Process: 279/2013-T

Date: June 30, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 279/2013-T) involves a dispute over the deductibility of bad debts under Portuguese Corporate Income Tax (IRC) law. Company A, S.A. challenged an additional IRC assessment of €226,223.35 related to tax losses declared in 2009 arising from uncollectable credits connected to an insolvency proceeding. The core legal issue concerns the interpretation of Article 39 (now Article 41) of the CIRC regarding when bad debts can be recognized for tax purposes. The Tax Authority argued that the company must wait until formal closure of insolvency proceedings under Article 230 of the CIRE (Insolvency Code) before deducting these credits. The claimant contended this interpretation has no basis in Article 39/41 CIRC and that non-recoverability was demonstrable from insolvency documentation itself, including the asset inventory (Article 153 CIRE), creditor list (Article 154), administrator's report (Article 155), and the creditors' assembly decision of November 23, 2009 ordering business closure. The company argued that requiring formal insolvency closure ignores clear evidence of actual non-recoverability. Alternatively, if insolvency closure were required, the company argued the Tax Authority violated Article 35 (now 36) CIRC on provisions for doubtful debts. The case was heard by a Collective Arbitral Tribunal under the RJAT framework (Decree-Law 10/2011), with witness testimony from the company's accountant and the insolvency administrator. The claimant sought annulment of the tax loss corrections, reimbursement of guarantee costs, and litigation expenses including legal representation fees.

Full Decision

ARBITRAL DECISION

I – Report

1.1. A, S.A. (hereinafter referred to solely as "claimant"), having been notified of an additional assessment of corporate income tax (IRC – Corporate Income Tax), in the amount of €226,223.35, including compensatory interest, relating to tax losses declared in 2009, filed on 4/12/2013 a request for constitution of an arbitral tribunal and for an arbitral decision, in accordance with and for the purposes of Articles 2, No. 1, lit. a), and 10, both of Decree-Law No. 10/2011 of 20/1 (Legal Framework for Arbitration in Tax Matters, hereinafter referred to solely as "RJAT"), in which the Tax and Customs Authority (AT) is "defendant", with the aim that it be "declared illegal and annulled the correction act of the tax losses declared by the aforementioned [claimant] set forth in the additional IRC assessment challenged, with all legal consequences".

1.2. The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD on 4/12/2013 and automatically notified to the AT on 5/12/2013.

1.3. In accordance with the provisions of lit. a) of No. 2 of Article 6 and of lit. b) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of 31/12, the Deontological Council appointed as arbitrators of the Collective Arbitral Tribunal the Honourable Judge José Poças Falcão (presiding arbitrator), the Honourable Prof. Dr. Miguel Patrício and the Honourable Dr. José Vieira dos Reis, who communicated acceptance of the assignment within the applicable period.

1.4. On 21/1/2014, the parties were duly notified of the appointment of arbitrators referred to above, and did not manifest any wish to challenge it, in accordance with Article 11, No. 1, lit. a) and b) of the RJAT and Articles 6 and 7 of the Code of Conduct.

1.5. Thus, in accordance with the provisions of Article 11, No. 1, lit. c) of the RJAT, as amended by Article 228 of Law No. 66-B/2012 of 31/12, the present Collective Arbitral Tribunal was constituted on 5/2/2014.

1.6. In accordance with Article 17 of the RJAT, the AT was summoned, as defendant party, to present a response, in accordance with and for the purposes of the aforementioned article (pursuant to a ruling of the president of the present Tribunal, dated 5/2/2014). The AT presented its response on 21/2/2014, having argued, in summary, the complete lack of merit of the request presented by the claimant.

1.7. On 28/2/2014, the president of the present Tribunal issued a ruling for the purpose of scheduling a meeting with the parties, in accordance with and for the purposes of Article 18 of the RJAT.

1.8. The aforementioned meeting took place on 24/3/2014. The designated arbitrators attended, as well as the Honourable Dr. B, in the capacity of representative of the claimant, and the Honourable Dr. C and the Honourable Dr. D, in the capacity of legal experts in representation of the Director-General of the AT.

1.9. The content of the respective minutes is reproduced herein. Furthermore, the date of 5/5/2014 was set for the purpose of conducting witness examination, which would be followed by the production of oral arguments.

