Process: 284/2017-T

Date: November 20, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 284/2017-T addresses critical IRC compliance issues regarding impairment losses and bad debt deductions. The tribunal ruled on three key matters: First, concerning Article 36 CIRC (impairment losses), the court rejected the Tax Authority's formalistic approach requiring precise timing based on insolvency judgment publication dates. Instead, the tribunal established that impairment losses should be recognized when uncollectibility risk is duly justified through reasonable interpretation, not rigid adherence to procedural dates. The taxpayer's 2012 recognition of impairment for a debtor in insolvency proceedings (judgment published December 2011) was deemed acceptable, as forcing taxpayers to file replacement declarations based on publication timing would create unnecessary administrative burdens. Second, regarding Article 41(2) CIRC for fiscal years 2012-2013, the tribunal upheld Tax Authority adjustments totaling €157,453.04. The taxpayer failed to prove communication to debtors recognizing expenses for tax purposes, a clear statutory requirement. The claimant's argument that Law 2/2014's repeal of this provision in 2014 demonstrated excessive formalism was rejected - the repeal had no retroactive effect, and legislative improvement cannot excuse non-compliance with then-applicable law. Third, concerning periodization under Article 18 CIRC, the decision emphasizes substance over form: the fundamental criterion is justified uncollectibility assessment, not mechanical application of technical legal dates. The ruling provides crucial guidance for practitioners: impairment timing requires reasonable judgment within normal business contexts absent manipulation indicators, but formal compliance requirements like debtor notification cannot be ignored despite subsequent legislative changes. Tax professionals must balance substantive reasonableness with strict procedural compliance.

Full Decision

CIRC does not make the constitution of the impairment loss dependent only on knowledge of the date of the debtor's insolvency, the fact is that the same norm does not make that recognition dependent on the date of the insolvency judgment or on the date of its publication in the Official Journal, as was also considered by the Respondent entity.

Actually, the normative provision in question goes in the direction of considering credits of doubtful collection those in which the risk of uncollectibility is duly justified, using a system of standard examples to flesh out such concept, where stand out, in what is relevant for the case, the cases in which the debtor has pending insolvency and company recovery proceedings or execution proceedings, or in which the credits have been claimed in court or in arbitral tribunal.

Thus, it will be in light of the fundamental criterion based on the judgment that the risk of uncollectibility is duly justified that should be read and interpreted the paragraphs that concretize that judgment, and not, as occurred in the case, through a formalistic approach to those, based on the technicalities specific to the legal realities to which they refer.

That is, and in summary, from a tax perspective, in the matter under consideration, it will be the justifiability of the judgment of uncollectibility that should guide the application of the paragraphs of No. 1 article 36 in question, being that, considering the indeterminacy inherent to the founding concept of the judgment in question, it will be by the negative that should operate the approach to the conclusion of compliance or non-compliance of the norm at issue.

In other words, and being the judgment of due justifiability intrinsically subjective in nature, it cannot, under the guise of a purported objectivity, confine its validity to a strict interpretation of concepts specific to other branches of law, should be considered therefore duly justified the uncollectibility if, faced with a plausible interpretation of the extrafiscal legal framework applicable, it presents itself as reasonable the understanding that, in a context of normalcy (that is, of absence of signs of manipulation of tax results), from that point onward is evident a degree of certainty about that of intensity and nature compatible with those expressed by the legislator in the paragraphs.

In the concrete case it is verified that the Claimant accounted for in 2012 an impairment loss of a credit relating to a debtor object of insolvency proceedings, whose insolvency judgment was the object of publication in Series II of the Official Journal No. ... of 19 December 2011.

The Tax Authority's criterion that this will determine the relevant moment for fixing the attribution to a fiscal year of the underlying impairment loss shows itself, from the outset, intrinsically unfounded, inasmuch as a publication, not constituting a means of bringing legally relevant facts to someone's knowledge, always has underlying by nature a certain period for the production of the legal effects of such knowledge.

On the other hand, whether the understanding (indirect and not expressly assumed) that it will be the mere pronouncement of the insolvency judgment that determines the fiscal year to which to attribute the impairment loss, whether the understanding that appears to be assumed, that it will be without more the mere publication of that, beyond not having more support in the legal texts than those rejected by the Tax Authority, enclose unreasonable potential for disturbance declaratory, since it would provide a considerable number of situations in which taxpayers, having knowledge of the facts considered as relevant by the Tax Authority (pronouncement of the judgment or its mere publication) after the end of the fiscal year in which those occurred, would be compelled to the filing of replacement statements, with all the undesirable disturbances and unnecessary consumption of resources, either of the taxpayers' tax organizations, or of the Tax Authority itself.

