Process: 271/2013-T

Date: June 5, 2014

Tax Type: IRS

Source: Original CAAD Decision

Summary

Process 271/2013-T addresses whether a €30,000 transfer from a company to its shareholder-administrator constitutes a loan (mútuo) or an advance on profits subject to IRS taxation as capital income. The Tax Authority reclassified the amount as an undeclared advance on profits for 2008, issuing an additional IRS assessment of €13,874.37. The Claimant argued the transfer was a legitimate loan, invoking subsidiary liability protections and contesting the Tax Authority's aggregation method for profit distributions. The Tax Authority rejected the loan characterization, citing failure to comply with Civil Code article 1143 formality requirements (public deed for loans) and absence of accounting records in the company's books. The Authority argued that without proper withholding tax by the company as tax substitute, the shareholder becomes directly liable. Key evidentiary issues included lack of written loan documentation, missing accounting entries, and absence of formal loan terms. The case also raised procedural questions about the taxpayer's option to aggregate income and whether tax authorities can substitute themselves in exercising this option. The Claimant sought annulment through CAAD tax arbitration under the Legal Framework for Arbitration in Tax Matters (RJAT), demonstrating this forum's role in resolving disputes over income characterization, substantive tax liability, and procedural rights, while also claiming compensatory interest for amounts allegedly paid in excess.

Full Decision

CAAD: Tax Arbitration

Case No. 271/2013-T

Subject: PIT – Loan and advance on account of profits, subsidiary liability

Claimant: A

Respondent: Tax and Customs Authority

The Arbitrator Rogério M. Fernandes Ferreira, appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to constitute the Arbitral Tribunal, established on 30 January 2014 (order of the President of the Ethics Council of CAAD of 30 January 2014), decides as follows:

ARBITRAL DECISION

A) Report:

  1. A (hereinafter referred to as "Claimant"), taxpayer number …, with tax address in …, municipality of …, filed a request for arbitral pronouncement and constitution of an arbitral tribunal on 27 November 2013, pursuant to the provisions of nos. 2 and 10 of article 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as "LFATM"), against the Tax and Customs Authority (hereinafter referred to as "Respondent").

  2. In the aforementioned request for arbitral pronouncement, the Claimant seeks that the Arbitral Tribunal declare:

(i) the annulment of the additional assessment of Personal Income Tax (PIT) No. 2012 ..., relating to the year 2008, in the amount of € 13,874.37;

(ii) condemnation of the Respondent to pay compensatory interest, from the date of payment of the debt to the date of restitution of amounts unduly paid.

  1. The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and was notified to the Respondent on 30 January 2014.

  2. The Claimant did not appoint an arbitrator, therefore, pursuant to article 6, no. 1, of the LFATM, the undersigned was appointed as arbitrator by the President of the Ethics Council of CAAD, the appointment having been accepted as legally provided.

  3. On 3 March 2014, the Respondent filed its Reply.

  4. On 18 March 2014, and in accordance with the terms and for the purposes provided in article 18 of the LFATM, the first arbitral hearing was held at CAAD.

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

(i) The additional PIT assessment, relating to the year 2008, in the amount of € 13,874.37, resulted from a correction made by the Respondent, following the statement of income obtained in that year, filed on 21 May 2009, jointly with Mrs. B (spouse).

(ii) The Claimant contends that he benefited from a loan, in the amount of € 30,000.00, provided by company Y, taxpayer number …, with headquarters in the district of ….

(iii) The Claimant further alleged, also in procedural matters, that he repaid the sum of € 15,177.73 to company Y, Ltd., as a consequence of the alleged loan of € 30,000.00.

(iv) With regard to the fact that the Respondent considered that an advance on account of profits was at issue, concerning the amount of € 30,000.00, the Claimant argues that, nonetheless, he could only be called as a subsidiary liable party if the original debtor, within the scope of a tax enforcement process, did not have available assets.