1.10. On 5/5/2014, the aforementioned witness examination was conducted: 1st) E, Certified Public Accountant, witness called by the claimant and examined by its representative regarding Articles 7 to 9, 87 and 98 of the claim and regarding Articles 143 and 144 of the response; 2nd) F, insolvency administrator, witness called by the claimant and examined by its representative regarding Articles 9 to 19 of the claim and regarding Articles 62 to 65, 70, 85 and 87 of the response. This second witness was also examined by the representatives of the Defendant and confronted, at the request of the representative of the claimant (and after consultation of the representatives of the Defendant and authorization of the tribunal), with the "Inventory of Assets and Rights", contained in doc. No. 2 attached to the claim.

1.11. At the end of the aforementioned witness examination, the representatives of the claimant and of the Defendant produced the corresponding oral arguments. In compliance with the provisions of Article 18, No. 2 of the RJAT, the Tribunal set, for the purpose of rendering the arbitral decision, the date of 20/6/2014. By ruling of the president of the present Tribunal of 21/6/2014, the date of 15/7/2014 was set as the new deadline for notification of the award (a date still within the six-month period established in Article 21, No. 1 of the RJAT).

1.12. The present Tribunal was properly constituted, is materially competent, the proceedings are not affected by defects that would invalidate it, and the Parties have legal standing and capacity, being duly qualified.

II – Grounds of Fact

2.1. The claimant, in its statement of claim (claim), alleges, in summary, that: a) the interpretation of the Defendant, according to which "the claimant would have to wait for one of the circumstances provided for in the various subsections of No. 1 of Article 230 of the CIRE for then, only on that date of that tax year, it could consider as costs or losses credits whose actual non-recoverability had long [been verified]", is a formulation that "has no minimum correspondence in the letter of Article 39 (current 41) of the CIRC" (see Articles 31 and 33 of the claim); b) the expression "«to the extent that it results from the insolvency proceedings» [...] [means that] that measure can only be that which results from the combination of all elements contained in the insolvency proceedings themselves [...] [namely] in the concrete case of the claimant [...] [the] inventory drawn up in accordance with Article 153, [the] list of creditors drawn up in accordance with Article 154 and [the] report drawn up in accordance with Article 155, all of the CIRE [to which is added] the deliberation of the creditors' assembly of 23 November 2009 which determined the closure of the business of the establishments of G, S.A." (see Articles 45 to 48); c) "the tax inspection [cannot] base its corrections on the mere fact that the insolvency proceedings were not closed on 31 December 2009. It could only succeed in basing its corrections on the fact that the non-recoverability of the credit of the claimant does not result from insolvency, analyzed according to the concrete elements demonstrative thereof" (see Articles 57, 58, 70 and 71); d) "[even if it were understood] that only with the closure of insolvency is the provision of Article 39 of the CIRC fulfilled [...] the correction act and the consequent assessment would also be illegal by violation of Article 35 (current 36) of the CIRC [...]. [Note that] to the claimant would not be allowed the fiscal consideration of its credits receivable under Article 39, because they would be merely questionable collection credits, nor under Article 35, because it did not constitute a provision for that purpose" (see Articles 79 et seq., especially 93 of the claim).

2.2. The claimant concludes by requesting the complete merit of the request and, by way thereof, requests that it be "declared illegal and annulled the correction act of the tax losses declared by the aforementioned [claimant] set forth in the additional IRC assessment challenged, with all legal consequences", further requesting "the condemnation of the Public Treasury to indemnify the claimant for the costs it incurs with the guarantee that must be provided" and "to reimburse the claimant for the expenses resulting from the litigation, namely the fees of its representative".

