IRS Presumption of Profits and Withholding Tax: Arbitral Claim Dismissed for Untimeliness (CAAD 261/2016-T)

Arbitral Decision[1]

Claimant – A…, S.A.

Respondent - Tax and Customs Authority

The arbitrator, Dr. Sílvia Oliveira, appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Single Arbitral Tribunal, constituted on 14 July 2016, with respect to the above-identified case, decided as follows:

1. REPORT

1.1. A…, S.A., Legal Entity No. …, with headquarters at Street …, No. …, … floor, in Porto (hereinafter referred to as "Claimant"), submitted a request for arbitral pronouncement and constitution of a Single Arbitral Tribunal, on 9 May 2016, under the terms set forth in Article 4 and No. 2 of Article 10 of Decree-Law No. 10/2011, of 20 January [Legal Regime of Arbitration in Tax Matters (RJAT)], against the Tax and Customs Authority (hereinafter referred to as "Respondent").

1.2. The Claimant, "(…) having been notified of the total dismissal of the gracious complaint filed with respect to the assessments that (…) are identified, hereby (…) requests the constitution of an arbitral tribunal", and intends "with the (…) request (…) the annulment of the Personal Income Tax assessments (…) with reference to the years 2010, 2011 and 2012, in the amounts of, respectively, € 18,038.73, € 28,534.83 and € 6,586.62, as well as their respective compensatory interest (…)".

1.3. The request for the constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 10 May 2016 and notified to the Respondent on the same date.

1.4. The Claimant did not proceed to appoint an arbitrator, whereby, under the terms set forth in Article 6, No. 2, subsection a) of RJAT, the undersigned was appointed as arbitrator by the President of the Deontological Council of CAAD, on 29 June 2016, with the appointment being accepted within the legally prescribed period and terms.

1.5. On the same date, both Parties were duly notified of this appointment and did not manifest the intention to refuse the arbitrator's appointment, in accordance with the terms set forth in Article 11, No. 1, subsections a) and b) of RJAT, combined with Articles 6 and 7 of the Deontological Code.

1.6. Thus, in compliance with the provision in subsection c), of No. 1, of Article 11 of RJAT, the Arbitral Tribunal was constituted on 14 July 2016, with an arbitral ruling having been issued on the same date, to the effect of notifying the Respondent to, "(…) within 30 days, respond, attach a copy of the administrative file and request, if desired, the production of additional evidence"

1.7. On 29 September 2016, the Respondent attached to the case file the administrative proceeding and on 30 September 2016 submitted its Response, having defended itself by exception and by substantive reply and concluded that "(…) the exception regarding the lapse of the right to arbitral action should be judged as upheld, with the absolution of the Respondent from the instance, or if not so understood, the present request for arbitral pronouncement should be judged as unfounded, maintaining in the legal order the impugned tax assessment acts and absolving, accordingly, the respondent entity from the request, all with the due and legal consequences".

1.8. In the response submitted, the Respondent further requested "(…) the waiver of witness testimony production, inasmuch as the examination of witnesses would constitute a manifestly useless act".

1.9. By arbitral ruling of 3 October 2016, the Claimant was notified to, within a period of ten days, if desired, state its position on the matter of exception raised by the Respondent in the Response submitted on 30 September 2016.

1.10. The Claimant, on 13 October 2016, stated its position regarding the exception raised by the Respondent in its Response, to the effect that "having the decision on the gracious complaint been notified to the requestor by letter dated 2016-02-03, received on 2016-02-08, and the request for the constitution of the arbitral tribunal having been made on 2016-05-09 (…), it was timely", whereby the Claimant understands that "the exception of untimeliness invoked does not exist (…)", concluding that "(…) the present action should be judged as well-founded and proven, with all due and legal consequences (…)".

1.11. By arbitral ruling of 13 October 2016, the Arbitral Tribunal ordered notification of:

1.11.1. "Both Parties to state their position, within a period of 5 days, on the possibility of waiving the holding of the meeting referred to in Article 18 of RJAT and on the possibility of waiving the submission of arguments";

1.11.2. "The Claimant to, within the aforementioned period of 5 days, state its position on the possibility of waiving the examination of the witnesses listed" and, should it not dispense with the examination of the witnesses indicated in the Request, it would be forthwith "(…) notified to, within the mentioned period (…), indicate the facts on which (…)" it intended the witness evidence to focus.

1.12. On 14 October 2016, the Respondent submitted a request to the effect of having "(…) nothing to object to the waiver of the holding of the meeting referred to in Article 18 of RJAT, and, for the same reasons, to the waiver of the holding of arguments".

1.13. The Claimant, on 18 October 2016 submitted a request to the effect of "(…) to inform that it has nothing to object to the waiver of the meeting referred to in Article 18 of RJAT, as well as nothing to object to the waiver of submission of arguments", further informing that "(…) it waives the examination of the witnesses listed in the Request".