(v) The Claimant further argues that, if it were considered that he received profits and advances on account of profits, nonetheless, in this case, he had not exercised his option for aggregation.

(vi) Indeed, following the non-exercise of this faculty, the Claimant argues that the Respondent substituted itself in this option, although it was not mandated to do so.

(vii) The Claimant also contends that, in the correction made to his statement of income, relating to 2008, by the Respondent, aggregation was carried out, as profits (capital income), of the total amount that the Respondent qualified as an advance on account of profits, when only 50% of that amount should have been considered.

(viii) In summary, the Claimant seeks that the contested assessment be annulled, on the grounds of error concerning the prerequisites of the right to assess and, furthermore, that the Respondent be condemned to pay compensatory interest, from the date of payment of the debt to the date of restitution of amounts unduly paid.

  1. The Respondent replied contending for the non-acceptance of the request for arbitral pronouncement and arguing, in summary, that:

(i) The statement of income, relating to the year 2008, submitted by the Claimant, gave rise to assessment No. 2009..., dated 31 August 2009, which determined tax payable in the amount of € 1,951.94, taking into account a total income of € 136,282.50.

(ii) Following the detection of the bank transfer made by company Y in favour of the Claimant, the Respondent initiated the internal inspection procedure, with Service Order No. ..., in which a correction was proposed regarding the income included by the Claimant in the PIT Form 3 Declaration relating to 2008, adding the value of € 30,000.00, relating to capital income.

(iii) Accordingly, a new assessment with No. 2012... was issued, dated 29 October 2012, in which the amount of tax payable was determined as € 14,201.94, plus compensatory interest of € 1,624.37, taking into account a total income of € 166,282.50.

(iv) The Claimant, administrator and shareholder of company X, contracted with company Y for the provision of civil construction services, in the amount of € 66,000.00, in 2008, and the latter made a bank transfer in the value of € 30,000.00 to the Claimant's bank account in 2008, without having performed the corresponding source withholding.

(v) It further states that the amount of the aforementioned transfer to be considered a loan requires formality, invoking, thus, article 1143 of the Civil Code, which requires that it be executed by public deed, and therefore argues that the Claimant made nothing more than a mere allegation, devoid of any substance or means of proof.

(vi) On the other hand, no loan to the Claimant was recorded accounting-wise, in accordance with the information provided by the Finance Office of … and the Finance Office of …, within the scope of an inspection action carried out on company Y.

(vii) Thus, the Respondent understood that, as company Y – tax substitute – did not withhold the tax due at the time of payment of the aforementioned amount, the Claimant must be liable, through tax substitution, for the source withholding of that amount.

B) Case Management Order

  1. The Tribunal is competent and is regularly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, all of the LFATM.

  2. The parties have legal personality and capacity, are legitimate and are represented, in accordance with articles 4 and 10 of the LFATM and article 1 of Ordinance No. 112-A/2011, of 22 March.

  3. There are no nullities, nor preliminary matters, that affect the entire process, therefore it is necessary to now decide the merits of the request.

  4. Within the scope of the first arbitral hearing held, in accordance with article 18 of the LFATM, on 31 March 2014, the testimony of a party of the Claimant was given.

  5. The production of the testimony of a party of the Claimant was accepted, in accordance with the principle of material truth discovery, provided in article 13 of the CPTPT, by virtue of articles 16, 19 and 29, no. 1, paragraph a), of the LFATM.

  6. Oral arguments were made by the representatives of the Claimant and Respondent and, as well, written arguments were also filed.

  7. Company Y and company X were notified to inform the arbitral tribunal about the nature and purpose of the amount that was transferred to the Claimant and which amounted to € 30,000.00, object of analysis of the request for arbitral pronouncement.

  8. Company X replied by registered letter with return receipt, on 16 April 2014, stating that that company entered into a contract for works with company Z on 6 June 2008, and the payment of € 66,000.00 was made, as a commission for intermediation, to company Y, on 24 April 2007.