2.3. For its part, the AT alleges, in its response, in summary, that: a) the "Claimant seeks [...] (only) the partial annulment of the assessment in question [...]. [...]. Thus, taking into account that the amount of tax to be paid (€226,223.35) is based on all corrections made in the inspection report and that the Claimant, in the present arbitral request, contests only the amount of €1,858,998.33, [...] the value of the request should correspond (only) to the percentage determined by that correction, that is, 79% of the value of the assessment" (see Articles 9 to 13 of the response); b) "in cases covered by that provision [Article 39 of the CIRC] one is no longer faced with the possibility of credits becoming non-recoverable, since if there is any uncertainty as to non-recoverability, one should, as we have seen above, resort to the constitution of a provision for questionable collections. One is, rather and only, faced with situations in which there is no – it is not possible to have – any doubt as to the non-recoverability of the debt in question." (see Articles 56 to 58 and 85 et seq.); c) "we do not see [...] how it is possible to obtain effective certainty that the credit is non-recoverable, in insolvency proceedings, prior to the «final distribution of the liquidation period» (cf. Article 27 of the r.i.). [...] Because, among many other examples that could be given, [...] the existence of patrimonial elements that were not considered in the «inventory of assets and rights» can be subsequently discovered." (see Articles 61 and 62 et seq.); d) "[To summarize,] the «non-recoverable credit» accounted for could not, and cannot, be accepted as a tax cost, since it did not meet the requirements established for this purpose in the then Article 39 of the CIRC."; e) "in view of what is itself referred to by the claimant in Article 81 of the r.i., it was incumbent on the same, in that 2009 tax year, in accordance with the cited rule, to have provisioned - and provisioned at 100% - the credits of «G» [so that] the claimant's allegation lacks meaning that, because they were credits it considered to be non-recoverable, it did not constitute, nor had to constitute, a provision for questionable collection credits, applying, rather, that Article 39 of the CIRC." (see Articles 116 and 119); f) "the correction put in question in the present proceedings and the consequent assessment [do not] violate the then Article 35 of the CIRC" (see Article 169); g) "[as for the request of the claimant regarding the payment of expenses resulting from the litigation, with fees of judicial representatives], reconciling the competencies that the RJAT confers on the Tax Arbitral Tribunals, the legislator understood not to confer on these tribunals any powers in this matter" (see Article 175).

2.4. In summary, the AT maintains that the "present request for arbitral decision [should] be judged without merit, absolving the Defendant Entity of the requests".

2.5. The following facts are considered proven:

i) The act challenged by the claimant resulted from a partial scope inspection action (IRC) relating to the 2009 tax year and, specifically, from the provisions of the Inspection Report dated 19/6/2013 (issued under service order No. OI 2012… of 21/12/2012), which is contained in the Administrative File attached to the present proceedings.

ii) In the course of the aforementioned inspection action, corrections were made to taxable profit. Specifically, such corrections concerned, in the understanding of the AT, non-recoverable credits, adjustments for amounts due to be received and provisions for the tax year and depreciation not accepted beyond the legal limit, for a total of €2,347,362.58 – i.e., moving from a declared tax loss of €1,578,690.69 (see p. 7 of the Administrative File attached) to a corrected taxable profit of €768,671.89 (ibidem).

iii) It follows from what the claimant alleges in its claim that it intends to challenge the correction relating to credits accounted for as non-recoverable, in the amount of €1,858,998.33 (see table No. 24 at p. 32 of the Administrative File), conforming itself "with the corrections relating to adjustments for amounts due to be received and provisions and depreciation not accepted or beyond the legal limit, better itemized in table No. 23 and table No. 35 of the Report" (see pp. 31 and 40 of the Administrative File).

iv) Following the corrections indicated above, an additional IRC assessment was issued relating to the 2009 tax year, with No. 2013…, in the amount of €78,779.66. Taking into account the reversal of the original assessment (No. 2010...), in the amount of €147,443.69, the result was a tax to be paid by the claimant of €226,223.35 (see doc. No. 1 attached to the claim).

v) Of this overall amount of €226,223.35, the claimant intends to challenge only the correction in the amount of €1,858,998.33 (amount relating to corrections concerning "G, S.A.", in the amount of €1,853,977.89, and "H, Lda.", in the amount of €5,020.44).

vi) The claimant is engaged in the provision of healthcare services, offering its customers, fundamentally, outpatient consultations in various medical-surgical specialties supported by complementary means of diagnosis and treatment. In the course of the aforementioned activity, it regularly provided to G the provision of medical services to claimants on account of various insurance companies (see Articles 7 and 8 of the claim).

vii) In 2009, the amount owed by "G, S.A." amounted to the amount already referred to above of €1,853,977.89 (see p. 36 of the Administrative File, and explanation given by the Certified Public Accountant on 4/2/2013, which is contained at p. 199 of the Administrative File). On 31/8/2009, the aforementioned company filed for insolvency alleging that it was unable to meet its due obligations (see pp. 33 et seq. of Annex 14 to the Administrative File). On 8/9/2009, the same company was declared insolvent by judgment rendered by the Commercial Court of Lisbon, in process No. … (judgment which became final on 12/10/2009).

