Process: 255/2014-T

Date: September 4, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 255/2014-T concerns a Corporate Income Tax (IRC) correction for the 2009 tax year involving a complex corporate restructuring. Company B... S.A. was created through a spin-off from M... Lda in September 2009, receiving assets valued at €1,033,675 net. Shortly after, in July 2009, a share purchase agreement was signed, and B... was subsequently absorbed by A... S.A. in August 2010. The Tax Authority issued a correction to the taxable matter for 2009 totaling €250,372, though this did not result in additional tax liability due to B...'s declared tax loss of €341,469.79 for that period. The claimant A... S.A., as the successor company following the merger by absorption, challenged both the legality of the tax correction and sought annulment of the related liquidation acts. The arbitral tribunal was constituted under RJAT (Decree-Law 10/2011) with three arbitrators designated by the CAAD Ethics Board after the claimant did not appoint its own arbitrator. The Tax Authority defended the correction in its response. Key legal issues include whether the successor company has standing to challenge corrections against the absorbed entity, the validity of tax corrections that do not generate additional payment obligations, and the proper tax treatment of assets received through spin-off operations valued at net book value. The tribunal confirmed its material competence and the parties' legal capacity and standing, noting that the claimant's legitimacy derives from the merger operation which transmitted all assets and liabilities of B... by operation of law.

Full Decision

ENGLISH TRANSLATION

Case No. 255/2014-T

The arbitrators Councillor Jorge Lopes de Sousa (arbitrator-president), Dr. António Alberto Franco and Prof. Doctor Jorge Júlio Landeiro de Vaz (arbitrators), designated by the Ethics Board of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 16-05-2014, agree as follows:

  1. Report

A..., S.A., a commercial company by shares with registered office at …., …, legal entity no. … (hereinafter Claimant), in its capacity as acquiring company and incorporating company of the company B... -…, S.A., (hereinafter referred to as B...), legal entity no. …, filed a request for arbitral pronouncement, pursuant to articles 2, no. 1, paragraph b), and 10, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January (hereinafter RJAT).

The Tax and Customs Authority is the Respondent.

The Claimant presented the following request:

a) declaration of illegality of the act correcting the taxable matter in Corporate Income Tax (hereinafter IRC), relating to 2009, in the amount of € 250,372.00 (two hundred and fifty thousand, three hundred and seventy-two euros), which did not result in the obligation to pay any amount in view of the tax loss determined in that financial year (IRC liquidation no. 2013…, of 02-12-2013, interest liquidation statement no. 2013… and account adjustment statement no. 2013…);

b) the annulment of said liquidations.

The Claimant did not proceed to appoint an arbitrator, therefore, under the provisions of article 6, no. 2, paragraph a), of the RJAT, the signatories were designated by the President of the Ethics Board of the CAAD to make up the present collective Arbitral Tribunal, having accepted in accordance with the legally provided terms.

The Parties were notified of this designation and did not manifest any will to refuse the designation 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 Code of Ethics.

Thus, in compliance with the provision in 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 16-05-2014.

The Tax and Customs Authority submitted a response, arguing that the request for arbitral pronouncement should be judged without merit.

By order of 19-06-2014, it was decided to waive the meeting provided for in article 18 of the RJAT, as it would constitute a futile act, given that the Parties had not indicated any evidence to produce nor had any exception been invoked.

A period of 10 days was also fixed for written submissions by the Claimant, followed by a period for written submissions by the Tax and Customs Authority.

The parties did not submit any submissions.

The Arbitral Tribunal was regularly constituted and is materially competent, in accordance with the provision in arts. 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The Parties have legal capacity and standing (arts. 4 and 10, no. 2, of the same law and art. 1 of Order no. 112-A/2011, of 22 March). With respect to the Claimant, it is important to emphasize that its standing results from a merger process by absorption — merger by absorption of B... (absorbed company) into the Claimant (absorbing company) — which implied by operation of law the extinction of that company and the transmission of all of its assets and liabilities to the latter.

The case does not suffer from nullities and no exceptions were invoked.

