Process: 264/2015-T

Date: January 18, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This decision from CAAD (Tax Arbitration Center) addresses a fundamental issue in Portuguese Corporate Income Tax (IRC) litigation: the burden of proof in cases involving gratuitous patrimonial increases. The Tax Authority issued an additional IRC assessment based on an accounting entry allegedly lacking supporting documentation, arguing that the taxpayer's refusal to collaborate and absence of documentation rebutted the presumption of truthfulness under Article 75(1) of the General Tax Law (LGT). The arbitration tribunal rejected this reasoning, establishing critical principles for IRC disputes. The court held that before addressing whether the presumption of truthfulness is rebutted under Article 75(2) LGT, one must first determine who bears the initial burden of proof under Article 74 LGT. In IRC cases where the Tax Authority seeks to tax a patrimonial increase as income, it carries the burden of proving the occurrence of the taxable event. Citing Supreme Administrative Court precedent, the tribunal emphasized that in administrative proceedings involving unfavorable acts, the Administration must prove the legal assumptions justifying its authority to act, particularly the existence of tax facts underlying additional assessments. This aligns with fundamental administrative law principles including legality, lawfulness, and the duty of substantiation. The decision clarifies that the presumption of truthfulness in tax returns only becomes relevant after establishing that the taxpayer bears the burden of proof, which is not the case when the Tax Authority asserts additional taxable income. The ruling protects taxpayers from improper burden-shifting and reinforces that the mere absence of documentation or alleged non-collaboration cannot automatically transfer the Tax Authority's fundamental obligation to prove the material facts supporting additional tax assessments. This decision has significant implications for IRC disputes involving Article 21(1)(a) CIRC on gratuitous patrimonial increases, establishing that taxpayers are not required to prove negative facts and that the Administration cannot rely solely on documentary gaps to meet its evidentiary obligations.

Full Decision

Before entering into the analysis of the controversial matter, it is necessary to define the question relating to the burden of proof directly addressed by the Tax Authority in its Response and Submissions.

The Respondent understands then that the burden of proof does not lie with it, to the extent that, notwithstanding accepting that "Under the Corporate Income Tax, the taxable matter is, as a general rule, determined on the basis of the taxpayer's return, without prejudice to the existence of monitoring by the Tax Authority, taking into account the provisions of Articles 16 and 17 of the Corporate Income Tax Code, the Tax Authority being able to proceed to the correction of the assessment pursuant to the provisions of Article 99 of the same Code (Article 91 at the date of the facts)", it understands that such rule, in the case, will be excepted, inasmuch as "the Tax Authority services verified that the accounting entry in question has no support in any supporting documents", wherefore will cease, in the concrete case, the presumption of truthfulness of the tax returns of the Applicant, and that "in the face of illegitimate refusal of collaboration by the taxpayer, ceases equally" such presumption.

It is not subscribed to, however, the line of argument of the Respondent, either in the interpretation or in the application which it makes of the Law.

Indeed, and from the start, the presumption of truthfulness of the return of the taxpayer, enshrined in paragraph 1 of Article 75 of the General Tax Law, operates in the cases in which that one is burdened with the burden of proof. Thus, prior to the question of knowing whether such presumption is – or not – rebutted pursuant to paragraph 2 of the same provision, it becomes necessary to establish to whom, pursuant to Article 74 also of the General Tax Law, lies in the first instance the burden of proof.

Now, on this point, there are no doubts that the said burden lies with the Tax Authority, to the extent that, seeking to tax an increase in equity as income, it is obliged to demonstrate its occurrence.

As was stated in the Decision of the Supreme Administrative Court of 29-04-2004, rendered in case 01680/03[1], "In the absence of special rules, the duty lies with the Administration the burden of proof of the verification of the legal assumptions of its action, above all the proof of the existence of the tax facts on which was based the contested additional assessment".