viii) The claimant then claimed its credit of €2,053,111.00 (€1,758,286.00 as principal and €294,825.00 as interest accrued until the date of insolvency) - see p. 36 of the Administrative File. It further requested the attachment of the bank accounts and revenues of company G in process No. … of the 3rd civil court of the Court of the Judicial District of Leiria, also in 2009 (see p. 34 of Annex 14 to the Administrative File).

ix) On 23/11/2009, the creditors' assembly took place to review the report (see respective minutes at pp. 38 et seq. of Annex 14 to the Administrative File). The credit claimed by the claimant was then provisionally recognized by the claimed amount as a common credit. In the same assembly it was resolved to close the business of the establishments of company G, with the Court determining that the proceedings continue with the liquidation of assets.

x) On 31/12/2009, the insolvency proceedings of company G included the inventory referred to in Article 153 of the CIRE, which contained assets valued at €1,000,567.16, as well as the provisional list of creditors referred to in Article 154 of the CIRE, and which contained a total value of credits of €22,177,353.99 (see declaration of the insolvency administrator of company G, dated 2/12/2013, which is contained in doc. No. 2 attached to the claim). The value of recognized privileged credits was then greater than the value of the inventoried assets (ibidem).

xi) As referred to in the aforementioned declaration of the insolvency administrator of company G, recovery of the credit recognized in favor of the claimant was not foreseeable, "to the extent that the value of recognized privileged credits amounted to €1,266,769.82 [and] the estimated value of the assets of G, S.A., was €1,000,567.16".

xii) Company H filed for insolvency in 2009, with the decision being made to close the respective proceedings in April 2012, due to insufficiency of assets, in accordance with Article 232 of the CIRE (see p. 36 of the Administrative File).

2.6. There are no material facts not proven relevant to the decision of the case.

III – Reasoning

For the conviction of the Tribunal, essential were the administrative file attached, as well as the other documents incorporated in the proceedings, analyzed critically and in conjunction with the testimonies given at hearing by witnesses F – administrator of the insolvency of the debtor company of the credits considered non-recoverable and that constitute the object of this proceeding – who testified with direct and profound knowledge of the facts and the insolvency proceedings of which he was (and still is) administrator, and who proved in a peremptory and convincing manner the absolute non-recoverability of the credits in question – and E, certified public accountant of the claimant – who corroborated or substantially supported the testimony of the previous witness.

IV – Grounds of Law

In the present case, there are two disputed legal issues: 1) on the one hand, whether, as the claimant alleges, the expression contained in Article 39 of the CIRC "«to the extent that it results from the insolvency proceedings» [...] [means that] that measure can only be that which results from the combination of all elements contained in the insolvency proceedings themselves", or whether, instead, as the Defendant understands, it is not possible to "obtain effective certainty that the credit is non-recoverable, in insolvency proceedings, prior to the «final distribution of the liquidation period»"; 2) by contrast, should it be understood that "only with the closure of insolvency is the provision of Article 39 of the CIRC fulfilled", whether, as also the claimant invokes, "the correction act and the consequent assessment would also be illegal by violation of Article 35 (current 36) of the CIRC".

The "formal questions" relating to the requests of the claimant regarding the payment of "costs [it incurs] with the guarantee that must be provided" [3.1)] and the payment of "expenses resulting from the litigation, namely the fees of its representative" [3.2)], and also regarding the request of the Defendant relating to the reduction of the value of the present proceeding [4)], will be decided in the final part of the present decision.

Let us then examine the questions raised beginning with the reproduction, for ease of exposition, of the following provisions of the CIRC, in force as of 2009:

Regime of Other Expenses

Article 39 – Non-Recoverable Credits

Non-recoverable credits may be directly considered costs or losses of the tax year to the extent that it results from a special process for recovery of enterprise and protection of creditors or from a process of execution, bankruptcy or insolvency, when in relation to the same the constitution of a provision is not admitted or, if it is, proves insufficient.

  1. The question then lies in whether it is or should be required formal and sure certainty of the non-recoverability of the credit for it to be considered non-recoverable and, consequently, the respective amount considered, for purposes of IRC assessment, as an expense or loss of the respective tax year.

It does not appear that the precept should be interpreted in such manner.

