Process: 233/2015-T

Date: December 16, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 233/2015-T addresses the tax deductibility of business expenses documented by invoices from a dissolved company with an invalid NIF. The claimant company A sought to deduct €139,475.62 in expenses from invoices issued by Company B (a Madeira Free Zone entity) during fiscal year 2010. The central issue was that Company B had been officially dissolved on 24 March 2009 through administrative closure of liquidation, and its tax registration was ceased by the Tax Authority on 18 August 2010. Despite this dissolution, invoices were issued by B after the cessation date. The Tax Authority disallowed these expenses under Article 45(1)(b) of the IRC Code, arguing that a dissolved entity cannot validly issue tax-relevant documents since it ceased to exist for tax purposes. The claimant contested this, claiming the Tax Authority failed to substantiate its decision and violated Article 45(5) of the CIRC. An important procedural ruling emerged: the tribunal issued an interlocutory decision on 29 September 2015, separating the IRC and IVA claims. The tribunal held that these claims could not be joined in a single arbitration proceeding under Article 3(1) of RJAT because they involve different legal principles and rules. The case proceeded only on the IRC assessment. This decision establishes important precedents regarding documentation requirements for expense deductibility, the consequences of dealing with dissolved entities, and procedural rules for cumulating different tax claims in CAAD arbitration. The outcome emphasizes the critical importance of verifying supplier tax status and NIF validity when documenting deductible business expenses.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Álvaro José da Silva and Marcolino Pisão Pedreiro, appointed by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree on the following:

ARBITRAL DECISION

I – REPORT

On 2 April 2015, A… – …, S.A., collective person no. …, with registered office at Av.ª …, no. …, … Lisbon, filed a petition for the constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, briefly designated as RJAT), seeking the declaration of illegality of acts of additional assessment of Corporate Income Tax (IRC) and Value Added Tax (IVA), relating to the fiscal year 2010 (period between 1 March 2010 and 28 February 2011), in the total amount of €61,943.28.

To substantiate its petition, the Claimant alleges, in summary, that: "By determining, as it did, that the expenses shown in documents issued in 2010 by Company B… S.A. (ZFM) would constitute expenses not deductible for tax purposes, the Tax Authority applied without substantiation the provisions of Article 45, number 1, paragraph b) of the CIRC, and violated number 5 of the same provision, both in the wording in force until December 2013" and that, regarding the IVA assessments: "as the two conditions mentioned in Article 19, number 4 of the CIVA were not met, the deductibility of the tax in question could not have been placed in question."

On 6 April 2015, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, so, pursuant to the provisions of Article 6, number 2, paragraph a) and Article 11, number 1, paragraph a) of the RJAT, the President of the Ethics Council of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 2 June 2015, the parties were notified of these appointments, and neither manifested any intention to refuse any of them.

In accordance with the provisions of Article 11, number 1, paragraph c) of the RJAT, the collective Arbitral Tribunal was constituted on 18 June 2015.

On 4 September 2015, the Respondent, duly notified for this purpose, presented its response, defending itself by exception and by impugning the claims.

After due observance of the principle of contradiction, on 29 September 2015 a partial decision was rendered, considering that the petitions formulated regarding the IVA and IRC assessments do not depend on the interpretation and application of the same principles or rules of law, and that the cumulation of the corresponding annulment petitions violated the provisions of Article 3, number 1 of the RJAT, and therefore could not be admitted, and accordingly judging the exception of illegal cumulation of claims, invoked by the Tax Authority, to be well-founded.

Furthermore, in the same order, pursuant to the principles of cooperation and efficiency of acts, embodied in Article 47, number 5 of the Code of Tax Procedure and Process (CPTA), and having regard to the option expressed by the Claimant in its petition of 16 September 2015, the proceedings would continue for the examination of the petition concerning the IRC assessment.

On 30 October 2015, the hearing referred to in Article 18 of the RJAT was held, at which the witnesses presented by the Claimant were examined.

A period having been granted for the submission of written submissions, these were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the rendering of a final decision, following the presentation of submissions by the Tax Authority.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, number 1, paragraph a), 5 and 6, number 1, of the RJAT.

