects and the facts with the tax orders. By means of one or more of these connection elements, two independent tax orders can provide for the incidence of tax on the same tax fact, both appearing as the active subject of the tax legal relationship.

The tax fact is the source of the obligation, determining the assumption, the taxpayer, the moment, the tax base, the place and the rate that are at the origin of the tax obligation. A single tax fact can meet the requirements of personal and real incidence in two different States, a situation in which we would be faced with international double taxation, unless mechanisms for removal of subjection or exemption in one of the States involved are triggered.

In the area of international double taxation, tax residence is a fundamental concept.

A person is a resident of a State if, by virtue of the legislation in force in that State, he is there subject to taxation, whether due to his domicile, residence, place of effective management or another similar criterion.

A permanent establishment is a term used in conventions to avoid double taxation normally associated with a fixed place through which a taxpayer exercises an activity covered by the incidence of tax.

International tax law rules that apply directly in the domestic legal order of States are aimed at eliminating international double taxation, in the case of conventions to avoid double taxation, but also at combating fraud and tax evasion.

The conventions to avoid international double taxation concluded by Portugal are sources of tax law. Article 8 of the CRP thus defines.

The principle of the hierarchy of sources of tax law is based on the non-contradiction between norms of the same system, in which a hierarchically superior norm prevails, in case of contradiction, over a hierarchically inferior norm.

The application of domestic law rules to tax legal relationships is always done without prejudice to the provisions of community law and other rules of international law that apply directly in the domestic order or in special legislation, so determined by no. 1 of article 1 of the LGT.

International double taxation should be based on the following principles:

v All income should be taxed somewhere;

v International double taxation should be avoided on the basis of internationally agreed principles;

v Non-concealment of income in "tax havens";

v The minimization of harmful tax competition;

v Promotion of international cooperation against tax evasion;

v The arm's length principle should be applied to all cross-border transactions.

In order to ensure the pursuit of these principles, the Portuguese State has concluded bilateral and multilateral treaties and normative agreements with other States, of which the conventions to avoid double taxation stand out for what is relevant here.

The conventions to avoid international double taxation are based on the OECD model convention. The purpose of the OECD model convention is to standardize the tax treatment of taxpayers in the contracting States, in order to make the implementation of mechanisms to eliminate double taxation and possible tax fraud and evasion clearer and simpler.

From the reading of article 132 of the CIRC it follows that transfers to foreign countries of income subject to IRC, obtained in Portuguese territory by non-resident entities, cannot be made without it being shown that the tax due has been paid or secured. According to points 1) and 2), paragraph (c), no. 3, article 4 of the CIRC, income obtained in Portuguese territory is deemed to be that attributable to a permanent establishment located there and, as well, that which, not being in those conditions, consists of income whose debtor has residence, registered office or effective management in Portuguese territory or whose payment is attributable to a permanent establishment located there, namely, income from intellectual or industrial property and as well as from the provision of information relating to experience acquired in the industrial, commercial or scientific sector.

Pursuant to paragraph (a), no. 1, article 94 of the CIRC, IRC is subject to withholding at source in relation to income obtained in Portuguese territory, such as income from intellectual or industrial property and as well as from the provision of information relating to experience acquired in the industrial, commercial or scientific sector.

It is provided in no. 2 of the same article 94 of the CIRC that for the purposes of the provisions in number 1, income obtained in Portuguese territory is deemed to be that mentioned in no. 3 of article 4, which includes "income from intellectual or industrial property and as well as from the provision of information relating to experience acquired in the industrial, commercial or scientific sector".

Withholdings at source have a definitive character when, not being real estate income, the income recipient is a non-resident entity that does not have a permanent establishment in Portuguese territory or that, having one, such income is not attributable to it (cf. paragraph (b), no. 3, article 94 of the CIRC).

It is prescribed in no. 5 of article 94 of the CIRC that withholdings that, in accordance with no. 3 of the same article, have a definitive character, the corresponding rates provided in article 87 are applicable.

And no. 4 of article 87 states that, in the case of income from entities that do not have their registered office or effective management in Portuguese territory and do not have a permanent establishment there to which such income is attributable, the IRC rate is 25%.

No. 6 of article 94 of the CIRC provides that the obligation to withhold IRC at source occurs on the date established for an identical obligation in the CIRS or, in its absence, on the date of making the income available, with the amounts withheld to be delivered to the State by the 20th of the month following that in which they were deducted, in accordance with the provisions established in the CIRS or in complementary legislation.