In fact, it would be an unheard-of burden to require that the taxpayer interested in the deduction would have to wait several years for the liquidation of assets and payments to creditors claimed and ranked by the proceeds of liquidation.

On the contrary, the most reasonable and logical interpretation is that which results from an objective and safe judgment of prognosis, from which it can be concluded to be revealed impossible in light of the value of assets and the volume of credits, the non-recoverability of the credit.

Certainly the CIRC then provided for a regime of provisions with the following contours:

Regime of Provisions

Article 34 – Fiscally Deductible Provisions

1 - The following provisions may be deducted for tax purposes:

a) Those intended to cover credits resulting from normal activity which at the end of the tax year may be considered of questionable collection and are evidenced as such in the accounting records;

b) Those intended to cover losses in value that inventories suffer;

c) Those intended to cover losses and charges arising from court proceedings in progress due to facts that would determine the inclusion of those among the costs of the tax year;

d) Those constituted as mandatory, by force of a generic and abstract imposition, by companies subject to the supervision of the Bank of Portugal and by branches in Portugal of credit institutions and other financial institutions with headquarters in another Member State of the European Union intended to cover specific credit risk, country-risk, for losses in value of securities in the trading portfolio and for losses in value of other investments, and also the technical provisions and provisions for premiums due to be collected constituted as mandatory, by force of rules issued by the Insurance Institute of Portugal, of a generic and abstract nature, by insurance companies subject to its supervision and by branches in Portugal of insurance companies with headquarters in another Member State of the European Union; (As amended by Article 52 of Law No. 53-A/2006 of 29/12)

e) Those constituted by companies that engage in the extractive petroleum industry, intended for the reconstitution of reserves;

f) Those constituted by companies belonging to the extractive industries sector or waste treatment and elimination, intended to cover expenses with landscape and environmental recovery of sites affected by exploitation, whenever such is mandatory and following the cessation thereof, in accordance with applicable legislation. (As amended by Law No. 64-A/2008 of 31 December).

2 - The provisions referred to in subsections a) to d) of the preceding number that should not continue because the events to which they refer have not occurred and those that are used for purposes other than those expressly provided in this article are considered income of the respective tax year. (As amended by Law No. 30-G/2000, 29/12).

3 - When there is restoration of provisions for general credit risks or other provisions not provided for in subsection d) of No. 1, they are considered income of the tax year, in the first place, those that have been accepted as a tax cost in the tax year of their constitution. (As amended by Article 52 of Law No. 53-A/2006 of 29/12).

Article 35 – Provision for Questionable Collection Credits

1 - For purposes of the constitution of the provision provided for in subsection a) of No. 1 of the preceding article, credits of questionable collection are those in which the risk of non-recoverability is considered duly justified, which occurs in the following cases:

a) The debtor has pending a special process for recovery of enterprise and protection of creditors or a process of execution, bankruptcy or insolvency;

b) The credits have been judicially claimed;

c) The credits are in default for more than six months from the date of their maturity and there is evidence that diligences have been made for their collection.

2 - The annual cumulative amount of the provision for coverage of credits referred to in subsection c) of the preceding number cannot exceed the following percentages of credits in default:

a) 25% for credits in default for more than 6 months and up to 12 months;

b) 50% for credits in default for more than 12 months and up to 18 months;

c) 75% for credits in default for more than 18 months and up to 24 months;

d) 100% for credits in default for more than 24 months.

3 - Not considered of questionable collection:

a) Credits owed by the State, Autonomous Regions and local authorities or those in which these entities have provided a guarantee;

b) Credits covered by insurance, with the exception of the amount corresponding to the percentage of mandatory deductible, or by any kind of real guarantee;

c) Credits owed by individuals or legal entities that hold more than 10% of the company's capital or members of its governing bodies, except in cases provided for in subsections a) and b) of No. 1;

d) Credits owed by companies in which more than 10% of the capital is held, except in cases provided for in subsections a) and b) of No. 1.

The question, in this case, is not whether a credit is or can be considered or not of questionable collection but rather whether it can be qualified as non-recoverable.

It does not appear that the legislator's intention was in the sense of requiring a final judgment as a means of proof of non-recoverability, because if that were so it would have expressed that requirement in an unequivocal manner. Or, put otherwise: there are no reasons why it should not have done so insofar as the requirement of a certain means of proof is always made unequivocally by the legislator.