Indeed, as was stated in the Decision also of the Supreme Administrative Court of 19-06-2015, rendered in case 0808/14:

"In this field of the distribution of the burden of proof, Professor Vieira de Andrade, who is cited in the appealed judgment, stresses that in the referred scope, by force of the operation of the principles of the inquisitorial and of free evaluation of evidence, does not apply a burden of proof 'subjective', which would imply that the judge could only consider facts alleged and proved by each of the parties, but must apply a burden of proof 'objective'. And explains:

[…]

'The burden of proof, understood in this sense more objective, will depend on the procedural situation of the parties, but – because it depends on normative evaluations and not on imperatives of pure logic – must be determined, in the absence of express rules, in accordance with a framework of concrete or typical normality, constructed on the basis of specific rules of the domain of life in question and on the principles specific to administrative law.

The general rule, pursuant to which whoever invokes a right has the burden of proof of the respective constitutive facts, with the duty lying with the counterpart the proof of the impeditive facts, modifying or extinctive facts [Article 342 of the Civil Code], can be understood as applicable in principle in administrative proceedings, but here, as also in the field of law and of civil procedure, is not sufficient for the resolution of all types of situations – especially if no differentiations are made according to the positions of the parties and the interests and situations at stake in the specific domains of reality, as normatively conceived.

In civil law, for example, different rules are admitted for special cases, and there is a tendency in doctrine to sustain a distribution more balanced of the burden of proof, taking into account, in particular, the more favorable position for, in the concrete case, demonstrating the fact.

But the problem of the distribution of the burden of proof arises with particular acuteness in administrative proceedings, above all with regard to the means of challenge of acts and rules.

In these proceedings, is required a special regime or an adaptation of the common regime, be it because it is a matter of the challenge of administrative decisions of authority, be it because may not be at issue directly a substantive right of the appellant [it is sufficient to have a de facto interest or, in a public action, a diffuse interest, not to mention the case of public action] – there it is a matter above all of conformity with the legal order of an administrative decision of authority [it is that the "question of law" to be resolved].

Thus, cannot be required of the plaintiff by system the proof of the constitutive facts of his/her claim of annulment [from the start and, for example, the proof of the non-verification of the legal assumptions of the performance of the act], so as to make it the duty of the Administration only to prove the exceptions invoked – this would be equivalent in practice to the pure and simple invocation of the "presumption of legality of the administrative act", making fall on the individual the burden of proof [subjective] of the illegality of the contested act.

Must on the contrary be taken into account, in general, for the construction of the framework of normality that is to serve as a normative paradigm for the distribution of the burdens of proof, the subjection of the Administration to the principles of legality and of lawfulness and, at least as regards unfavorable acts, the duty of substantiation.

That is, it seems that must lie in principle with the Administration the burden of proof of the verification of the legal assumptions [binding] of its action, namely aggressive [positive or unfavorable]; in return, it will be the duty of the challenger to present sufficient evidence of the illegitimacy of the act when the such legal assumptions are shown to be verified.

In other words, the Administration must be the one to bear the disadvantage of not having been made the proof [of the judge not having been convinced] of the verification of the legal assumptions that permit the Administration to act with authority [at least when producing effects unfavorable for individuals]; the individual must be the one to bear the disadvantage of not having been made the proof [of the judge not having been convinced] that in the exercise of discretionary powers the Administration acted against fundamental legal principles' [José Carlos Vieira de Andrade, in Administrative Justice (Lectures), Almedina, 2012-12th edition, pages 447 to 449].

[…]

In the same vein, Professor Aroso de Almeida warns that '… it is necessary to distinguish on this matter, according to whether the contested act is an act of positive content, that expresses a position of the Administration whose grounds it is her duty to demonstrate positively, or on the contrary, is an act of negative content, that merely refutes a claim that had been presented by the individual.

For according to whether it is one or the other case, differences are made in the positions in which the parties find themselves placed in the framework of the underlying relationship to the appeal.

Let us start therefore with the hypothesis structurally simpler of the appeal of challenge of an act of positive content. It is in this field that the parties figure in the appeal in inverted positions in relation to those that belong to them in the framework of the substantive legal relationship.