It further provides in paragraph (b) of no. 10 of article 8 of the CIRC that in the case of income subject to withholding at source with a definitive character, the tax event is deemed to occur on the date on which the obligation to effect such withholding at source occurs.

Pursuant to article 20 of the LGT, tax substitution occurs when, by legal requirement, the tax obligation is required from a person other than the taxpayer, and is effected through the mechanism of withholding the tax due at source, and by virtue of the provisions of article 28 of the same Law, in cases of withholding at source with a definitive character, as is the case of payment of income to non-residents, the substitute is responsible for the amounts that should have been deducted.

Taxation by withholding at source with a definitive character arises in cases of payment of income to non-residents without a permanent establishment and who are not required to comply with declaratory obligations before the Portuguese Tax Administration, with the entity required to withhold becoming the original responsible party because the income recipient is only so on a subsidiary basis.

However, it is prescribed in no. 1 of article 98 of the CIRC that there is no obligation to withhold IRC at source, in whole or in part, as applicable, in relation to the income referred to in no. 1 of article 94 of the CIRC when, by virtue of a convention intended to eliminate double taxation or another agreement of international law that binds the Portuguese State or internal legislation, the competence for taxation of income earned by an entity that does not have its registered office or effective management in Portuguese territory and does not have a permanent establishment there to which such income is attributable is not attributed to the source State or is only attributed in a limited manner.

In the situations referred to in no. 1 of article 94 of the CIRC, it is prescribed in paragraph (a) of no. 2 of the same article, that the recipients of the income must furnish proof to the entity obliged to withhold at source, by the end of the period established for the delivery of the tax that should have been deducted in accordance with the applicable legal rules, of the verification of the assumptions that result from a convention intended to eliminate double taxation or another agreement of international law or of applicable internal legislation, through the presentation of a form model to be approved by an order of the Minister of Finance certified by the competent authorities of the respective State of residence;

When proof is not furnished by the end of the period established for the delivery of the tax, the tax substitute is obliged to deliver the total amount of the tax that should have been deducted in accordance with the law (cf. no. 5 of article 98 of the CIRC). Without prejudice to the responsibility for contraventions, this responsibility can be set aside whenever the tax substitute proves, with the document referred to in no. 2 of article 94 of the CIRC, the verification of the assumptions for complete or partial exemption from withholding.

For the case dealt with in this section of the report, it is important to refer to the Convention between the Portuguese Republic and the Kingdom of the Netherlands to avoid Double Taxation and Prevent Tax Evasion in Matters of Taxes on Income and Capital, ratified by Resolution of the National Assembly no. 62/2000, of 12 July 2000.

III.2 - Facts and grounds for the failure to pay withholding tax on IRC

No. 1 and 2 of article 12 of the aforementioned convention provide that royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State but, however, such royalties may also be taxed in the Contracting State from which they arise and in accordance with the legislation of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so established shall not exceed 10% of the gross amount of the royalties.

Invoice … 3-1 from Dutch company B… B.V. relating to technology transfer, in the amount of 832,000.00 €, paid in two instalments, the 1st of 500,000.00 € on 2013-04-24 and the 2nd of 332,500.00 € on 2013-07-08, was recorded in the accounting of the SP, in account 2771112001, in the year 2013, in accordance with the documents attached (Annex 1).

The acquisition was recorded in the accounting of the taxpayer as an intangible fixed asset, being designated for the purpose of obtaining financing from the European Regional Development Fund, DL287/2007, 17 August (Universal project code NORTE-07-…-FEDER-…)

The technology transfer contract, attached to Annex 1, expressly states that company B… is available to transfer knowledge and know-how to A… to produce a labeling/tagging system to incorporate in machines.

"Know-how" contracts have as their object the transmission of pre-existing technological information not revealed to the public, in themselves considered, in the form of temporary or definitive assignment of rights, so that the acquirer may use them for its own account, without the transmitter intervening in the application of the technology ceded or guaranteeing its result.

For tax purposes, the remuneration of "know-how" is income from capital, since it remunerts a previously accumulated technological capital that is made available to the beneficiary.

The income paid by A… is income resulting from technology transfer, being called, in an international context, "royalties".

The term "royalties" means in general the remuneration:

(a) of the use or the granting of the use of industrial, commercial or scientific equipment,

(b) of information relating to experience acquired in the industrial, commercial or scientific sector;

(c) of the use or the granting of the use of a model, plan or formula of a secret process.