Thus the segment of Article 39 of the CIRC ("non-recoverable credits may be directly considered costs or losses of the tax year to the extent that it results from a special process for recovery of enterprise and protection of creditors or from a process of execution, bankruptcy or insolvency"), should be interpreted to mean that it is not the final formal result of the proceeding (recovery of enterprise, execution, bankruptcy or insolvency) that is relevant but rather that result should be that which derives from a set of acts and facts reflected in that same proceeding and revealing unequivocally the non-recoverability of the credit (for example, if a no-seizure record was drawn up due to absolute lack of assets from the bankrupt or insolvent, what sense would it make to wait for a final judgment to consider the credit non-recoverable?).

In the same sense, see, for example, the following judgment: "Article 39 of the CIRC, in the version of Decree-Law No. 198/2001 of 3 July, admitted as costs or losses of the tax year credits that, among other things, resulted non-recoverable «from a special process for recovery of enterprise and protection of creditors or from a process of execution, bankruptcy or insolvency». That rule does not require that credits in coercive collection through execution proceedings can only be accounted for as non-recoverable credits by final judgment that declares their non-recoverability in execution proceedings. The same rule does not prevent, in particular, that the lack of seizable assets certified in a record of judicial diligence for seizure serves to prove the non-recoverability verified in execution proceedings." (Judgment of the Administrative Supreme Court of 10/10/2012, case 782/12).

It can thus be affirmed then and in summary that what must be captured are signals in the insolvency proceeding, of recovery of enterprise, of execution, that unequivocally reveal the non-recoverable nature of credits.

Subsuming:

In the case at hand the following factual picture emerges (cf. above, list of proven facts):

"(...) vi) The claimant is engaged in the provision of healthcare services, offering its customers, fundamentally, outpatient consultations in various medical-surgical specialties supported by complementary means of diagnosis and treatment. In the course of the aforementioned activity, it regularly provided to G the provision of medical services to claimants on account of various insurance companies (see Articles 7 and 8 of the claim).

vii) In 2009, the amount owed by "G, S.A." amounted to the amount already referred to above of €1,853,977.89 (see p. 36 of the Administrative File, and explanation given by the Certified Public Accountant on 4/2/2013, which is contained at p. 199 of the Administrative File). On 31/8/2009, the aforementioned company filed for insolvency alleging that it was unable to meet its due obligations (see pp. 33 et seq. of Annex 14 to the Administrative File). On 8/9/2009, the same company was declared insolvent by judgment rendered by the Commercial Court of Lisbon, in process No. … (judgment which became final on 12/10/2009).

viii) The claimant then claimed its credit of €2,053,111.00 (€1,758,286.00 as principal and €294,825.00 as interest accrued until the date of insolvency) - see p. 36 of the Administrative File. It further requested the attachment of the bank accounts and revenues of company G in process No. … of the 3rd civil court of the Court of the Judicial District of Leiria, also in 2009 (see p. 34 of Annex 14 to the Administrative File).

ix) On 23/11/2009, the creditors' assembly took place to review the report (see respective minutes at pp. 38 et seq. of Annex 14 to the Administrative File). The credit claimed by the claimant was then provisionally recognized by the claimed amount as a common credit. In the same assembly it was resolved to close the business of the establishments of company G, with the Court determining that the proceedings continue with the liquidation of assets.

x) On 31/12/2009, the insolvency proceedings of company G included the inventory referred to in Article 153 of the CIRE, which contained assets valued at €1,000,567.16, as well as the provisional list of creditors referred to in Article 154 of the CIRE, and which contained a total value of credits of €22,177,353.99 (see declaration of the insolvency administrator of company G, dated 2/12/2013, which is contained in doc. No. 2 attached to the claim). The value of recognized privileged credits was then greater than the value of the inventoried assets (ibidem).

xi) As referred to in the aforementioned declaration of the insolvency administrator of company G, recovery of the credit recognized in favor of the claimant was not foreseeable, "to the extent that the value of recognized privileged credits amounted to €1,266,769.82 [and] the estimated value of the assets of G, S.A., was €1,000,567.16".

xii) Company H filed for insolvency in 2009, with the decision being made to close the respective proceedings in April 2012, due to insufficiency of assets, in accordance with Article 232 of the CIRE (see p. 36 of the Administrative File) (...)".

