Process: 279/2014-T

Date: November 27, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitration decision (Process 279/2014-T) concerns a dispute over IRC (Corporate Income Tax) self-assessment for fiscal year 2010 under the RETGS (Special Regime for Taxation of Groups of Companies). The claimant, a Portuguese holding company (SGPS), challenged the exclusion of Portuguese subsidiaries from its tax consolidation group when those subsidiaries were held indirectly through UK-resident intermediate companies (B... LIMITED, B... SALADS, and C... SALADS). The core legal issue involves Article 69(4)(f) of the Portuguese Corporate Income Tax Code (CIRC), which prohibits companies from joining RETGS when the required 90% participation threshold is achieved through non-resident entities. The claimant argued this provision violates EU law, specifically the Freedom of Establishment under Article 43 of the Treaty of the European Community, citing ECJ jurisprudence including the Papillon judgment. The taxpayer sought restitution of €38,026.24 in allegedly unlawful tax assessments. Notably, the Portuguese Tax Authority (TCA) had previously issued a binding tax ruling (PIV) for fiscal year 2012 accepting that Portuguese companies held through EU-resident intermediaries could be included in RETGS, creating an apparent contradiction with the 2010 treatment. The claimant filed an administrative complaint and hierarchical appeal (both implicitly rejected) before requesting arbitration at CAAD. The arbitral tribunal was constituted as a single-arbitrator panel under Decree-Law 10/2011. This case exemplifies the ongoing tension between domestic corporate tax consolidation rules and EU fundamental freedoms, particularly regarding cross-border group taxation structures.

Full Decision

ARBITRAL DECISION

I – REPORT

A – PARTIES

A... – Company Manager of Social Participations, S.A., Company Registration Number ..., with registered office at ..., hereinafter referred to as Claimant or taxpayer.

TAX AND CUSTOMS AUTHORITY (which succeeded the General Directorate of Taxes, by means of Decree-Law no. 118/2011, of December 15) hereinafter referred to as Respondent or TCA.

The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD, on March 24, 2014, and automatically notified to the Tax and Customs Authority on March 26, 2014, as recorded in the respective minutes.

The Claimant did not proceed with the appointment of an arbitrator, wherefore, in accordance with the provisions of no. 1 of article 6 and point b) of no. 1 of article 11 of Decree-Law no. 10/2011, of January 20, with the wording introduced by article 228 of Law no. 66-B/2012, of December 31, the Deontological Council appointed His Excellency Dr. Paulo Ferreira Alves, with the appointment having been accepted in accordance with legally foreseen terms.

On May 13, 2014, the parties were duly notified of that appointment, having not manifested the intention to refuse the appointment of the arbitrators, in accordance with article 11 no. 1, point a) and b), of the RJAT and Articles 6 and 7 of the Deontological Code.

In accordance with the provision of point c) of no. 1 of article 11 of Decree-Law no. 10/2011, of January 20, with the wording introduced by article 228 of Law no. 66-B/2012, of December 31, the sole arbitral tribunal is regularly constituted on May 28, 2014.

The arbitral tribunal is regularly constituted. It is materially competent, in accordance with articles 2 no. 1, point a), and 30 no. 1, of Decree-Law no. 10/2011, of January 20.

On September 3, 2014, the meeting provided for in article 18 of the RJAT was held, in which the floor was given to the representatives of the Claimant and the Respondent.

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

The case does not suffer from defects that would invalidate it.

B – CLAIM

  1. The Claimant hereby requests the declaration of illegality of the self-assessment tax act for corporate income tax (IRC) relating to the fiscal year 2010, that the illegality of the act of implicit rejection of the Administrative Complaint regarding the Self-Assessment and the implicit rejection of the Hierarchical Appeal be declared, and condemnation to the restitution of the amount unduly assessed of 38,026.24€ (thirty-eight thousand and twenty-six euros and twenty-four cents).

C – GROUNDS OF CLAIM

  1. To support its request for arbitral ruling, the Claimant alleged, with a view to the declaration of illegality of the self-assessment tax act for corporate income tax relating to the fiscal year 2010, and the declaration of the illegality of the act of implicit rejection of the Administrative Complaint regarding the Self-Assessment and the implicit rejection of the Hierarchical Appeal, and requesting the condemnation of the Tax Administration to the restitution of the amount unduly assessed, in summary, the following:

  2. The Claimant petitions for the declaration of illegality of the act of implicit rejection of the Administrative Complaint regarding the Self-Assessment and the implicit rejection of the Hierarchical Appeal, as well as of the self-assessment tax act for corporate income tax relating to the fiscal year 2010, due to non-conformity with European Union Law, and considers the determination of the taxable income of 2010 of the Claimant as dominant company by inclusion in the RETGS A..., for the fiscal year 2010, of all participations of at least 90% held indirectly by the respective dominant company A... in companies resident in Portugal through the mediation of companies B... LIMITED, B... SALADS and C... SALADS, resident for tax purposes in the United Kingdom, can form part of the RETGS of which the A....

  3. And that, consequently, the taxable income and taxable basis be corrected, and the restitution of the amount of € 38,026.24, quantity unduly assessed in non-conformity with European Union Law, be ordered, plus compensatory interest accrued and accruing until full payment of the quantity unduly borne.

  4. To argue for the declaration of illegality of the 2010 IRC self-assessment, the Claimant sustains that it is subject to RETGS, and it is certain that in the fiscal year in question, the companies that formed the perimeter of the group, for purposes of application of that regime, are the companies with registered office in Portugal held by companies B... LIMITED, B... SALADS, B... SGPS and C... SALADS.