1.14. By arbitral ruling of 18 October 2016, taking into account the arbitral ruling of 13 October 2016 (see point 1.11, above) and the requests submitted by the Parties on 14 and 18 October 2016 (see previous points), the Arbitral Tribunal decided, in accordance with the procedural principles established in Article 16 RJAT, of equality of the parties [subsection b)], of the autonomy of the Arbitral Tribunal in the conduct of the proceeding and in the determination of the rules to be observed [subsection c)], and of free conduct of the proceeding established in Articles 19 and 29, No. 2 of RJAT, as well as taking into account the principle of limitation of useless acts, provided for in Article 130 of the Code of Civil Procedure (CPC), applicable by virtue of the provision in Article 29, No. 1, subsection e) of RJAT:

1.14.1. To dispense with the holding of the meeting referred to in Article 18 of RJAT;

1.14.2. To dispense with the examination of the witnesses listed in the proceeding;

1.14.3. To dispense with the submission of arguments;

1.14.4. To designate 18 November 2016 for the purpose of issuing the arbitral decision.

1.15. Finally, the Tribunal also warned the Claimant that, until the date of the issuance of the arbitral decision, it should proceed to pay the subsequent arbitration fee, in accordance with the provision in No. 3 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings and communicate this payment to CAAD (which it did on 26 October 2016).

2. CAUSE OF ACTION

The Claimant supports its request, in summary, as follows:

OBJECT OF THE REQUEST

2.1. In this regard, the Claimant clarifies that "with the present request the annulment of the Personal Income Tax assessments (…) with reference to the years 2010, 2011 and 2012, in the amounts of, respectively, € 18,038.73, € 28,534.83 and € 6,586.62, is sought, as well as their respective compensatory interest (…)".

2.2. The Claimant further states that "such assessments concern alleged advances on account of profits, with respect to which (…) it would not have withheld Personal Income Tax at source (…), nor made the corresponding payment to the State Treasury of the tax (…) due (…)".

OF THE FACTS

2.3. In this matter, the Claimant clarifies that "it commenced its activity of buying, selling and construction of buildings on 07/05/2009 and with share capital of € 5,000.00", namely, setting forth information relating to purchases made in the years 2009, 2010, 2011 and 2012, as well as the revenues invoiced in the aforementioned years.

2.4. Now, according to the Claimant, taking into account that "the data presented reveal a strong financial imbalance requiring recourse to external capital, namely, to execute the acquisitions of real properties (…)", it clarifies that "(…) the payment of the acquisitions of real properties (…)", made in the years 2009 and 2010 were made "(…) directly by the partner Adriano Correia Cardoso using his own resources".

2.5. Indeed, according to the Claimant, "(…) such financial imbalance was compensated by contributions made by the partner (…)" inasmuch as, "the partnership agreement does not provide for the possibility of Supplementary Contributions being made, and moreover, no corporate resolution was ever adopted regarding the need for or determination of their implementation (…)".

2.6. The Claimant states that, in this regard, "the Tax Authority identified, through the bank statements to which it had access (…), as movements that should correspond to partner benefits as advances on account of profits (…)", the amounts it indicates in the request for arbitral pronouncement.

2.7. Additionally, according to the Claimant, "(…) the Tax Authority detected in the requestor's accounting the recording of expenses, accounted for as Purchases (…) and External Supplies and Services (…), which were consumed in the development of service provision in buildings of third parties, namely, residential property of the partner (…) and properties of other companies, concluding that such charges would correspond to partner benefits susceptible to being classified as advances on account of profits".

2.8. The Claimant recognizes that "(…) the accounting revealed that the partner (…) was a creditor of the requestor as a consequence of the contributions recorded as Supplementary Contributions".

2.9. On the other hand, it also recognizes that "in the course of the inspection procedure the requestor admitted deficiencies in the accounting with regard to the recording of financial operations".

OF THE GROUNDS FOR THE ASSESSMENTS

2.10. Thus, according to the Claimant, "the Tax Authority, in its Tax Inspection Report, states that the requestor did not make bank reconciliations between the accounting records and the data contained in the respective bank statements, concluding in the existence of a total discrepancy in the information provided by those elements".

2.11. In these terms, "(…) the Tax Authority concludes that, in the absence of evidence in the accounting that the amounts in question could correspond to reimbursement of a loan made or payment of dependent work, the amounts paid concern profits or advances on profits (…)".

PROCEDURAL ANTECEDENTS

2.12. In this matter, the Claimant clarifies that "(…) it filed, on 16/10/2014, a gracious complaint in which (…) it argued that the partner B… was a creditor of the requestor, whereby it resulted in being pointless to consider that he (…) would resolve to distribute amounts on account of profits when he could decide to have himself reimbursed the amounts he had contributed to the company (…)".

2.13. "As a consequence, the Tax Authority, dated 24/04/2015, materializes a draft decision on the gracious complaint (…)", having the same merited "(…) on 15/05/2015, by the requestor, the appropriate response, therein informing that the partnership agreement does not allow Supplementary Contributions to be requested and that their implementation was never approved (…)" whereby "(…) not constituting the credits Supplementary Contributions, the amounts in question would always be available for reimbursement to the creditor partner (…)".

2.14. However, according to the Claimant, "in a clear demonstration of the lack of grounds to sustain the assessments (…)", "(…) the Tax Authority (…) decides without ruling on the grounds presented in the gracious complaint".

OF THE GROUNDS FOR THE REQUEST FOR PRONOUNCEMENT

Non-existence of a taxable event

2.15. In this regard, the Claimant understands that "the Tax Authority sought to rely on the legal presumption established in (…) CIRS, without taking care to demonstrate the verification of the respective requirements, namely, to prove that the amounts in question were recorded in the partner's current account, as well as that their attribution could not correspond to loan reimbursement, provision of work or exercise of corporate positions" inasmuch as, according to the Claimant, "(…) the Tax Authority verified that of all the amounts involved, only that concerning the bank transfer dated 03/12/2010 (…), was recorded in accounting in the partner's current account".