[…]

Now, this difference of substantive nature must, in our view, project itself on the plane of the definition of the decision rules on the basis of which the court must decide in the situations in which no clear conclusion has resulted from all the evidence gathered in favor of any of the parties:

a) Thus, if the appellant alleges the non-fulfillment of the assumptions of the act, must fall on the Administration the risk of lack of proof of its respective verification' [Mário Aroso de Almeida, Annotation to the Decision of the Supreme Administrative Court of 26.01.2000, Rº37739, in Administrative Justice Notebooks, 20, March/April 2000, pages 48 and 49; see also this author in General Theory of Administrative Law: nuclear themes, Almedina, 2012, pages 184 to 186].

And it is this doctrine that, fundamentally, has come to be adopted by this Supreme Court in several of its decisions [see by way of example, Decision of the Supreme Administrative Court of 26.01.2000, Rº37739; Decision of the Supreme Administrative Court of 24.01.2002, Rº048154; Decision of the Supreme Administrative Court of 25.01.2005, Rº0290/04; and Decision of the Supreme Administrative Court of 17.05.2007, Rº1011/06]."

In this manner, and in summary, in the case, the burden of proof that the Applicant benefited actually of an undeclared increase in equity of €1,603,855.75, will lie with the Tax Authority.

On the other hand, and in any case, it will be stated that it is understood that the Respondent is not right when it states that, in the case, "the accounting entry in question has no support in any supporting documents", and that there is "illegitimate refusal of collaboration by the taxpayer".

Indeed, and having examined the facts found to be proved, it is verified from the start that the accounting entries of the Applicant at issue are based on the journal entry note issued by the banking institution, on one hand, on the minutes of the meeting of the General Meeting dated of 17-02-2009 and of 20-02-2009, and on the contract for the transfer of shares of 17-02-2009[2].

On the other hand, was not demonstrated – nor even alleged – any refusal of collaboration by the Applicant, nor any indication of such is contained either in the Tax Inspection Report or in the administrative file.

Having established this, it is necessary to determine whether is satisfied the burden of proof that lies with the Tax Authority to demonstrate the existence of an increase in equity undeclared by the Applicant, in the amount of €1,603,855.75, fact in which the assessment which is the subject of these proceedings, as was seen before, is based.

Preliminarily, it should be stated that such demonstration will not consist – solely – in the demonstration that, in the account of the Applicant, was deposited the amount in question, that fact, which, as mentioned in the Tax Inspection Report, is undisputed.

That is because, such demonstration demonstrates nothing more, save the redundancy, than that very thing, that is, that such amount was deposited in a bank account of the Applicant.

Not being invoked – surely because it does not exist – any presumption that dispositions of equity without known cause are gratuitous or by way of gifts, always – in this case – the Tax Authority would have to demonstrate, beyond any reasonable doubt, that that was the case, that is, that the deposit in question was made with the purpose to increase the equity of the Applicant in the respective amount, without any counterpart[3].

Indeed, so that concludes, as happens in the Tax Inspection Report, that "It is fully demonstrated that this sum was actually transferred by J… ..., having been considered in the correction proposal, that inherent to this deposit, there was not any obligation created between the inspected taxpayer and that company of English law" (emphasis ours), it will not be enough to demonstrate that the obligation which the Applicant presents as the counterpart of the disputed disposition of equity does not exist, but by the positive, that "there was no obligation created" as the counterpart of that disposition of equity (that is, that it occurred by way of gift).

It becomes, in summary, and quoting again the Tax Inspection Report, necessary to demonstrate actually "that there is a capital contribution in the amount of 1,603,855.75 € that does not correspond to the creation of any type of effective obligation to the entity that places that money in the taxpayer" (emphasis ours).

It will not be sufficient thus, contrary to what the Tax Authority appears to understand, to demonstrate that the cause of the disposition of equity declared by the Applicant is not true, since therefrom does not follow, as was stated, that it is another (in particular a gift), nor exists any presumption in that sense.

