Process: 222/2018-T

Date: October 31, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (222/2018-T) addresses the deductibility of bad debt credits under Portuguese Corporate Income Tax (IRC) law. The taxpayer, A... S.A., challenged the Tax Authority's disallowance of credits written off as uncollectible in fiscal year 2013, resulting in additional tax liability of €73,046.08. The dispute centers on Article 41 of the IRC Code (CIRC), which permits deduction of uncollectible credits when three cumulative requirements are met: (1) the uncollectibility results from insolvency or enforcement proceedings; (2) no impairment loss has been previously deducted; and (3) the debtor is notified of the write-off. The core legal question is whether processes must be formally closed before credits can be deemed uncollectible. The taxpayer argued that uncollectibility can be demonstrated while proceedings remain open if judicial evidence shows no reasonable expectation of recovery—such as insufficient assets in the debtor's estate. The Tax Authority contended that process closure is a prerequisite for deductibility. This case illustrates the tension between formal procedural requirements and economic substance in tax treatment of bad debts. The taxpayer followed the hierarchical appeal process before seeking CAAD arbitration, challenging both the IRC assessment and compensatory interest charges. The tribunal found itself competent to review the matter, highlighting CAAD's role in resolving IRC disputes over bad debt deductions when administrative appeals fail to provide relief to taxpayers.

Full Decision

ARBITRAL DECISION

I – Report

1.1. A..., S.A., legal person no. ..., with headquarters at Rua ..., no. ..., ...-..., … (hereinafter referred to as the "Claimant"), having been notified through Official Letter no. ..., dated 25/1/2018, of the order issued by the Director of IRC Services, which dismissed the hierarchical appeal filed against the Corporate Income Tax Assessment Act no. 2016..., the corresponding compensatory interest assessment act no. 2016... and against the statement of account reconciliation no. 2016..., all relating to the fiscal year 2013, from which a value to pay of €73,046.08 results, filed, on 27/4/2018, a request for constitution of an arbitral tribunal and for arbitral pronouncement, pursuant to the provisions of Article 2, paragraph 1, subsection a), and Articles 10 et seq. of Decree-Law no. 10/2011, of 20/1 (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as "LRAT"), in which the Tax and Customs Authority (TCA) is requested, with a view to "solely discussing the legality of part of the said assessment acts", whereby "the value of the present Request [...] is limited to the value of the tax and respective compensatory interest corresponding to the value of credits considered uncollectible by the Claimant and which were subject to correction by the tax administration". In those terms, the now Claimant requests that the present request be "judged meritorious, as proven, thereby annulling, consequently, the decision dismissing the hierarchical appeal that precedes it and, likewise, part of the Corporate Income Tax Assessment Act no. 2016... and corresponding compensatory interest assessment act no. 2016..., with the necessary legal consequences, namely the reimbursement of the corresponding amount of tax paid, plus indemnity interest."

1.2. On 10/7/2018, the present Singular Arbitral Tribunal was constituted.

1.3. Pursuant to Article 17, paragraph 1, of the LRAT, the TCA was cited, as the respondent party, to submit a response. The TCA submitted its response on 1/10/2018, having argued in the sense of total lack of merit of the claimant's request.

1.4. By order of 12/10/2018, the Tribunal considered, pursuant to Article 16, subsections c) and e), of the LRAT, that the meeting provided for in Article 18 of the LRAT was unnecessary and that the case was ready for decision. By order dated 23/10/2018, a new date of 31/10/2018 was set for the issuance of the arbitral decision.

1.5. The Arbitral Tribunal was regularly constituted, is materially competent, the case does not suffer from defects that would invalidate it, and the Parties have legal standing and capacity, configuring themselves as legitimate.