2.16. On the other hand, the Claimant understands that, as regards the amounts "(…) recorded as purchases and supply and external services (…)", "(…) not being the recording (…) in the partner's current account verified, the basis of the legal presumption established in (…) CIRS is not met" whereby, "in this chapter, one cannot intend to see the use of such presumption legitimized by invoking an analogical application of the law, considering that such normative provision might have application to all situations that, although not recorded in the partner's current account, should have been in compliance with the accounting norms", "which would represent a violation of the principle of tax legality that derives from the Constitution and is embodied (…)" in the General Tax Law (LGT).

2.17. Thus, in this matter, the Claimant concludes that "(…) this ground cannot be used as support for the tax acts of which the annulment is requested here".

Irrelevance of the facts invoked

2.18. According to the Claimant, "the Tax Authority invokes, through the Tax Inspection Report, as facts with relevance to establish the presumption that the costs borne by the requestor, and recorded as such, correspond to distribution of profits or advance on account of the same, their allocation to the development of works in buildings that do not form part of the company's assets or business", arguments with which the Claimant does not agree.

2.19. Now, "being that only part of these costs were consumed in works in the partner's residence (…), which does not appear to be properly quantified in the Report (…), the remainder were allocated to works in buildings belonging to other companies" whereby, in the Claimant's view, they cannot be considered "(…) as distribution of profits or advance on account of the same, by virtue of not corresponding to direct or indirect benefits of which he could have taken advantage".

Violation of the principle of burden of proof

2.20. In this matter, the Claimant understands that "(…) the Tax Authority agents do not have the right to benefit from, only, part of the facts and circumstances that involve and define the tax classification (…)" whereby the Claimant concludes that the taxation for "(…) withheld Personal Income Tax should be annulled in their entirety".

OF THE CONCLUSION

2.21. In these terms, the Claimant concludes the request for arbitral pronouncement understanding that "in view of all that has been set out, the Personal Income Tax assessment acts present themselves as flawed with illegality (…) whereby they should be annulled in their entirety".

3. RESPONSE OF THE RESPONDENT

3.1. The Respondent responded, defending itself by exception and by substantive reply, concluding that "(…) the exception regarding the lapse of the right to arbitral action should be judged as upheld, with the absolution of the Respondent from the instance, or if not so understood, the present request for arbitral pronouncement should be judged as unfounded, maintaining in the legal order the impugned tax assessment acts and absolving, accordingly, the respondent entity from the request, all with the due and legal consequences".

By Exception

3.2. In this regard, the Respondent states that "the Claimant (…) petitions in its request for arbitral pronouncement for the annulment of the Personal Income Tax assessments (IRS), developed by the Tax and Customs Authority (AT) with reference to the years 2010, 2011 and 2012, in the amounts of, respectively, € 18,038.73, € 28,534.83 and € 6,586.62, as well as their respective compensatory interest", being that "the object of the request is, therefore, the aforementioned Personal Income Tax assessments and identified in the present proceeding", whereby "(…) the Claimant petitions that the Tribunal deign to assess the legality of the Personal Income Tax assessment acts, identified in the proceeding".

3.3. Now, according to the Respondent, "(…) the immediate object of the proceeding should be the dismissal of the gracious complaint (…) dismissed by ruling notified on 8 February 2016 (…)", but "(…) from the content of the request formulated (…) it is verified that the tax acts challenged and that are in fact the object of the request for arbitral pronouncement are not the dismissal of the gracious complaint (…) but rather, as the Claimant states, the Personal Income Tax assessment acts identified in the arbitral request".

3.4. The Respondent continues stating that, in this regard, "(…) intending the Claimant to challenge the assessment acts, the request for constitution of Arbitral Tribunal should have been submitted within the period of 90 days counting from the end of the period for voluntary payment (…)" whereby, "having the Claimant submitted the request for constitution of Arbitral Tribunal on 9 May 2016 (…) it is verified that on this date the legally defined period for challenging in the arbitral forum the assessment acts in question had already been exceeded (…)", concluding the Respondent that the request "(…) is untimely, and the Tribunal cannot know the same (…)" "(…) inasmuch as the lapse of the right of action constitutes an exception (…) preventive of the knowledge of the merits of the case (…)".

By Substantive Reply

3.5. Notwithstanding, in this regard, the Respondent alleges that "in compliance with Service Order No. OI2013…, a tax inspection action was carried out on the (…) now requesting party, of general scope and concerning the exercises of 2010, 2011 and 2012", having resulted from the aforementioned inspection action "(…) corrections regarding Personal Income Tax/withholdings at source at the liberatory rate, for advances on account of profits (…)", which resulted "(…) in corrections to the taxable basis regarding Personal Income Tax, which in turn constitutes the object of the present dispute".

3.6. These corrections regarding Personal Income Tax resulted "(…) from the fact that the Claimant incurred in expenses with real properties not allocated to the activity of A… and from the detection of transfers of funds from the company to the managing partner, characterized as advance of profits, subject to the liberatory rate (…)".

Funds of the Claimant Applied to Property Not Allocated to the Activity - Withholding of Personal Income Tax at Source in Default

3.7. Indeed, the Respondent states that "(…) in accordance with the provision in No. 4 of Article 6 of the Personal Income Tax Code, deposits in any current accounts of partners, recorded in commercial or civil companies in commercial form, when they do not result from loans, from provision of work or from exercise of corporate positions, are presumed to have been made as profits or advances on profits", whereby "(…) the amounts spent by the company in expenses or charges not accepted for tax purposes, being attributable, by their nature, to the partner/shareholder's private sphere, should have been recorded in accounting in their own current account in order to restore the material truth of the facts, which did not occur".