The parties have legal personality and capacity, are entitled to appear and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

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

All things considered, it is appropriate to render

II. DECISION

A. FACTUAL MATTER

A.1. Facts established as proven

  1. The Claimant was engaged, at the date of the tax events, in the activity of retail trade in unspecified establishments, without predominance of food products, beverages and tobacco.

  2. For Corporate Income Tax purposes, the Claimant was, at the date of the tax events, within the general taxation regime, and its fiscal year begins on 1 March and ends on 28 or 29 February of the following year.

  3. On 24 March 2009, the company B…, …, S.A. (ZFM), (B…), with Tax Identification Number …, was dissolved, by registration of the closure of its liquidation carried out pursuant to the administrative procedure for dissolution instituted ex officio by the Commercial Registry of the Free Trade Zone of Madeira, based on paragraph d) of Article 5 of the Legal Regime for Administrative Procedures for Dissolution and Liquidation of Commercial Entities, approved by Decree-Law no. 76-A/2006 of 29 March, as shown by the presentation for registration of entry 3-AP. 7/20090324, published online by the Ministry of Justice and accessible through its website.

  4. On 24 March 2009, the dissolution and closure of the liquidation of B… was declared, with registered office at Rua …, no. …, … – Funchal, resulting from the fact that it failed to increase its capital to the legal minimum, all within the scope of the administrative procedure initiated on 9 December 2008.

  5. Following notification by the Commercial Registry of that dissolution, the Tax Authority proceeded with the ex officio cessation of the activities of B…, for purposes of both IRC and IVA, pursuant to, respectively, Article 8, number 5, paragraph a) of the CIRC and Article 34, number 1, paragraph b) and number 2 of the CIVA, with effects as of that date, by way of entry in the Tax Payers Management and Registration System on 18 August 2010.

  6. Pursuant to Order no. 2014…, of 1 August 2014, of the Large Taxpayers Unit, the Claimant was subject to an inspection action to analyse the fiscal year 2010 (1 March 2010 to 28 February 2011), in order to examine invoices accounted for and issued by B… with a date subsequent to the date of its cessation, relating to the acquisition of goods.

  7. According to the draft corrections notified on 8 October 2014 to the Claimant by official communication no. …, of 10 July 2014, the following was concluded in the inspection procedure:

    i. Company B… was dissolved with the registration of the closure of its liquidation, which occurred on 24 March 2009, in accordance with Article 160 of the Commercial Code;

    ii. For Corporate Income Tax purposes, the Claimant accounted for expenses totalling €139,475.62, relating to invoices issued by B… after 24 March 2009, which were considered non-deductible by virtue of the provisions of Article 2, number 1, paragraph a), Article 8, number 5, paragraph a) and number 6, and Article 45, number 1, paragraph b), all of the CIRC, because with the closure of the liquidation the taxpayer ceased to exist for purposes of that tax;

    iii. The Claimant's cooperation was provided through a response to official communication no. …, of 4 August 2014, and the clarifications provided were considered insufficient to dispel the conclusions reached in the draft corrections.

  8. The Claimant exercised its right of prior hearing, pursuant to Article 60 of the General Tax Code (LGT), which was examined in the final report notified to the Claimant on 6 November 2014.

  9. Subsequently, on 14 November 2014, the Claimant was notified of the Corporate Income Tax assessment now in dispute.

  10. On 25 November 2014, the Claimant received from the Tax Authority the notices for additional IRC assessment, and compensatory interest, which it paid on 12 January 2015.

  11. The …, …, SA began commercial relations with Entity B…, …, SA in the fiscal year 2001, at which time it validated its tax classification, by means of resources made available by the Tax Authority for this purpose (namely NIF identification through the Finance Portal).

  12. Over the following 10 years, including in its fiscal year 2010, it carried out a large number of transactions with B….

  13. The General Directorate of Taxes did not make available information, as of the date of the tax events, regarding the registry status of B…, to the effect that it was in the conditions set out in Article 45, number 1, paragraph b) of the CIRC, that is, officially dissolved during the year in question, nor in time to permit that in the fiscal year in question the said expenses could be corrected ("expunged") for tax purposes in schedule 07 of Form 22.

  14. Accordingly, the Claimant was unaware, at the time of its fiscal year 2010, and when submitting its tax returns, of the facts described above in points 3 to 5.

