Process: 273/2013-T

Date: September 10, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD arbitral decision 273/2013-T addresses the conflict between Article 43 of the Tax Benefits Statute (EBF) and subsequent regulatory instruments regarding IRC tax benefits for companies operating in Portugal's interior regions. The taxpayer, an agricultural company, claimed entitlement to a reduced 15% IRC rate for 2010 under Article 43 EBF (previously Article 39-B), which grants preferential tax treatment to entities conducting business in designated inland areas. The Tax Authority issued an additional assessment denying these benefits. The central legal issue concerned the hierarchical validity of Decree-Law 55/2008 and Ordinance 170/2002, which excluded agricultural activities from the interior benefits scheme, despite the EBF's broader inclusion. The claimant argued these regulatory instruments violated the constitutional principle of tax legality (reserva de lei) under Article 103(2) of the Portuguese Constitution, as they effectively created new rules of tax incidence through subordinate legislation rather than parliamentary law or authorized decree-law. This constitutional principle requires that essential elements of tax obligations and benefits be established by primary legislation. The decision was subsequently reformulated following a Constitutional Court ruling, highlighting the fundamental tension between administrative convenience in defining beneficiary areas and the constitutional requirement that tax benefits be established through proper legislative hierarchy. The case exemplifies critical issues in Portuguese tax law regarding the scope of regulatory authority to limit statutory tax benefits and the application of constitutional safeguards to taxpayer rights.

Full Decision

ARBITRAL DECISION

The Arbitrator Marta Gaudêncio, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on [date], determines the following:

Following the Decision handed down by the Constitutional Court, the arbitral decision is hereby reformulated.

I - Report

On 2 December 2013, A..., Lda., holder of NIPC ... and with registered office at Rua ..., ..., ...-... ..., requested the constitution of an arbitral tribunal and a request for arbitral pronouncement, pursuant to article 10, nos. 1 (a) and 2 of Decree-Law no. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), in which the Tax and Customs Authority (hereinafter referred to as AT) is the respondent. Three documents were attached.

The request for arbitral pronouncement aims at the annulment of the corporate income tax (IRC) assessment demonstration for 2010 and compensatory interest no. 2013..., in the amount of €15,097.47, as well as the account settlement demonstration no. 2013... (compensation no. 2013...), which resulted in an amount payable of €9,582.76, on the grounds of its illegality and unconstitutionality. Documents were attached.

The Claimant is represented by Mr. Dr. B..., with professional domicile at ..., no. ..., ...-... ... .

The Claimant did not proceed to appoint an arbitrator, and therefore, pursuant to article 6, no. 1 of the RJAT, the undersigned was designated sole arbitrator by the President of the Deontological Council of CAAD.

The Tribunal was constituted on 3 February 2014.

The Claimant alleges, as grounds for the claim, that the additional assessment issued by the Tax Administration is affected by illegality, as well as unconstitutionality.

In fact, the Claimant considers that:

  • The Claimant indicated, when completing the Model 22 income declaration for the 2010 tax year, the application of the tax rate reduction regime provided for in article 43 of the Tax Benefits Statute (EBF).

  • The said legal provision, which at the date of the facts corresponded to article 39-B of the same statute, established as follows:

"1 - To companies that directly and primarily carry out an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, hereinafter referred to as 'beneficiary areas', the following tax benefits are granted:

a) The IRC rate, provided for in no. 1 of article 80 of the respective Code, is reduced to 15% for entities whose principal activity is located in beneficiary areas;

b) In the case of establishment of new entities whose principal activity is located in beneficiary areas, the rate referred to in the previous number is reduced to 10% during the first five years of activity;

c) Reinstatements and depreciations relating to investment expenses up to €500,000, excluding those relating to the acquisition of land and light passenger vehicles, of IRC taxpayers who carry out their principal activity in beneficiary areas may be deducted, for purposes of determining taxable profit, with an increase of 30%;

d) Mandatory social contributions borne by the employer entity relating to the net creation of permanent jobs in beneficiary areas are deducted, for purposes of determining taxable profit, with an increase of 50%, once only per worker employed in that entity or in another entity with which special relationships exist, pursuant to article 58 of the IRC Code;

e) Tax losses ascertained in a given year pursuant to the IRC Code are deducted from taxable profits, if any, from one or more of the seven subsequent years.

2 - Conditions for enjoying the tax benefits provided for in the previous number are:

a) The determination of taxable profit being carried out using direct evaluation methods;

b) Having regularized tax status;

c) Not having outstanding wages;

d) Not resulting from a division carried out in the two years prior to enjoying the benefits.

3 - The following acquisitions are exempt from payment of municipal tax on paid transfers of real property:

a) By young persons, aged between 18 and 35 years, of a property or autonomous fraction of urban property located in beneficiary areas, intended exclusively for first own and permanent residence, provided that the value on which the tax would be levied does not exceed the maximum values for housing at controlled costs, plus 50%;

b) Of properties or autonomous fractions of urban properties, provided they are located in beneficiary areas and permanently dedicated to the activities of companies.

4 - The exemptions provided for in the previous number only apply if the acquisitions are properly reported to the tax service of the area where the properties to be acquired are located, by means of a declaration stating that the declarant has not previously benefited from an identical benefit.

5 - The exemptions provided for in no. 3 are dependent on authorization from the deliberative body of the respective municipality.

6 - For purposes of this article, beneficiary areas are delimited in accordance with criteria that take into account, especially, low population density, the compensation or fiscal deficiency index and the inequality of social, economic and cultural opportunities.