II – Allegations of the Parties

2.1. The Claimant alleges, in its initial petition, that: a) "the tax administration errs regarding the factual and legal assumptions, by not considering deductible part of the credits considered uncollectible by the Claimant in the fiscal year 2013"; b) "[in light of the facts described above,] it is necessary to conclude that the prerequisites for deductibility of the said credit(s) are met, by considering [them to be] uncollectible, in light of the provisions of Article 41 of CIRC. In conclusion, and given the occurrence of the credits in question, it is concluded that they result from the normal activity of the now Claimant, that is, they are the result of operations of a commercial nature related to the sale of goods or services pertaining to the Claimant's main activity and, taking into account the evidence of impossibility of collection demonstrated here, they were duly considered uncollectible by the Claimant"; c) "the law provides [...] as requirements for recognition of credit uncollectibility, that (1) such results from a process such as insolvency or execution, (2) no loss by impairment has been admitted, and (3) there is communication of the recognition as an expense of the fiscal year to the debtor"; d) "the tax administration seems to add a new requirement for application of the regime, requiring the closure of the processes in question [...]. However, the Claimant fails to understand how the tax administration reaches such conclusion, given the legal text"; e) "even if the expression 'provided that (...) such results from a process' is understood as 'an unfortunate expression', to the extent of the indetermination of what it means to result from a process, it shall never be concluded therefrom that process closure is necessary, but only that it may be inferred that a certain credit, subject of that process, is uncollectible. Therefore, it shall only be necessary that it results that the credit cannot be received by the creditor, because the debtor will not pay or because the debtor genuinely cannot pay, losing hope of good collection due to the absence of attachable assets, evidenced judicially"; f) "[in the insolvency proceeding] the principle of exclusivity of insolvency proceedings applies, that is, it is forbidden to creditors to obtain payment of their respective credits by any means other than through insolvency proceedings. Indeed, it will be agreed that both singular executive action and universal action aim at 'satisfaction of creditors', since they aim to satisfy unfulfilled obligations, hence, in the abstract, hope of credit collection will remain alive as long as such processes subsist. However, in practice, reality differs, since the actual collection of the credit does not depend on the creditor, but rather on the existence of assets in the debtor's estate"; g) "more: in insolvency proceedings, it will further depend on the sufficiency of the insolvency estate to satisfy the debts of the estate, secured credits and privileged credits, before satisfaction of ordinary credits, as are those of the now Claimant. The verification of such insufficiency is, in most cases, simple to observe, requiring only analysis of the underlying proceeding. It follows that the credit will never be satisfied in that singular or universal executive process, even if the process is not closed"; h) "a company wishing to de-recognize an uncollectible credit must (1) obtain a judicial certificate attesting, albeit not expressly, that the credit is uncollectible in that process and (2) communicate such de-recognition to the debtor. [...]. Obtaining a judicial certificate does not depend, at least solely, on whoever requests it, as it rests on the diligence of the Court that issues it"; i) "all the above-listed tax expenses resulting from de-recognition of uncollectible credits are correctly deducted, because uncollectibility results from a judicial process, because communication of the consideration as an expense to the debtor has been made and, likewise, there is no loss by impairment, with the cumulation of requirements in the fiscal year 2013, pursuant to Article 41 of CIRC"; j) "thereby, it is necessary to annul the tax acts whose contested part relates to the credits above mentioned, subject to correction by the Tax Administration, as they are shown to be devoid of grounds, and it is equally necessary to annul the respective corrections made by the Tax Inspection Services, because contrary to law and to applicable legal principles"; l) "with regard to the Decision dismissing [the decision] rendered in the context of the Hierarchical Appeal filed, [...] the same was made in violation of the applicable legal norms and principles, and should be annulled accordingly"; m) "the assessment of compensatory interest should be annulled to the same extent as the illegality of the Corporate Income Tax assessment that serves as its basis"; n) "the tax administration, limit[ed itself to] automatically demand the said value [€4,738.48] as compensatory interest, exceeding the legal formalities established for its assessment, thus tainting the compensatory interest assessment act, now contested, with a defect of form due to lack of substantiation, error in the factual and legal assumptions and violation of law, by offense to the provisions of paragraph 1 of Article 35 of LGT"; o) "the Claimant should be recognized the right to indemnity interest, following the annulment of the part of the assessment acts contested here".