  15. The now-Claimant, when submitting the IES - Annual Declaration for the fiscal year in question – 2010 - mentioned in its annex P – recapitulation of suppliers, the amount of transactions carried out with this entity – NIF … in the amount of €180,436.00, having been "successfully submitted" – consequently validated in advance as a "declaration without errors" - by the Tax Authority.

  16. The Electronic Declaration System validates the format of the NIF/Tax Identification Number, that is, tests the number and the order of the characters that compose it.

  17. The Claimant has thousands of suppliers with which it works, and it is entirely impractical to conduct contributory validation of each one with reasonable successive periodicity, such validation occurring upon "opening" of the supplier in the Claimant's computer systems, and it is not possible for it to become aware of the subsequent invalidity of any supplier's NIF at the moment of fulfilling supplementary obligations, except through the system made available by the Tax Authority.

A.2. Facts established as not proven

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

A.3. Grounds for the facts established as proven and not proven

With respect to factual matters, the Tribunal is not required to pronounce on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish between proven and unproven matters (cf. Article 123, number 2, of the Code of Tax Procedure and Process and Article 607, number 3 of the Code of Civil Procedure, applicable by virtue of Article 29, number 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and defined in accordance with their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (cf. former Article 511, number 1, of the Code of Civil Procedure, corresponding to current Article 596, applicable by virtue of Article 29, number 1, paragraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110, number 7 of the Code of Tax Procedure and Process, the documentary and testimonial evidence, and the administrative file attached to the proceedings, the facts listed above were considered proven, with relevance to the decision.

In particular, the facts established as proven in points 11 to 17 were confirmed by the witnesses presented who, notwithstanding being employees of the Claimant or having professional relations with it, testified clearly, precisely and impartially, in a manner that did not give rise to any reasonable doubt regarding the occurrence of the facts in question.

B. LAW

Having been removed from this arbitral proceeding, by way of a partial decision on the matters of exception, the issue raised by the Claimant concerning IVA, only the question concerning IRC remains to be resolved.

With respect to this matter, the Claimant alleges, in summary, that the Tax Authority applied without substantiation the provisions of Article 45, number 1, paragraph b) of the CIRC, in the applicable wording, and violated number 5 of the same provision.

In the course of the inspection procedure carried out on the Claimant, which resulted in the corrections in question, the Tax Authority determined that:

a. Company B… was dissolved with the registration of the closure of its liquidation, which occurred on 24 March 2009, in accordance with Article 160 of the Commercial Code;

b. For Corporate Income Tax purposes, the Claimant accounted for expenses totalling €139,475.62, relating to invoices issued by B… after 24 March 2009.

In light of such facts, the Tax Authority considered the said amount as non-deductible, based on the provisions of Article 2, number 1, paragraph a), Article 8, number 5, paragraph a) and number 6, and Article 45, number 1, paragraph b), all of the CIRC, understanding that, with the closure of the liquidation, no taxpayer existed for purposes of that tax.

Let us examine this.

Article 2, number 1, paragraph a) of the applicable CIRC provides:

"1 - The following are taxpayers of Corporate Income Tax:

a) Trading companies or civil companies in commercial form, cooperatives, public enterprises and other collective legal entities of public or private law, with registered office or effective management in Portuguese territory;"

Furthermore, Article 8, numbers 5, paragraph a) and 6 provide:

"5 - For purposes of this Code, cessation of activity occurs:

a) With respect to entities with registered office or effective management in Portuguese territory, on the date of closure of the liquidation, or on the date of merger or division, with respect to companies dissolved as a consequence thereof, or on the date on which the registered office and effective management cease to be situated in Portuguese territory, or on the date on which acceptance of vacant succession occurs or declaration that it is vacant in favour of the State, or furthermore on the date on which the conditions for subjection to the tax cease to apply; (...)

6 - Independently of the facts provided for in the previous number, the tax administration may furthermore ex officio declare cessation of activity when it is manifest that this is not being conducted nor there is any intention to continue it, or whenever the taxpayer has declared the conduct of an activity without possessing an adequate business structure capable of conducting it."

Finally, numbers 1, paragraph b) and 5 of Article 45 of the same Code provide:

"1 - The following expenses are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the taxation period: (...)

b) Expenses shown in documents issued by taxpayers with a non-existent or invalid tax identification number or by taxpayers whose cessation of activity has been ex officio declared in accordance with number 6 of Article 8; (...)