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

  1. Factual Basis

2.1. Established Facts

Based on the elements in the case file and the administrative file attached to the records, the following facts are considered established:

a) On 2009-07-15, C…, D…, E… and F…, the future shareholders of the company B..., S.A., signed a promise of sale contract of all the shares of this new company, with the other future shareholder, A..., SA., for a global price divided into fixed (€1,333,000.00) and variable installments (2.50% of the annual sales value of company B..., SA, if this is less than €2,250,000.00 and 5.00% if the annual sales value is equal to or greater than €2,250,000.00, in the financial years 2010, 2011 and 2012) (see Annex 4 of the TIR);

b) On 17-07-2009, the registration of the spin-off draft of M..., Lda and the constitution of the new company, B..., SA (dated 29-06-2009), was carried out in the Commercial Registry Office of … (see Annexes 1 and 2 of the TIR);

c) On 16-09-2009, the company B..., S.A. was constituted in the context of a simple spin-off process, in the course of which a line of business of the company M..., Lda (previously B..., Lda) was transferred to its sphere;

d) The spin-off operation corresponded to the separation of the assets (assets and liabilities) of M..., Lda (previously B..., Lda), associated with the line of business engaged in the import, export, manufacture, marketing and assembly of energy production and savings equipment, (with the exception of the real property registered in the accounts of Buildings and Other Constructions and some basic equipment), to incorporate it into the assets of the new company, B..., SA, constituted to develop this same activity (TIR);

e) The spin-off operation was carried out in accordance with the "Simple Spin-off Draft" a copy of which is attached as Annex II to the Report of the Tax Inspection, the content of which is reproduced herein and had, moreover, the following consequences:

– It involved the transmission of the assets and liabilities associated with the activity of import, export, manufacture, marketing and assembly of energy production and savings equipment, namely, intangible fixed assets (research expenses and others) and tangible assets (such as basic equipment, transport equipment, tools and utensils, administrative equipment and others); inventories; available funds; receivables from third parties and deferrals. In total, the patrimonial value transferred corresponds to the difference between the overall value of the transmitted assets (€1,340,918.00) and the corresponding liabilities incorporated in the new company (beneficiary) (€307,243.00), which totals a net patrimonial value of €1,033,675.00;

– 32 workers of the spin-off company were also transferred to the new company constituted after the spin-off;

– Shares of the beneficiary company were attributed to the shareholders of the company to be spun off; (TIR and its Annex II)

f) The M..., Lda (previously B..., Lda) did not practice or develop, before the restructuring operation, the activity of promotion and development of real estate and urban development projects, management and administration of urban and rural properties, own and third-party properties, purchase, transformation and sale of real estate and the resale of those previously purchased for that purpose, this activity having been added to the corporate purpose of the company on the day of the registration of the spin-off, only being exercised after the spin-off operation; (TIR)

g) The corporate purpose of B..., S.A. corresponded to the import, manufacture, marketing and assembly of energy production and savings equipment and the provision of engineering services;

h) On 09-08-2010, B..., S.A. was subject to a merger by absorption into the sphere of the Claimant A..., SA.;

i) B..., S.A. recorded the assets received through the spin-off at the same net book value at which such assets were recognized at the level of the spun-off company;

j) On 31-05-2010, B..., S.A. submitted IRC Model Declaration 22, relating to the 2009 financial year (taxation period between 16-09-2009 and 31-12-2009), determined a tax loss of € 341,469.79 (see doc. no. 4 attached with the request for arbitral pronouncement the content of which is reproduced herein) which resulted from the completion of the following fields:

– negative net result for the period in the amount of € 505,510.01 (field 201);

– non-deductible provisions or exceeding legal limits in the amount of € 36,639.77 (field 208);

– fines, penalties, compensatory interest and other charges for the commission of infractions in the amount of € 219.67 (field 212);

– capital losses in the amount of € 74,227.59 (field 215);

– corrections relating to previous financial years in the amount of € 52,953.19 (field 224);

– totaling a negative amount of € 341,469.79 which constitutes a tax loss (fields 226 and 239);

k) A tax inspection procedure was initiated by the Tax Inspection Services of the Finance Office of …, Service Order no. …2013…, which focused on the 2009 IRC financial year of B..., S.A., with the following motivation: "The simple spin-off operation between M..., Lda and B..., SA, does not enjoy tax neutrality, as it does not comply with the provision in no. 4 of article 73 of the IRC. Since the companies involved treated this operation as benefiting from the tax neutrality regime, provided for in article 73 and following articles of the IRC, it was necessary to proceed with the appropriate corrections in the sphere of B..., SA." (page 2 of the administrative file);

l) The Claimant was notified of the Draft Report of Tax Inspection, to exercise the right to be heard, through official letter no. …, of 18-10-2013 (Pages 122 et seq. of the administrative file);

m) The Claimant was notified of the Report of Tax Inspection (TIR) through official letter no. …, of 19-11-2013 (pages 2-121 of the administrative file and document no. 5 attached with the request for arbitral pronouncement, the content of which is reproduced herein), which concluded, in summary, that "the simple spin-off operation that gave rise to the constitution of B... did not meet the requirements to benefit from the tax neutrality regime provided for in article 68 of the IRC Code (current article 74 of that Code)";

n) In the Report of Tax Inspection the following is stated, among other things:

Thus, by not complying with this requirement, the present spin-off operation is not capable of being framed within the provisions of article 67 (currently corresponds to article 73) of the IRC Code, as it does not fall, for this reason, under any of the specific legal characterizations contained therein, in particular, under the purpose typified in paragraph a) of no. 2 of article 67 (currently corresponds to paragraph a) of no. 2 of article 73) of the IRC Code and under the concept of line of business established in no. 4 of the same article.

As the tax neutrality regime does not apply, it is necessary to determine the results, both in the spun-off company and in the beneficiary company, therefore, with respect to the present spin-off operation, it is subject to the general taxation regime, with the application, in particular of the provision in no. 3, paragraph d) of article 46 of the IRC (previous 43 of the IRC), determining the corresponding capital gains and losses in the sphere of the spun-off or transferring company M..., Lda (previously B..., Lda.). In the sphere of the beneficiary company, B..., SA, it gives rise to a positive actual patrimonial variation, which contributes to the formation of taxable profit since it is not excluded in article 21 of the IRC;

As to the acquisition value of the elements that were transferred, in the sphere of B..., SA, it should be considered as the acquisition cost, its market value, thus equating the acquisition value to the realization value of the spun-off company.

Article 46, no. 3, paragraph d) of the IRC provides that, in case of spin-off, the realization value is considered "the market value of the elements of the fixed assets transferred as a result of those acts", on the date to which those operations refer.

Although this rule applies directly only to the realization value, given that it is considered that there is "disposal", it must be concluded that there is an "acquisition", and it appears to us that the legislator intended that the patrimonial elements transferred in the context of merger or spin-off operations be, except when it comes to operations covered by the neutrality regime, equated to operations of purchase and sale of those elements. Therefore, the acquisition value should be considered, by the beneficiary company (B..., SA), of the patrimonial elements separated from the spun-off company, their respective market value on the date of the operation.

III.1.3. Proposed Corrections

The tax neutrality regime, provided for in article 67 and following articles (currently corresponds to article 73 and following articles) of the IRC Code, only applies to the operations described therein.

As was described in the preceding points, with respect to the spin-off operation in question, although it can be considered that the activity of import, export, manufacture, marketing and assembly of energy production and savings equipment, embodied in the patrimonial elements and other resources transferred, is frameable within the concept of line of business provided for in no. 4 of article 67 (currently corresponds to article 73) of the IRC Code and even though the attribution of capital shares to the shareholders of the spun-off company is verified, it is not frameable within the tax neutrality regime, since one of the other requirements provided for in paragraph a) of no. 2 of the same article is not met, which requires, in the case of partial spin-off, that the spun-off company maintain at least one of the lines of business previously exercised.

However, this was not the case, as the activity added to the corporate purpose of the spun-off company only begins to be exercised after the spin-off operation, demonstrating that, before the restructuring operation, the said company did not develop such activity, in accordance with what is required by the aforementioned norm.

By not complying with this requirement, the present spin-off operation is not capable of being framed within the provisions of article 67 (currently corresponds to article 73) of the IRC Code, as it does not fall, for this reason, under any of the specific characterizations contained therein, in particular, under the purpose typified in paragraph a) of no. 2 of article 67 (currently corresponds to article 73) of the IRC Code and not even under the concept of line of business established in no. 4 of the same article.

Thus, not meeting the requirements to benefit from the tax neutrality regime, provided for in article 68 (currently corresponds to article 74) of the IRC and notwithstanding that from a commercial perspective it is considered a spin-off operation, this operation should be submitted to the general taxation regime.

III.1.3.1. Determination of the Result Derived from the Transfer of Patrimonial Elements as a Result of the Spin-off

Article 3, paragraph d) of no. 3 of article 43 (currently corresponds to article 46) provides that "Realization value is considered: (...) In cases of merger or spin-off, the market value of the elements of fixed assets transferred as a result of those acts.".

a1) Realization Value

On 15 July 2009 (two days before the registration of the spin-off draft in the Commercial Registry Office of …), C…, D…, E… and F…, the future shareholders of the new company to be established, sign a promise of sale contract of all the shares of this new company, with the other shareholder, A..., SA., for a global price divided into fixed (€1,333,000.00) and variable installments (2.50% of the annual sales value of company B..., SA, if this is less than €2,250,000.00 and 5.00% if the annual sales value is equal to or greater than €2,250,000.00, in the financial years 2010, 2011 and 2012).