7 - The definition of criteria and the delimitation of beneficiary territorial areas, pursuant to the previous number, as well as all regulatory rules necessary for the proper execution of this article, are established by ordinance of the Minister of Finance.

8 - The tax benefits provided for in this article are not cumulative with other benefits of an identical nature, without prejudice to the choice of another more favorable one."

  • Pursuant to no. 7 of the said legal provision, the inland regime would be regulated by an ordinance of the Minister of Finance.

  • Decree-Law no. 55/2008 of 26 March came to establish the regulatory rules necessary for the proper execution of measures to encourage the accelerated recovery of Portuguese regions suffering from inland problems.

  • This statute provided, in article 8, the following:

"1 - The provisions that prove necessary to ensure, throughout the implementation period, full compliance with the European Commission's decision regarding the incentives in question, namely as regards their application to different economic activities, shall be the subject of a joint ordinance of the members of government in the areas of Finance and Work and Social Solidarity.

2 - To the incentive measures regulated by this decree-law the rules established by Ordinance no. 170/2002 of 28 February apply, until approval of the ordinance referred to in the previous number."

  • There is a conflict of norms between article 43 of the EBF, Decree-Law no. 55/2008 of 26 March and Ordinance no. 170/2002 of 28 February, in that the EBF is derogated by these two statutes.

  • The statutes, by excluding from the application of this tax benefit entities engaged in agricultural activity, create rules of incidence (as they reduce the incidence of the tax benefit in subjective terms), which is manifestly unconstitutional, as the principle of legality applies in Tax Law (see article 103, no. 2 of the Constitution of the Portuguese Republic – CRP).

  • These rules are innovative and, not having been created by Parliamentary Law or by authorized Decree-Law, are illegal, on the grounds of unconstitutionality, in that they extinguish a tax benefit instituted by Decree-Law.

  • Therefore, the additional assessments of tax and compensatory interest, issued on the basis of purely arithmetic corrections, should be annulled.

The Tax and Customs Authority filed a response, by way of impugnation, and attached documents. It argued that the request for arbitral pronouncement should be judged unfounded and the Respondent absolved of the claim, on the following grounds:

  • The request for arbitral pronouncement should be perfected, in that the Claimant only partially contests the IRC assessment and compensatory interest, having accepted the correction relating to autonomous taxation.

  • There is no illegality whatsoever in the correction made, in that it is based on the legal norms applicable at the date of the facts.

  • The incentives for the accelerated recovery of Portuguese regions suffering from inland problems are considered state aid and are subject to analysis by the European Commission, to verify their compliance with community rules provided for in the Treaty on European Union.

  • On this matter, Regulation (EC) no. 1860/2004 of 6/10 and Regulation (EC) no. 875/2007 of 24/7 apply, which establish a de minimis rule for the agricultural sector, which is a sector subject to specific rules.

  • Ordinance no. 170/2002 of 28/2 excludes from its scope of application the aid granted to agricultural activity precisely because the benefits granted to this activity are dependent on compliance with special rules.

  • Thus, the provision in the EBF regarding tax benefits for inland development only applies to agricultural activity if it is regulated by rules dependent on specific approval, which comply with the community regulations in force.

  • Ordinance no. 170/2002 of 28/2 does not prevent the approval of other regulatory rules that allow entities engaged in agricultural activity to enjoy any tax benefits, and it is up to the legislator to take steps to regulate the rules provided for in the EBF.

  • The primacy of community law prevails in the Portuguese legal order (see article 8 of the CRP), and community regulations have direct application in the legal order of Member States, without need for transposition, making any national rules that are incompatible with the provisions therein inapplicable.

  • Therefore, the correction made is not open to criticism, and the request for arbitral pronouncement should be judged unfounded and the Respondent absolved of the claim.

The Tax Administrative Proceedings file was attached to the case record.

On 16 April 2014, at 2 p.m., the meeting provided for in article 18 of Decree-Law no. 10/2011 of 20 January was held, during which the following clarifications were given:

  • The Claimant only partially contests the assessment, on the grounds of illegality of corrections made with respect to the tax rate reduction regime provided for in subparagraph (a) of no. 1 of article 43 of the Tax Benefits Statute (EBF), therefore the value of the present action is €9,132.67.

  • The amount of €450, relating to the autonomous taxation assessment, is not questioned by the Claimant.

  • The amount of tax in dispute in the present case was paid by the Claimant.

During the course of the said meeting, the Claimant's representative requested the attachment to the case record of a subsequent petition, in which it alleges that the response constitutes a posteriori reasoning of the tax act challenged. A period of ten days was granted to the Respondent for its reply, which it provided.

By arbitral decision of 4 July 2014, the request for arbitral pronouncement was judged to be well-founded. Having been appealed to the Constitutional Court, it decided (see Decision no. 294/2018 of 7 June 2018, Case no. 310/15):

  • Not to judge unconstitutional the norm of no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March, in the part in which it determines that, until approval of the ordinance provided for in no. 1, the rules established in Ordinance no. 170/2002 of 28 February apply to inland development incentive measures, from which results the exclusion of the application of the tax benefit provided for in article 39-B of the Tax Benefits Statute to the economic activity of agriculture;

  • And, as a consequence, judge the present appeal well-founded, determining the reformulation of the appealed decision, in accordance with the judgment of non-unconstitutionality formulated.

Thus, the arbitral decision is hereby reformulated.