In the case under analysis, this is the transfer of knowledge relating to information concerning experience acquired in the industrial sector, namely with regard to a labeling/tagging system.

A… wanted to purchase technology to produce the labeling systems to incorporate in the machines it produced, and B… was available to transfer the necessary knowledge and know-how.

B… B.V. is a non-resident company with registered office in the Netherlands in accordance with the certificate of tax residence attached - Annex 3.

Payment was made without the taxpayer effecting withholding at source.

The income paid to company B… is deemed to be subject to IRC under point 1) paragraph (c) of no. 3 of art. 4 of the CIRC, as it comes from intellectual or industrial property and as well as from information relating to experience acquired in the industrial, commercial or scientific sector and paid by a debtor with registered office in Portuguese territory.

Such income is subject to withholding at the rate of 25% in accordance with paragraph (a) of no. 1 and no. 4 of art. 94 of the CIRC, or, in the case of the convention to avoid double taxation concluded between Portugal and the Netherlands being invoked, at the rate of 10%.

In accordance with the Convention between Portugal and the Netherlands, royalties are covered by the provisions of article 12 of the Convention, and therefore, subject to taxation in Portugal, if the form model 21-RF is delivered, at the withholding tax rate of 10% on the amounts paid.

The obligation to withhold IRC at source occurs on the date established by an identical obligation under the CIRS, or in its absence, on the date of making the income available, with the amounts withheld to be delivered to the State by the 20th of the following month, in accordance with no. 6 of art. 94 of the CIRC.

In accordance with nos. 1 and 2 of art. 98 of the CIRC, there could be complete or partial exemption from tax, provided that the assumptions resulting from a convention to avoid double taxation or an agreement of international law, or internal legislation applicable, were met, through the presentation of a form model approved by an order of the Minister of Finance and certified by the competent authorities of the respective State of residence.

The taxpayer did not present to the present date the Mod 21 RFI (model specific for the income in question), duly certified by the State of residence, the Netherlands, having only presented a certificate of tax residence.

On 2016-09-12 the taxpayer was notified to present the Mod 21 RFI, within 15 days, in accordance with the notification attached (Annex 2), not having presented the document to the present date.

From the combination of the provisions of no. 1 of article 132 and no. 5 of article 98, both of the CIRC, when the aforementioned proof is not furnished by the end of the period established for the delivery of the tax, the tax substitute is obliged to deliver the total amount of the tax that should have been deducted in accordance with the law.

The taxpayer did not present model 30, having failed to comply with the obligation referred to in no. 7 of article 119 of the CIRS, by referral to article 128 of the CIRC.

Taking into account the facts and grounds set out, the failure to deliver withholding tax on IRC results in the amount in accordance with the table that follows.

In the event that the taxpayer proves that the beneficiary of the income invoked the application of the convention to avoid double taxation, even in the course of the inspection procedure (during the right to hearing), then the withholding tax rate will be 10%.

r) As a result of the inspection action, the Authority for Tax and Customs issued additional assessments no. 2016… and no. 2016…, respectively in the amounts of € 142,452.05 and € 93,892.53, relating to withholding tax on IRC, relating to the year 2013;

s) The Applicant did not present during the inspection procedure the Mod 21 RFI certified by the Dutch tax authorities, having presented a certificate of tax residence, which is contained in Annex II to the Tax Inspection Report, the contents of which are hereby reproduced, which refers, among other things, to the following:

"The inspector of the Tax authorities Administration Office Arnhem, the Netherlands, hereby declares that

B… B.V,

… …

… -Rijk

Was during the year 2013 a resident of the Netherlands within the meaning of article 4 of the Convention for the avoidance of double taxation between the Kingdom of the Netherlands and the Portuguese Republic".

t) On 06-09-2017, the Applicant sent by electronic mail to the Arbitral Tribunal the document MOD. 21-RFI, a copy of which was attached to the Meeting Minutes held on 07-09-2017, the contents of which are hereby reproduced, in which the Dutch Tax Administration certifies that B… was a resident of the Netherlands in the year 2013, being subject to income tax;

u) The Applicant and B… are not associated companies;

v) On 29-03-2017, the Applicant filed the request for arbitral pronouncement that gave rise to the present proceeding.

2.2. Unproven Facts

It was not established how the total amounts paid were calculated.

2.3. Justification for the determination of the factual matter

The proven facts are based on the documents submitted by the Applicant with the request for arbitral pronouncement and on the administrative proceeding, as well as on the witness evidence.