On 17 September 2009, one day after the final registration of the simple spin-off, the sale contract for said shares was signed (annex no. 4 of 11 pages). It was confirmed by C… that the sale value stated in the share purchase and sale contract is the same as stated in the share promise of purchase and sale contract (annex no. 6 of 1 page).

The total shares sold by shareholders C…, D…, E…. and F… represents 99.80% of the share capital of B..., SA and was sold for €1,333,000.00. The remaining capital (0.2%) of B..., SA belongs to A..., SA.

In light of the above, we shall consider that the realization value of the assets and liabilities that were transferred to B..., SA was €1,335,671.00 (€1,333,000.00 / 99.80%).

After determining the realization value (transmission) of the business transmitted, we must determine the acquisition value of the transmitted assets and liabilities.

According to the data collected during the inspection procedure, the net value of the transmitted assets was €1,033,675.00, a value that corresponds to the difference between assets and liabilities, as described in the table presented below:

Given that the transmitted assets include intangible and tangible fixed assets, the acquisition value to be considered should be corrected in accordance with no. 2 of article 44 (currently corresponds to article 47) of the IRC Code. In the table attached as annex no. 6 of 2 pages, the calculations made to determine the updated net value of the transmitted intangible and tangible fixed assets are presented.

Thus, the value of the transmitted assets will be €1,035,299.00, as shown in the calculations presented in the following table:

In light of the above, the result derived from the transfer of the patrimonial elements as a result of the spin-off is €300,372.00, as shown in the following table:

a2

Result Determined

As has been demonstrated, the present simple spin-off operation does not meet the requirements to benefit from the tax neutrality regime, provided for in article 73 and following articles of the IRC Code, in particular, the one typified in paragraph a) of no. 2 of article 73 of the IRC Code and the concept of line of business established in no. 4 of the same article, therefore this operation should be submitted to the general taxation regime.

In the sphere of the beneficiary company, the value of the patrimonial elements should be their respective market value on the date of the spin-off, so that there is correspondence between the value considered in the spun-off company and in the beneficiary company.

Since there is no actual financial expenditure by the beneficiary with the acquisition of such patrimonial elements, we are dealing with a situation that constitutes a positive patrimonial variation not reflected in the net result of the period, in the amount of €300,372.00.

Patrimonial variations assume particular importance in the IRC Code, precisely due to the concept of "income increase," in which profit encompasses any and all patrimonial increment (variation). Hence, no. 2 of article 3 of the IRC Code refers to the "difference" between the values of net assets at the end and beginning of the taxation period, with the corrections established in the Code.

Moreover, no. 1 of article 17 of the IRC Code provides that taxable profit includes not only the operations reflected in the net result but also positive and negative patrimonial variations not reflected in the result and the positive and negative tax corrections established in the Code.

However, that positive patrimonial variation comprises the realization of the share capital of the beneficiary company, in the amount of €50,000.00, which does not contribute to the formation of taxable profit, in accordance with paragraph a) of no. 1 of article 21 of the IRC Code, therefore the value to be taxed will be:

as it concerns the positive patrimonial variation that is not excepted in no. 1 of article 21 of the IRC Code.

III.1.4. Correction to the 2009 Fiscal Result

Considering the absence of tax neutrality, in the transfer of patrimonial elements from M..., Lda to B..., SA, we obtain a correction to the fiscal result of B..., SA of -€91,097.79. In the following table, we describe the calculations made:

(...)

The taxpayer asserts that the spin-off is a paid operation. However, it did not prove that it actually acquired these elements for valuable consideration, by proving the payments made or the existence of a debt assumed in exchange for the elements received.

On the other hand, in paragraph d) of no. 3 of article 46 of the IRC Code (previous 43 of the IRC) no reference is made to the existence of consideration by the acquirers, concluding that, regardless of the qualification of the transmission as paid or free, the legislator intended to tax the realities in question, merely assimilating, for the purposes of that norm, those operations to transmissions for valuable consideration.