In light of the foregoing, it is necessary to decide.

As to the value of the dispute, and given the facts mentioned above, it should be corrected to €9,132.67, without consequences regarding the arbitration fee.

Concerning the issue of posterior reasoning, the following must be stated.

The Claimant argued that, in its response, the Respondent had defended itself by way of exception, seeking to adduce arguments that were not contained in the reasoning of the tax act challenged, that is, in the tax inspection report. In fact, the Claimant understands that the Respondent sought, in its response, to subsequently reason the tax act whose legality is discussed in the present case, which is manifestly illegal. The Respondent replied, invoking the correct reasoning of the tax act at the time of its issuance and arguing that posterior reasoning of the same is not at issue.

It is necessary to verify whether we are indeed faced with a situation of posterior reasoning of the assessment act.

It is unquestionable that the reasoning of a tax act is essential to its full validity and production of effects, being imposed by article 268, no. 3 of the Constitution of the Portuguese Republic (CRP), by article 77 of the General Tax Law (LGT) and by articles 124 and 125 of the Code of Administrative Procedure (CPA). It is also unquestionable that, when presenting the request for arbitral pronouncement regarding the IRC assessment in question, the Claimant did not raise the issue of lack of reasoning, nor did it do so at any earlier time, during the inspection proceedings.

Let us then see whether we can consider that we are faced with a situation of posterior reasoning of the assessment act.

Article 77 of the LGT provides as follows:

"1 - The procedural decision is always reasoned by means of a brief exposition of the facts and law that motivated it, the reasoning being able to consist of a mere declaration of agreement with the grounds of earlier opinions, information or proposals, including those forming part of the tax inspection report.

2 - The reasoning of tax acts may be carried out in summary form, and must always contain the applicable legal provisions, the qualification and quantification of tax facts and the determination operations of taxable matter and the tax."

Article 268, no. 3 of the CRP provides that: "Administrative acts are subject to notification to the interested parties, in the manner provided by law, and require express and accessible reasoning when they affect rights or legally protected interests."

The reasoning, in fact and in law, of a tax act is essential, in that only this allows the taxpayer to know the reasons that led to the application of corrections, as well as to exercise, in an informed manner, the right of defense. Thus, in this regard, Diogo Leite Campos, Benjamin Silva Rodrigues and Jorge Lopes de Sousa understand that "With respect to reasoning, the CRP guarantees the right of interested parties to express and accessible reasoning of all administrative acts (a concept in which tax acts are included, in view of article 120, no. 3). In no. 4 of article 268 it ensures to the interested parties the possibility of contentious challenge, on the grounds of illegality, against any administrative acts, regardless of their form, that injure rights or legally protected interests. (...) As the Supreme Administrative Court has understood it, the legal and constitutional requirement of reasoning aims, primarily, to allow the interested parties to know the reasons that led the administrative authority to act, in order to enable them to make a conscious choice between accepting the legality of the act and challenging it contentiously." (in General Tax Law – Annotated and Commented, 4th Edition, 2012).

With respect to the content of the reasoning, the said authors further state that "These acts may contain summary reasoning, which however cannot fail to contain the applicable provisions, the qualification and quantification of tax facts and the determination operations of taxable matter and the tax. (...) The reasoning should make known to the interested party the cognitive and evaluative itinerary followed by the author of the decision to decide in the manner decided and not in any other."

Now, both the draft report and the final tax inspection report contain the reasons that led the Tax Administration to make the correction to the IRC, with said correction being properly quantified. The legal norms that the Tax Administration considered not to have been complied with are cited in the tax inspection report, the same being true of the quantification of the tax benefit enjoyed by the Claimant, with the respective value corresponding to that of the correction made.

It cannot therefore be considered that the assessment act is deficiently reasoned – so much so that it was possible for the Claimant to present the request for arbitral pronouncement, challenging the application of the legal norms that form the basis of the present correction.

However, it cannot also be considered that the Respondent subsequently reasoned the act carried out. In the response filed, the Respondent, faced with the legal norms alleged by the Claimant, came to argue that the same do not have the effects sought by the Claimant, mentioning other equally applicable norms. The Respondent did not use new elements in its response; rather it resorted to the legal norms that it understands to have been violated (norms that were mentioned by the Claimant in the request for constitution of the arbitral tribunal).

In light of the foregoing, it seems appropriate to conclude that we are not faced with a situation of posterior reasoning, and therefore the Claimant's argument should not be upheld in this regard.

Let us then proceed to the analysis of the disputed issue.

II - Clearing

The Tribunal has jurisdiction.

The parties have legal personality and capacity, are legitimate and are legally represented (articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

The proceedings are not affected by defects that would invalidate them in their entirety.

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

There are no disputed questions of fact.

Object of the Dispute

At issue is the examination of the legality of the correction made in the course of tax inspection proceedings, regarding the Claimant's application of the inland tax benefit. It is necessary to determine any illegality, by reason of unconstitutionality, of the application of Decree-Law no. 55/2008 of 26 March, more specifically article 8, no. 2, which determines the application of Ordinance no. 170/2002 of 28/02 as the norm that regulates the inland tax benefit provided for in the EBF, thereby excluding entities engaged in agricultural activity from the said benefit.

Matters of Fact

The Claimant is engaged in the production of horticultural products and has CAE 1192 – "Other temporary crops, n.e." and carries out activity in a "beneficiary area".