  5. The Claimant considers that article 69, no. 4, point f) of the CIRC by excluding from RETGS the companies resident in Portugal, whose participation level of at least 90% is obtained by non-resident companies, clearly violates community law.

  6. The Claimant sustains that it submitted to the TCA a binding information request (PIV), in order to confirm that, once the other requirements for inclusion in RETGS are met, participations equal to or greater than 90% that are held indirectly by A... in companies resident in Portugal, through the mediation of companies B... LIMITED, B... SALADS, and C... SALADS, resident for tax purposes in the United Kingdom, can form part of the RETGS of which the A..., is the dominant company.

  7. The Claimant sustains that the TCA responded to the request, expressly stating that, notwithstanding the provision of article 69 of the CIRC, a company resident in Portuguese territory held at least 90% of the capital, through a company resident in another Member State of the EU, can, in fact, form part of the perimeter of a group for purposes of RETGS.

  8. In effect, the factual and legal reasons that motivated the TCA to consider that the companies held by B... LIMITED, B... SALADS, by B... SGPS and by the company held by C... SALADS, should integrate the perimeter of RETGS, in the fiscal year 2012, are exactly the same reasons for which the said companies should also integrate the perimeter of RETGS, in the fiscal year in question of 2010.

  9. Further states the Claimant that article 69, no. 4, point f), of the CIRC appears to be manifestly illegal, contrary to the ECJ, wherefore in the fiscal year 2010, it determined the fiscal result of the group without including the companies held by companies B... LIMITED, B... SALAD and by C... SALADS, in compliance with the provision of the above-mentioned legal precept, no other conclusion can be drawn than that of the illegality and incorrectness of the declaration filed and the assessed tax.

  10. That illegality, which the Claimant intends to see corrected through the correction of the self-assessment of the IRC.

  11. It results according to the Claimant that article 69, no. 4, point f), of the CIRC establishes that companies whose required participation level of at least 90% is obtained indirectly through an entity that does not meet the requirements legally required to form part of the group, in particular, not being a company resident in Portugal, cannot form part of RETGS.

  12. It sustains that from the said legal precept, by excluding from RETGS the companies resident in Portugal whose holding is carried out through non-resident companies, more specifically of companies resident in the European Union, it is clearly violating community law, in particular the Freedom of Establishment, provided for in article 43 of the Treaty of the European Community (TEC).

  13. The Claimant sustains that the orientation of the ECJ, bound by the Papillon Judgment, is notoriously unconditional, precise and clear, raising no reasonable doubt about the scope of the interpretation carried out by the ECJ at the level of the norm provided for in point f) of no. 4 of article 69 of the IRC Code.

  14. Furthermore, the Claimant adds that we are faced with an interpretative Judgment of the ECJ, in relation to which the rule of its retroactive effectiveness applies, a principle that cannot be unjustifiably derogated by the Member States.

  15. It further states that it is unequivocal that a provision foreseen in the Treaty of the European Union such as the Freedom of Establishment is directly applicable in domestic legal systems and by itself sufficient to produce direct effects in the individual legal sphere. Being that the ECJ has already pronounced itself on this question, considered unanimous within Community Law, as results from the Reyners and Van Binsbergen Judgments, delivered on June 21, 1974 and December 31, 1974.

  16. The Claimant reiterates that the argument cannot be accepted that compliance with the law would constitute a very burdensome situation for the taxpayer, in particular would imply that, due to lack of communication from the dominant company of the integration in the group of the companies in question, RETGS would have ceased from the taxation period in which the requirements were met, in accordance with the jurisprudence of the ECJ the requirements for the integration of those companies in the group, in accordance with the provision of point b), of no. 9 of article 69 of the CIRC.

  17. In reality, the Claimant understands that the argument cannot be accepted that respect for and compliance with community law imply that RETGS lapse, because the duty to communicate the integration of certain companies that national law expressly excluded from the application of that regime was not fulfilled.

  18. The Claimant sustains that it merely complied with national law, and such fact, in no way, can be valued to its detriment, and much less prevent the situation from being corrected and legality restored.

  19. Furthermore, it expresses that the application of retroactive effects to the Papillon Judgment cannot be evaded on the ground that it determines in the specific case the cessation of RETGS, of which it is the dominant company by virtue of the failure to communicate the integration of the companies held through non-resident companies, when such possibility was not granted to it in the face of domestic law.

  20. The Claimant reiterates that the said judgment provides, for the period between September 1, 2004 and December 30, 2009, the possibility of retroactive application of the amended provisions regarding this legal-fiscal framework. In accordance with such understanding, faced with the above, the inclusion in RETGS A..., for the fiscal year 2010, should be considered, of all participations of at least 90% held indirectly by the respective dominant company A... in companies resident in Portugal through the mediation of companies B... LIMITED, B... SALADS and C... SALADS, resident for tax purposes in the United Kingdom, can form part of the RETGS of which the A..., now Claimant, is the dominant company.

  21. Based on the factual and legal motivation set out, and in view of the grounds invoked, the Claimant requests the declaration of illegality of the self-assessment tax act for corporate income tax relating to the fiscal year 2010, as illegal, due to non-conformity with European Union Law. And that, consequently, the taxable income and taxable basis be corrected, ordering the restitution of the amount of € 38,026.24, quantity unduly assessed in non-conformity with European Union Law, plus compensatory interest accrued and accruing until full payment of the quantity unduly borne.