The witnesses appeared to testify with direct knowledge of the facts about which they pronounced, and their testimonies were relevant to clarify the services provided by B… under the contract, which are referred to in the proven facts.

However, some points were not clarified, namely the reasons why an amendment to the contract was made, nor why not all the services that the witnesses said were provided are referred to in the contract.

3. Legal Matter

Firstly, the Applicant imputes to the disputed assessments an error in the classification of the situation created with the contract concluded and its execution, which it considers cannot be considered a know-how contract (technology transfer), but should rather be considered a contract for the provision of services, whereby the income of B… cannot be qualified as royalties for the purposes of the Convention between the Portuguese Republic and the Kingdom of the Netherlands to avoid Double Taxation and Prevent Tax Evasion in Matters of Taxes on Income and Capital, approved for ratification by Resolution of the National Assembly no. 62/2000, of 12 July (hereinafter "CTD Portugal – Netherlands").

In the alternative, in the event that it is understood that know-how contracts are in question taxed in Portugal, the Applicant imputes to the disputed assessments a defect due to error in the applicable rate, which it considers should be 5%, by application of Directive no. 2003/49/EC of the Council of 03-06-2003, or that of 10% resulting from the CTD Portugal – Netherlands.

3.1. Question of the classification of the situation in the file under the concept of technology transfer, for the purposes of article 12 of the CTD Portugal – Netherlands

3.1.1. Terms in which the question is posed

At issue in the present proceeding, first of all, is the interpretation and application of article 12 of the CTD Portugal – Netherlands, which establishes the following, insofar as relevant here:

Article 12

Royalties

1 - Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2 - However, such royalties may also be taxed in the Contracting State from which they arise and in accordance with the legislation of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so established shall not exceed 10% of the gross amount of the royalties.

The competent authorities of the Contracting States shall, by mutual agreement, establish the manner of application of this limit.

3 - Should an EU directive enter into force providing for the common tax treatment of interest and royalties paid between enterprises, with such amendments as may be introduced, the provisions of that directive shall apply to such royalties instead of the provisions of this article.

4 - The term "royalties", as used in this article, means payments of any kind made for the use or the grant of the use of a copyright in a literary, artistic or scientific work, including cinematograph films, films or tapes for broadcasting by radio or television, a patent, a trademark, a design or a model, a plan, a formula or a secret process, as well as for the use or the grant of the use of industrial, commercial or scientific equipment or for information concerning experience acquired in the industrial, commercial or scientific sector.

The term "royalties" also includes payments in relation to technical assistance in connection with the use or the grant of the use of copyrights, property or information referred to in this number.

The Applicant made payments to B… B.V. (hereinafter "B…"), with registered office in the Netherlands, which the Authority for Tax and Customs understood should be considered royalties, income from capital, in light of the CTD Portugal – Netherlands, on the assumption that the contract concluded has as its object the transmission of technology (Know-how).

The Applicant argues that "in the specific case, the contract concluded between the Applicant and B… involves, not only the transfer of technology, but also the provision of a series of services by B…, in which it applies its technological knowledge" and that "the payments made to B… correspond to the consideration for services that this company provided to the Applicant: the parties concluded not a contract for the transmission of know-how, but rather a contract for technical assistance, involving the provision of services".

The Applicant further emphasizes, in the wake of ALBERTO XAVIER, that the consideration paid by the Applicant was not characteristic of know-how contracts, as it does not "take the form of a lump sum or a percentage of billing, production or profit" and in contracts for the provision of services "it is fixed essentially on the basis of the cost demonstrated by criteria relating to the work performed, such as the number of hours spent".

Thus, the Applicant argues that "in this case, B… was not limited to transmitting technology, nor information, nor knowledge", "as it had direct intervention in the application of the technology ceded, providing technical services for that purpose", "having also been remunerated for the execution of those same services and without establishing criteria related to billing, production or profit", whereby we are not "faced with a contract for the transmission of know-how, nor can the income earned by the non-resident entity be classified as royalties, being instead commercial income arising from the provision of services and assistance of a technical nature".

With these premises, the Applicant argues that the services referred to do not fall within the provisions of article 12 of the CTD Portugal – Netherlands, as they do not relate solely to the transfer of technology, whereby there is no withholding tax obligation on the amounts paid to B….