In the income declaration Model 22 for the 2010 tax year, the Claimant indicated in table 4 the tax rate reduction regime, considering that it met the conditions allowing it to enjoy the inland tax benefit (reduction of the tax rate to 15%).

The additional assessments of tax and compensatory interest were issued on the grounds of purely arithmetic corrections.

There are no facts with relevance to the examination of the merits of the case that have not been proven.

Matters of Law

The questions posed to this Tribunal are as follows:

  1. Could the Claimant, for the 2010 tax year, benefit from the tax rate reduction regime resulting from the inland tax benefit, provided for in article 43 of the EBF?

  2. Was this regime regulated by Ordinance no. 170/2002 of 28 February?

  3. Were agricultural and fishing activities, among others, excluded from the application of this regime?

  4. If the answer to questions 2 and 3 is affirmative, is the inland tax benefit thereby derogated? Is such derogation illegal, because unconstitutional, in that (i) it does not respect the principle of legality and the relative reserve of parliamentary law provided for in articles 103, no. 2 and 165, no. 1 (i) of the CRP and in that (ii) it allows a norm that is hierarchically inferior to dispose in an innovative manner vis-à-vis the norm it purports to regulate, thereby disrespecting the same legal provisions?

It is necessary to decide.

III - Ruling

The issue to be decided is essentially a question of law, with no disputed facts. It is therefore necessary to determine the law applicable to the underlying facts, taking into account the questions above.

Tax Benefits for Inland Development – Applicable Regime

The inland tax benefit was originally enshrined by Law no. 171/99 of 18 September, which aimed to combat desertification and foster the development of inland areas of the country. Thus, the statute provided for a set of tax incentives applicable to entities whose principal activity was located in beneficiary zones. It was incumbent upon the Government, pursuant to article 13 of Law no. 171/99 of 18 September, to approve by decree-law the regulatory rules necessary for the proper execution of the law, which was subsequently amended by Law no. 30-C/2000 of 29 December.

Decree-Law no. 310/2001 of 10 December came to regulate Law no. 171/99 of 18 September. It should be noted that this regulation was only approved and published, as stated in the preamble of the statute, after the norms of the said Law (which constitutes state aid with regional purpose) had been approved by the European Commission (State Aid N 223/01, Portugal), resulting expressly from communications made by the Portuguese State, and also from the examination of this benefit by the European Commission, that the sectors of agriculture, fishing and coal industry were expressly excluded.

According to article 6 of Decree-Law no. 310/2001 of 10 December, "The provisions that prove necessary to ensure, throughout the implementation period, full compliance with the European Commission's decision regarding the incentives in question, namely as regards their application to different economic activities, shall be the subject of a joint ordinance of the Ministries of Finance, Planning and Work and Solidarity."

Subsequently, Ordinance no. 170/2002 of 28 February was published, which aimed to set the rules necessary for full compliance with the European Commission's decision regarding the incentives provided for in Law no. 171/99 of 18 September. Pursuant to article 2 of Ordinance no. 180/2002 of 28 February, the activities of agriculture, fishing, coal industry and transport could not benefit from the incentives in question.

With the publication of Law no. 53-A/2006 of 29 December (State Budget for 2007), Law no. 171/1999 of 18 September was repealed, and the inland tax benefits came to be provided for in article 39-B of the EBF, which provided for the grant of benefits "to companies that directly and principally carry out an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, hereinafter referred to as 'beneficiary areas'". (see article 83 of the State Budget Law for 2007)

No. 7 of the said EBF provision provided that the definition of criteria and the delimitation of beneficiary territorial areas, as well as all regulatory rules necessary for the proper execution of the regime, would be established by ordinance of the Minister of Finance. Article 88 of the State Budget Law for 2007 contained a transitional regime within the framework of tax benefits and established as follows:

"(l) To the exemptions from social security contributions relating to net job creation in inland areas and the tax benefits relating to inland development provided for, respectively, in article 39 of this law and in article 39-B of the Tax Benefits Statute, the rules established by Decree-Law no. 310/2001 of 10 December and by Ordinance no. 170/2002 of 28 February apply."

Decree-Law no. 55/2008 of 26 March was subsequently published, which aimed to establish the regulatory rules necessary for the proper execution of measures to encourage the accelerated recovery of Portuguese regions suffering from inland problems, regulating the provision of article 39-B of the EBF, pursuant to its no. 7. This statute provided, in no. 8, the following:

"1 — The provisions that prove necessary to ensure, throughout the implementation period, full compliance with the European Commission's decision regarding the incentives in question, namely as regards their application to different economic activities, shall be the subject of a joint ordinance of the members of government in the areas of Finance and Work and Social Solidarity.

2 — To the incentive measures regulated by this decree-law the rules established by Ordinance no. 170/2002 of 28 February apply, until approval of the ordinance referred to in the previous number."

Thus, article 39-B of the EBF provided that the inland tax benefit applied, among others, to the agricultural sector, while referring the regulation of the norm to an ordinance of the Minister of Finance. On the other hand, Decree-Law no. 55/2008 of 26 March, which established the implementation rules for article 39-B of the EBF, referred to Ordinance no. 170/2002 of 28 February for the regulation of the norm, until a joint ordinance by members of the Government in the areas of Finance and Work and Social Solidarity was approved – thereby excluding the application of the said tax benefit to the agricultural sector. The question is whether the reference to Ordinance no. 170/2002 of 28 February implies derogation of article 39-B of the EBF and thus constitutes illegality.