2.2. The Claimant concludes that the present request for arbitral pronouncement should be "judged meritorious, as proven, thereby annulling, consequently, the decision dismissing the hierarchical appeal that precedes it and, likewise, part of the Corporate Income Tax Assessment Act no. 2016... and corresponding compensatory interest assessment act no. 2016..., with the necessary legal consequences, namely the reimbursement of the corresponding amount of tax paid, plus indemnity interest."

2.3. For its part, the Respondent alleges, in its response, that: a) "at no time does the Claimant prove what it puts forward throughout its request for arbitral pronouncement"; b) "at no time is it proven that the processes in question have become final and, in that context, that the debts have become definitely uncollectible"; c) "the Claimant alleges facts that serve as grounds and which substantially configure the alleged legal position it claims, without proving it"; d) "with regard to uncollectible credits erroneously recognized in the fiscal year 2013 by the Claimant under Article 41 of CIRC, the inspection services of the now Respondent correctly decided to disregard them because they did not fulfill the factual and legal prerequisites for their recognition"; e) "uncollectible credits may be directly considered expenses or losses of the period, if such results from an insolvency proceeding, or from an execution proceeding, among other proceedings listed in that legal provision (subsection a) of paragraph 1 of Article 41 of CIRC)"; f) "the declaration of insolvency is not synonymous with extinction of the legal entity, since, between the judgment declaring insolvency and its closure, a series of acts occur, namely convocation of creditors, claim of credits and graduation of credits that may lead to identification of assets and satisfaction of the claimed debts. Closure of insolvency occurs only with the occurrence of one of the situations provided for in paragraph 1 of Article 230 of CIRE, namely closure of distribution, cessation of the insolvency situation and verification of insufficiency of the insolvency estate to satisfy the debts. Furthermore, closure of insolvency is publicized and subject to registration, pursuant to paragraph 2 of Article 230 of CIRE. It follows, inexorably, that only with the closure of insolvency can recognition of credit uncollectibility take place"; g) "mere pendency of an insolvency proceeding constitutes, in accordance with the provision of subsection a) of paragraph 1 of Article 36 of CIRC, grounds for constitution of impairment in credits and not grounds for recognition of credit uncollectibility"; h) "only with extinction [of the execution] process in accordance with Article 919 of CPC, due to lack of payment or due to absence of assets, may the credit be declared uncollectible"; i) "as long as closure of the insolvency proceeding or closure of the execution process does not occur, the creditor retains the right to receipt of the credit and may be compensated for it, being unable consequently for the financial asset to be de-recognized"; j) "in Corporate Income Tax a recognition by impairment results from a risk of collectibility of a credit, whereas for its part, the concept of uncollectibility [...] presupposes an impossibility, a definite inexecutability of credit collection"; l) "no other interpretive solution can be reached for the situation sub judice than that the legislator, the ratio of recognition of uncollectible credits as tax expenses and their systematization within CIRC in contrast with the impairment regime imposes a character of definitiveness to credit uncollectibility that cannot be proven in any other way than through finality of the insolvency proceeding and/or execution proceeding"; m) "[the Claimant] failed to present any proof attesting to the definitiveness of the decisions in question and their consequent recognition as uncollectible credit, not fulfilling, thereby, the prerequisites of Article 41 of CIRC"; n) "there being no error attributable to the services in the tax assessment, the Claimant should not be recognized any right to indemnity interest"; o) "the TCA limited itself, therefore, to apply the legal consequences that, from the tax perspective, were imposed given the occurrence of the factual prerequisites underlying the correction made, whereby the objection to the requested interest should also be judged to lack merit."