  22. In accordance with the interpretation carried out by the ECJ regarding the requirements on which the application of RETGS depends, the Claimant has the right to be reimbursed of the amount of € 38,026.24, which results from the difference between the IRC to be recovered resulting from the interpretation carried out by the ECJ and that entered in the Annual Declarations of Income Model 22 previously submitted, deducted from the amount of Municipal Levy whose reimbursement has already been requested by the Claimant (€ 38,026.24 = € - 318,467.28 + € 524,190.26 - € 167,696.74), as reproduced in the table below, to which reference is made.

  23. The Claimant terminates petitioning, in accordance with and under the law applicable, that in view of the above, it be declared the illegality of the act of implicit rejection of the Administrative Complaint regarding the Self-Assessment and the implicit rejection of the Hierarchical Appeal, as well as of the self-assessment tax act for corporate income tax relating to the fiscal year 2010, due to non-conformity with European Union Law, and consider whether the determination of the taxable income of 2010 of the Claimant as dominant company by inclusion in RETGS A..., for the fiscal year 2010, of all participations of at least 90% held indirectly by the respective dominant company A..., in companies resident in Portugal, through the mediation of companies B... LIMITED, B... SALADS and C... SALADS, resident for tax purposes in the United Kingdom, can form part of the RETGS of which the A..., is the dominant company.

D – RESPONSE OF THE RESPONDENT

  1. The Respondent, duly notified for that purpose, timely presented its response in which, in summary abbreviated form, alleged the following:

  2. The Respondent sustains that the request of the Claimant is subsumed in the declaration of illegality of the acts of implicit rejection of the administrative complaint and the hierarchical appeal of the declaration of illegality of the self-assessment of corporate income tax relating to the year 2010, made by the Claimant, and that the tribunal consider the determination of the taxable income of the Claimant as dominant company by inclusion in RETGS A... of the companies B... PORTUGAL SGPS, B... AGRICULTURA INTENSIVA, D... SALADS, E..., F..., B... 2, G..., B... COMERCIALIZAÇÃO and H..., all better identified in the claim, held by the Claimant through companies B... LIMITED, B... SALADS AND C... SALADS, resident for tax purposes in the United Kingdom, all due to the alleged non-conformity of the said acts with European Union Law, and, consequently, order the restitution of the amount of 38,026.24 €, which it deems unduly assessed, plus compensatory interest.

  3. The Claimant presented on May 31, 2011 Annual Declaration Model 22 of IRC, relating to the year 2010, as the dominant company of Group A...

  4. By means of registered mail on May 30, 2013, the now Claimant presented an administrative complaint of the self-assessment act of corporate income tax relating to the year 2010, an administrative complaint that was not decided.

  5. By means of registered mail on October 23, 2013, the now Claimant filed a hierarchical appeal of the implicit rejection of the administrative complaint.

  6. The hierarchical appeal was also not subject to any information or decision with assignment of no. …2013….

  7. The Respondent sustains that there is no record of any fact relating to the date on which the binding information request was formulated, or to which service it was delivered, or on what date the response to the taxpayer would have been notified.

  8. From this specific information, there is no assignment of any serial number, nor is there any express mention of the binding nature of the information or of the date of preparation or notification, with the exception of the reference to the sanctioning by dispatch of October 24, 2012.

  9. The factual allegation of this response that it was never taken position on the factual assumptions for the application of RETGS, in particular on the verification of the minimum percentages of holding of companies resident through non-resident companies.

  10. The Respondent refers that despite the restriction to the option of RETGS provided for in point f) of no. 4 of Article 69 of the CIRC, in which the controversial issue in the present case resides, the Claimant was permitted to opt for the application of this regime, having constituted two independent groups of companies, the GROUP A... (since 2002), and the GROUP B... SGPS (PORTUGAL) (since 2006), with the configuration referred to by the Claimant, both taxed in accordance with this regime in the fiscal year 2010 in question here.

  11. Further states the Respondent that from the hierarchical appeal filed on October 23, 2013, the Claimant presents the same organizational chart, referring that the same would be liable to describe the corporate structure from January 1, 2012. And that neither in Administrative Complaint, nor in Hierarchical Appeal, nor in Request for Arbitral Ruling, does the Claimant provide any proof of the participation percentages that it alleges to hold in Group B... SGPS (Portugal).

  12. This being a material requirement for the exercise of the option for the application of RETGS that falls to the Claimant to prove, in order to assess whether or not it could be taxed under this regime.

  13. The Claimant, invoking the jurisprudence of the ECJ, could have exercised its option for RETGS for the fiscal year 2010, having at its disposal several means of reaction in case of refusal of application of RETGS on the ground of the application of national law without observance of the interpretation conveyed by the ECJ.

  14. In fact, the Claimant is well aware of the Principle of Primacy of Community Law and its effects on the legal sphere of those who are holders of legal relationships to which European Union Law is applicable, as derives from the argument put forward by it in its PI.

  15. To do so, the Claimant should have proceeded in accordance with the provision of numbers 7 and 8 of Article 69 of the CIRC.

  16. Now, with regard to the formal requirements listed above, the Claimant cannot invoke any violation of the Principle of Non-Discrimination or the Principle of Freedom of Establishment, since the same are required in equal circumstances by all companies that intend to opt for RETGS.

  17. However, and as the Claimant itself admits in its PI, it did not proceed with such option, having not complied with the formal prerequisites listed.