Non-unconstitutionality of the Norm of No. 2 of Article 8 of Decree-Law no. 55/2008 of 26 March

As results from the Constitutional Court Decision, identified above (emphasis added):

"Comparing the norm of no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March with subparagraph (l) of article 88 of the State Budget Law for 2007 (Law no. 53-A/2006 of 29/12), we note that both expressly refer to Ordinance no. 170/2002 of 28 February. In fact, the Assembly of the Republic, in the same statute in which it determined the addition of article 39-B to the Tax Benefits Statute, providing for the applicability of the benefit to companies carrying out economic activities in diverse areas, namely of an agricultural nature, on the one hand left recorded, in no. 7 of the article added, that the regulatory rules necessary for its proper execution would be established by ordinance and, on the other hand, introduced a transitional regime, where it expressly stated that 'to the tax benefits relating to inland development provided for (...) in article 39-B of the Tax Benefits Statute the rules established by Decree-Law no. 310/2001 of 10 December and by Ordinance no. 170/2002 of 28 February apply' (article 88). It thus becomes clear that the Government, in Decree-Law no. 55/2008, merely reproduced – following the same referential technique – the pre-existing transitional regime contained in the State Budget Law, emanating from the Assembly of the Republic. Only the reference to Decree-Law no. 310/2001 was not maintained, because the subject matter of its provisions was the object of specific regulation in Decree-Law no. 55/2008, which accordingly repealed that first statute (article 9).

Accordingly, it is concluded that the reference made by no. 2 of article 8, the norm under examination in the present case, does not constitute an innovation with respect to the pre-existing norms emanating from the Assembly of the Republic.

It must moreover be said that it results from the combination of no. 7 of article 39-B, added to the Tax Benefits Statute by article 83 of Law no. 53-A/2006, with the transitional regime defined in subparagraph (l) of article 88 of the same statute, that the Assembly of the Republic did not intend that the applicability of the tax benefit to agricultural economic activity be immediate or directly enforceable.

It is thus concluded that the maintenance of the exclusion of such activity until the publication of the ordinance intended to 'ensure, throughout the implementation period, full compliance with the European Commission's decision regarding the incentives in question, namely as regards their application to different economic activities', resulting from the reference made by article 8 of Decree-Law no. 55/2008 of 26 March, to Ordinance no. 170/2002 of 28 February, does not entail the invoked vice of organic unconstitutionality.

Neither can it be affirmed that there is a violation of no. 5 of article 112 of the Constitution, in that it is the Assembly of the Republic that, in the said State Budget Law, refers to the content of an ordinance, not yet to be published, but already existing in the legal order, such reference being materially translated into a reproduction of the normative regime contained therein which thus becomes its own."

Hierarchy of Legal Norms

As can be read in the Constitutional Court Decision, identified above:

"The constitutional question having been resolved, it must be said that the decision now handed down by the Constitutional Court does not prejudice the infra-constitutional treatment of the problem, likewise resolved by the Supreme Administrative Court (decision of 9 September 2015, in case no. 115/2015; decision of 18 May 2016, in cases nos. 493/2016 and 494/16 and decision of 12 October 2016, in case no. 482/2016), a matter not falling within the purview of the Constitutional Court to examine."

In fact, having the unconstitutionality of the norm of no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March been rejected, it is necessary to examine other applicable norms and the rules relating to their hierarchy.

It is a fact that the Claimant, in completing the Model 22 declaration by indicating the application of the tax benefit referred to above, did nothing other than apply the tax legislation in force at the date of the facts. Indeed, article 39-B of the EBF expressly provided for the application of the inland tax benefit to entities engaged in agricultural activity. And tax benefits are, as a rule, directly applicable, requiring no regulation to become enforceable (although some aspects may be dependent on such regulation).

In the situation under analysis, it appears that a tax benefit was regularly approved, and therefore taxpayers had a legitimate expectation of enjoying it within the scope of their activity. The fact that the said benefit was made dependent on subsequent regulation and that such regulation was not approved by the Portuguese State (and such regulation should comply with community regulations) means that IRC taxpayers are prejudiced by an omission that calls into question their legitimate expectation of application of a set of more favorable rules, which is not acceptable.

Therefore, from this omission of an obligation to regulate the norm, it cannot be concluded that the tax benefit in question was not applicable to agricultural activity, particularly because no one can substitute themselves for the legislator and apply existing (unregulated) norms in order to achieve the result that would be reached if the legislator had regulated the provisions in force, in compliance (or non-compliance) with community provisions.

It is therefore necessary to analyze the other issues raised.

Article 39-B of the EBF provided for the application of a set of tax benefits to companies that directly and principally carried out an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas.

Subparagraph (l) of article 88 of Law no. 53-A/2006 of 29 December (which added the said article to the EBF and repealed Law no. 171/1999 of 18 September) established that "To the exemptions from social security contributions relating to net job creation in inland areas and the tax benefits relating to inland development provided for, respectively, in article 39 of this law and in article 39-B of the Tax Benefits Statute, the rules established by Decree-Law no. 310/2001 of 10 December and by Ordinance no. 170/2002 of 28 February apply".

The application of Ordinance no. 170/2002 of 28 February to the inland tax benefits entails the derogation of the tax benefits provided for in article 39-B of the EBF, in that it excludes agricultural activity from the scope of their application, expressly provided for in the norm. But moreover, the application of the said Ordinance is contrary to the provision in Law no. 53-A/2006 of 29 December itself, particularly article 83, which adds a set of legal provisions to the EBF (among which the provision in question). We thus have a situation in which an Ordinance that, in regulating a norm of hierarchically superior value, derogates it, which constitutes illegality.