Now in view of this reality revealed, designedly by the insolvency proceedings of H, with closure of the respective proceeding in 2012 due to insufficiency of assets (Article 232 of the Code of Insolvency and Business Recovery – CIRE) and the existence of assets of G valued at €1,000,567.16, for a total of recognized privileged credits of greater value, in an overall volume of €22,177,353.99, a conclusion other than that which was produced by the claimant cannot be formulated: its credit is non-recoverable without the need to await closure of the insolvency proceeding.

Certainly, formally, the claimed credit persists for the crystalline reason that it has not been extinguished juridically by the legally provided forms.

But such circumstance cannot be impeditive to the fiscal relevance of a framework that points unequivocally to the non-recoverability with reflexes in taxation in IRC based on the real income of the taxpayer (See Article 104, No. 2 of the Constitution).

It will thus proceed, on this basis, to the annulment of the correction act of the tax losses set forth in the additional IRC assessment under challenge, as requested.

  1. The consideration of the second question [should it be understood that "only with the closure of insolvency is the provision of Article 39 of the CIRC fulfilled", whether, as also the claimant invokes, "the correction act and the consequent assessment would also be illegal by violation of Article 35 (current 36) of the CIRC"] is, in light of the above, prejudiced.

3.1) As to the request for indemnification for the costs incurred by the claimant "(…) with the guarantee that must be provided (…)":

The claimant requests the condemnation of the AT in indemnification for costs of hypothetical guarantee.

Such request is manifestly without merit because it lacks legal support.

In fact, for indemnification for material damage to be granted, proof is required that the author has experienced actual or concrete prejudice. Hypothetical damages are not indemnifiable and as to future damages only insofar as foreseeable is it that the Law confers the possibility of indemnification if framed in light of Article 564 of the Civil Code. Which is not the case.

In the same sense, see the following judgments: "Damages to be indemnified must be certain and not merely probable, with potential or hypothetical damages not being susceptible of indemnification as patrimonial damages." (Judgment of the Administrative Supreme Court of 7/5/1998, case 41751); "Hypothetical damages are not indemnifiable." (Judgment of the Administrative Supreme Court of 17/3/2010, case 45899A).

Such request therefore fails.

3.2) As to the request for reimbursement of the claimant for expenses resulting from the litigation and attorney fees, to be liquidated in execution of judgment:

The subject matter of this request is withdrawn from the scope of competencies of the Tax Arbitral Tribunal, defined in Decree-Law No. 10/2011 of 20 January, as amended by Articles 228 and 229 of Law No. 66-B/2012 of 31 December.

Hence the inevitable lack of merit of this request.

V – Decision

In accordance with the above, it is agreed in this Arbitral Tribunal that:

a) The request for annulment of the correction act of the tax losses declared by the claimant set forth in the additional assessment [No. 2010…] under challenge is judged to have complete merit;

b) The remaining requests formulated in a) and b) of the petition for arbitral decision are judged to be without merit.

Value of the Proceeding

  1. The Tax and Customs Authority raised the incident regarding the value of the case, proposing as an alternative to that indicated by the claimant the value of €178,716.45, considering this to be only the value resulting from the impact of the correction challenged in the value of the assessment/settlement of accounts.

The claimant, when called upon to make a statement, maintained the value indicated in the initial petition (See the minutes of the meeting of the Tribunal with the parties – Article 18 of the RJAT).

It falls to decide the incident and fix the value.

Although the tax act and the consequences of its annulment may translate into a value lower than that indicated in the initial petition, the fact remains that the claimant combines several requests with that of annulment of the assessment, namely a request for indemnification for costs with guarantee to be provided and for expenses of the litigation and attorney fees.

There does not appear to be, therefore, ground for altering the value of the request indicated by the claimant.

Thus and in accordance with the provisions of Article 306, Nos. 1 and 2 of the Code of Civil Procedure, Article 97-A, No. 1, lit. a) of the Code of Tax and Customs Procedure and Article 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at €226,223.35.

Costs

In accordance with Article 22, No. 4 of the RJAT, the amount of costs is set at €4,284.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by both parties, considering their respective defaults, in the equitable proportion of 5/6 by the AT and 1/6 by the claimant.