  18. As such, we are not faced with a situation in which the TCA refused the taxation of Group A... as a whole, including the companies of Group B... SGPS (PORTUGAL), in accordance with RETGS, but rather with an omission on the part of the Claimant in the exercise of the option that was incumbent upon it, particularly by compliance with the formal requirements for this to occur.

  19. Having not exercised in the fiscal year 2010 the option that it considered having a right to, on the ground of the extensively cited Papillon Judgment, which at the time had already been delivered and was in force in the community legal order, the TCA was not even called upon to assess whether the Claimant could, under the Principle of Primacy of Community Law, exercise such option.

  20. Nor whether the TCA, as a Public Administration body and in the absence of legislative amendment adopting the understanding of the ECJ, could, under the principle of legality, authorize such option.

  21. In truth, whether it is understood that the TCA could not act against what was legally stipulated in Article 69 of the CIRC in its wording at the time of the facts, or whether it is understood that the Principle of Primacy of Community Law binds not only the judicial bodies of the MS, but also the administrative bodies, the simple fact that the Claimant did not formalize any claim in that sense prevents such assessment, due to lack of impulse capable of raising it.

  22. Considering that the Claimant did not proceed with any communication exercising the option for RETGS of Group A... encompassing all companies with registered office in national territory.

  23. Also noting that, with all due respect, we are not faced with a restriction of a right that the Claimant considered having, not being able to exercise it because it was forbidden by the TCA, but rather with an omission in the exercise of that right.

  24. The Respondent alleges that it is not clear how the claims made by the Claimant could be successful, neither as regards the assessment itself, and much less with regard to the claim relating to compensatory interest.

  25. Depending absolutely on the success of the aforementioned claim on the success of the main claim, a claim that the TCA respectfully considers, for all that has been set out and demonstrated above, should be dismissed.

  26. The Respondent concludes by sustaining that, once again, it is reiterated that we are not faced with conduct of the TCA that refuses a claim made by the Claimant, but rather with a total omission in the exercise of the right that was incumbent upon the Claimant to exercise and it did not exercise. Even though the Claimant sustains the position that it did not proceed with the necessary communications revealing the option for RETGS in compliance with the letter of the law in force at the time.

E – FACTUAL GROUNDS

  1. Before entering into the assessment of these questions, it is necessary to present the material facts relevant to their understanding and decision, which was carried out on the basis of documentary evidence, and taking into account the facts alleged.

  2. In relation to relevant material facts, this tribunal considers the following facts as established:

  3. The Claimant presented on May 21, 2011 its income declaration Model 22, as dominant company of a Group of Companies hereinafter referred to as Group A..., relating to the IRC of 2010, in which it calculated a net fiscal result of 5,885,623.24 euros, and a tax to be paid of € 464,406.11.

  4. On May 30, 2013, the Claimant presented an administrative complaint of the self-assessment act of corporate income tax relating to the year 2010, an administrative complaint that was implicitly rejected. Pursuant to article 57, no. 5 of the LGT.

  5. On October 23, 2013, the Claimant filed a hierarchical appeal of the implicit rejection of the administrative complaint, a hierarchical appeal that was implicitly rejected, pursuant to article 66, no. 5 of the CPPT.

  6. The Claimant has been, since 2002, the dominant company of a group of companies taxed in accordance with RETGS composed, in addition to the dominant company A..., of the following companies: I… TRADE AND SERVICES LTD, NIF …; J… FOOD PRODUCTS SA, NIF …; I… SA, NIF …; K… SOC PROMOTION AND REAL ESTATE INVESTMENTS SA, NIF …; L… SOC WATERS OF …, LTD, NIF …; I… SOC OF M… HOLDING SA, NIF …; I… REAL ESTATE COMPANY SA, NIF …; N… MANAGEMENT SERVICES CENTER, NIF …; O… TOURIST AND REAL ESTATE PROMOTIONS SA, NIF …; P... SERVICE PROVISION SA, NIF …;Q… – REAL ESTATE COMPANY SA, NIF …;COMP- I… – CENTRAL PURCHASING SA, NIF …;R… – STUDIES AND INNOVATION SA, NIF …;S... ENERGY SINGLE-PERSON LTD, NIF …;S... PORTUGAL SA, NIF …;REAL ESTATE COMPANY URBANIZATION OF T… SA, NIF …; I… CLINICAL ASSISTANCE SERVICES LTD, NIF …; I… COGENERATION SINGLE-PERSON LTD, NIF …;U… REAL ESTATE CONSTRUCTION AND PROMOTION SA, NIF ….

  7. The company P... Service Provision, S.A., holds, among other investments, a business line dedicated to the production of fresh products, namely salads, tomatoes and aromatic herbs through its subsidiary B... Limited, a company that is resident for tax purposes in the United Kingdom.

  8. B... Limited is the sole shareholder of two companies resident for tax purposes in the United Kingdom: B... Salads Limited and C... Salads Group Limited.

  9. B... SALADS has held, since December 30, 2004, a 100% participation in the share capital of B... Portugal, SGPS, S.A., holder of NIPC …, which participates directly and indirectly in the entire share capital of several other companies resident for tax purposes in Portugal.