Indeed, it is commonly accepted that in Portugal the hierarchy of sources of law is as follows: (i) constitutional norms, (ii) norms and principles of international law, (iii) ordinary laws (laws, decree-laws, regional legislative decrees) and (iv) other norms of hierarchically inferior value (such as ordinances). Now, when an implementation norm is contrary to a parliamentary law, which is hierarchically superior to it, it follows that the hierarchically inferior norm is affected by illegality – which is what occurs in this case.

In this sense the Supreme Court of Justice has already pronounced itself, in a situation entirely similar to the one we are dealing with. Indeed, in its Decision of 18 May 2016 (Case no. 0494/16), the following can be read (emphasis added):

"It is unequivocal that article 39-B of the EBF, added by article 83, no. 1 of Law no. 53-A/2006 of 29 December (State Budget Law for 2007), provided for the grant of tax benefits relating to inland development, namely to 'companies that directly and principally carry out an economic activity of an agricultural nature'.

That is, the said article provided (as, later, article 43 of the same Statute) that inland tax benefits apply, among others, to the agricultural sector.

It is true that, as we have already stated, no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March, which came to establish the implementation rules for article 39-B of the EBF, referred, until a joint ordinance by members of the Government in the areas of Finance and Work and Social Solidarity was approved, to Ordinance no. 170/2002 of 28 February, whose article 2, subparagraph (a), as we have already stated, excluded agricultural activity from the scope of application of the benefits of the inland tax regime.

But, the question is whether from the comparison between article 39-B of the EBF and Ordinance no. 170/2002 of 28 February it results that the inland tax benefit is not applicable to agricultural activity, as the AT considered with the approval of the appealed judgment? In other words, does the reference to Ordinance no. 170/2002 of 28 February, made pursuant to the said no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March, have the effect of derogating article 39-B of the EBF, namely by excluding agricultural activity from the scope of application of the said benefit? In our view, no.

Firstly, because the hierarchy of norms does not permit it. Let us see:

In fact, the said ordinance constitutes a regulation, or that is, citing the decision of this Section of Tax Proceedings of the Supreme Administrative Court of 7 March 2012, handed down in case no. 1100/11 (Published in the Appendix to the Official Journal of 18 April 2013 (http://www.dre.pt/pdfgratisac/2012/32210.pdf), pp. 662 to 672, also available in http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/cc5328f21fd98fb6802579c30059534e.) 'a decision of a public administration body which, pursuant to public law norms, aims to produce legal effects in general and abstract situations, and is therefore distinguished from an administrative act, from the outset, by being general and abstract, whereas an administrative act produces legal effects in a concrete case (On the matter, see Freitas do Amaral, in "Administrative Law", III, 1989, p. 36 et seq., Esteves de Oliveira, in "Administrative Law" (Lessons), 1979, p. 144 et seq., Marcelo Rebelo de Sousa and André Salgado de Matos, in "General Administrative Law", Volume III, 2nd Edition, p. 248)'.

The said ordinance, in terms of its relationship with the law and its functions, is among complementary or implementation regulations ('As for the relationship of regulations with the law and their functions [...], regulations may be of implementation, complementary or independent. Implementation regulations implement the law; complementary regulations develop aspects of a normative discipline that the law has not regulated but which are not necessary for it to become enforceable; independent regulations contain materially innovative disciplines' (Marcelo Rebelo de Sousa and André Salgado de Matos, General Administrative Law, Volume III, Quixote, 2007, p. 246).), which, as was stated in the decision of this Section of Tax Proceedings of the Supreme Administrative Court of 1 October 2014, handed down in case no. 1548/13 (Published in the Appendix to the Official Journal of 15 January 2016 (http://www.dre.pt/pdfgratisac/2014/32240.pdf), pp. 3156 to 3162, also available in http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/b977d4ce1df1371f80257d690031b143.) 'embody a '...task of detailing, of detail and of supplementation of the legislative command...are the development, carried out by administrative means, of the legislative provision, making possible the application of the primary command to concrete life situations – making, in essence, possible the practice of individual and concrete administrative acts that are its natural corollary.

Complementary or implementation regulations may, in turn, be spontaneous or mandatory. In the first case, the law says nothing about the need for their supplementation: nevertheless, if the Administration deems it appropriate and has the competence to do so, it may issue an implementation regulation. In the second, it is the law itself that imposes on the Administration the task of developing the provision of the legislative command.

Finally, these complementary or implementation regulations are, typically, regulations 'secondary to the law', and are therefore illegal if they conflict with the discipline laid down in the law, of which they can only be a deeper development.' (see Diogo Freitas do Amaral, Course in Administrative Law, Vol. II, 2012, 2nd edition, pp. 185 and 186, see also Mário Aroso de Almeida, General Theory of Administrative Law: nuclear themes, 2012, pp. 98 and 99'.