3.8. And the Respondent continues, stating that "in this conformity, in the absence of evidence in the accounting that resulted from reimbursement of a loan made or from provision of dependent work, as manager [in which case the same amounts would be considered taxable income regarding Personal Income Tax (…)], it is presumed that the amounts paid concern profits or advances on profits, although paid in kind (…)".

3.9. Now, "since for the years in question (2010, 2011 and 2012) profits or advances on account of profits (…) are subject to withholding at source at the liberatory rate of 21.5% (2010 and 2011) and 25% (2012) (…) and the taxpayer did not make the withheld tax owed, there is a shortfall of tax (…) for the years 2010, 2011 and 2012 (…)".

Funds of the Company Transferred to the Managing Partner - Withholding of Personal Income Tax at Source in Default

3.10. In this regard, the Respondent states that "(…) the Tax Inspection services verified, with respect to the years 2010 and 2011, the existence of debits (outflows of funds by transfers) that were recorded in an account (…) Other debtors and creditors (2010) or were not subject to any accounting record (2011)", being that "(…) the Tax Inspection services determined that the beneficiary account of these same transfers is held by the very B…".

3.11. Having taken into account that "they also verified that in the years in question no salaries or compensation (…) to the corporate bodies (…)" were processed and paid and that "the minute No. 1 of the Claimant, dated 2009-06-01, states that the managing partner will not earn any compensation nor will make any deductions of contributions to Social Security, given that he exercises his functions (…)" in another company, the Respondent understands that "in accordance with the provision in No. 4 of Article 6 of the Personal Income Tax Code, deposits in any current accounts of partners, recorded in commercial or civil companies in commercial form, when they do not result from loans, from provision of work or from exercise of corporate positions, are presumed to have been made as profits or advances on profits".

3.12. Thus, the Respondent presumes that "(…) the amounts of the transfers identified (…) in the total of € 177,000.00 concern profits or advances on profits", "(…) subject to withholding at source at the liberatory rate (…) for the years in question (…)", whereby "since the taxpayer did not make the due withholding at source of Personal Income Tax, there is a shortfall of tax (…)".[2]

3.13. The Respondent further states that "in the exercise of the right of hearing the Claimant did not contest the proposed corrections (…) regarding withholding at source of Personal Income Tax (…)", being that "the matter contested referred to the corrections proposed regarding withholding at source of Personal Income Tax as advances on account of profits, of two bank transfer movements to the managing partner's personal account (…) whose amount amounted to € 117,000.00", having the Claimant alleged, in summary that the "said financial movements were subject to incorrect accounting recording and that the decision on the corrections in question was based, fundamentally, on the confusion created by the accounting itself".

3.14. In this regard, the Respondent understood that "nor can incorrect accounting recording be alleged, since the bank transfer in the amount of € 117,000.00 was not the object of any accounting record" and "as for the bank transfer in the amount of € 60,000, the accounting movement demonstrates that the partner is a debtor of the company and not a creditor" whereby the Respondent concludes that "it did not accept the Claimant's arguments in the prior hearing (…)" having been converted "(…) the draft report (…) into a final one".

3.15. The Respondent further confirms that "on 16-10-2014, the Claimant filed a gracious complaint against the assessment acts (…)" at issue, being that it concluded in the scope of that "(…) process of gracious complaint that for the same facts, contradictory justifications were presented by the partner of the requestor, depending on whether we are in the scope of the inspection procedure to the company or in the scope of his personal sphere, a situation that does not appear admissible, nor coherent", whereby "the draft decision on the gracious complaint was converted into a final decision, having the Claimant's claim (…) been dismissed".

3.16. In these terms, the Respondent understands that "(…) the assessments sub judice, as well as the decision issued in the scope of the Gracious Complaint, as we have seen throughout the entire exposition, are in accordance with the law in force and the taxation undertaken does not violate, rather fulfills, the principles of the inquisitorial and of tax truth", whereby "(…) the reasons and arguments expended by the Claimant in favor of the (…) annulment of the tax acts are wholly lacking".

3.17. In these terms, the Respondent concludes its request, understanding that "(…) the arguments invoked by the Claimant of the request for arbitral pronouncement are unfounded, here expressly and entirely challenged, as well as the documents attached, for not corresponding to the truth or from them not being able to extract the legal effects sought by him".

4. RESPONSE TO THE EXCEPTION RAISED BY THE RESPONDENT

4.1. The Claimant, on 13 October 2016, stated its position regarding the exception raised by the Respondent in its Response.

4.2. In this regard, the Claimant alleges that it cannot agree with the understanding manifested by the Respondent that:

4.2.1. "(…) the request for arbitral pronouncement is untimely inasmuch as the claimant petitions exclusively that the illegality of the assessment acts be declared, whereby the period of 90 days granted (…) would have as its starting date the day following the end of the period for voluntary payment of the tax obligation, on 19 June 2014 (…)" and,

4.2.2. "(…) having the period for direct challenge of the tax assessment acts been exceeded, the timeliness of the request could only be founded on the existence of some means of gracious challenge of the assessment acts where a decision to dismiss (…) the claims formulated there by the tax payer had been issued (…)", being that "the requestor, despite having filed a gracious complaint of the assessments, in identifying and formulating his arbitral request did not make any reference to the challenge of the act dismissing the gracious complaint, whereby, not having sought the assessment of the legality of the second-degree act, there does not exist the support that could defend the timeliness of the request and, consequently, the possibility of the arbitral tribunal assessing the same with respect to the assessment acts that the Claimant intends to challenge".