  9. Notwithstanding, insofar as company Z breached the said contract (fact deemed as proven within the scope of case No. ...) and Y assumed its performance up to € 125,000.00, company X maintained a credit vis-à-vis Y, in the said amount, as the latter company has not regularized this debt to this date.

C) Subject Matter of the Arbitral Pronouncement

  1. The following questions are posed to the Tribunal, in accordance with the terms described above:

(i) Should the additional PIT assessment No. 2012... be declared annulled, and should the Respondent be condemned to refund the amount unduly paid, plus compensatory interest?

(ii) Should the Claimant be considered liable for the allegedly due tax, to the extent that it should have been withheld at source by the debtor entity?

D) Factual Matter (Facts Found Proved)

  1. The following facts are considered proved, with relevance to the decision, based on the documentary evidence attached to the proceedings:

(i) On 21 May 2009, the present Claimant and his wife filed the statement of income relating to the year 2008, which gave rise to the PIT assessment No. 2009... of 31 August 2009, with tax payable in the value of € 1,951.94.

(ii) Through service order No. OI..., the internal inspection procedure was determined in relation to PIT and concerning the year 2008, based on information sent by the Finance Office of …, following which, as a result of an inspection of company Y, a bank transfer was detected, on 4 July 2008, in favour of the Claimant, in the value of € 30,000.00 (in accordance with the bank transfer order of bank …, attached to the Letter No. ... of 25 October 2011, from the Finance Office of …).

(iii) By Letter No. ..., of 22 March 2012, the present Claimant was notified to provide clarification on the basis on which the said bank transfer was made.

(iv) In accordance with Letter No. ..., of 10 August 2012, from the Tax Inspection Services of the Finance Office of …, the present Claimant was notified of the draft corrections to the inspection report, to pronounce himself within 10 days on the corrections to the income declared in income tax form 3 of 2008, adding a value of € 30,000.00.

(v) On 4 September 2012, the Claimant exercised his right to a hearing, clarifying that the € 30,000.00 have nothing to do with the commercial relationship established between company X and company Y and, as well, that it comes from a loan contract, not reduced to writing, between himself and Y, having repaid the amount of € 15,177.73 on 18 May 2010, and providing for the repayment of the remainder when there is availability for such, and having also attached a copy of the statement of account of Y, which shows the credit of that amount.

(vi) By Order of 24 September 2012, of the Head of the Tax Inspection Services Division of the Finance Office of …, the final report of conclusions of the inspection procedure in question was issued, maintaining the proposed corrections to the PIT taxable income of 2008 of the present Claimant, to be classified in category E (capital income).

(vii) In accordance with the incident report, of 17 September 2012, the administrative offense case No. ... was initiated on this date, at the Finance Office of …, for alleged violation of article 119, no. 1, of the General Regime of Tax Offences, and the same was suspended, in accordance with article 55 of the General Regime of Tax Offences (cf. Document 3 attached to the request for arbitral pronouncement).

(viii) The Claimant was notified of the compensation act No. 2012..., arising from the Personal Income Tax assessment act No. 2012... and, as well, of the Compensatory Interest assessment act No. 2012 ..., from which results an amount payable of € 13,874.37, until 12 December 2012 (cf. document 5 attached to the request for arbitral pronouncement).

(ix) The Claimant filed a Gracious Objection against the said PIT assessment act, with the Finance Office of …, whose procedure was conducted under No. ... (cf. pages 47 to 50 of the administrative proceedings attached to the Reply).

(x) By Letter No. …, of 21 March 2013, the present Claimant was notified to exercise his right to prior hearing regarding the draft decision to reject the gracious objection.

(xi) The present Claimant exercised his right to a hearing on 15 April 2013, having advocated for the revocation of the draft decision and the annulment of the additionally assessed tax.

(xii) By Order of 23 April 2013, of the Head of the Administrative Justice and Litigation Division of the Finance Office of …, the gracious objection filed by the Claimant was rejected, and the latter was notified of this rejection by Letter No. …, of 29 April 2013.