2.4. The Respondent concludes that "the present request for arbitral pronouncement should be judged to lack merit, as unproven and, consequently, the Respondent absolved of all requests with legal consequences."

III – Proven Facts, Unproven Facts and Respective Grounds

3.1. The following facts are considered proven:

i) The Claimant is a commercial stock company whose activity concerns the sale and repair of vehicles and equipment for heavy vehicles of Brand B..., with the company being held 100% by company C..., with headquarters in Sweden.

ii) The Claimant is subject to the normal Corporate Income Tax regime and Value Added Tax subject, within the monthly periodicity regime.

iii) The Claimant was subject to an internal inspection procedure, of partial scope, covering Corporate Income Tax for the fiscal years 2012 and 2013, carried out pursuant to service orders no. OI2016... and no. OI2016..., with Order from the Head of Division of Department B, of the Tax Inspection Area of Finance Directorate of … (see Doc. no. 3).

iv) The Claimant was notified, by Official Letter..., from the Finance Directorate of …., of 19 April 2016, of the Preliminary Report of the Inspection Corrections (see Doc. no. 4).

v) In disagreement with the projected corrections, the Claimant exercised, on 4/5/2016, its right of participation in the decision, in the form of prior hearing (see Doc. no. 5).

vi) The Claimant was notified, by Official Letter..., of 11/5/2016, from the Finance Directorate of …, of the Final Report of Tax Inspection – in which (see Doc. no. 3) it was determined that in fiscal year 2013 tax expenses with uncollectible credits had been erroneously recognized, and which appeared in table 07 of the income return model 22.

vii) The set of corrections made by the TCA appears in the table at point 20 of the initial petition, which is considered reproduced here and which was not challenged by the Respondent. Consequently, the TCA corrected the Claimant's taxable profit for 2013 to the amount of €651,229.81.

viii) In that sequence, the Claimant was notified of the Corporate Income Tax Assessment Act no. 2016..., of the corresponding compensatory interest assessment act no. 2016... and, likewise, of the Statement of Account Reconciliation no. 2016..., in the total amount of €73,046.08 (see Doc. no. 3). The Claimant, although in disagreement, proceeded with voluntary payment of the assessment acts on 15/7/2016 (see Doc. no. 6).

ix) The factuality concerning the Clients whose credit deductibility (in light of their uncollectibility) was denied by the TCA was as follows:

  1. As to client "D..., Lda.", the Account balance is €168,571.94 (see Doc. no. 8). In this case, and in accordance with a certificate issued by the ... Court of Commerce of …, on 28/6/2013, the client was declared insolvent, by judgment that became final on 7/3/2011 (see p. 3 of Doc. no. 8). Subsequently, without the Claimant having received any amount to satisfy its credit, closure of that insolvency proceeding was determined, due to insufficiency of the insolvency estate, as results from the announcement published on 3/1/2013 by the ... Court of Commerce of … (see p. 10 of Doc. no. 8). Following that announcement, the Claimant communicated, on 2/12/2013, the reversal of the expense to the debtor and, likewise, to the Insolvency Administrator, pursuant to paragraph 2 of Article 41 of CIRC (although, due to a cause beyond its control, the registered letter was returned with the notation "Moved": see p. 14 of Doc. no. 8).

  2. As to client "E..., Lda.", the Account balance is €596.53 (see Doc. no. 9). In this case, the Claimant brought an executive action with a view to coercive collection of its credit (see p. 2 of Doc. no. 9). Due to the absence of attachable assets of the Defendant, the said execution proceeding was terminated, in accordance with notification from the Enforcement Officer responsible for the proceeding (see p. 10 of Doc. no. 9). In a certificate of 23/9/2013, relating to the execution proceeding mentioned above, it is certified that the Claimant did not receive any amount for total or partial payment of the sum owed by the Defendant (see p. 11 of Doc. no. 9). Following and given the tenor of the notification and the mentioned certificate, the Claimant communicated, on 2/12/2013, the reversal of the expense to the debtor, pursuant to Article 41, paragraph 2, of CIRC (see p. 12 of Doc. no. 9).