  10. B... SGPS has been, since 2006, the dominant company of a group of companies taxed in accordance with RETGS.

  11. The group of companies RETGS B..., integrated, by reference to the fiscal year 2010, in addition to the said dominant company B... SGPS, the following companies: B... AGRICULTURA INTENSIVA SA, NIF … (which integrated this RETGS since 2006); D... SALADS - AGRICULTURA SA, NIF … (which integrated this RETGS since 2006); AGRICULTURAL COMPANY E... LTD, NIF … (which integrated this RETGS since 2008); F... AGRICULTURA, LTD, NIF … (which integrated this RETGS since 2006); B... 2 AGRICULTURA OF …, LTD, NIF … (which integrated this RETGS since 2006); B... COMMERCIALIZATION OF HORTICULTURAL PRODUCTS, NIF … (which integrated this RETGS since 2009). G... AGRICULTURA, Ltd., NIPC ….

  12. C... SALADS holds a 100% participation in the share capital of H..., Agro Industry, SA (hereinafter H...), holder of NIPC …, which is a company resident for tax purposes in Portugal.

  13. The indirect totalitarian participation is held through the holding of companies B... LIMITED, B... SALADS and C... SALADS, which are companies resident for tax purposes in the United Kingdom.

  14. The Claimant requested the reimbursement from the TCA of an amount of Municipal Levy unduly borne in the amount of € 167,696.74.

  15. The Claimant did not present in the year 2010 the declaration provided for in article 69 of the CIRC, to the Tax Administration, requesting the inclusion of the companies hereinafter better described for purposes of the application of RETGS.

F – UNPROVEN FACTS

  1. Of the facts with interest for the decision of the case, contained in the challenge, all subject to concrete analysis, those that do not appear in the factuality described above were not proven.

G – QUESTIONS TO BE DECIDED

  1. Given the positions of the parties assumed in the arguments presented, the central question to be resolved is the following, which must therefore be assessed and decided:

a) The alleged by the Claimant, declaration of illegality of the tax self-assessment act for corporate income tax relating to the fiscal year 2010, the declaration of illegality of the acts of implicit rejection of the Administrative Complaint regarding the Self-Assessment and the implicit rejection of the Hierarchical Appeal and condemnation to restitution of the amount unduly assessed of 38,026.24€.

H – LEGAL GROUNDS

  1. Given the positions of the parties assumed in the pleadings presented, the central question to be resolved by this arbitral tribunal consists of assessing the legality of the tax self-assessment act for corporate income tax relating to the fiscal year 2010, and subsequent acts of implicit rejection of the Administrative Complaint regarding the Self-Assessment and the implicit rejection of the Hierarchical Appeal.

  2. According to the arguments presented by the Claimant, it is intended to determine whether the Claimant has the right to the application of RETGS in the year 2010, for the companies that compose directly or indirectly the Group of Companies, since according to the Claimant the legal regime at the date of RETGS, in particular article 69 of the CIRC did not allow the inclusion in that regime of various companies held by, and that according to the Claimant that norm violates fundamental rights and Community norms and the jurisprudence of the ECJ.

  3. The request is thus subsumed in the declaration of illegality of the self-assessment act for IRC of the year 2010, for violation of article 69 of the CIRC of community norms.

  4. Article 69 of the CIRC in the wording at the date established regarding the Special Regime for Taxation of Groups of Companies, the following.

Article 69

Scope and conditions of application

1 — Where there is a group of companies, the dominant company may opt for the application of the special regime for determination of the taxable basis in relation to all companies in the group.

2 — There is a group of companies where a company, called dominant, holds, directly or indirectly, at least 90% of the capital of one or more other companies called dominated, provided that such participation grants it more than 50% of the voting rights.

3 — The option for the application of the special regime for taxation of groups of companies may only be formulated when the following cumulative requirements are met:

a) The companies belonging to the group all have registered office and effective management in Portuguese territory and all of their income is subject to the general system of taxation in IRC, at the highest normal rate;

b) The dominant company has held the participation in the dominated company for more than one year, with reference to the date on which the application of the regime begins;

c) The dominant company is not considered dominated by any other company resident in Portuguese territory that meets the requirements to be qualified as dominant;

d) The dominant company has not renounced the application of the regime in the three years preceding, with reference to the date on which the application of the regime begins.

4 — The following companies cannot form part of the group which, at the beginning or during the application of the regime, are in the following situations:

e) Are inactive for more than one year or have been dissolved;

f) A special recovery or bankruptcy proceeding has been initiated against them in which a dispatch continuing the action has been issued;

g) Record fiscal losses in the three fiscal years preceding the beginning of the application of the regime, except, in the case of dominated companies, if the participation has already been held by the dominant company for more than two years;

h) Are subject to an IRC rate lower than the highest normal rate and do not renounce its application;

i) Adopt a taxation period not coinciding with that of the dominant company;

j) The required participation level of at least 90% is obtained indirectly through an entity that does not meet the requirements legally required to form part of the group;

k) Do not assume the legal form of limited liability company, joint stock company or limited partnership with shares, except as provided for in no. 10.

5 — The temporal requirement referred to in point b) of no. 3 does not apply when these are companies incorporated by the dominant company less than one year ago, being relevant for the counting of that period, as well as that provided for in point c) of no. 4, in cases where the participation was acquired in the context of a merger, spin-off or contribution of assets, the period during which the participation remained in the ownership of the merged, spun-off companies or of the contributing company, respectively.

6 — When the participation is held indirectly, the effective participation percentage is obtained by the process of successive multiplication of the participation percentages at each level and, where participations in a company are held both directly and indirectly, the effective participation percentage results from the sum of the participation percentages.