4.3. To support its position, the Claimant begins by alleging that "(…) the request for constitution of the arbitral tribunal is timely inasmuch as it was made within the period of 90 days counting from the dismissal of the gracious complaint (…)" and that "(…) it could not have requested the constitution of the arbitral tribunal after the period for voluntary payment of the taxes expired inasmuch as, if it did, the entire administrative phase of the tax procedure was passed by, namely, it was precluded the possibility of filing a gracious complaint and hierarchical appeal of the assessments made, its means of defense being restricted".

4.4. On the other hand, the Claimant understands that "(…) the Respondent's allegation that the Claimant in identifying and formulating its arbitral request did not make any reference to the challenge of the act dismissing the gracious complaint does not stand, inasmuch as, in Articles 18 to 26 of its initial petition the Claimant invokes (…) the illegality of the decision of the gracious complaint (…)" but admits that "(…) even if it had not done so, the request for constitution of the arbitral tribunal would still be timely inasmuch as the decision of the gracious complaint could not contain any illegality and have merely dismissed the requestor's claim for declaration of illegality of the tax assessments, being able (…) the requestor to challenge this dismissal, within the period of 90 days (…)".

4.5. Thus, the Claimant concludes its response to the exception to the effect that "having the decision of the gracious complaint been notified to the requestor by letter dated 2016-02-03, received on 2016-02-08, and the request for the constitution of the arbitral tribunal having been made on 2016-05-09 (…), it was timely", whereby the Claimant understands that "the exception of untimeliness invoked does not exist (…)", concluding that "(…) the present action should be judged as well-founded and proven, with all due and legal consequences (…)".

5. CASE MANAGEMENT RULING

5.1. With respect to the alleged untimeliness of the request, see Chapter 7 of this Decision, under the heading "Preliminary Issue – Assessment of the Exception Raised by the Respondent"

5.2. The parties have legal personality and capacity, are legitimate as to the request for arbitral pronouncement and are duly represented, in accordance with the terms set forth in Articles 4 and 10 of RJAT and Article 1 of Portaria No. 112-A/2011, of 22 March.

5.3. The Tribunal is competent as to the assessment of the request for arbitral pronouncement formulated by the Claimant.

5.4. No other exceptions of which it is incumbent to rule were raised besides the untimeliness of the request (see analysis in Chapter 7 of this Decision).

5.5. With respect to the value of the request for arbitral pronouncement (EUR 58,847.17, relating to the total of the Personal Income Tax assessments at issue), the same was not quantified and indicated in the Request for Arbitral Pronouncement.

5.6. Nevertheless, it was considered for purposes of calculating the value of the initial arbitration fee (EUR 1,071.00), paid by the Claimant on 6 May 2016, the value of EUR 58,817.17, whereby there is an immaterial difference of EUR 0.30 between the two values mentioned above.

5.7. In this regard, having taken into account:

5.7.1. The request formulated by the Claimant [that the Arbitral Tribunal declare "(…) the annulment of the (…) Personal Income Tax assessments, developed by the Tax and Customs Authority (…) with reference to the years 2010, 2011 and 2012 (…), as well as their respective compensatory interest (…)"], as identified in point 2.1 of this Decision;

5.7.2. The provision in Article 296 of the CPC that "to every cause must be attributed a certain value, expressed in legal currency, which represents the immediate economic benefit of the request";

In accordance with the provision in Article 306, No. 2 of the CPC, the value of the case is fixed at EUR 58,847.17, with the normal implications on the amount of final costs of the case (whose amount and responsibility for the same, in accordance with the provision in Article 4, No. 4 of the Regulation of Costs in Arbitration Proceedings, will be fixed in the final chapter of this Decision)].

5.8. There are no procedural nullities.

6. FACTUAL MATTERS

6.1. Of the facts proven

6.2. The following facts are considered as proven (based on the documents identified below, attached by the Claimant, as well as based on the documents that form part of the administrative file attached by the Respondent):

6.2.1. The Claimant is a commercial company, constituted on 28 April 2009, which adopts the single-quota type and has as its object the construction of buildings, the purchase and sale of real property and the resale of those acquired for that purpose, according to a copy of the partnership agreement attached by the Claimant (Annex 11).

6.2.2. The Claimant has share capital of EUR 5,000.00, belonging to the sole partner, B…, according to a copy of the partnership agreement attached by the Claimant (Annex 11).

6.2.3. In compliance with Service Order No. OI2013…, a tax inspection action was carried out on the Claimant, of general scope, concerning the exercises of 2010, 2011 and 2012, according to a copy of the Inspection Report contained in the administrative file attached by the Respondent and partially attached by the Claimant (Annex 4).

6.2.4. The Claimant was notified of the Draft Conclusions of the Inspection Report (Letter No. …/…, of 24 February 2014), to within a period of 15 days be able to exercise the right to hearing on the said Draft Conclusions, according to a copy contained in the administrative file attached by the Respondent and partially attached by the Claimant (Annex 4).

6.2.5. On 12 March 2014, the Claimant exercised its respective right of hearing on the Draft Conclusions of the Inspection Report, according to a copy contained in the administrative file attached by the Respondent and partially attached by the Claimant (Annex 4).

6.2.6. The Claimant was notified of the Inspection Report (Letter No. …/…, of 24 March 2014) and its corrections, according to a copy contained in the administrative file attached by the Respondent and partially attached by the Claimant (Annex 4).