5 - The General Directorate of Taxes must make available information concerning the registry status of taxpayers relevant for purposes of the provision of paragraph b) of number 1."

As emerges from the reading of the Inspection Report, as well as from the Response and Submissions presented in the arbitral proceeding, the position sustained by the Tax Authority in the proceedings is based, essentially, on the fact that on 24 March 2009 the registration of the closure of the liquidation of B… occurred, in accordance with Article 160 of the Commercial Code, applying to this circumstance the provisions of paragraph b) of number 1 of Article 45 of the CIRC, which excludes the deductibility of expenses shown in documents issued by taxpayers:

a) with a non-existent or invalid tax identification number; or

b) whose cessation of activity has been declared ex officio in accordance with number 6 of Article 8.

Upon examination of the grounds of the tax act in question, it appears that the Tax Authority does not clarify whether, in the specific case, it subsumes the factual situation to the first or second of the normative hypotheses contained in paragraph b) of number 1 of Article 45, mentioned above, making instead merely a global reference to the paragraph in question.

Having duly examined the facts brought to the Tribunal's judgment, however, it is understood that neither one nor the other of these situations can be demonstrated.

Indeed, as was written, for example, in the Decision of the Administrative Court of the South of 26 June 2014, rendered in case 07141/13, in these situations, it is incumbent upon "the Administration to prove that the legal conditions that legitimize its actions are met", that is, the conditions of the norm it seeks to rely upon, which in this case is paragraph b) of number 1 of Article 45 of the CIRC, which is applicable.

Now, it is not demonstrated in the proceedings that, as of the date of the tax event (that is, during the Claimant's fiscal year 2010) B…:

a) had a non-existent or invalid tax identification number; nor that

b) had been ex officio declared to have ceased activity in accordance with number 6 of Article 8.

Thus, and with respect to the first of the said hypotheses, it is proven that:

a. The Claimant's IES, including the transactions carried out with the entity NIF …, was "successfully submitted" in the Tax Authority's Electronic Declaration System;

b. The Electronic Declaration System tests the number and the order of the characters that compose it.

That is: not only does the Tax Authority not demonstrate that, during the Claimant's fiscal year in question (2010), the NIF of B… was non-existent or invalid, but it is instead demonstrated that this was not the case, since, as that NIF was tested by the Electronic Declaration System of the Tax Authority itself, it was validated.

On the other hand, it is also not demonstrated that in the same fiscal year in question, it had been ex officio declared that it had ceased activity in accordance with number 6 of Article 8. Indeed, there is no record in the administrative or arbitral proceedings of the declaration of ex officio cessation of activity of B…, and it was neither alleged nor invoked that this occurred by the end of the Claimant's fiscal year 2010.

The provision of Article 8, number 5 of the applicable CIRC, invoked by the Tax Authority, does not stand in the way of what is concluded, from which it results, among other things and for what is relevant to the case, that cessation of activity occurs (with respect to entities with registered office or effective management in Portuguese territory) on the date of closure of the liquidation, which, demonstrably, occurred on 24 March 2009, insofar as the normative provision of Article 45, number 1, paragraph b) of the applicable CIRC does not refer to cessation of activity, but to ex officio declaration of cessation of activity.

Thus, as not demonstrated, as was the burden that lay with the Tax Authority, none of the alternative conditions of paragraph b) of number 1 of Article 45 of the applicable CIRC, upon which the tax act sub iudice is based, such act should be annulled, and the arbitral petition should be judged as well-founded.

In any case, and even if it were understood otherwise, one would still have to, by another path, reach the same conclusion.

Indeed, the said Article 45, number 1, paragraph b) of the applicable CIRC, as was seen, excludes the deductibility of expenses shown in documents issued by taxpayers in the circumstances discriminated therein.

The delimitation of the scope of application of the norm evidences with sufficient clarity, it is believed, that it refers directly to the requirement of documentation of expenses, in the same terms as paragraph g) of number 1 of Article 45 of the CIRC, which enshrines the principle of non-acceptability of "expenses not properly documented".

This principle, as is known, has been understood by the courts in a non-absolute manner, rather embracing its functional or instrumental aspect in relation to the requirement of proven indispensability of expenses.