7 — The option mentioned in no. 1 and the changes referred to in points d) and e) of no. 8, as well as the renunciation or cessation of the application of this regime must be communicated to the General Directorate of Taxes by the dominant company through the sending, by electronic data transmission, of the competent declaration provided for in article 118, within the following periods:

l) In the case of option for the application of this regime, until the end of the 3rd month of the taxation period in which it is intended to begin the application;

m) In the case of changes in the composition of the group:

Until the end of the 3rd month of the taxation period in which the inclusion of new companies should be made in accordance with point d) of no. 8;

ii) Until the end of the 3rd month of the taxation period following the one in which the departure of companies from the group or other changes occur in accordance with point e) of no. 8;

c) In the case of renunciation, until the end of the 3rd month of the taxation period in which it is intended to renounce the application of the regime;

d) In the case of cessation, until the end of the 3rd month of the taxation period following the one in which the conditions for the application of the regime referred to in points a) and b) of no. 8 cease to be met.

8 — The special regime for taxation of groups of companies ceases to apply when:

n) One of the requirements referred to in nos. 2 and 3 ceases to be met, without prejudice to the provision of points d) and e);

o) One of the situations provided for in no. 4 occurs and the respective company is not excluded from the group to which the regime is being or intends to be applied;

p) The taxable income of any of the companies in the group is determined using indirect methods;

q) Changes occur in the composition of the group, in particular with the entry of new companies that meet the legally required requirements without their inclusion being made within the scope of the regime and the respective communication being made to the General Directorate of Taxes in accordance with the terms and period provided for in no. 7;

r) The departure of companies from the group occurs by alienation of participation or by non-compliance with the other conditions, or other changes in the composition of the group caused in particular by mergers or spin-offs, always when the dominant company does not opt for the continuity of the regime in relation to the other companies in the group, by means of sending the respective communication in accordance with the terms and period provided for in no. 7.

9 — The effects of the renunciation or cessation of this regime are reported to:

s) The end of the taxation period preceding the one in which the renunciation of the application of this regime was communicated in accordance with the terms and period provided for in no. 7;

t) The end of the taxation period preceding the one in which the inclusion of new companies should have been communicated in accordance with point d) of no. 8 or the end of the taxation period preceding the one in which the continuity of the regime should have been communicated in accordance with point e) of that number;

u) The end of the taxation period preceding the one in which the facts provided for in points a), b) and c) of no. 8 occur.

10 — Public business entities that meet the requirements relating to the quality of dominant company required by this article may opt for the application of this regime to their respective group.

  1. According to this regime, specifically its number 1, it is the responsibility of the taxpayer to choose whether to opt for the application of the special regime for determination of the taxable basis in relation to all companies in the group.

  2. This choice must be made by the taxpayer in accordance with point a) of number 7 of the cited article, through the filing of a declaration with the competent tax service, until the end of the 3rd month of the taxation period in which it is intended to begin the application. The filing of this request constitutes a formal requirement, fundamental to the application of RETGS.

  3. That is, it is the responsibility of the taxpayer to make such declaration indicating the option for the regime and indicating which companies form the group.

  4. The assessment of the tax in the specific case was made on the companies indicated by the Claimant as integrating the group. H... did not integrate the application request submitted within the scope of article 69.

  5. In the present case, the Claimant, in the context of compliance with this declaration, indicated the companies intended to be included in the regime, leaving out of this declaration the companies which, according to the Claimant, were not accepted by article 69 for purposes of RETGS and further petitions that if such request were to be made in such a way as to include the companies now petitioned, it would be rejected by the Tax Administration, wherefore the Claimant chose not to indicate the companies now petitioned.

  6. Companies that the Claimant, in the present proceeding, asks to be accepted for purposes of RETGS and for purposes of the calculation of the IRC of the year 2010, on the ground of violation by the rule 69 of community norms and principles.

  7. However, the Claimant did not submit such declaration of accession in order to indicate its intention to include in RETGS H..., therefore such request did not exist and consequently cannot be assessed.

  8. That is, the defect, if it were to exist, would be verified in the act of assessment to be made by the TCA regarding the declaration of accession referred to above, and not in the self-assessment act.

  9. Thus, the real question sub judice relates to the compliance with a formal obligation/declaration by the taxpayer, in choosing to opt for RETGS for H..., even though at the correct time for compliance with that obligation national legislation, in the Claimant's understanding, did not allow that situation.

  10. Given the above, there are two problems that prevent the knowledge of the request as formulated by the Claimant. The first concerns the non-existence of the declaration for the application of RETGS to the companies now mentioned, and the second problem concerns the competence of this arbitral tribunal to assess the request of the Claimant in the terms in which it was formulated.

  11. As was mentioned, the application of RETGS is a free choice of the taxpayer, which was formulated by means of a declaration of will and indication of the companies belonging to the group.

  12. This declaration was not submitted by the Claimant in the year 2010, as regards H....

  13. Not having been submitted, it was not subject to assessment by the TCA, and therefore cannot have been granted or denied, and in the case of rejection, it could create a defect, which according to the Claimant, consists of the defect due to violation of community norms.

  14. As the declaration of accession to RETGS, as regards company H..., was not submitted, the defect that the Claimant petitions would consist of in the hypothetical illegality of the self-assessment act, due to violation of community norms, here in question, resulting from the potential rejection of the RETGS declaration, did not exist.

  15. That is, the defect of rejection of the RETGS declaration, would be transferred to the tax self-assessment act for the IRC of the year 2010, which would vitiate this act and make it hypothetically illegal.