The Authority for Tax and Customs argues that the contract in question should be qualified as "royalties" given the breadth of that qualification, in accordance with article 12, no. 4, of the CTD Portugal – Netherlands, emphasizing that the very title of the contract "Assignment and technological transfer", which it translates as "Assignment/Grant and technological transfer".

The Authority for Tax and Customs further states that this is a "technology transfer and know-how contract tout court, providing accessorily for "local training" (meaning training at the premises of the Applicant), the only part of the contract that seems to frame a putative provision of services (alleged provision of services in points 18, 20, 22, 23, 24 and 26 of the request for arbitral pronouncement), which "also includes remuneration relating to technical assistance in connection with the use or the grant of the use of copyrights, property or information", in accordance with no. 4, of article 12 of the CTD Portugal – Netherlands, thus integrating the concept of royalties".

3.1.2. Appreciation of the question

The concepts of "know-how contract", contract for "provision of technical services" (engineering) and "technical assistance" were defined by the Supreme Administrative Court in the judgment of 08-03-2006, handed down in case no. 0845/05, in the wake of ALBERTO XAVIER, in the following terms:

Let us begin by distinguishing between the know-how contract and the contract for the provision of technical services, designated as an "engineering" contract.

Citing Alberto Xavier, we will say that the know-how contract has as its object the "transmission of pre-existing technologies and not revealed to the public, in themselves considered, in the form of temporary or definitive assignment of rights, so that the acquirer may use them for its own account, without the transmitter intervening in the application of the technology ceded or guaranteeing its result".

The contract for the provision of technical services ("engineering"), on the other hand, has as its object the execution of services which presuppose, on the part of the service provider, a technology, which is not intended to be transmitted, but only applied in the specific case.

Again, citing Alberto Xavier, in know-how technology is transferred, while in engineering technology is applied.

Another distinction is between the technical assistance contract and the contract for the provision of technical services (engineering).

The word assistance implies, as is obvious, a relationship of dependence, ancillary to another operation.

As an example of this is cited the case of the contract for the sale of industrial equipment that provides clauses or related contracts, relating to advice on installation, assembly and commissioning.

And technical assistance is distinguished from the contract for the provision of technical services, as while in the latter the parties desire the actual execution of a certain service, in the former, the parties desire technological information through a service complementary or ancillary to the principal object of the contract, which is the transmission of technological information (Fiscalidade, 19/20, p. 149).

That is: technical assistance is distinguished from the engineering contract as while in the latter the provision of services is the principal object of the contract, in the former, the provision of services is merely instrumental in relation to the principal object of the contract, which is the transmission of technological information.

And the Spanish Tax Administration characterizes technical assistance as the "fact of a company making qualified personnel available to the client, when this is necessary for the actual transfer of the knowledge and experience ceded and do not correspond to an obligation to do, which constitutes the principal object of the contract".

And hence technical assistance contracts are subject to taxation, being qualified as income from capital, due to the complementary or instrumental character of technical assistance in relation to the transmission of the information resulting from the experience acquired.

The terms of the contract allow one to unequivocally conclude that the parties intended thereby the transfer of technology and know-how regarding the production of labeling systems that B… possessed and that A… intended to acquire in order to produce for incorporation in the machines it intended to manufacture:

1. A… wants to purchase the technology to B… to produce the labeling systems to incorporate in A… machines;

2. B… is available to transfer the technological knowledge and know-how to A… to produce labeling systems to incorporate in A… machines;[1]

The terms of the contract also reveal that not only was the use by the Applicant of B…'s technology and know-how contracted, but also the provision of services by B… at the premises of the Applicant:

I – TECHNOLOGY TRANSFER

1. The transfer of all the knowledge with regard to the manufacture, assembly and implementation of the labeling systems;

2. The transfer of all the knowledge with regard to the technical information to be used;

3. Local training to be given by B… technical staff at the facilities of A… to A... technical staff. This training includes the know-how of die cutting systems. [2]

The evidence produced confirms that the contract concluded was intended to enable the Applicant to use B…'s technology and experience in the production of the Applicant's machines, but included the provision of services by B…'s technicians at the Applicant's premises, advising it on equipment to be acquired, the hiring of appropriate labor, training personnel and suggesting specialized services that should be contracted in electronics and software and providing technical support, being there 3 or 4 days, sometimes in continuous weeks, with the value of such services being included in the amounts referred to in the invoices, as a complete service was agreed for the implementation of the production line.