In this line, it has been understood that insufficient documentation of an expense, per se, does not lead to its non-acceptability for purposes of determining taxable profit subject to Corporate Income Tax.

Rather, the courts have understood that "In the context of Corporate Income Tax, the document proving and justifying costs for purposes of Articles 23, number 1, and 42, number 1, paragraph g), of the CIRC, need not assume the essential formalities required for invoices for purposes of IVA, since the requirement of documentary proof is not confused with nor exhausted in the requirement of an invoice, it being sufficient merely that there be a written document, in principle external and with mention of the fundamental characteristics of the operation, since unlike what occurs with IVA, in the context of Corporate Income Tax, the justification of the cost constitutes a probative formality and, therefore, may be substituted by any other form of proof", as well as that "VIII) - But in the event that it is proven that the appellant incurred the payment of services actually rendered and indispensable for obtaining income, it must be accepted that the respective costs are not documented by those invoices, but rather proven by another admissible means, notably through testimonial proof.

IX) - Thus, the probative ineffectiveness of the accounting records does not prevent its supplement by other means of proof admitted in law and appropriate to substantiate the correctness of the assessment by proving the commercial operation underlying the deficient record or documentary support of such accounting record."

Coherently, it is accepted that "In undocumented or insufficiently documented expenses, the burden rests with the taxpayer to prove the respective cost, as required by Article 23 of the CIRC, by demonstrating that the operations were actually carried out, and it is possible to resort to other means of proof (namely supplementary means of documentary proof and testimonial proof) to demonstrate this and convince of the merits of the respective accounting entry and of the illegality of the correction that the Tax Authority has carried out by virtue of this lack or insufficient documentation."

This is because "It is in the concept of indispensability inherent in Article 23 of the CIRC that the essential question lies regarding the fiscal consideration of business costs and upon which rests the fundamental distinction between the cost actually incurred in the collective interest of the enterprise and that which may result only from the individual interest of a shareholder, a group of shareholders or their aggregate and which cannot, therefore, be considered a cost."

It has thus been understood that, notwithstanding the absence or insufficiency of formally required documentation, the taxpayer is not prevented from, by any admissible means of proof, demonstrating the existence and indispensability of the expense – this being the sine qua non condition of its relevance for determining the respective taxable profit – including in the appeal stage.

Indeed, contrary to what occurs in IVA (Article 36, number 5), in the Corporate Income Tax sphere the requirements relating to documentation are less stringent, having regard to the different mechanism of operation of the tax, not only sufficient therefore that the supporting document explicitly states clearly the principal characteristics of the operation, that is, the parties, the price, the date and the subject matter of the transaction, but even admitting that proof of the cost need not be made exclusively through written document.

It is not without relevance, moreover, to observe that in the recent reform of Corporate Income Tax the legislator has set increased requirements in supporting documents, very similar to those of IVA (cf. Article 23, number 4) which allows one to infer, on one hand, that these requirements did not previously exist and, on the other, that such requirements were not – as they are not – as stringent in Corporate Income Tax as in IVA.

That is, and in summary, the lack of documentation of the cost does not, ipso facto, result in the non-deductibility of such cost, but in the necessity of proof, "by another admissible means, notably through testimonial proof", "that the operations were actually carried out". Now, with due respect to other views, paragraph b) of number 1 of Article 45 of the applicable CIRC should be read in the same manner as paragraph g) of the same article, in the terms just explained.

Thus, if not by majority, at least by parity of reasoning, expenses shown in documents issued by taxpayers in the circumstances discriminated therein should only, always with reservation for better opinion, have their deductibility excluded in the same terms as occurs with undocumented or insufficiently documented expenses, that is, only when the taxpayer fails to demonstrate, by any other admissible means of proof, that the operations in question were actually carried out.

Now, in this case, such proof has been made, having resulted from the testimonial proof presented, and as set forth in point 15 of the factual matters, that the amount of transactions carried out with B… was in the amount of €180,436.00, a matter which, moreover, is not disputed by the Tax Authority itself.

Thus, and even if it were understood – which is not the case – that the provision of Article 45, number 1, paragraph b) of the applicable CIRC does not refer to situations in which in an operation a tax identification number, at the time, non-existent or invalid is used or in which, also at that time, ex officio cessation of activity of the supplier has been declared, in accordance with number 6 of Article 8 of the CIRC, there would still have to be a consideration that, in this case, the tax irrelevance of the documentation of expenses resulting from that paragraph would be overcome by the proof of the reality of the transactions that was carried out.