  16. With the non-existence of the request of the Claimant by means of the declaration of option of RETGS for H..., no defect was verified in the self-assessment act for the IRC of the year 2010.

  17. It is concluded in these terms that the self-assessment act here in question is legal, by not suffering from any defects here petitioned, since RETGS was applied to the companies that the Claimant presented as forming part of the group, in accordance with article 69 of the CIRC, H... not having been included in the consolidation perimeter by the Claimant.

  18. The second problem, referred to above, is a consequence of the result of the first problem, that is, the non-existence of the request by means of declaration of the taxpayer, and legality of the self-assessment act.

  19. As petitioned by the Claimant, which intends the companies now invoked to be included in the group of companies in accordance with RETGS, and the IRC of the year 2010, be calculated including these amendments, invoking that it did not make the declaration referred to above because it understood that the law would not permit it.

  20. The taxpayer should have made the RETGS declaration within the stipulated period (end of the 3rd month), in order to include the said companies, and in that forum would have had the possibility to come to appeal from a hypothetical rejection on the ground of illegality and violation of community norms.

  21. Since the declarations imposed by point a) of number 7 of article 69, and the companies that form the Group, for all purposes it was correctly applied the regime and consequently the self-assessment act is equally correct and legal.

  22. And according to the logical argument of the Claimant, it did not make that inclusion because it understood that although the law being contrary to community norms, its request for inclusion would be rejected by the TCA.

  23. However, by not making the said request, and the consequent implicit rejection of the administrative complaints and hierarchical appeal relating to the self-assessment act, and not to the act of rejection of the RETGS declaration relating to the companies petitioned, because it did not exist, there is not an assessment by the TCA on the issue. Because the issue was not raised in the proper forum.

  24. What is meant to be said is that the competences of arbitral tribunals do not include the assessment and substitution of the TCA in an issue that was not raised and the legality was not assessed.

  25. The cause of action of the Claimant in the present case should have been raised in the proper forum, by means of the filing of the declaration of point a) of number 7 of article 69.

  26. It further states that Arbitral Tribunals do not have the competence to determine the illegality of a tax self-assessment act founded on a defect due to the failure to file a declaration by the taxpayer necessary to enjoy a particular regime.

  27. In other words, this arbitral tribunal cannot decree the illegality of a tax act on the ground of violation of community norms of a legislative norm when the same did not have the opportunity to be implemented illegally, that is, only through the implementation of the norm by means of a rejection of the taxpayer's request for the inclusion of the desired companies by means of the declaration imposed by article 69, could this arbitral tribunal decide, since the assessment act would be founded on a hypothetical violation of community norms by means of the rejection of the taxpayer's request.

  28. It does not have competence to practice the act requested by the Claimant.

  29. It does not have technical competence to determine the illegality of an act that did not exist and therefore did not vitiate the tax act here under assessment.

  30. If we see it, the competence of arbitral tribunals operating in CAAD is, in the first place, limited to the matters indicated in article 2, no. 1, of the RJAT, on a second line, the competence of arbitral tribunals operating in CAAD is also limited by the terms to which the TCA bound itself to that jurisdiction, which are embodied in Ordinance no. 112-A/2011, of March 22, since article 4 of the RJAT establishes that "the binding of the tax administration to the jurisdiction of the tribunals constituted in accordance with the present law depends on an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

  31. In this way, we can derive another restriction to the scope of competence of arbitral tribunals that derives from the request for recognition of rights and legitimate interests in tax matters only integrating the circle of competence of arbitral tribunals in cases in which it is underlying a declaration of illegality of a tax assessment act or acts that determine the taxable basis or taxable income.

  32. Since the Claimant did not make such declaration, RETGS was applied to the declared companies, and the IRC of the year 2010 and the self-assessment act were calculated based on those companies.

  33. In effect, what is intended is the declaration of illegality of the decision of the Tax Administration that maintained the legal framework of the Claimant, an act that did not exist.

  34. However, as the taxpayer did not file the declaration of option of RETGS necessary, neither did it have a decision from the TCA on that issue, so it cannot presume that the TCA would reject such request.

  35. The self-assessment act does not suffer from any defect here invoked, therefore is legal, since the Claimant's request is on the illegality of application of the regime on the groups subject to RETGS, which according to the Claimant the regime is illegal for violating Community Law.

  36. For all purposes, the IRC declaration and the self-assessment act do not suffer from defects, because they were founded in accordance with the information and declarations provided by the Claimant.

  37. And thus given the above, and the grounds and request of the Claimant, this arbitral tribunal determines that the legality of the self-assessment act, and given the limitation of the competences of Arbitral Tribunals, it is determined that it does not have competence to decide on the request of the Claimant regarding the inclusion of the companies of the petitioned group, because that request was not made in the proper forum and this arbitral tribunal does not have competence to oblige the Tax Administration to accept now the inclusion of those companies.

  38. The self-assessment act does not suffer from defects, therefore it is concluded by its legality as regards the questions petitioned, and consequently the implicit rejection of the administrative complaint and hierarchical appeal do not suffer from defects attributable to the TCA.

I – DECISION

Therefore, in view of all of the above, this Arbitral Tribunal decides:

To judge the requests unfounded for the declaration of illegality of the tax self-assessment acts for corporate income tax relating to the fiscal year 2010, and subsequent acts of implicit rejection of the Administrative Complaint regarding the Self-Assessment and the implicit rejection of the Hierarchical Appeal.