  3. As to client "F..., Lda.", the Account balance is €2,245.36 (see Doc. no. 10). In this case, the Claimant brought an executive action with a view to coercive collection of its credit (see p. 2 of Doc. no. 10). Due to the absence of attachable assets of the Defendant, the said execution proceeding was terminated, in accordance with notification from the Enforcement Officer responsible for the proceeding (see p. 3 of Doc. no. 10). In a certificate of 12/11/2013, relating to the execution proceeding cited above, it is certified that the Claimant did not receive any amount for total or partial payment of the sum owed by the Defendant (p. 2 of Doc. no. 10).

x) In disagreement with the above-mentioned assessment acts, the Claimant filed, on 14/11/2016, a gracious administrative appeal against them. By Official Letter no. ..., of 3/7/2017, the Claimant was notified of the Final Decision dismissing the said appeal (see Doc. no. 7). On 31/7/2017, the Claimant filed a hierarchical appeal of the dismissal decision, which was also dismissed (the Claimant was notified of the order dismissing the hierarchical appeal through Official Letter no. ..., of 25/1/2018).

xi) In disagreement, the Claimant filed the present request for arbitral pronouncement on 27/4/2018.

3.2. There are no unproven facts relevant to the decision of the case.

3.3. The facts considered pertinent and proven (see 3.1) are grounded in the analysis of the positions exposed by the parties and the documentary evidence attached to the case file.

IV – On the Law

In the present case, there are, in summary, two disputed legal issues: 1) whether, in light of the provisions of Article 41 of CIRC, the prerequisites for deductibility of the credits considered uncollectible by the now Claimant and which were not recognized by the TCA are fulfilled; and 2) whether the requested indemnity interest is due.

Let us see, then.

  1. The Claimant argues, in summary, that: the "credits in question [...] result from the normal activity of the now Claimant, that is, they are the result of operations of a commercial nature related to the sale of goods or services pertaining to the Claimant's main activity and, taking into account the evidence of impossibility of collection [...] demonstrated, they were duly considered uncollectible by the Claimant"; "the law provides [in Article 41 of CIRC] [and the Claimant complied with the] requirements for recognition of credit uncollectibility[:] (1) such results from a proceeding such as insolvency or execution; (2) no loss by impairment has been admitted; and (3) there is communication of the recognition as an expense of the fiscal year to the debtor"; "the tax administration seems to add a new requirement for application of the regime, requiring the closure of the processes in question".

For its part, the Respondent alleges, in summary, that: "at no time does the Claimant prove what it puts forward throughout its request for arbitral pronouncement, i.e., at no time is it proven that the processes in question have become final and, in that context, that the debts have become definitely uncollectible"; "as an example, Article 48 of the request for arbitral pronouncement [in which it is noted that] the Claimant presents a document from the Family and Minors Court and District of Loures that shows that '…until the present date…' the Claimant had not received total or partial payment of the debt [...] does not confirm any finality or any debt uncollectibility"; "with regard to uncollectible credits erroneously recognized in fiscal year 2013 by the Claimant under Article 41 of CIRC, the inspection services of the now Respondent correctly decided to disregard them because they did not fulfill the factual and legal prerequisites for their recognition"; "only with closure of insolvency can recognition of debt uncollectibility take place"; "the ratio of recognition of uncollectible credits as tax expenses and their systematization within CIRC in contrast with the impairment regime imposes a character of definitiveness to credit uncollectibility that cannot be proven in any other way than through finality of the insolvency proceeding and/or execution proceeding"; "[the Claimant] failed to present any proof attesting to the definitiveness of the decisions in question and their consequent recognition as uncollectible credit, not fulfilling, thereby, the prerequisites of Article 41 of CIRC."