Thus, and for all the foregoing, the tax act that is the subject of this arbitral action being tainted by an error of law, by erroneous application of Article 45, number 1, paragraph b) of the CIRC, in the wording in force at the date of the tax event, the arbitral petition remaining should be judged as well-founded.

C. DECISION

Accordingly, the Arbitral Tribunal hereby decides to judge the arbitral petition filed as partially well-founded and, in consequence:

a) To annul the Corporate Income Tax assessment, and corresponding interest, relating to the Claimant's fiscal year 2010 (period between 1 March 2010 and 28 February 2011), which is the subject of this arbitral proceeding;

b) To condemn the Tax Authority to refund to the Claimant the amounts unduly paid, by virtue of such assessment;

c) To condemn the parties to the costs of the proceeding, in the proportion of their respective defeat, fixing at €636.00 the amount chargeable to the Claimant, and at €1,812.00 the amount chargeable to the Respondent.

D. Value of the case

The value of the case is fixed at €61,943.28, in accordance with Article 97-A, number 1, paragraph a), of the Code of Tax Procedure and Process, which is applicable by virtue of paragraphs a) and b) of number 1 of Article 29 of the RJAT and number 2 of Article 3 of the Regulation of Costs in Tax Arbitration Cases.

E. Costs

The arbitration fee is fixed at €2,448.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Cases, to be paid by the parties in the proportion of their respective defeat, and having regard to the partial pronouncement with respect to the matters of exception, the petition was partially well-founded, in accordance with Articles 12, number 2, and 22, number 4, both of the RJAT, and Article 4, number 4, of the cited Regulation.

Let notification be made.

Lisbon

16 December 2015

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Vogal

(Álvaro José da Silva)

The Arbitrator Vogal

(Marcolino Pisão Pedreiro)

ARBITRAL DECISION

CAAD: Tax Arbitration

Case no.: 233/2015-T

Subject: Cumulation of claims.

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Álvaro José da Silva and Marcolino Pisão Pedreiro, appointed by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree on the following:

ARBITRAL DECISION

The present proceedings are at the stage subsequent to the submission of pleadings by the parties.

As a general rule, it has been normal practice in the processing of tax arbitration cases to relegate examination of the exceptions that the Tribunal must know about to the stage of rendering the final decision.

However, in the present proceedings, having regard to the specificities of the concrete situation, pursuant to the principle of free conduct of the proceedings, it appears convenient to this Tribunal to issue now a partial pronouncement limited to the issue of exception raised in the proceedings by the Tax Authority.

For purposes of this decision, the following facts are considered established:

  1. The issue before the Tribunal concerns the legality of IVA and Corporate Income Tax assessments relating to the Claimant's fiscal year 2010.

  2. The Initial Petition of the Claimant contains, among other things, the following:

    i. "With respect to the Corporate Income Tax assessment: "By determining, as it did, that the expenses shown in documents issued in 2010 by B... S.A. (ZFM) would constitute expenses not deductible for tax purposes, the Tax Authority applied without substantiation the provisions of Article 45, number 1, paragraph b) of the CIRC, and violated number 5 of the same provision, both in the wording in force until December 2013" (Article 37); and

    ii. With respect to the IVA assessments: "Whereby, as the two conditions mentioned in Article 19, number 4 of the CIVA are not met, the deductibility of the tax in question could not have been placed in question."

The facts stated result from the documentary evidence included in the file.

The Tax Authority raises in the proceedings the exception of illegal cumulation of claims, "because the conditions of number 1 of Article 3 of the RJAT were not met."

Having been heard for this purpose, in writing, the Claimant sustains, in summary, that:

  • "the petitions for annulment of the additional IVA and Corporate Income Tax assessments formulated in the proceedings are undoubtedly based on the examination of the same factual circumstances",

  • both the examination regarding Corporate Income Tax and IVA are based on the principal understanding that "the invoices issued in the name of that company, at a date subsequent to the date on which its dissolution occurred, do not constitute invoices issued by a collective person, nor yet by an individual person, and the quality of taxpayer is thus not verified (...)"; and that

  • "the legal examination comes down to the analysis of the personality (tax, 'legal and judicial') of company B... and the consequent (in)justification of the additional corrections regarding both Corporate Income Tax and IVA".