It invokes the provision of paragraph P) Commission for the Reform of the IRC of 2013 (Review of the regime of neutral concentrations and development of rules applicable to non-neutral reorganizations), to demonstrate that in beneficiary companies, the contributions of the assets involved in concentration operations are made on behalf of the corresponding shareholders. As is known, this is a proposal that is under discussion, and the IRC in its current wording does not adopt that concept and form of proceeding in terms of taxation.

Thus, we consider that the positive patrimonial variation obtained by the beneficiary company, B..., SA, as a result of the operation in question should contribute to the determination of taxable profit, and should be considered as the acquisition value, its market value, so that there is correspondence between the exit values of the spun-off company and the values on entry to the beneficiary company.

For what has been stated, having been pointed out no fact or current situation that alter/modify the premises, criteria and calculations on the proposed values, the maintenance of the amounts determined in the draft report is proposed.

o) By order of 18-11-2013, issued by the Head of Division, in a substitute capacity, of the Tax Inspection Services of …, by sub-delegation, agreement was manifested with the proposal formulated in the Report of Tax Inspection;

p) The Claimant was notified of the IRC liquidation statement, relating to the 2009 financial year, liquidation no. 2013…, of 02/12/2013, compensation no. 2013…, of 04-12-2013, in which a tax loss of € 91,097.79 and an amount payable of € 34.94 was determined, resulting from the correction of the late payment interest owed (see Document no. 1 attached with the request for arbitral pronouncement);

q) The Claimant was notified of the interest liquidation statement, interest liquidation no. 2013…, of 02/12/2013, compensation no. 2013…, of 04-12-2013, with a total amount of € 34.94, having as its basis document the IRC liquidation no. 2013… (see Document no. 2 attached with the request for arbitral pronouncement);

r) The Claimant was notified of the account adjustment statement no. 2013 …, from which resulted a final balance of € 0.00, with no place for a payment obligation or a reimbursement right (see Document no. 3 attached with the request for arbitral pronouncement);

s) On 11-03-2014, the Claimant submitted the request for arbitral pronouncement that gave rise to the present case.

2.2. Unproven Facts

There are no facts relevant to the consideration of the merits of the case that have not been proven.

2.3. Justification for the Establishment of the Factual Basis

The established facts are based on the Report of Tax Inspection and documents attached with the request for arbitral pronouncement, with no controversy over them.

  1. Legal Basis

3.1. Disputed Issue

The Claimant A..., S.A., is the acquiring company and incorporating company of the company B..., S.A..

The company B..., S.A. was created on 16-09-2009 through a simple spin-off process, in the course of which a line of business of the company M..., LDA was transferred to its sphere.

The Tax and Customs Authority understood that the tax neutrality regime provided for in articles 67 and following articles of the IRC does not apply to the spin-off process, to which articles 73 and following articles currently correspond, and that "the positive patrimonial variation obtained by the beneficiary company, B..., SA, as a result of the operation in question should contribute to the determination of taxable profit, and the acquisition value should be considered its market value, so that there is correspondence between the exit values of the spun-off company and the entry values to the beneficiary company."

The Claimant, in the present arbitral process, despite stating that it disagrees with the understanding of the Tax and Customs Authority that the tax neutrality regime is not applicable, states the following: "in a logic of procedural economy, the Claimant opts not to contest the understanding advocated by the Tax and Customs Authority that the concept of 'maintenance of line of business' — referred to in paragraph a) of no. 2 of article 67 of the IRC Code as a condition for a spin-off to be fiscally neutral — requires that the line of business was actually exercised prior to the spin-off operation" (article 20 of the request for arbitral pronouncement).

For this reason, there is an explicit taking of a position in the sense of not imputing to the impugned act any defect of error with respect to the non-application of the tax neutrality regime.

Being generative of mere voidability the possible defect that could derive from error in the non-application of the tax neutrality regime, it is within the availability of the Claimant not to invoke any defect on that basis, therefore, for the purposes of the present case, it should be considered procedurally established that the tax neutrality regime is not applicable.

Thus, the Claimant's disagreement with what was decided by the Tax and Customs Authority is reduced to what it decided on the relevance for purposes of determining the taxable profit of the beneficiary company of the patrimonial variation corresponding to the difference between the market value of the transferred assets and the net book value by which it was recognized by the same company in the spin-off process.

3.2. Onerous Nature of the Spin-off

The first point of disagreement between the Claimant and the Tax and Customs Authority is the onerous or non-onerous nature of the spin-off operation.

The question is not of decisive importance for the consideration of the essential issue that is the subject of the present case, and its solution can only clarify one of the practical differences between a spin-off with tax neutrality regime and without it.