Hence, the demonstration that there is no known cause for a determined disposition of equity, at the limit, reduces itself solely to that very thing, that is, to that there was a disposition of equity without cause.

Now, as follows from the rules of Article 473 et seq. of the Civil Code, the occurrence of an "unjust enrichment", does not result in an increase in equity of the "enriched party", to the extent that, by force of the said legal regime, such situation generates an obligation to restore/return, wherefore, in that case, cannot be validated the occurrence of an income-accrual, at least until there is extinguished objectively such obligation[4].

In this manner, and in summary, as was stated above, the demonstration that burdens the Tax Authority encompasses not only the occurrence of a disposition of equity, but also that the same was made with the purpose to increase the equity of the Applicant, in the respective amount.

In the case, reserving respect due to contrary opinion, it is considered that this was not done. That is because, although it may be questioned on what grounds was effected the transfer of the amount of €1,603,855.75 to the account of the Applicant, it is not possible to draw from the facts found to be proved sufficient support to assert, beyond any reasonable doubt, that the same was accompanied by an intent to gift, in the sense of having occurred with the purpose to increase the equity of the Applicant in such amount, without any financial obligation on the part of the latter as counterpart.

Will not prevent in any way the conclusion formulated, the considerations made by the Respondent regarding the operation of the Commercial Registry and the lack of timely registration of the legal facts corporate presented by the Applicant as underlying the transfer in question.

Indeed, contrary to what is advocated, in the elucidation of the cause of the disposition of equity in question, will not be relevant the question of the "effectiveness as against third parties of the changes mentioned in the Extraordinary Minutes of 17 February 2009".

Indeed, the existence or not of financial obligations of the Applicant as counterpart of the said disposition of equity (such as, specifically, the obligation to return the additional contributions in full or with interest, or to return the amount received in the event it fails to be justified[5]), is neither a question of effectiveness nor of third parties.

That is because, from the start, an obligation validly created, even if ineffective, will constitute, in any case, a liability. Hence, what is at issue is to know, whether in the equity of the Applicant, was formed one (or more) obligation(s), in the amount (at least) corresponding to the deposit of €1,603,855.75, which was made, and not whether such obligation(s) is/are or are not effective.

On the other hand, that same question arises between the parties, since it is between them that shall be verified the existence, validity and, being the case, effectiveness of the obligations that burden the Applicant. Indeed, the Applicant, or any other legal entity, will not be able to evade the performance of an obligation by alleging that the same is ineffective as against third parties. Or stated differently, the obligations of the Applicant with entities other than the Tax Authority will not be nor can be conditioned on their effectiveness as against the Tax Authority, since the Applicant will not be able to escape the performance of such obligations by alleging that the same are ineffective as against the Tax Authority.

Will not be relevant likewise in the examination of the question at issue, the circumstance that "the one who transferred the share was partner B…, wherefore the amount of € 112,229.53 should have been paid to him, and not transferred to the account of the company".

Indeed, therefrom does not follow any positive variation in equity for the Applicant, since the improper receipt of an amount intended for a third party (in this case, to its partner), generates the obligation to return it, as expressly required by Article 476, paragraph 3 of the Civil Code, which provides that "Payment made to a third party may be recovered by the debtor".

Neither is it considered capable of compromising the conclusion formulated above, the content of the information provided by the English authorities regarding J…, which, in substance and for what is relevant in this case, is reduced to that it did not declare any relevant business activity, and was later subject to assessment.

Indeed, the very tax act which is the subject of these proceedings is based apodicticly on an activity of the said J…: the deposit made by it to the bank account of the Applicant.

Now, reserving due respect, it would be contradictory to assert that the said company was the author of the disposition of equity in question, and on the other, that the same had no activity whatsoever.

Being thus evident that it did have, the conclusion to be drawn from the lack of declaration of its activities in the United Kingdom, will not be able to be that such activities did not exist, but rather that the same there were – for whatever reason that is not relevant to this case – omitted.