However, in accordance with no. 4 of the CTD Portugal – Netherlands, the term "royalties" does not cover only remuneration for the use or grant of use of rights or equipment, but also that paid "for information concerning experience acquired in the industrial, commercial or scientific sector", and it is from this perspective that the aforementioned provision of services falls within the concept of "royalties".

In fact, the information provided to the Applicant on equipment to be acquired and hiring of appropriate labor, training of personnel and suggestion of specialized services that should be contracted in electronics and software and provision of technical support based on the knowledge of B…'s technicians, constitutes the provision of information concerning an experience that they acquired, which the Applicant lacked, whereby the situation falls within the final part of the 1st paragraph of no. 4 of article 12 of the CTD Portugal – Netherlands, as the Authority for Tax and Customs correctly understood in the Tax Inspection Report when it stated: "In the case under analysis, this is the transfer of knowledge relating to information concerning experience acquired in the industrial sector, namely with regard to a labeling/tagging system".

In the case at hand, the object of the contract is the transfer to the Applicant of the technological knowledge necessary for the implementation of the manufacture of labeling systems, with no provision of services that cannot be reduced to the provision of information intended for such implementation by the Applicant itself.

In fact, in the case at hand, it was only the Applicant that acquired equipment and hired the appropriate labor and produced the machines using the knowledge transmitted by B…'s technicians, with the latter themselves not executing these tasks for the Applicant, without the transmission of the knowledge necessary for the Applicant to execute them, which would allow the contract to be qualified as being for the provision of technical services ("engineering"), in light of the aforementioned jurisprudence of the Supreme Administrative Court.

Also with regard to the training of the Applicant's personnel by B…'s technicians, we are faced with a means of transmitting to the Applicant the knowledge necessary to apply the aforementioned technology, whereby we are not faced with services separable from the technology transfer and know-how contracted.

The fact that B…'s remuneration is quantified in the contract rather than translating into a percentage of billing, production or profit that the Applicant might obtain, does not appear to be sufficient to divest the contract of its character as a technology and know-how transfer, as the form of remuneration is not relevant for that purpose, as follows from no. 4 of article 12 of the CTD Portugal – Netherlands, which qualifies as "royalties" "remuneration of any kind".

In any event, contrary to what the Applicant argues, the fixing of a lump sum payment rather than a percentage of billing, production or profits is in line with the teachings of ALBERTO XAVIER, as that is what constitutes a lump sum, referred to in the citation that the Applicant makes of this Author.

On the other hand, the characterization of the contract as know-how is also in line with comments 11.1 and 11.2 to article 12 of the OECD Model Convention in which it is stated:

"11.1 In a know-how contract, one party undertakes to impart to the other his special knowledge and experience not disclosed to the public, so that the latter can use them for his own account. It is recognized that the grantor is not required to play any part in the application of the formulas granted to the licensee and that he does not guarantee the result thereof.

11.2 This type of contract thus differs from contracts for the provision of services, in which one party undertakes to use the customary skills of his profession to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7."[3]

In the case at hand, B…'s knowledge and experience were intended for use by the Applicant for the production of labeling machines on its own account, with B… not assuming the obligation to produce them for the Applicant.

For this reason, in line with the aforementioned jurisprudence and doctrine, it must be understood that the contract concluded between the Applicant and B… falls within the provision of article 12, no. 4, of the CTD Portugal – Netherlands, whereby the qualification given to it by the Authority for Tax and Customs is not open to criticism.

3.2. Question of the applicable rate for withholding taxes

Pursuant to article 94, no. 1, paragraph (a), of the CIRC, "IRC is subject to withholding at source in relation to the following income obtained in Portuguese territory: (a) Income from intellectual or industrial property and as well as from the provision of information relating to experience acquired in the industrial, commercial or scientific sector".

In accordance with no. 2 of the same article, income referred to in no. 3 of article 4 of the CIRC, which includes "income from intellectual or industrial property and as well as from the provision of information relating to experience acquired in the industrial, commercial or scientific sector", is deemed to be obtained in Portuguese territory.

By virtue of paragraph (b) of no. 3 of article 94 of the CIRC, "withholding at source has a definitive character when, not being real estate income, the income recipient is a non-resident entity that does not have a permanent establishment in Portuguese territory or that, having one, such income is not attributable to it".

Thus, the income paid by the Applicant to B… was subject to withholding at source, with the Authority for Tax and Customs applying the rate of 25%, pursuant to nos. 5 and 6 of article 94 and no. 4 of article 87 of the CIRC.