Article 67, no. 2, paragraph a), of the IRC, in the wording prior to Decree-Law no. 159/2009, of 13 July, to which corresponds article 73, no. 2, paragraph a), in the wording of this decree-law, establishes the following:

2 - A spin-off is considered to be an operation by which:

a) A company (spun-off company) separates one or more parts of its assets to constitute other companies (beneficiary companies) with them or to merge them with already existing companies, through the attribution to its shareholders of shares representing the share capital of the latter companies and, possibly, a sum of money not exceeding 10% of the nominal value or, in the absence of nominal value, of the book value equivalent to the nominal value of the shares to be attributed to them;

b) A company (spun-off company) is dissolved and its assets are divided into two or more parts, each being intended to constitute a new company (beneficiary company) or to be merged with already existing companies or with parts of the assets of other companies, separated by identical processes and with the same purpose, through the attribution to its shareholders of shares representing the share capital of the latter companies and, possibly, a sum of money not exceeding 10% of the nominal value or, in the absence of nominal value, of the book value equivalent to the nominal value of the shares to be attributed to them.

As can be seen, in either situation, the cession has a counterpart for the shareholders of the spun-off company, which inevitably leads to the conclusion that, by the very legal definition, one is facing a paid operation.

That counterpart actually existed in the case in question, as results from point 6 of the "Simple Spin-off Draft" a copy of which is attached as Annex II to the Report of Tax Inspection, which refers to the regime of "Shares of the Company to be Constituted that will be attributed to the shareholders of the Company to be Spun Off, specifying the exchange ratio of the social shares and the basis of this ratio."

In any case, as the spin-off, in the light of the very legal definition contained in the IRC, is a paid operation, it must always be considered as such for the purposes of this Code.

In this light, paragraph c) of no. 5 of article 46 of the IRC, added by Law no. 2/2014, of 16 January, when expressly establishing that "paid transmissions" include "the transfer of patrimonial elements within the scope of merger, spin-off or asset contribution operations, carried out by the merged, spun-off or contributing companies," is merely an express confirmation of what already necessarily resulted from the legal definition of spin-off.

3.3. Consequences of the Non-application of the Tax Neutrality Regime regarding Positive Patrimonial Variations

Being the spin-off a paid operation and not applying the tax neutrality regime, it may generate positive patrimonial variations (that is, capital gains, in the terminology adopted with respect to elements of fixed assets), for the spun-off company (and possibly for its shareholders), as they are considered "realized" with the spin-off, as is inferred from paragraph d) of no. 3 of article 43 of the IRC in the wording prior to Decree-Law no. 159/2009 [to which corresponds paragraph d) of no. 3 of article 46 in the wording of this decree-law], when establishing that "realization value" is considered "in cases of merger or spin-off, the market value of the elements of fixed assets transmitted as a result of those acts."

However, as the Claimant rightly states, in the light of the legislation in force in 2009, only the "realization" of capital gains, materialized by the transmission of assets, could generate capital gains relevant for the determination of taxable profit.

Indeed, from the outset, article 21, no. 1, paragraph b), of the IRC, in the wording prior to Decree-Law no. 159/2009, expressly excluded the relevance for the formation of taxable profit of "potential or latent capital gains, even if expressed in accounting" and article 43 of the same Code (article 46 in the wording of Decree-Law no. 159/2009) only established rules for the relevance of realized capital gains.

On the other hand, the said paragraph d) of no. 3 of article 43 (article 46 in the wording of Decree-Law no. 159/2009), when stating that "realization value" is considered "in cases of merger or spin-off, the market value of the elements of fixed assets transmitted as a result of those acts," leaves no room for reasonable doubt that, with respect to elements of fixed assets, only the transmission (and not also their acquisition) can generate capital gains relevant for the determination of taxable profit.

And, with respect to the transmission of elements of fixed assets, there was no, in the light of the legislation in force in 2009, any other form of relevance of positive patrimonial variations for the determination of taxable profit other than at the level of realized capital gains.

Now, being certain that the non-application of the tax neutrality regime to the operation leads to the conclusion that the value of the transmission of the elements of fixed assets should be the market value, by virtue of the provision in the said paragraph d) of no. 3 of article 43 of the IRC (article 46 in the wording of Decree-Law no. 159/2009), and that this value should be recorded in accounting both by the spun-off company and by the beneficiary company, a positive patrimonial variation cannot be found in the difference between the incorrect accounting by the latter and the market value for purposes of determining taxable profit, as the transmission value to be considered cannot but be exclusively the market value.