As Ordinance no. 170/2002 of 28 February constitutes a regulation (norms emanating from the exercise of administrative function), it is relevant to note that it is subject to the principle of administrative legality in its two aspects (We follow closely here the Opinion of the Advisory Council of the Attorney General's Office with number 5/2004 of 1 July 2004, in the Official Journal of 14 August 2004 (https://dre.pt/application/file/716772), pp. 12589 to 12600, also available in http://www.dgsi.pt/pgrp.nsf/7fc0bd52c6f5cd5a802568c0003fb410/33aaeac315ebfe1d80256e21003d5f11.): the principle of primacy, or prevalence of the law and the principle of legal reserve, the first meaning that the acts of the administration (of any of the public administrations) cannot be contrary to the laws and the second meaning that those acts must be founded in laws (See Jorge Manuel Coutinho de Abreu, On Administrative Regulations and the Principle of Legality, Almedina Library, Coimbra, 1987, pp. 131 and 132, and Gomes Canotilho and Vital Moreira, Constitution of the Portuguese Republic Annotated, 3rd revised edition, Coimbra Editor, 1993, pp. 922 and 923).

Thus, an implementation regulation, having in mind its instrumental function of concretizing or detailing the law on which it is based, must be considered illegal whenever it contains any norm against or beyond the law, that is, whose content provides to the contrary or beyond the legislative discipline (Mário Esteves de Oliveira, Administrative Law, AAFDL edition, 1977, p. 200. In the same sense, also Freitas do Amaral, Course in Administrative Law, in collaboration with Lino Torgal, volume II, Almedina, 2001, p. 160, where he states that 'implementation regulations are, typically, regulations "secondary to the law", and are therefore illegal if they conflict with the discipline laid down in the law, of which they can only be a deeper development' (cited work, p. 160)).

We therefore conclude that the said ordinance cannot be contrary to the provision of article 39-B of the EBF, in the wording in force at the date of the facts, under penalty of nullity (In this sense, Marcelo Rebelo de Sousa and André Salgado de Matos, cited work and volume, who, at pp. 256/257, state: 'Regulations that violate ordinary law are also subject as the only admissible defect to nullity. Indeed, annulability would allow the production of legal effects by the illegal regulation until its annulment, as well as the consolidation thereof in the legal order after the time-limit for its annulment has passed. That is, the illegal regulation would, in practice, have the effect of suspending the law it violates from its entry into force until its annulment, as well as of repealing the law it violates in the event that annulment is not requested within the legally prescribed time-limit'.).

Nor can it be said that this contradiction was intended by the legislator, in that the reference to Ordinance no. 170/2002 of 28 February results from the said no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March, a statute through which – as we have already stated and is mentioned in its respective Preamble – aims to 'proceed with the regulation of the rules necessary for the proper execution of article 39-B of the Tax Benefits Statute'.

Firstly, because this is not what results from the wording of no. 2 of article 8 of Decree-Law no. 55/2008, which only states that '[t]o the incentive measures regulated by this decree-law the rules established by Ordinance no. 170/2002 of 28 February apply, until approval of the ordinance referred to in the previous number', after, in no. 1 of the same article, it refers to the fact that '[t]he provisions that prove necessary to ensure, throughout the implementation period, full compliance with the European Commission's decision regarding the incentives in question, namely as regards their application to different economic activities, shall be the subject of a joint ordinance of the members of government in the areas of Finance and Work and Social Solidarity'.

That is, in our view, what results from the letter of the law is that, in order to ensure compliance with the European Commission's decision regarding the incentives in question – which may be considered as state aid (On the subject of state aid and with numerous doctrinal references, see the first of many decisions handed down by this Section of Tax Proceedings of the Supreme Administrative Court, of 23 April 2013, handed down in case no. 29/13, published in the Appendix to the Official Journal of 15 April 2014 (http://www.dre.pt/pdfgratisac/2013/32220.pdf), pp. 1654 to 1671, also available in http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/4e814ebe3e52143980257b65003c2170.) – a joint ordinance of the Ministries in the area of Finance and in the area of Work and Social Security will be approved and that, until such ordinance is approved, the rules established by Ordinance no. 170/2002 of 28 February will apply to those incentives."

In summary, it is found that no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March, in directing the application of Ordinance no. 170/2002 of 28 February in a manner that restricts the application of article 39-B of the EBF (in the sense of excluding the applicability of this provision to agricultural activity), is illegal, by failing to respect the applicable norms on the hierarchy of laws.

It is thus found that no. 2 of article 8 of Decree-Law no. 55/2008 of 26 March, and Ordinance no. 170/2002 of 28 February, in the interpretation given to them by the Respondent, derogate the EBF, a situation that constitutes illegality, in that these are norms hierarchically inferior to that which they purport to regulate.

...

In light of the foregoing, it is decided to grant the request for arbitral pronouncement and, as a consequence, to determine the annulment of the corporate income tax assessment demonstration for 2010 and compensatory interest no. 2013..., in the amount of €15,097.47, as well as the account settlement demonstration no. 2013... (compensation no. 2013...), in the part corresponding to arithmetic corrections based on improper enjoyment of the inland tax benefit. It is further determined that the Respondent restore to the Claimant the amount of tax paid, plus compensatory interest, calculated pursuant to no. 1 of article 43 of the LGT.

Costs to be borne by the Respondent, assigning to the dispute the value of €9,132.67, whereby the amount of costs amounts to €918.

Let notification be made.

Lisbon, 10 September 2018

Text prepared by computer, pursuant to article 138, no. 5 of the Code of Civil Procedure (CPC), applicable by referral from article 29, no. 1, subparagraph (e) of the Legal Framework for Tax Arbitration, with blank lines and revised by me.

The text of this decision is governed by the old spelling system.