Indeed, if, as the Tax Authority states, it is true that J… did not "declare profit or loss", the truth is that it would have had to declare either the disposition of equity in question had, as the Applicant sustains, cause in additional contributions, or the same had, as is implicit in the tax act which is the subject of these proceedings, a purpose of gift.

That is, and in summary, being established as it is, that J… was the author of the disputed disposition of equity, the circumstance that it declared nothing in the United Kingdom, assumes no relevance whatsoever, as regards the cause of that disposition, since, whatever was that cause, always would J… have the obligation to report it.

It is concluded, in this manner, that the Tax Authority did not satisfy the burden that lay upon it, to demonstrate that "there is a capital contribution in the amount of 1,603,855.75 € that does not correspond to the creation of any type of effective obligation to the entity that places that money in the taxpayer", since, even strictly faced with the position sustained by it, the most that can be considered demonstrated is the occurrence of a transfer of equity without cause, which creates on the Applicant, by force of the regime of Articles 473 et seq. of the Civil Code, the obligation ("effective", to use the terminology of the Tax Inspection Report) to return what was received, with no verification of any positive variation in equity.

Notwithstanding, faced with the facts found to be proved, it is indicated that, actually, the "capital contribution in the amount of 1,603,855.75 €" corresponded to the creation of an "effective obligation" to return such value.

Indeed, and as was stated, nothing indicating that the "capital contribution in the amount of 1,603,855.75 €" had a purpose of gift, all the more so since it occurred in a context of liquidation of other liabilities of the Applicant, always directly or indirectly, at the expense of financial resources of its partner B…, there will always legally exist an obligation of reimbursement of that sum, that will burden the equity of the Applicant, being certain that the basis on which such reimbursement is owed (ancillary contribution; loan; obligation to return derived from the invalidity of the underlying transaction which justified the transfer of equity, or from unjust enrichment), will not be relevant for the examination of the occurrence or not of a positive variation in equity.

Given that the "capital contribution in the amount of 1,603,855.75 €" is synallagmatically related with an obligation to return an amount equivalent or superior – on whatever basis – the variation in equity will then be null or, at most, negative.

Failing in this manner, the factual assumptions and consequently, the legal assumptions, on which is based the assessment act which is the subject of this arbitral action, it must be annulled, the application succeeding.

C. DECISION

On these terms it is decided in this Arbitral Tribunal to find well-founded the arbitral application filed and, in consequence:

a) The additional assessment of the Corporate Income Tax for 2009 and the respective compensatory interest, which is the subject of this arbitral proceedings, is annulled;

b) To condemn the Respondent in the costs of the proceedings.

D. Value of the Case

The value of the case is fixed at €454,565.75, pursuant to Article 97-A, paragraph 1, subparagraph a) of the Code of Procedure and Process for Tax Matters, applicable by force of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT, and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €7,344.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent, since the application was fully successful, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4 of the cited Regulation.

Let notification be made.

Lisbon

18 January 2016

The President Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Carla Castelo Trindade)

The Arbitrator Member

(Catarina Gonçalves)

[1] Available for consultation at www.dgsi.pt, as with the remaining case law cited without indication of source.

[2] The existence of supporting documents is a separate issue, as is obvious from their credibility or validity, as well as their inclusion in the tax file. In this case, the accounting entry has support in the documents mentioned even though the same do not form part of that file. Knowing whether the support is complete or sufficient is another matter that naturally presupposes its existence.

[3] As was written in the Decision of the Supreme Court of Justice of 03-06-2003: "The transfer of the gifted thing, (...), is not just any material delivery, but solely a legal transfer, that is, a transfer producing legal effects, embodied in a delivery revealing the intent to gift." (emphasis ours).

[4] It being that, pursuant to Article 482 of the Civil Code, the obligation to return derived from unjust enrichment is barred by the statute of limitations after a period of 3 years has elapsed.