In light of the elements brought to the case file and considered proven, it is inevitable to decide here in the sense of decisions such as, for example, the judgment of the Supreme Administrative Court of 10/10/2012 (proc. 782/12), according to which the provision of Article 39 of CIRC [Article 41 as of 1/1/2010] "does not require that credits in coercive collection through execution proceeding may only be accounted for as uncollectible credits by means of a judgment with finality that declares their uncollectibility in execution proceeding."

Indeed, the said judgment states in detail that: "If the legislator had wanted that only the judgment with finality would serve as means of proof of credit uncollectibility for purposes of its deduction as a cost for purposes of determining taxable matter for Corporate Income Tax purposes, it would certainly have said so unequivocally; by having chosen a formula from which this requirement does not result, even minimally, we must conclude that it did not want to make it a requirement for proving uncollectibility (see Article 9, paragraph 3, of the Civil Code). In fact, in situations in which the legislator understands that for the proof of certain facts a specific means of proof is required, it always states this unequivocally."

In the same sense, with which we agree here, see the Arbitral Decision of 30/6/2014, issued in proc. 279/2013-T: "It does not appear that the legislator's intention was in the direction of the requirement of a judgment with finality as a means of proof of uncollectibility, because if so it would have expressed that requirement unequivocally. Or, put another way: there are no reasons why it would not have done so insofar as the requirement of a certain means of proof is always made unequivocally by the legislator. Thus the segment of Article 39 of CIRC ('uncollectible credits may be directly considered costs or losses of the period insofar as such results from a special procedure for recovery of enterprise and protection of creditors or from an execution, bankruptcy or insolvency proceeding'), must be interpreted in the sense that it is not the final formal result of the proceeding (recovery of enterprise, execution, bankruptcy or insolvency) that is relevant but rather this result must be what derives from a set of acts and facts reflected in that same proceeding and revealing unequivocally the uncollectibility of the credit (for example, a property seizure report was drawn up showing absence of assets due to absolute lack of patrimony of the bankrupt or insolvent person, what sense would it make to wait for a court decision with finality to consider the credit uncollectible?). [...]. It can be stated then and in summary that what must be captured are signals in the insolvency proceeding, enterprise recovery, execution proceeding, that unequivocally reveal the uncollectible nature of credits."

Thus, it is necessary to verify whether there are signals that unequivocally point to the uncollectible nature of the credits now in question.

In light of the documentary evidence brought to the present case and the facts considered proven based on that evidence, it was verified that:

  1. As to client "D..., Lda.", the Account balance is €168,571.94 (see Doc. no. 8). In this case, and in accordance with a certificate issued by the ... Court of Commerce of …, on 28/6/2013, the client was declared insolvent, by judgment that became final on 7/3/2011 (see p. 3 of Doc. no. 8). Subsequently, without the Claimant having received any amount to satisfy its credit, closure of that insolvency proceeding was determined due to insufficiency of the insolvency estate, as results from the announcement published on 3/1/2013 by the ... Court of Commerce of … (see p. 10 of Doc. no. 8). Following that announcement, the Claimant communicated, on 2/12/2013, the reversal of the expense to the debtor and, likewise, to the Insolvency Administrator, pursuant to paragraph 2 of Article 41 of CIRC (although, due to a cause beyond its control, the registered letter was returned with the notation "Moved": see p. 14 of Doc. no. 8).

  2. As to client "E..., Lda.", the Account balance is €596.53 (see Doc. no. 9). In this case, the Claimant brought an executive action with a view to coercive collection of its credit (see p. 2 of Doc. no. 9). Due to the absence of attachable assets of the Defendant, the said execution proceeding was terminated, in accordance with notification from the Enforcement Officer responsible for the proceeding (see p. 10 of Doc. no. 9). In a certificate of 23/9/2013, relating to the execution proceeding mentioned above, it is certified that the Claimant did not receive any amount for total or partial payment of the sum owed by the Defendant (see p. 11 of Doc. no. 9). Following and given the tenor of the notification and the mentioned certificate, the Claimant communicated, on 2/12/2013, the reversal of the expense to the debtor, pursuant to Article 41, paragraph 2, of CIRC (see p. 12 of Doc. no. 9).