In fact, the basic rule for determining taxable profit is stated in article 17, no. 1, of the IRC, which establishes that "the taxable profit of legal entities and other entities mentioned in paragraph a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the financial year and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined based on accounting and possibly corrected in accordance with this Code." As concludes from this latter part of this provision, the relevance of accounting elements for determining taxable profit is secondary, as, in the first instance, the corrections to accounting provided in the IRC apply for tax purposes.

That is, if there is any rule of the IRC that provides that for a certain asset or act a certain value should be considered for purposes of determining taxable profit, it is irrelevant what appears in accounting, as what matters for tax purposes is only what results from the correction to be made to accounting values.

Now, in the case in question, there is indeed a special rule of the IRC on the valuation of elements of fixed assets, in cases of company spin-off, which is the said paragraph d) of no. 3 of article 43 (article 46 in the wording of Decree-Law no. 159/2009).

Indeed, this rule, when establishing that realization value is considered "in cases of merger or spin-off, the market value of the elements of fixed assets transmitted as a result of those acts," requires that, if the tax neutrality regime does not apply, the value to be considered for purposes of determining taxable profit as capital gains be the market value, regardless of the value, greater or lesser, recorded in the accounting of the spun-off company.

On the other hand, this legal requirement that the market value of fixed assets transmitted be the value to be considered for purposes of determining taxable profit in cases of company spin-off has as a corollary that it should also be this value to be considered in determining the taxable profit of the beneficiary company, as it would be incongruous that one same transmission be valued in different ways for those who transmit and those who receive the transmitted assets. ([1])

Thus, in the assumption that the tax neutrality regime is not applicable, one must conclude that the book value corresponding to the historical cost of the elements of fixed assets transmitted that was recorded in the accounting of the beneficiary company cannot have any relevance for determining its taxable profit, as one is dealing with a situation where the IRC requires that this value not be considered, but rather the market value, and the values corrected by force of a rule of the code prevail over accounting values, by force of the provision in the final part of no. 1 of article 17 of the IRC.

If in the conditions in which the spin-off occurred, the value to be considered, for purposes of determining taxable profit, is the market value of the transmitted assets, this must be the only value to be considered for this purpose, being irrelevant what the taxpayer erroneously recorded in accounting.

Moreover, carried to its ultimate consequences, the understanding underlying the position adopted by the Tax and Customs Authority that the transmission value recorded by the taxpayer in accounting would be relevant for the determination of patrimonial variations, even if erroneously recorded, would imply that one should also consider this erroneous value in the inverse situation in which the taxpayer recorded in accounting a transmission value much superior to that of the market, which would result in placing within the availability of taxpayers the faculty of artificially generating negative patrimonial variations, artificially reducing taxable profit, which would be incompatible with the constitutional principles of legality and equality in the distribution of public burdens.

It is concluded, therefore, that the correction made to the taxable matter of the beneficiary company, B..., S.A., suffers from a defect of violation of law, as it is incompatible with the regime resulting from articles 17, no. 1, 21, no. 1, paragraph b), and 43, nos. 1 and 3, paragraph d), of the IRC, in the wording prior to Decree-Law no. 159/2009, of 13 July, to which in the wording of this decree-law correspond articles 17, no. 1, 21, no. 1, paragraph b), and 46, nos. 1 and 3, paragraph d).

This defect justifies the annulment of the order of 18-11-2013, issued by the Head of Division of the Tax Inspection Services of …, in a substitute capacity, which decided to make the correction to the taxable matter of B..., S.A. [article 135 of the Administrative Procedure Code, applicable by force of the provision in article 2, paragraph c) of the LGT], as well as of the acts that were based on that correction, namely liquidation no. 2013…, of 02-12-2013, the interest liquidation statement no. 2013… and the account adjustment statement no. 2013….

  1. Decision

In harmony with the foregoing, this Arbitral Tribunal agrees:

a) To judge the request for arbitral pronouncement to be well-founded;

b) To declare the illegality of the correction made by the Tax and Customs Authority to the taxable result in IRC determined by B..., S.A. in the 2009 financial year;

c) To annul liquidation no. 2013…, of 02-12-2013, the interest liquidation statement no. 2013… and the account adjustment statement no. 2013….

  1. Value of the Case

In harmony with the provision in art. 315, no. 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 250,372.00.