6.2.7. From the corrections made by the Tax Inspection Services (SIT) resulted the following additional Personal Income Tax assessments, according to copies attached by the Claimant (Annex 1 to 3):

6.2.8. On 16 October 2014, the Claimant filed a gracious complaint (No. …2014…) against the Personal Income Tax assessment acts identified in the previous point, according to a copy attached by the Claimant (Annex 13) and administrative file attached by the Respondent.

6.2.9. On 4 May 2015, the Claimant was notified, by registered mail, of Letter No. …/…, dated 27 April 2015, concerning the content of the draft ruling regarding the decision to dismiss the gracious complaint filed, to exercise, if desired, its respective right of hearing, according to a copy attached by the Claimant (Annex 14) and the administrative file attached by the Respondent.

6.2.10. The Claimant exercised, within the period fixed for the purpose, the right of hearing in writing, according to the administrative file attached by the Respondent.

6.2.11. On 22 December 2015, the Tax Inspection Services produced information that is attached to the administrative file, in which they conclude that "as for the classification made by the company regarding the amount of € 430,000.00 (…) there is no evidence in the accounting that the contributions made by the company to the partner resulted from reimbursement of a loan", according to a document attached to the administrative file submitted by the Respondent.

6.2.12. The Claimant was notified of Letter No. …/…, of 3 February 2016 (and received on 8 February 2016), concerning the content of the ruling of 1 February 2016, to the effect of dismissing the gracious complaint identified in point 6.2.8, above, according to a copy attached by the Claimant (Annex 16) and the administrative file attached by the Respondent.

6.3. Of the facts not proven

6.4. It was not proven that the Claimant made payment of the Personal Income Tax assessments identified in point 6.2.7, above.

7. LEGAL GROUNDS

Preliminary Issue – Assessment of the Exception Raised by the Respondent

7.1. In accordance with the provision in Article 608, No. 1 of the CPC, applicable by virtue of the provision in Article 29 of RJAT, "(…) the judgment rules, first, on the procedural issues that may determine the absolution from the instance (…)", and the judge must "decide all questions that the parties have submitted to its assessment, excepting those whose decision is prejudiced by the solution given to others (…)" (emphasis ours).

7.2. In these terms, having taken into account the exception of the untimeliness of the request for arbitral pronouncement, raised by the Respondent, it becomes necessary to assess and decide, previously, the exception raised inasmuch as, according to the Respondent, "(…) the lapse of the right of action constitutes an exception (…) preventive of the knowledge of the merits of the case (…)", determining "(…) the absolution of the Respondent from the instance (…)".

Of the Untimeliness of the Request for Arbitral Pronouncement

7.3. In general terms, having taken into account the provision in No. 1 of Article 102 of the Code of Tax Procedure and Process (CPPT), the period for submitting judicial challenge is of three months counted from the facts enumerated in that article, namely, from the "end of the period for voluntary payment of the tax obligations legally notified to the taxpayer" or from "the notification of the other acts that may be subject to autonomous challenge under the terms of this Code".

7.4. On the other hand, in accordance with the provision in Article 10, No. 1, subsection a) of RJAT, the request for constitution of an arbitral tribunal must be submitted "within the period of 90 days, counted from the facts provided for in Nos. 1 and 2 of Article 102 of the CPPT, as to acts susceptible to autonomous challenge (...)".

7.5. In this matter, it should be noted that the arbitral nature of this tribunal and the application of the tax arbitration regime do not entail any modification as to the nature, modalities and form of calculation of periods, as can be extracted from the reading of RJAT.

7.6. And, if there were any doubt, Article 29 of RJAT provides for the subsidiary application of the norms of a procedural or tax process nature, of the norms on organization and process in administrative and tax courts, of the Code of Administrative Procedure (CPA) and of the CPC.

7.7. In the case under analysis, having the Claimant been notified of the assessments identified in point 6.2.7, above, and having filed a gracious complaint against them on 16 October 2014, from the decision dismissing this complaint (notified by Letter No., of 3 February 2016), the counting of the period referred to in points 7.3 and 7.4, above would begin from the day following notification of this (since the decision notified ruled on the legality of the Personal Income Tax assessments that are the object of the request).

7.8. In this regard, having the period of three months provided for in Article 102, No. 1 been exceeded (as of the date of notification of the dismissal of the gracious complaint), counted from the end of the period for voluntary payment of the tax obligations legally notified (that is, counted from 20 June 2014), in general terms, the request for constitution of the arbitral tribunal to be timely (and as such valid) had to be submitted, within the maximum period of three months (90 days) counting from the date of the said notification of the decision dismissing the gracious complaint filed by the Claimant (that is, counting from 9 February 2016, the day following receipt of that notification).

7.9. Now, having into account that the request for constitution of the arbitral tribunal was submitted to CAAD on 9 May 2016, one could assert that, apparently, in view of the provision generically set forth in law, the period of 90 days referred to in the previous point would be being complied with by the Claimant.

7.10. Nevertheless, in order to decide on this matter, it will be necessary to analyze the content of the request submitted.

7.11. In accordance with the request for arbitral pronouncement submitted on 9 May 2016 (and identified under the designation "Object of the Request"), the Claimant states that "with the present request the annulment of Personal Income Tax assessments, developed by the Tax and Customs Authority (AT) with reference to the years 2010, 2011 and 2012, in the amounts of, respectively, € 18,038.73, € 28,534.83 and € 6,586.62, is sought, as well as their respective compensatory interest (…)", in the amounts of EUR 2,376.83, EUR 2,852.34 and EUR 457.82, respectively (emphasis ours).