  3. As to client "F..., Lda.", the Account balance is €2,245.36 (see Doc. no. 10). In this case, the Claimant brought an executive action with a view to coercive collection of its credit (see p. 2 of Doc. no. 10). Due to the absence of attachable assets of the Defendant, the said execution proceeding was terminated, in accordance with notification from the Enforcement Officer responsible for the proceeding (see p. 3 of Doc. no. 10). In a certificate of 12/11/2013, relating to the execution proceeding cited above, it is certified that the Claimant did not receive any amount for total or partial payment of the sum owed by the Defendant (p. 2 of Doc. no. 10).

It is further noted that, as the Claimant states in its initial petition (and was demonstrated by the documents it brought to the case file), "all the [...] tax expenses resulting from de-recognition of uncollectible credits are correctly deducted because uncollectibility results from a judicial proceeding, because communication of the consideration as an expense to the debtor has been made [see paragraph 2 of Article 41 of CIRC] and, likewise, there is no loss by impairment, with the cumulation of requirements in fiscal year 2013, in accordance with Article 41 of CIRC."

In summary: from the factuality stated above, it is concluded, unequivocally (note that the Respondent, despite alleging that it considers contested "the facts alleged by the Claimant that are in opposition with [its] defense" – as can be read in the Response – the fact is that it does not present facts or elements that clearly contradict the said and evident signs that the credits in question have an uncollectible nature) that the Claimant has succeeded in proving the uncollectible nature of the credits in question, for which reason the annulment of the tax acts whose contested part relates to the said credits and which was subject to correction by the Tax Administration is necessary.

  1. Finally, it is necessary to examine, pursuant to Article 24, paragraph 5, of the LRAT, the request for payment of indemnity interest in favor of the Claimant.

Pursuant to Article 43, paragraph 1, of the LGT, indemnity interest is due when it is determined, in a gracious administrative appeal or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due.

It is, therefore, a necessary condition for attribution of the said interest the demonstration of the existence of error attributable to the services. In that sense, see, for example, the following judgments: "The right to indemnity interest provided for in paragraph 1 of Article 43 of the LGT [...] depends on it being demonstrated in the proceeding that this act is affected by error regarding factual or legal assumptions attributable to the TCA." (Supreme Administrative Court Judgment of 30/5/2012, proc. 410/12); "The right to indemnity interest provided for in paragraph 1 of Article 43 of the General Tax Law presupposes that in the proceeding it is determined that in the assessment 'there was error attributable to the services', understood as 'error regarding factual or legal assumptions attributable to the Tax Administration'" (Supreme Administrative Court Judgment of 10/4/2013, proc. 1215/12).

Having been, as is noted from reading of 1), error attributable to the TCA, given that it made the assessment act partially illegal on its own initiative, it is concluded by the merit of the said request for payment of indemnity interest in favor of the Claimant.

V – DECISION

In light of the foregoing, it is decided:

– To judge the request for arbitral pronouncement meritorious, with the consequent annulment of the contested assessments in the part relating to the correction corresponding to tax expenses with uncollectible credits that were not accepted, in the amount now in question, and the reimbursement of the amount wrongfully paid.

– To judge the request meritorious in the part relating to the recognition of the right to indemnity interest in favor of the claimant.

The value of the proceeding is set at €39,374.45 (thirty-nine thousand, three hundred seventy-four euros and forty-five cents), pursuant to Article 32 of CPTA and Article 97-A of CPPT, applicable by force of the provisions of Article 29, paragraph 1, subsections a) and b), of the LRAT, and Article 3, paragraph 2, of the Regulation on Costs in Tax Arbitration Proceedings (RCPAT).