  1. Costs

Under the terms of art. 22, no. 4, of the RJAT, the amount of costs is fixed at € 4,896.00, in accordance with Table I attached to the Regulations on Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 04-09-2014

The Arbitrators

(Jorge Lopes de Sousa)

(António Alberto Franco)

(Jorge Júlio Landeiro de Vaz)

[1] Moreover, this correspondence is accepted by the Tax and Customs Authority, as can be seen from the Report of Tax Inspection, which states that "in the sphere of the beneficiary company, the value of the patrimonial elements should be their respective market value on the date of the spin-off, so that there is correspondence between the value considered in the spun-off company and in the beneficiary company" (page 19 of the Report, the content of which is reaffirmed in article 89 of the Response submitted in the present arbitral process).

Frequently Asked Questions

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What is an IRC tax base correction (correção da matéria coletável) and when can it be challenged?
An IRC tax base correction (correção da matéria coletável) is an adjustment made by the Portuguese Tax Authority to the taxable income declared by a company for Corporate Income Tax purposes. This correction typically occurs after a tax inspection reveals discrepancies, improper deductions, unreported income, or incorrect application of tax rules. Taxpayers can challenge these corrections through administrative appeals or by filing a request for arbitral proceedings with CAAD (Centro de Arbitragem Administrativa) within the legal deadlines established in the RJAT (Regime Jurídico da Arbitragem Tributária). The challenge must be filed within 90 days from notification of the tax assessment or within the timeframe for hierarchical review.
How does the CAAD arbitral tribunal process work for disputing tax assessments in Portugal?
The CAAD arbitral tribunal process begins when a taxpayer files a request for arbitral pronouncement under Decree-Law 10/2011 (RJAT). The claimant may appoint an arbitrator or allow the CAAD Ethics Board President to designate the tribunal members. In collective tribunals, three arbitrators are appointed. The Tax Authority then submits a response defending its position. The tribunal may hold hearings if evidence needs to be produced or waive meetings if deemed unnecessary. Both parties can submit written arguments and evidence. The process is generally faster than judicial courts, with strict deadlines. The tribunal issues a binding decision on the legality of the contested tax acts, which can declare them illegal and order their annulment if procedural or substantive violations are found.
Can a successor company (sociedade cessionária) challenge tax corrections made against the absorbed entity?
Yes, a successor company can challenge tax corrections made against an absorbed entity. Under Portuguese law, when a merger by absorption occurs, all assets, liabilities, rights, and obligations of the absorbed company transfer by operation of law to the absorbing company. This includes tax-related rights and obligations, as well as procedural standing to contest tax assessments. In Process 255/2014-T, A... S.A. specifically invoked its capacity as 'acquiring company and incorporating company' of B... S.A. to challenge the IRC correction issued against B... for the 2009 tax year. The tribunal recognized this standing under Article 10(2) of the RJAT, confirming that the merger transmitted all patrimonial elements and litigation rights to the successor entity.
What happens when an IRC tax base correction does not result in additional tax due to existing tax losses?
When an IRC tax base correction does not result in additional tax due to existing tax losses, the taxpayer may still challenge it because the correction reduces available tax losses that can be carried forward to offset future taxable income. Under Portuguese IRC law, tax losses can generally be carried forward for up to five years (now extended in recent legislation). A correction that increases taxable income reduces the deductible loss, thereby potentially increasing future tax liabilities when the company becomes profitable. In Process 255/2014-T, although the €250,372 correction did not generate immediate tax payment due to B...'s €341,469.79 loss for 2009, it effectively reduced the loss carryforward by that amount, impacting future tax positions. This provides legitimate interest to contest the correction's legality.
What legal grounds exist under the RJAT (Decree-Law 10/2011) for requesting annulment of IRC tax assessments?
Under the RJAT (Decree-Law 10/2011), taxpayers can request annulment of IRC tax assessments on several legal grounds: (1) substantive illegality - incorrect application of tax law, improper calculation methods, or erroneous interpretation of legal provisions; (2) procedural violations - failure to observe mandatory procedural requirements during tax inspection or assessment; (3) lack of factual basis - corrections not supported by adequate evidence or documentation; (4) violation of fundamental rights - breach of rights to be heard, defense rights, or proportionality principles; (5) incompetence of the tax authority; (6) formal defects in notification or assessment acts. Article 2(1)(a) grants CAAD jurisdiction over legality challenges to tax acts, while Article 10(1)(a) specifically addresses pronúncia arbitral (arbitral pronouncements) on the legality of tax liquidations and related acts.