The value of the case is set at €38,026.24, in light of the economic value of the case assessed by the value of the tax assessments challenged, and in accordance therewith the costs are set, in the respective amount of 1,836.00€ (one thousand eight hundred and thirty-six euros), to be borne by the Respondent in accordance with article 12, no. 2 of the Regime of Tax Arbitration, article 4 of the RCPAT and Table I attached to the latter – no. 10 of article 35, and nos. 1, 4 and 5 of article 43 of the LGT, articles 5, no. 1, point a) of the RCPT, 97-A, no. 1, point a) of the CPPT and 559 of the CPC).

Let notification be made.

Lisbon, November 27, 2014.

The Arbitrator

Paulo Renato Ferreira Alves

Frequently Asked Questions

Automatically Created

How is taxable profit calculated under the RETGS group taxation regime for IRC purposes?
Under the RETGS group taxation regime, taxable profit is calculated by consolidating the individual tax results of all qualifying group companies. The dominant company (holding at least 90% participation) aggregates profits and losses from Portuguese resident subsidiary companies that meet eligibility criteria set out in Article 69 of the CIRC. The consolidated taxable income represents the sum of each group member's individual taxable results, with certain adjustments and eliminations for intra-group transactions. This consolidation allows loss-making group companies to offset profits of profitable entities within the same fiscal group, potentially reducing the overall IRC liability. However, Article 69(4)(f) CIRC traditionally excluded companies whose 90% participation was held indirectly through non-resident intermediaries, though this restriction has been challenged under EU law principles.
Can losses from an EU-resident subsidiary be included in the RETGS consolidated taxable profit?
Portuguese domestic law under Article 69(4)(f) CIRC historically prohibited the inclusion of results from Portuguese subsidiaries held through EU-resident intermediate companies in RETGS consolidation. However, this restriction has been successfully challenged as contrary to EU law, particularly the Freedom of Establishment guaranteed by the Treaty on the Functioning of the European Union. Following ECJ case law (notably the Papillon judgment), the Portuguese Tax Authority has issued binding rulings confirming that losses and profits from Portuguese companies held through EU-resident parents can indeed be included in RETGS consolidated results. The key requirement is that the indirect participation meets the 90% threshold and other RETGS eligibility criteria are satisfied. This interpretation aligns Portuguese tax practice with EU fundamental freedoms, preventing discrimination against cross-border corporate structures within the European Union.
What are the legal grounds for challenging an IRC self-assessment through tax arbitration at CAAD?
To challenge an IRC self-assessment through CAAD tax arbitration, taxpayers must first exhaust administrative remedies. The procedure involves: (1) filing an administrative complaint (reclamação graciosa) with the Tax Authority within the legal deadline; (2) if rejected or not decided within the statutory period (creating an implicit rejection), filing a hierarchical appeal (recurso hierárquico); (3) following rejection or implicit rejection of the hierarchical appeal, submitting an arbitration request to CAAD under Decree-Law 10/2011 of January 20. The legal grounds for challenge typically include illegality of the tax assessment due to incorrect application of tax law, violation of procedural requirements, unconstitutionality, or incompatibility with EU law. The arbitration request must be filed within 90 days of notification of the final administrative decision or the formation of implicit rejection. CAAD provides an alternative dispute resolution mechanism to judicial tax courts, offering faster resolution of tax disputes.
How does Portuguese IRC law apply to holding companies (SGPS) within a tax consolidation group?
Holding companies (SGPS - Sociedades Gestoras de Participações Sociais) can serve as dominant companies in RETGS tax consolidation groups under Portuguese IRC law. As the parent entity, an SGPS must hold at least 90% of the capital and voting rights in subsidiary companies for an uninterrupted period. The SGPS becomes responsible for determining and declaring the consolidated taxable income of the entire group. Under RETGS, the SGPS aggregates the individual tax results of all qualifying Portuguese resident subsidiaries, applying consolidation adjustments and eliminations as required by Articles 69-71 of the CIRC. The regime is designed to recognize the economic unity of corporate groups while preventing tax avoidance. SGPS entities benefit from special tax treatment under the Portuguese Participation Exemption regime, which can complement the RETGS consolidation benefits. However, when intermediate holding companies are resident in other EU Member States, compliance with EU freedom of establishment principles requires that Portuguese subsidiaries held through such non-resident intermediaries not be automatically excluded from the RETGS perimeter.
What is the procedure for filing a hierarchical appeal after a rejected gracious complaint on IRC self-assessment?
The procedure for filing a hierarchical appeal (recurso hierárquico) following a rejected administrative complaint on IRC self-assessment is governed by the Portuguese General Tax Law (LGT) and Tax Procedure Code (CPPT). After the Tax Authority rejects an administrative complaint (reclamação graciosa) - either expressly through a formal decision or implicitly through failure to decide within the statutory timeframe (typically 4 months under Article 57 LGT) - the taxpayer may file a hierarchical appeal within 30 days. The appeal must be addressed to the hierarchical superior of the authority that issued the contested decision, submitted through the original deciding authority. The appeal should include: identification of the contested decision, factual and legal grounds for challenge, supporting documentation, and clear statement of the relief sought. The hierarchical superior authority has up to 60 days to decide. If the hierarchical appeal is rejected (expressly or implicitly through inaction), the taxpayer may then seek judicial review through administrative courts or, alternatively, request tax arbitration at CAAD within 90 days, as provided under Decree-Law 10/2011.