Costs to be borne by the respondent, in the amount of €1,836.00 (one thousand eight hundred thirty-six euros), pursuant to Table I of RCPAT, and in compliance with the provisions of Articles 12, paragraph 2, and 22, paragraph 4, both of the LRAT, and the provisions of Article 4, paragraph 5, of the cited Regulation.

Notify.

Lisbon, 31 October 2018.

The Arbitrator

(Miguel Patrício)

Text prepared by computer, in accordance with the provisions of Article 131, paragraph 5, of the Code of Civil Procedure, applicable by reference from Article 29, paragraph 1, subsection e), of the LRAT.

The drafting of this decision is governed by spelling prior to the 1990 Orthographic Agreement.

Frequently Asked Questions

Automatically Created

What are the requirements for deducting bad debt credits (créditos incobráveis) under Portuguese IRC tax law?
Under Article 41 of the IRC Code, deducting bad debt credits requires three cumulative conditions: (1) uncollectibility must result from insolvency or enforcement proceedings; (2) no impairment loss can have been previously admitted as a tax deduction for the same credit; and (3) the taxpayer must notify the debtor of recognizing the credit as uncollectible. The Tax Authority often requires that judicial processes be closed, though taxpayers argue that demonstrable uncollectibility—such as insufficient debtor assets evidenced in ongoing proceedings—should suffice without awaiting formal closure.
Can a company challenge an IRC tax assessment regarding non-deductible bad debts through CAAD arbitration?
Yes, companies can challenge IRC assessments regarding disallowed bad debt deductions through CAAD (Administrative Arbitration Center) arbitration. Following notification of the Tax Authority's decision dismissing a hierarchical appeal, taxpayers have the right to file a request for arbitral tribunal constitution under Decree-Law 10/2011 (RJAT). This alternative dispute resolution mechanism provides specialized review of tax disputes, including technical questions about bad debt deductibility under Article 41 CIRC, offering a faster resolution than traditional court proceedings.
What happens when the Portuguese Tax Authority (AT) disallows the deduction of credits considered uncollectible by a taxpayer?
When the Portuguese Tax Authority disallows credits deemed uncollectible by a taxpayer, it issues an IRC assessment act correcting the taxable income upward by adding back the disallowed deductions. This results in additional tax liability plus compensatory interest charges calculated from the original payment deadline. Taxpayers can contest through hierarchical appeal to the Director of IRC Services, and if dismissed, can escalate to CAAD arbitration or judicial courts. The burden falls on taxpayers to demonstrate compliance with Article 41 CIRC requirements through judicial certificates and debtor notifications.
How does the hierarchical appeal process work before filing a CAAD arbitral tribunal request for IRC disputes?
The hierarchical appeal process begins after the taxpayer receives an IRC assessment act. The taxpayer files an appeal with the superior hierarchical authority (typically the Director of IRC Services) challenging the legality or merit of the assessment. This administrative review examines whether tax corrections were properly substantiated and legally grounded. If the hierarchical appeal is dismissed, the taxpayer receives formal notification and has a limited timeframe to initiate CAAD arbitration under Article 10 of RJAT, as demonstrated in this case where the appeal dismissal on 25/1/2018 led to arbitration filing on 27/4/2018.
Are compensatory interest charges applicable when IRC tax corrections are made for disallowed bad debt deductions in Portugal?
Yes, compensatory interest (juros compensatórios) is automatically charged when IRC corrections are made for disallowed bad debt deductions. These interest charges compensate the State for delayed tax collection, calculated from the original payment deadline until actual payment. The interest assessment act accompanies the IRC correction and can be challenged alongside the principal tax assessment. However, compensatory interest assessments are derivative—if the underlying IRC correction is annulled due to illegal disallowance of bad debt deductions, the compensatory interest assessment falls accordingly, as it lacks independent legal foundation without a valid principal tax liability.