(xiii) The Claimant filed, on 10 May 2013, at the Finance Office of …, a hierarchical appeal against the Personal Income Tax assessment act No. 2012..., following the notification, by Letter No. ..., of the rejection of the gracious objection case No. ... (cf. document 4 attached to the request for arbitral pronouncement and pages 14 to 19 of the administrative proceedings attached to the Reply).

(xiv) The Claimant was notified through Letter No. ..., of 18 December 2013, that is, already after the Claimant had filed the request for arbitral pronouncement, by the Personal Income Tax Services Division, of the decision of partial allowance of the hierarchical appeal No. ..., having determined the application of the exemption rate of 20% on the amount allegedly received by the Claimant as an advance on account of profits, making the tax payable amount € 6,000.00 (cf. request submitted on 13 January 2014, and attached to the present case, in accordance with article 13, no. 1, of the LFATM).

(xv) By letter of 16 April 2014, company X informed the tribunal that it entered into a contract for works with company Z on 6 June 2008, in which company Y intervened as intermediary/agent, having received as a commission, on 24 April 2007, the amount of € 66,000.00. It further informs that company that in accordance with the intermediation agreement, Y guaranteed the performance of the works contract up to the value of € 125,000.00.

(xvi) Considering that, as stated in the said letter, company Z breached the contract, X became a creditor of Y in € 125,000.00, and the said debt has not been settled to that date. No supporting documents for the facts alleged in the letter sent to the tribunal were attached.

  1. No other facts capable of affecting the decision on the merits were proved, in view of the possible legal solutions, and there are no unproved facts of interest for the decision of the case.

E) On the Law

  1. On the assessment of the legality of the contested acts and the condemnation of the Respondent to refund the amount unduly paid, plus compensatory interest:

(i) The question underlying the present request for arbitral pronouncement takes into account the bank transfer made by company Y to the Claimant, in the amount of € 30,000.00, in accordance with which it is intended to analyse whether this is a loan or an advance on account of profits and, consequently, to determine whether the Claimant would be obligated to perform source withholding, by being considered a subsidiary liable party.

(ii) Thus, it is necessary, from the outset, to determine whether what is at issue is really an advance on account of profits, as invoked by the Respondent.

(iii) The Respondent understood that the transfer made by company Y to the Claimant, in the amount of € 30,000.00, was an advance on account of profits, to the extent that it knew of the existence of a debt of company Y vis-à-vis company X, of which the Claimant was administrator.

(iv) Notwithstanding, the Respondent qualifies the amount received by the Claimant without having elements, factual and legal, that support the conclusions on which the corrections made to the income earned in 2008 by the Claimant are based.

(v) Indeed, in the reply to the Hierarchical Appeal filed by the Claimant, the Respondent limited itself to invoking as legal basis for the qualification of the income in question as "advance on account of profits", article 5, no. 2, paragraph h), of the PIT Code, in accordance with which it is provided that capital income includes "profits of entities subject to CIT, placed at the disposal of associates or shareholders".

(vi) Now, as appears from the case file, the Claimant is not a shareholder of Y, not participating, therefore, in its capital stock.

(vii) It is not clear, therefore, how the sum in question of € 30,000.00 transferred to the Claimant's bank account can qualify as "advance on account of profits", given the factuality described.

(viii) Indeed, for the sum in question to be imputed to the Claimant on the basis of the legal rule invoked by the Respondent, the latter would have to prove, which it failed to do, that the Claimant was an associate or shareholder of company Y, as results from article 74 of the General Tax Law.

(ix) Thus, what actually occurred was a transfer of the amount of € 30,000.00 made by company Y to the Claimant, who is administrator and shareholder of another company, company X, and, as well, that in corporate terms there was no relationship whatsoever between the shareholder Claimant and company Y, with only a relationship of provision of civil construction services existing between the companies in question.