The Arbitrator

Marta Gaudêncio

Frequently Asked Questions

Automatically Created

What IRC tax rate reductions are available for businesses operating in Portugal's interior regions under Article 43 of the Tax Benefits Statute (EBF)?
Article 43 of the Tax Benefits Statute provides several IRC rate reductions for businesses in Portugal's interior regions: a reduced 15% rate (compared to the standard rate) for entities whose principal activity is located in beneficiary areas; a further reduced 10% rate for new entities during their first five years of operation; enhanced deductions of 130% for reinstatements and depreciations on qualifying investments up to €500,000; increased deductions of 150% for employer social security contributions related to net permanent job creation; and extended tax loss carryforward for seven years instead of the standard period. These benefits require compliance with conditions including direct evaluation methods for taxable profit determination, regularized tax status, no outstanding wages, and not resulting from recent corporate divisions.
How does the principle of legality reserve (reserva de lei) affect the application of interior region tax benefits in Portuguese corporate tax law?
The principle of legality reserve (reserva de lei) under Article 103(2) of the Portuguese Constitution requires that essential elements of taxation, including tax benefits, be established by parliamentary law or authorized decree-law, not by subordinate regulatory instruments. In CAAD decision 273/2013-T, this principle was central to evaluating whether Decree-Law 55/2008 and Ordinance 170/2002 could validly exclude agricultural activities from the interior region benefits scheme established by the Tax Benefits Statute. The taxpayer argued that these regulatory instruments unconstitutionally created new rules of subjective incidence by restricting the scope of beneficiaries beyond what the primary legislation contemplated. This constitutional safeguard prevents the executive branch from fundamentally altering tax obligations or benefits through administrative regulation, ensuring democratic accountability and legal certainty in tax matters. The decision was reformulated following Constitutional Court intervention, underscoring the supremacy of constitutional principles over administrative convenience.
What was the outcome of CAAD arbitral decision 273/2013-T regarding the additional IRC tax assessment for 2010?
The CAAD arbitral decision 273/2013-T was reformulated following a Constitutional Court ruling, replacing the original decision of July 4, 2014. The case concerned an additional IRC assessment and compensatory interest totaling €15,097.47 for the 2010 tax year, with a net amount payable of €9,582.76 after offsetting credits. The taxpayer challenged the Tax Authority's denial of interior region tax benefits claimed on the Modelo 22 declaration under Article 43 EBF (formerly Article 39-B). The central issue was whether subordinate legislation (Decree-Law 55/2008 and Ordinance 170/2002) could validly exclude agricultural activities from the statutory tax benefits scheme, despite the primary legislation's broader scope. The taxpayer argued this exclusion violated constitutional principles of tax legality, as regulatory instruments cannot create new rules of tax incidence that fundamentally alter benefits established by decree-law. While the complete outcome of the reformulated decision is not detailed in the excerpt, the Constitutional Court's involvement suggests recognition of the constitutional issues raised regarding the hierarchy of legal norms and the limits of regulatory authority in tax matters.
How does the hierarchy of legal norms impact the validity of IRC tax benefits for companies in Portugal's designated interior areas?
The hierarchy of legal norms in Portuguese tax law places the Constitution at the apex, followed by parliamentary laws and authorized decree-laws, with regulatory instruments (portarias and ministerial orders) subordinate to these primary sources. In CAAD decision 273/2013-T, this hierarchy was critical because the Tax Benefits Statute (established by decree-law) granted IRC benefits to companies in interior areas, while subsequent Decree-Law 55/2008 and Ordinance 170/2002 purported to exclude agricultural activities from these benefits. The constitutional principle of tax legality (reserva de lei) in Article 103(2) CRP requires that essential elements of taxation and tax benefits be established by primary legislation, not subordinate regulation. The taxpayer argued that these regulatory instruments illegally derogated the EBF by creating new rules of subjective incidence, effectively reducing the scope of beneficiaries through administrative regulation rather than proper legislative authority. This hierarchical conflict raised questions of both illegality (regulatory instruments exceeding their mandate) and unconstitutionality (violation of the legality reserve). The Constitutional Court's intervention demonstrates that subordinate legislation cannot fundamentally alter tax benefits established by higher-ranking norms, preserving both legal certainty and constitutional safeguards for taxpayers.
Can the Portuguese Tax Authority (AT) deny interior region IRC tax benefits claimed on the Modelo 22 declaration, and on what legal grounds?
The Portuguese Tax Authority can deny interior region IRC tax benefits claimed on the Modelo 22 declaration, but only on legally valid grounds that respect the hierarchy of norms and constitutional principles. In CAAD decision 273/2013-T, the AT denied benefits based on Decree-Law 55/2008 and Ordinance 170/2002, which excluded agricultural activities from the interior benefits scheme despite the broader scope of Article 43 EBF. The legal grounds for denial must comply with the constitutional principle of tax legality (reserva de lei), which requires that essential tax elements, including benefit eligibility criteria, be established by parliamentary law or authorized decree-law, not by subordinate regulatory instruments. The AT may deny benefits where: taxpayers fail to meet statutory conditions (such as having regularized tax status, no outstanding wages, using direct evaluation methods); the business activity or location does not qualify under properly enacted legislation; or claims are based on incorrect interpretation of validly enacted provisions. However, the AT cannot rely on regulatory instruments that unconstitutionally restrict benefits established by higher-ranking legislation. The reformulation of this decision following Constitutional Court review suggests that denials based solely on regulatory exclusions that conflict with primary legislation may be invalid, emphasizing the importance of proper legislative hierarchy in tax benefit administration.