3.2.1. Question of the application of the 5% rate by application of Directive no. 2003/49/EC of the Council of 03-06-2003

The Applicant argues, however, that the withholding tax rate of 5% should be applied, on the basis of Directive no. 2003/49/EC of the Council of 03-06-2003.

The Authority for Tax and Customs argues that the Interest & Royalties Directive applies to cross-border payments of interest and royalties between associated companies of different member states and also between permanent establishments of such associates, which results from article 1, no. 7, in which it states that "this article applies only if the company that is the payer or the company whose permanent establishment is considered as being the payer of the interest or royalties is an associated company to the company that is the beneficial owner or whose permanent establishment is considered as being the beneficial owner of such interest or royalties."

Effectively, as results from this provision, as well as from paragraph (b) of article 96 of the CIRC (which was later repealed by Law no. 55/2013, of 8 August), the regime provided for in Directive no. 2003/49/EC applies only to the payment of royalties between associated companies, which is not the case.

For this reason, the Applicant's claim that a 5% rate be applied to it has no legal basis.

3.2.2. Question of the application of the 10% rate by application of the CTD Portugal – Netherlands

In the Tax Inspection Report, it was understood that "in accordance with the Convention between Portugal and the Netherlands, royalties are covered by the provisions of article 12 of the Convention, and therefore, subject to taxation in Portugal, if the form model 21-RF is delivered, at the withholding tax rate of 10% on the amounts paid."

No. 2 of the aforementioned article 12 establishes that "such royalties may also be taxed in the Contracting State from which they arise and in accordance with the legislation of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so established shall not exceed 10% of the gross amount of the royalties".

The Applicant argues that the AT does not contest that B… is a non-resident entity, with registered office in the Netherlands, having been delivered to it the certificate of tax residence of the company, whereby it cannot be imposed ancillary obligations, namely pursuant to article 98 of the CIRC, the delivery of Mod. 21-RFI, as the CTD has superior force to internal norms by virtue of the provisions of article 8, no. 3, of the CRP.

No. 1 of article 98 of the CIRC establishes that there is no obligation to withhold IRC at source, in whole or in part, as applicable, in relation to the income referred to in no. 1 of article 94 of the CIRC when, by virtue of a convention intended to eliminate double taxation or another agreement of international law that binds the Portuguese State or internal legislation, the competence for taxation of income earned by an entity that does not have its registered office or effective management in Portuguese territory and does not have a permanent establishment there to which such income is attributable is not attributed to the source State or is only attributed in a limited manner.

By virtue of paragraph (a) of no. 2 of the same article, "the recipients of the income must furnish proof to the entity obliged to withhold at source, by the end of the period established for the delivery of the tax that should have been deducted in accordance with the applicable legal rules" "of the verification of the assumptions that result from a convention intended to eliminate double taxation or another agreement of international law or of applicable internal legislation, through the presentation of a form model to be approved by an order of the Minister of Finance certified by the competent authorities of the respective State of residence".

Pursuant to no. 5 of the same article 98 "when proof is not furnished by the end of the period established for the delivery of the tax, and, as well, in the cases provided for in nos. 3 et seq. of article 14, the tax substitute is obliged to deliver the total amount of the tax that should have been deducted in accordance with the law".

No. 2 of article 12 of the CTD Portugal – Netherlands allows royalties to be "taxed in the Contracting State from which they arise and in accordance with the legislation of that State", whereby the procedural terms related to that taxation in Portugal and its exemption are accepted by the CTD, which allows, in principle, the application of the regime provided for in article 98 of the CIRC.

On the other hand, for B… to be considered a "resident of a Contracting State" for the purposes of the CTD Portugal – Netherlands, it is not enough that it be domiciled there, as, pursuant to article 4, no. 1, of the CTD, "for the purposes of this Convention, the expression 'resident of a Contracting State' means any person who, by virtue of the legislation of that State, is there subject to tax by reason of his domicile, residence, place of management or any other criterion of a similar nature".

In the case at hand, the certificate of residence presented by the Applicant during the inspection action, contained in Annex II to the Tax Inspection Report, issued by the Dutch tax authorities, whose authenticity was not questioned, states that, during the year 2013, B… was a resident of the Netherlands with the meaning of article 4 of the CTD Portugal – Netherlands ("resident of the Netherlands within the meaning of article 4 of the Convention for the avoidance of double taxation between the Kingdom of the Netherlands and the Portuguese Republic").