[5] Which would be, for example, the case if, for any reason, the acquisition of the status of partner by the maker of the deposit were to be rendered void or not to occur.

Frequently Asked Questions

Automatically Created

What is a gratuitous patrimonial increase (incremento patrimonial gratuito) under Portuguese IRC?
A gratuitous patrimonial increase (incremento patrimonial gratuito) under Portuguese IRC is an increase in a company's equity or assets that occurs without corresponding consideration, compensation, or identifiable commercial justification. Under Article 21(1)(a) of the Corporate Income Tax Code (CIRC), such increases are presumed to constitute taxable income unless the taxpayer can demonstrate their legitimate origin. These increases represent unexplained wealth accretions that Portuguese tax law seeks to capture within the IRC tax base, operating as an anti-avoidance mechanism to prevent untaxed income from escaping taxation through undocumented equity enhancements.
How does Article 21(1)(a) of the CIRC apply to additional IRC tax assessments?
Article 21(1)(a) of the CIRC provides the legal basis for taxing patrimonial increases as corporate income when they cannot be justified by legitimate sources. In additional IRC assessments, the Tax Authority invokes this provision to tax unexplained equity increases. However, as this decision clarifies, the Tax Authority bears the burden of proving that such a gratuitous increase actually occurred and constitutes taxable income under Article 21(1)(a). The presumption of truthfulness in taxpayer returns under Article 75 LGT does not relieve the Tax Authority of this initial burden. The Authority must demonstrate the existence of the patrimonial increase and its gratuitous nature before the burden shifts to the taxpayer to prove legitimate origins.
Can a company challenge an additional IRC liquidation through tax arbitration at CAAD?
Yes, companies can challenge additional IRC liquidations (assessments) through tax arbitration at CAAD (Centro de Arbitragem Administrativa). This case (Process 264/2015-T) itself demonstrates this procedural avenue. CAAD provides an alternative dispute resolution mechanism to judicial courts for tax matters, including IRC assessments. Taxpayers may submit arbitration requests to challenge the legality of additional tax assessments, corrections to declared income, or other IRC determinations. The arbitral tribunal has jurisdiction to review the substantive and procedural legality of Tax Authority decisions, including examining whether the Administration properly met its burden of proof and complied with applicable legal principles in issuing additional IRC assessments.
What role does the principle of taxation by real profit play in IRC disputes in Portugal?
The principle of taxation by real profit (tributação pelo lucro real) is fundamental to Portuguese IRC. Under Articles 16-17 of the CIRC, IRC taxable income is generally determined based on the taxpayer's accounting returns reflecting actual profits, subject to Tax Authority monitoring and verification. In disputes, this principle supports the presumption that properly maintained accounting records and tax returns accurately reflect taxable income. However, as this decision demonstrates, when the Tax Authority seeks to deviate from declared profits through additional assessments (such as under Article 21 for gratuitous increases), it must affirmatively prove the facts justifying the correction pursuant to Article 99 CIRC. The principle ensures taxation reflects economic reality while placing evidentiary burdens appropriately on the party asserting deviation from declared results.
What are the legal grounds for annulling an IRC additional assessment under Portuguese tax law?
Portuguese tax law provides several grounds for annulling IRC additional assessments, as illustrated by this decision. Primary grounds include: (1) Tax Authority's failure to meet its burden of proof under Article 74 of the General Tax Law regarding the existence of the taxable facts supporting the assessment; (2) Violation of the inquisitorial principle and duty of substantiation required in administrative proceedings; (3) Improper application of the presumption of truthfulness rules under Article 75 LGT; (4) Insufficient evidence demonstrating the occurrence of alleged patrimonial increases or other taxable events; (5) Procedural violations in the assessment process; (6) Substantive errors in applying IRC provisions such as Article 21(1)(a) or Article 99 CIRC; and (7) Breach of fundamental administrative law principles including legality and proportionality. The taxpayer must demonstrate that the Tax Authority failed to satisfy its evidentiary obligations or violated applicable legal requirements.