7.12. Thus, in the object of the request, expressly delimited by the Claimant, it is clearly stated that the object (sole) of the request for arbitral pronouncement is the request for declaration of the illegality of the Personal Income Tax assessments of the years identified in the previous point, petitioning the Claimant that the same be annulled in their entirety (see Article 53 of the request), it not being requested the assessment of the ruling dismissing the gracious complaint.[4]

7.13. However, in order for it to be possible to assess only the tax assessments at issue, the period provided for that purpose should be counted from the "end of the period for voluntary payment of the tax obligations legally notified to the taxpayer" (that is, having the Personal Income Tax assessments that are the object of the request a period for voluntary payment until 19 June 2014, that period would be counted from 20 June 2014), whereby the request for arbitral pronouncement under analysis would reveal itself to be untimely as from the date of its submission (9 May 2016).

7.14. Nevertheless, such untimeliness would not occur if the Claimant had clearly stated that the immediate object of the request for arbitral pronouncement was the illegality of the act dismissing the gracious complaint (appropriately filed), being the illegality of the Personal Income Tax assessment acts of the years 2010, 2011 and 2012 the mediate object of that request for arbitral pronouncement.

7.15. Indeed, the way the request is presented, and having taken into account the explanations given by the Claimant in its Response to the exception raised by the Respondent, the latter at no point in its articulation requests the assessment of the decision dismissing the gracious complaint, despite stating that "(…) having been notified of the total dismissal of the gracious complaint filed with respect to the assessments (…) hereby (…) requests the constitution of an arbitral tribunal", in a logic of chronological sequence of events.

7.16. This understanding of the Tribunal is also reinforced, contrary to what the Claimant alleged (in its Response to the exception), by what is stated in Articles 18 to 26 of the request under the designation of "Procedural Antecedents", once again presenting in those articles a chronological reference to what occurred in the gracious forum, from the filing of the complaint identified until notification of the decision dismissing it.

7.17. Nevertheless, although in Article 24 of the request the Claimant states that "(…) there should be no doubt about the illegality of the decision issued (…)" (in an allusion to the decision dismissing the gracious complaint), once again it does not articulate any request for assessment of that alleged illegality, the Tribunal understands it to be merely the manifestation of the Claimant's own understanding, but whose assessment of the alleged illegality, we repeat, at no point in the request submitted (nor in the Response submitted with respect to the exception raised by the Respondent) is formulated.

7.18. Thus, it remains to conclude that, in the case under analysis, the period having elapsed counted from the end of the period for voluntary payment of the tax obligations legally notified, the illegality of these acts could only be assessed through the assessment of the illegality of the act dismissing the gracious complaint (identified in point 6.2.8, above) and, for this purpose, the period provided for would be counted from the notification of the ruling dismissing the gracious complaint, inasmuch as this entails the assessment of the legality of the assessment acts at issue.

7.19. In this regard, taking into account that in the request for arbitral pronouncement there is no included the request for assessment of the decision dismissing the gracious complaint filed against the Personal Income Tax assessments of the years 2010, 2011 and 2012 (as a means of being able to declare, ultimately, the illegality of the Personal Income Tax assessments that are the object of the request), the request for arbitral pronouncement should therefore be considered untimely inasmuch as it only demonstrates intent to assess the legality of the Personal Income Tax assessments mentioned above.

7.20. Being preventive of the exercise of the respective right, untimeliness, translated into the lapse of the right to request arbitral pronouncement, implies the absolution of the Respondent from the request.[5]

Questions of Prejudiced Knowledge

7.21. In accordance with the above stated, the exception of untimeliness of the request (raised by the Tax and Customs Authority) proceeding, there is an obstacle to the assessment of the request itself formulated by the Claimant, absolving the Respondent from the request and with knowledge of the merits of it being prejudiced.[6]

Of the Responsibility for Payment of Arbitration Costs

7.22. In accordance with the provision in Article 22, No. 4 of RJAT, "in the arbitral decision issued by the arbitral tribunal the amount and distribution by the parties of the costs directly resulting from the arbitration proceeding are set forth".

7.23. Thus, in accordance with the provision in Article 527, No. 1 of the CPC (ex vi Article 29, No. 1, subsection e) of RJAT), it must be established that the Party that has given cause to costs or, in the absence of a successful outcome of the action, whoever benefited from the proceeding shall be condemned in costs.

7.24. In this regard, No. 2 of the said article specifies the expression "has given cause", according to the principle of the burden of costs, understanding that the losing party gives cause to the costs of the proceeding, in the proportion in which it loses.

7.25. In the case under analysis, having taken into account the above stated, the principle of proportionality imposes that full responsibility for costs be attributed to the Claimant, in accordance with the provision in Article 12, No. 2 of RJAT and Article 4, No. 4 of the Regulation of Costs in Tax Arbitration Proceedings.

8. DECISION

8.1. Having taken into account the analysis undertaken, this Arbitral Tribunal decided:

8.1.1. To judge the exception of the untimeliness of the request for arbitral pronouncement as upheld and, in consequence, absolve the Respondent from the request, with the legal consequences arising therefrom;

8.1.2. To condemn the Claimant in the payment of the costs of the present proceeding.

Value of the case: Having taken into account the provision in Articles 306, No. 2 of the CPC, Article 97-A, No. 1 of the CPPT and Article 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at EUR 58,847.17.