Information provided by foreign tax administrations has, in principle, evidential value identical to that provided by Portuguese authorities, being this the principle that can be inferred from no. 4 of article 76 of the LGT, whereby, there being no reason to doubt the information provided, it should be considered as a means of proof.

In this case, in stating that B… was a resident of the Netherlands with the meaning of article 4 of the CTD, the declaration of the Dutch authorities was implicitly stating that "is there subject to tax", as it is with this meaning that no. 1 of this provision considers any entity as a "resident of a Contracting State", for the purpose of the CTD.

Thus, it is to be concluded that proof of B…'s status as a resident of the Netherlands in the year 2013, for the purposes of applying the CTD, was already made with the presentation of the aforementioned declaration from the Dutch tax entities.

In this context, the question arises whether the presentation of mod. 21-RFI is an indispensable element to prove what was already proven by the aforementioned declaration of the Dutch tax authorities.

The answer to this question must be negative, as understood by the Supreme Administrative Court in the judgment of 14-12-2016, handed down in case no. 0141/14:

I - Where there is a convention intended to avoid double taxation, in order to determine the exemption from the obligation to withhold IRC at source, only the material assumptions agreed upon in the convention need to be considered.

II - Conventional rules bind the contracting States and cannot be altered by the internal law of one of them, given the primacy of conventional law over internal law.

III - Although it is within the competence of each of the contracting States to regulate the procedural rules for the purposes of applying the convention, such fact cannot be used to alter in a procedural rule the material assumptions of application of the convention under penalty of violation of the conventional rules and of the provisions of no. 1 of article 1 of the LGT.

IV - It follows from the interpretation of articles 103 of the CRP and 90 of the CIRC that forms required as proof of the exemption from the obligation to withhold IRC at source on income earned by non-resident entities are mere documents ad probationem, whereby they can be presented "a posteriori" within the legally fixed periods and can be replaced in accordance with article 364, no. 2 of the Civil Code.

In line with this jurisprudence, it is understood that it follows from the primacy of international convention norms over internal law norms (article 8, no. 3, of the CRP), as well as from the principle that the fundamental elements of taxation depend on formal law (article 103, no. 2, of the CRP), that the application of the regime resulting from the CTD Portugal – Netherlands when the material assumptions of its application were proven cannot be set aside on the ground of the failure to present MOD. 21-RFI, required by an order of the Minister of Finance published in the II series of the Diário da República.

By the above, it is concluded that the disputed assessments suffer from a defect of violation of law in not applying the 10% rate.

4. Decision

For these reasons, the members of this Arbitral Tribunal agree to:

a) Declare the request for arbitral pronouncement well-founded;

b) Annul the disputed assessments on the ground of the failure to apply the 10% withholding tax rate.

5. Value of the proceeding

In accordance with the provisions of art. 306, no. 2, of the CPC and 97-A, no. 1, paragraph (a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 236,344.56.

6. Costs

Pursuant to art. 22, no. 4, of the RJAT, the amount of costs is fixed at € 4,284.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Authority for Tax and Customs.

Lisbon, 27-10-2017

The Arbitrators

(Jorge Lopes de Sousa)

(António Pragal Colaço)

(Gonçalo Cid Peixeiro)

[1] Free translation:

1. A… wants to purchase the technology from B… to produce labeling systems to incorporate in A… machines;

2. B… is available to transfer the technological knowledge and know-how to A… to produce labeling systems to incorporate in A… machines;

[2] Free translation:

I - TECHNOLOGY TRANSFER

1. The transfer of all knowledge relating to the manufacture, assembly and implementation of labeling systems;

2. The transfer of all knowledge relating to the technical information to be used;

3. Local training to be provided by B…'s technical team at A…'s premises to A…'s technical team. This training includes the know-how of die-cutting systems.

[3] English version:

11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof.

11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7.

French version:

11.1 Dans le contrat de savoir-faire, l'une des parties s'oblige à communiquer ses connaissances et expériences particulières, non révélées au public, à l'autre partie qui peut les utiliser pour son propre compte. II est admis que le cédant n'a pas à intervenir dans l'application des formules concédées au concessionnaire et n'en garantit pas le résultat.

11.2 Ce contrat diffère donc de ceux qui comportent des prestations de services, ou l'une des parties s'oblige, à l'aide des connaissances usuelles de sa profession, à faire elle-même un ouvrage pour l'autre partie. Les rémunérations versées à ce titre relèvent généralement de l'article 7.