With respect reserved for contrary views, it is understood that in this case the right lies on the side of the Tax Authority.

Indeed, Article 3, number 1 of the RJAT provides:

"Cumulation of claims, even if relating to different acts and joinder of parties are admissible when the success of the claims depends essentially on the examination of the same factual circumstances and the interpretation and application of the same principles or rules of law."

From this provision it results that the conditions for admission of cumulation of claims in tax arbitration proceedings are that the success of the claims depend essentially on:

a) the examination of the same factual circumstances; and

b) the interpretation and application of the same principles or rules of law.

Now, with respect reserved for better opinion, it cannot be considered that the said conditions are met.

Indeed, if it can be considered unquestionable that the factual circumstances to be examined are essentially the same, it cannot, however, be agreed with the Claimant when it asserts that the same is true with respect to the principles or rules of law to be applied.

Indeed, and as results from the Initial Petition itself:

  • the legal ground invoked for the annulment of the Corporate Income Tax assessment is the violation of numbers 1, paragraph b), and 5, of Article 45 of the CIRC, in the wording in force until December 2013;

  • the legal ground invoked for the annulment of the IVA assessments is the violation of number 4 of Article 19 of the CIVA.

These are thus essentially distinct grounds of law and, as such, obstructive, in the terms in which the RJAT is drafted, of the cumulation of the claims in question.

Evidently, from the identity of the underlying factual situation results a great identity of grounds to the cumulated claims, but the fact is that, in accordance with the provision of Article 3, number 1 of the RJAT, this is not sufficient for cumulation to be admitted.

Thus, it cannot fail to be considered that the petitions formulated with respect to the Corporate Income Tax and IVA assessments do not depend on the interpretation and application of the same principles or rules of law, and that the cumulation of the corresponding annulment petitions violates the provision of Article 3, number 1 of the RJAT, and therefore cannot be admitted.

In light of the foregoing, and pursuant to the principles of cooperation and efficiency of acts, embodied in Article 47, number 5 of the Code of Tax Procedure and Process (CPTA), having regard to the option expressed by the Claimant in its petition of 16 September, the present proceedings will continue for examination of the petition concerning the Corporate Income Tax assessment.

Accordingly, for the grounds stated, it is decided:

a) To judge the exception of illegal cumulation of claims as well-founded, and to absolved the respondent from the action with respect to the petitions for annulment of the IVA assessments identified in the initial petition;

b) To determine the continuation of the proceedings for examination of the legality of the petition for annulment of the Corporate Income Tax assessment identified in the initial petition.

In closing its Response, the Tax Authority states that "The value of the case should be reduced to its respective economic utility, corresponding to the amount of tax and compensatory interest in dispute in the proceedings".

This does not, with respect also reserved here, have any basis. Indeed, as results from Article 299, number 1 of the Code of Civil Procedure (applicable by virtue of Article 29, number 1, paragraph e) of the RJAT), "In determining the value of the case, regard must be had to the moment at which the action is brought".

Hence, the absolution from the action declared, just as any other resulting from the success of a dilatory exception, has no repercussion on the value of the case.

It will, however, have repercussion on the apportionment of the costs of the proceeding, which will be fixed in the decision that is to terminate it.

The date of 30 October 2015, at 14.00 hours, is designated for the hearing provided for in Article 18 of the RJAT, at which will take place, among other things, the examination of the witnesses listed by the Claimant, which must ensure their attendance.

Let notification be made.

Lisbon

25 September 2015

The Presiding Arbitrator

(José Pedro Carvalho – Rapporteur)

The Arbitrator Vogal

(Álvaro José da Silva)

The Arbitrator Vogal

(Marcolino Pisão Pedreiro)

[1] Available at www.dgsi.pt, as is all remaining jurisprudence cited hereafter without indication of origin.

[2] Decision of the Supreme Administrative Court of 5 July 2012, rendered in case 0658/11.

[3] Decision of the Administrative Court of the South, of 20 April 2010, rendered in case 03632/09.

[4] Decision of the Administrative Court of the South, of 16 March 2005, rendered in case 00340/03.