(x) Furthermore, the Respondent also failed to prove whether, within the scope of the inspection procedure carried out on company Y and company X, the transfer in question was recorded in the accounts.

(xi) Therefore, the Respondent also cannot sustain that the transfer in favour of the Claimant was made as consideration for the payment of the debt that company Y maintained vis-à-vis company X. Note that it is the tax administration itself that considered in Service Order No. ... that, in accordance with the current account statement of company X, the said debt remained to be settled, from which it follows that, indeed – assuming the credibility of this company's accounting, which the Respondent never put in question – the debt was not regularized – by virtue of the transfer made in favour of the Claimant.

(xii) On the other hand, as appears from the elements on the case file, the amount of € 15,177.73 was, in the meantime, transferred by the Claimant to company Y on 21 May 2010, although the Claimant also failed to prove the existence of a loan contract, from the proof produced there results a well-founded doubt about the existence and qualification of the taxable fact (alleged by the Respondent), therefore, in accordance with article 100 of the Tax Procedure and Process Code, the contested act must be annulled, the tribunal excusing itself from pronouncing on the issue of subsidiary liability of the Claimant, to the extent that this is foreclosed by the decision on the (non)existence of the taxable fact.

(xiii) In this sense, see the Arbitral Decision No. 20/2011-T, in accordance with which "As noted by Jorge Lopes de Sousa (TPPC, Annotated, 3rd edition, Vislis, 2002), no. 1 of Art. 100 of the TPPC establishes 'the principle that doubts about the existence and quantification of the taxable fact are valued in favour of the taxpayer, leading to the annulment of the contested act', being a corollary of the 'presumption of truthfulness of acts of the citizen-taxpayer' and that 'constitutes an application in the process of judicial contestation of the general rule on the burden of proof in tax procedure stated in art. 74, no. 1 of the GTL' (pages 500 and 501, note 2 to art. 100 of the TPPC)."

(xiv) It is concluded, thus that in the case at hand an advance on account of profits is not at issue in accordance with the provisions of article 5, no. 2, paragraph h) of the PIT Code, therefore the Respondent must be condemned to the refund of the amount unduly paid by the Claimant, in the value of € 13,874.37, and this same amount was already partially annulled, in accordance with the decision of (partial) rejection of the hierarchical appeal, issued by the Director-General of the Tax and Customs Authority, determining the subsequent uselessness of the action as to the part allowed.

(xv) In view of the foregoing, the Claimant must be reimbursed for the amount paid unduly, plus compensatory interest, in accordance with article 43 of the General Tax Law, to the extent that there was an error attributable to the services.

F) Decision:

The Tribunal judges the request of the Claimant to be well-founded in the part rejected by the Hierarchical Appeal decision issued in the meantime by Letter No. ... of 18 December 2013, judging by the subsequent uselessness of the action in the part allowed by said decision, consequently annulling the tax assessment contested and determining the refund of the entire amount unduly paid, plus compensatory interest calculated at the legal rate in force.

The value of the action is set at € 13,874.37 (thirteen thousand, eight hundred and seventy-four euros, and thirty-seven cents), in accordance with the provisions of article 97-A, no. 1, paragraph a) of the TPPC, applicable by virtue of article 3, no. 2 of the Regulation of Costs of Tax Arbitration Processes.

The value of the Arbitration Fee is set at € 918.00 (nine hundred and eighteen euros), in accordance with Table I of the Regulation of Costs of Tax Arbitration Processes, to be borne by the Respondent, in accordance with the provisions of article 22, no. 4 of the LFATM.

Notify the parties.

The drafting of the decision follows the orthography prior to the 1990 Orthographic Agreement.