Costs of the proceeding: In accordance with the provision in Table I of the Regulation of Costs in Tax Arbitration Proceedings, the value of the costs of the Arbitration Proceeding is fixed at EUR 2,142.00, to be borne by the Claimant, in accordance with Article 22, No. 4 of RJAT.

Let it be notified.

Lisbon, 18 November 2016

The Arbitrator

Sílvia Oliveira

[1] The writing of the present decision is governed by the orthography prior to the Orthographic Agreement of 1990, except as regards transcriptions made.

[2] The Respondent further states that "the Tax Inspection Services also verified, through analysis of the Model 10 statement (…) relating to the years in question, submitted by the Claimant, as well as to the withholding at source payment slips paid in the same period, that no payment of any income from category E of Personal Income Tax was declared, nor was withholding at source made on the same income".

[3] With respect to arbitration proceedings, it must be noted that "the competence of arbitral tribunals is limited to the declaration of illegality of assessment acts covering only the acts dismissing second-degree claims (complaints or hierarchical appeals) that actually assessed the legality of the first-degree acts" (Jorge Lopes de Sousa, in "Guide to Tax Arbitration", Almedina, 2013, p. 120 to 123).

[4] In this regard, even if it were intended that "in judicial challenge the tribunal's competence extends beyond the knowledge of the illegality of the assessment to the knowledge of the defects of the administrative decision itself (of 2nd degree) that analyzed the legality of the 1st degree act", the tribunal is bound by the request formulated by the Claimant (for annulment of the Personal Income Tax assessments at issue) inasmuch as, in accordance with the provision in Article 608, No. 2 of the CPC (applicable by virtue of the provision in Article 29 of RJAT); "the judge must decide all questions that the parties have submitted to its assessment, excepting those whose decision is prejudiced by the solution given to others; he may not concern himself except with questions raised by the parties, except if the law permits or requires him to take official knowledge of others", under penalty of incurring in improper pronouncement.

In this sense, see also the Judgment of TCAS of 27 October 2016 (case No. 09711/16), according to which it is stated that "a judgment is null when the judge (…) rules on questions of which he could not take knowledge", and that "(…) the defect affecting the decision results (…) from an excess of pronouncement (…)". "Now, as is inferred (…), the excess of pronouncement presupposes that the judge goes beyond the knowledge that was requested by the parties. In other words, there will be an excess of pronouncement whenever the subject matter of the judgment does not coincide with the subject matter of the claim or the judgment does not coincide with the request. (…). However, one thing is the subject matter of the claim, another is the reasons, the grounds on which the party relies to support the same subject matter of the claim. (…) Based on this logical reasoning, doctrine and jurisprudence distinguish on one hand, questions and, on the other, reasons or arguments to conclude that only the lack of assessment of the former (that is, questions) constitutes the nullity provided for in the said normative, but not the mere lack of discussion of the "reasons" or "arguments" invoked to conclude on the questions (cf. Prof. Alberto dos Reis, C.P. Civil annotated, V, Coimbra Publisher, 1984, p.53 to 56 and 143 et seq.; Antunes Varela and Others, Manual of Civil Procedure, 2nd Edition, Coimbra Publisher, 1985, p.690 et seq.; Luís Filipe Brites Lameiras, Practical Notes on the Regime of Appeals in Civil Procedure, 2nd edition, Almedina, 2009, p. 37) (emphasis ours).

[5] In this sense, see the Judgment of STA No. 340/13, of 22-05-2013, when it states that "the lapse of the right of action, since it obstructs the production of the legal effect of the facts articulated by the plaintiff, constitutes a peremptory exception. In fact, the lapse of the right of action configures a cause to which substantive law attributes the cessation of the right that the plaintiff invokes as already validly constituted and, from this perspective, integrates the domain of peremptory exceptions which are those that translate into the invocation of facts or causes preventive, modificative or extinctive of the Plaintiff's right, therefore leading to the total or partial unfoundedness of the action – to a decision materially unfavorable (more or less) to that claimant. The Defendant does not deny the facts from which the Plaintiff claims to have derived his right, but opposes against them counter-facts that would have excluded or paralyzed from the outset the legal potentiality or subsequently altered or suppressed the effects that came to produce" (Manuel de Andrade, in "Elementary Notions of Civil Procedure", Coimbra Publisher, 1979, pages 130/131).

And the same Judgment continues by stating that "it is true that the question can be observed from a different angle, such as in the Code of Procedure of Administrative Courts (…), within the scope of the special administrative action, where the lapse of the right of action was qualified as a dilatory exception. (…) From the point of view of practical results, this diversity of doctrinal options will have no repercussions: in both the tribunal does not proceed with the assessment of the merits of the case and, even for those who maintain that the consequence of the lapse of the right of action is the absolution from the instance, the plaintiff is always prevented from presenting a new initial petition in the sequel of the absolution from the instance (in accordance with No. 1 of Article 289 of the CPC), since this faculty is only available to him when the violation that gave rise to the absolution from the instance is susceptible of remedying. In the case sub judice, because the law subsidiarily applicable is the CPC, we understand that the legal effect will be the absolution from the request (…)".

[6] In this sense, as already stated, see Article 608, No. 2 of the CPC (applicable by virtue of the provision in Article 29 of RJAT), "the judge must decide all questions that the parties have submitted to its assessment, excepting those whose decision is prejudiced by the solution given to others (…)" (emphasis ours).