[5] Among others, Decision of the Administrative Court of the South of 30 January 2007, rendered in case 01486/06.

[6] Cf. in this sense the Decision of the Administrative Court of the South of 1 June 2004, rendered in case 06615/02.

[7] In this sense, cf. Decisions of the Administrative Court of the South of 27/01/2009 (case 02576/08) and of 24/03/2009 (case 02794/08).

[8] In the same sense, in the Decision of the Administrative Court of the South, of 20 April 2010, rendered in case 03632/09, one may read: "Thus, the probative ineffectiveness of the accounting records does not prevent its supplement by other means of proof admitted in law and appropriate to substantiate the correctness of the assessment by proving the commercial operation underlying the deficient record or documentary support of such accounting record."

Frequently Asked Questions

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What are the requirements for deducting business expenses under Portuguese IRC rules?
Under Portuguese IRC rules, business expenses must be incurred for business purposes and properly documented with valid invoices containing required information including a valid NIF (Tax Identification Number). The expenses must meet the general deductibility criteria and cannot fall under the exclusions listed in Article 45 of the CIRC. Crucially, as this case demonstrates, invoices must be issued by entities that legally exist and are registered for tax purposes. Documentation from dissolved entities or those with ceased tax registrations may render expenses non-deductible under Article 45(1)(b) of the CIRC, even if the underlying commercial transaction occurred.
How does an invalid or questionable NIF affect the tax deductibility of documented expenses?
An invalid or questionable NIF significantly impacts tax deductibility of expenses. In this case, Company B's dissolution on 24 March 2009 and subsequent tax registration cessation meant it no longer existed for tax purposes. Invoices issued after this date, despite bearing B's NIF, were considered invalid for supporting deductible expenses. The Tax Authority applied Article 45(1)(b) of the CIRC to disallow €139,475.62 in expenses documented by such invoices. This highlights that taxpayers must verify not only that invoices contain a NIF, but that the NIF belongs to an entity actively registered and operating for tax purposes. Dealing with dissolved or deregistered entities creates substantial risk of expense disallowance, regardless of the commercial substance of transactions.
Can IRC and IVA claims be joined in a single CAAD arbitration proceeding?
No, IRC and IVA claims cannot be joined in a single CAAD arbitration proceeding unless they depend on interpretation and application of the same legal principles or rules. In this case, the tribunal issued an interlocutory decision on 29 September 2015 ruling that the cumulation of IRC and IVA annulment petitions violated Article 3(1) of the RJAT (Legal Regime for Arbitration in Tax Matters). The exception of illegal cumulation raised by the Tax Authority was upheld, and the proceedings continued only regarding the IRC assessment, with the claimant having expressed preference for pursuing the IRC matter. This procedural rule ensures arbitration efficiency by preventing the joining of claims involving distinct legal frameworks and analytical approaches.
What does Article 45 of the Portuguese IRC Code say about non-deductible charges?
Article 45 of the Portuguese IRC Code (CIRC) establishes which charges are not considered tax-deductible costs. Specifically, Article 45(1)(b) was applied in this case to deny deductibility of expenses documented by invoices from a dissolved entity. The provision excludes certain expenses from being deducted when calculating taxable income. The claimant argued that the Tax Authority applied Article 45(1)(b) without proper substantiation and violated Article 45(5), which was in force until December 2013. Article 45(5) contains specific procedural or substantive requirements that the Tax Authority allegedly failed to observe. This article is central to determining which business costs can reduce taxable profit and represents a key battleground in expense documentation disputes.
What is the role of interlocutory decisions in CAAD tax arbitration proceedings?
Interlocutory decisions in CAAD tax arbitration proceedings resolve preliminary, procedural, or incidental issues before the tribunal reaches a final decision on the merits. In this case, the interlocutory decision of 29 September 2015 addressed the procedural exception raised by the Tax Authority regarding illegal cumulation of claims. The tribunal ruled on whether IRC and IVA claims could be joined, applying principles of cooperation and procedural efficiency under Article 47(5) of the CPTA (Code of Tax Procedure and Process). After ruling that the claims must be separated, the tribunal allowed the claimant to choose which claim to pursue, demonstrating how interlocutory decisions can shape the scope and direction of arbitration proceedings while ensuring compliance with procedural rules before substantive analysis begins.