Lisbon, 30 June 2014

The Arbitrators

(José Poças Falcão)

(Miguel Patrício)

(José Vieira dos Reis)

Frequently Asked Questions

Automatically Created

What are the rules for deducting bad debt credits (créditos incobráveis) under Portuguese IRC?
Under Portuguese IRC law, bad debts (créditos incobráveis) are deductible pursuant to Article 41 of the CIRC (formerly Article 39) when their non-recoverability is demonstrated. The key dispute in this case concerns timing: whether credits can be deducted when insolvency proceedings evidence non-recoverability through documentation (asset inventory per Article 153 CIRE, creditor lists per Article 154, and administrator reports per Article 155), or only upon formal closure of insolvency proceedings under Article 230 CIRE. The taxpayer position is that actual non-recoverability demonstrated by insolvency documentation suffices, while the Tax Authority requires waiting for formal insolvency closure. Additionally, Article 36 CIRC (formerly Article 35) allows provisions for doubtful debts of questionable collectability.
Can the Tax Authority correct declared fiscal losses related to uncollectable debts in IRC?
Yes, the Tax Authority can correct declared fiscal losses related to uncollectable debts in IRC when it determines that the legal requirements for deductibility have not been met. In this case, the Tax Authority issued an additional assessment correcting tax losses of €1,858,998.33 declared in 2009, arguing that the claimant improperly deducted bad debts before insolvency proceedings were formally closed. The Tax Authority's inspection concluded that Article 39/41 CIRC required waiting for one of the circumstances in Article 230(1) CIRE (insolvency closure triggers) before recognizing credits as definitive losses. Such corrections result in additional IRC assessments plus compensatory interest, which taxpayers can challenge through administrative appeals or CAAD arbitration.
What is the CAAD arbitration procedure for challenging additional IRC tax assessments?
The CAAD arbitration procedure for challenging additional IRC assessments follows the RJAT framework (Decree-Law 10/2011). The process involves: (1) Filing an arbitration request under Articles 2(1)(a) and 10 RJAT within the legal deadline; (2) Acceptance by the CAAD President and notification to the Tax Authority; (3) Constitution of an Arbitral Tribunal (sole or collective) with arbitrators appointed by the Deontological Council; (4) The Tax Authority submits a response; (5) A preliminary meeting is scheduled under Article 18 RJAT; (6) Evidence is presented, including witness examination; (7) Parties present oral arguments; (8) The tribunal issues a decision within six months per Article 21(1) RJAT. In this case, a Collective Arbitral Tribunal of three arbitrators was constituted, held witness examinations with the company's accountant and insolvency administrator, and heard oral arguments before rendering its decision.
How does the RJAT framework apply to disputes over IRC fiscal loss adjustments?
The RJAT framework (Legal Framework for Arbitration in Tax Matters, Decree-Law 10/2011) applies to disputes over IRC fiscal loss adjustments by providing an alternative dispute resolution mechanism to judicial courts. Under Articles 2(1)(a) and 10 RJAT, taxpayers can request arbitration for acts of settlement (liquidação) including additional assessments that correct declared fiscal losses. The framework establishes procedural rules for tribunal constitution (Article 11), arbitrator appointment and challenge procedures (Articles 6-7), response deadlines (Article 17), preliminary meetings and evidence production (Article 18), and decision timelines (Article 21). In fiscal loss correction cases, the RJAT allows taxpayers to challenge the Tax Authority's substantive interpretation of deductibility requirements (such as Article 39/41 CIRC on bad debts) and procedural compliance, with the arbitral tribunal having full jurisdiction to annul illegal assessments.
What are the legal consequences of annulling an additional IRC tax assessment by CAAD?
The legal consequences of annulling an additional IRC tax assessment by CAAD include: (1) Elimination of the tax debt, meaning the taxpayer is not required to pay the assessed amount; (2) Release or reimbursement of any guarantees provided to suspend collection during the dispute; (3) Right to reimbursement of compensatory interest paid if the assessment was already collected; (4) In some cases, the taxpayer may receive compensatory interest from the State for undue payment periods; (5) The Tax Authority must reimburse litigation costs including representative fees if the taxpayer prevails; (6) The corrected tax losses are restored to the taxpayer's fiscal position and remain available for offset against future taxable profits within the legal carryforward period; (7) The annulment has definitive effect as CAAD decisions are binding and enforceable, subject only to limited appeal to administrative courts on procedural grounds under Article 25 RJAT.