Lisbon, 5 June 2014

The Arbitrator

Rogério M. Fernandes Ferreira

Frequently Asked Questions

Automatically Created

Can a loan from a company to its shareholder be reclassified as an advance on profits for IRS purposes in Portugal?
Yes, Portuguese tax authorities can reclassify purported loans from companies to shareholders as advances on profits (adiantamentos por conta de lucros) for IRS purposes when the transaction lacks proper legal formalities and supporting documentation. Under article 1143 of the Civil Code, loans (mútuos) require execution by public deed to be legally valid. Without this formality, accounting records demonstrating the loan, or written loan agreements with repayment terms, tax authorities may characterize the transfer as disguised profit distribution subject to IRS as category E income (capital income). The burden falls on taxpayers to prove the genuine loan nature through contemporaneous documentation, formal contracts, and proper accounting treatment in both the company and individual's records.
What is the tax treatment of a mútuo (loan) between a company and its shareholders under Portuguese IRS rules?
A genuine mútuo (loan) between a company and its shareholders is not subject to IRS taxation as it does not constitute taxable income but rather a debt obligation requiring repayment. However, Portuguese tax law requires strict compliance with Civil Code article 1143 formalities, including execution by public deed for loans. The loan must be properly recorded in the company's accounting books, with clear documentation of principal amount, interest terms (if any), and repayment schedule. If these requirements are not met, the Tax Authority may recharacterize the transfer as capital income (rendimentos de capitais - category E), subjecting it to IRS taxation. Companies making genuine loans must perform withholding tax if any interest is charged, acting as tax substitute (substituto tributário).
How does subsidiary tax liability (responsabilidade subsidiária) apply to shareholder income from company loans?
Subsidiary tax liability (responsabilidade subsidiária) under Portuguese tax law applies when the primary taxpayer (the company as tax substitute) fails to withhold and remit required taxes on profit distributions or deemed profit distributions. The shareholder becomes subsidiarily liable only after enforcement proceedings against the company prove unsuccessful due to insufficient assets. However, when amounts are recharacterized as advances on profits without proper withholding, the shareholder may be held directly liable rather than subsidiarily liable, particularly when the company failed to act as tax substitute. The Claimant's argument that subsidiary liability requires prior unsuccessful enforcement against the company was contested by the Tax Authority, which asserted direct liability for improperly characterized income, making the distinction between primary and subsidiary liability crucial for determining collection procedures and taxpayer rights.
What evidence is required to prove a genuine loan agreement versus a disguised profit distribution under Portuguese tax law?
To prove a genuine loan agreement versus disguised profit distribution under Portuguese tax law, taxpayers must provide: (1) a written loan contract executed by public deed as required by Civil Code article 1143; (2) proper accounting entries in both the lending company's and borrower's books showing the loan as a liability/asset; (3) evidence of arm's length terms including interest rates, repayment schedule, and security if applicable; (4) actual repayment history demonstrating the debt obligation; (5) corporate resolutions or shareholder meeting minutes authorizing the loan; and (6) correspondence between loan documentation dates and actual fund transfers. Mere allegations or informal transfers without contemporaneous documentation are insufficient. The absence of accounting records, as occurred in Process 271/2013-T where company Y showed no loan in its books, strongly supports recharacterization as profit distribution.
How can taxpayers challenge additional IRS assessments through CAAD tax arbitration in Portugal?
Taxpayers can challenge additional IRS assessments through CAAD (Centro de Arbitragem Administrativa) tax arbitration by filing a request for arbitral pronouncement under the RJAT (Legal Framework for Arbitration in Tax Matters - Decree-Law 10/2011). The request must be filed within 90 days of notification of the tax decision being challenged. Taxpayers can seek annulment of assessments based on legal errors, procedural violations, or incorrect fact determination. The process involves: (1) filing the arbitration request with CAAD identifying the contested act and grounds; (2) appointment of an arbitrator; (3) submission of the Tax Authority's reply; (4) an arbitral hearing where evidence and testimony may be presented; (5) oral and written arguments; and (6) issuance of a binding arbitral decision. Taxpayers may also claim compensatory interest (juros indemnizatórios) for amounts unduly paid. CAAD arbitration provides a faster alternative to judicial tax courts for resolving disputes over assessments, income characterization, and procedural rights.