Having established this, it is judged that, in the case, the criterion adopted by the Claimant to consider the risk of uncollectibility duly justified in light of the conduct of the insolvency proceeding, in the underlying terms to paragraph a) of No. of article 31 of the applicable CIRC, presents itself from all angles as reasonable, considering furthermore as is demonstrated that there are no signs of manipulation of tax results, on the contrary.

In this way, and facing all the foregoing, suffering from an error of law, the adjustment in question must be cancelled, finding merit in this respect to the arbitral request.

*

With regard to the adjustments relating to the fiscal years 2012 and 2013, corresponding to an expense not accepted for tax purposes in the amounts of € 84,098.21 in the year 2012 and € 73,354.83 in the year 2013, is exclusively at issue the application of No. 2 of article 41 of the applicable CIRC, which provided that:

"Without prejudice to the maintenance of the obligation for civil purposes, the deductibility of credits considered uncollectible in the terms of the prior number or pursuant to the provision of article 36, is still dependent on the existence of proof of communication to the debtor of the recognition of the expense for tax purposes, which must recognize that amount as income for purposes of determination of taxable profit."

Admittedly, the Claimant accounted for as deductible the uncollectible credits in question without having complied with the obligation of proof of communication to the debtor of the recognition of the expense for tax purposes.

The Claimant intends that once "No. 2 of the said article was repealed in 2014 by Law 2/2014 of 16 January" it should be considered that "such requirement disappeared from the law/wording of the law precisely because it is of excessive formalism as being manifestly unjustified, in particular given that it presupposed the existence of a proceeding in Court in which the debtor was party therefore obviously would know that such credit was considered uncollectible."

Saving due respect, it is considered that the Claimant's position has no merit in this matter, which does not even invoke any legal provision with which it aims to support its understanding.

In the present case, is at issue a direct and undisputed non-compliance of a norm clear and unambiguous, without any contextualization that questions minimally the foundations of the legal imperative disregarded.

In that way, not having the legislative amendment noted by the Claimant retroactive effects or interpretative nature, not existing any legal support for its claim, and not being the evolution and possible improvement of the law basis for the non-application of the repealed law, should in this respect fail to find merit the arbitral request.

*

With regard to the adjustments relating to the fiscal year 2014, corresponding to an expense not accepted for tax purposes in the amount of € 147,977.16, the Claimant begins by considering that they suffer from lack of substantiation.

As is well known, substantiation is a requirement of tax acts in general, being a constitutional imposition (article 268 of the Constitution) and legal (article 77 of the General Tax Code).

Briefly, it can be said that it is today undisputed in national doctrine and case law that the required substantiation must meet the following characteristics:

1. Official nature: must always come from the administration's initiative, not being admissible substantiation on request;

2. Contemporaneity: must be contemporaneous with the performance of the act, there cannot be deferred substantiation;

3. Clarity: must be comprehensible by an average recipient, avoiding ambiguous concepts or highly technical ones;

4. Completeness: must contain all essential elements and those that were determinative of the decision taken. This characteristic unfolds into two requirements, namely the duty of justification (legal norms and factuality – domain of legality) and of motivation (domain of discretion or opportunity when a valuation is needed).

Now, if substantiation is, in the terms mentioned, necessary and mandatory, this cannot nor should be understood in a way abstract and/or absolute, that is, the required substantiation to a concrete tax act must be that which functionally is necessary in order that it does not present itself before the taxpayer as a pure demonstration of arbitrariness. This will be – it is judged – the touchstone of compliance of the duty of substantiation: when before an average recipient placed in the position of the actual recipient, the tax act presents itself from a point of view of reasonableness as a product of pure arbitrariness of the Administration, for not being discernible the reasons of fact and/or of law on which it is based, the act will suffer from lack of substantiation.

Descending to the concrete case, it is verified that the assessment acts in question occurred in the sequence of an inspection act and in accordance with the Tax Inspection Report approved by order, report in which are stated the bases of the assessments in question, which the Claimant demonstrated understanding, taking in a well-founded manner the decision of not accepting.

From the RIT, which substantiates the assessment in question, is expressly stated, among other things, that:

"On the basis of the elements provided, it was verified that the amount of € 98,346.98 classified as uncollectible credit was reversed in the same fiscal year. On page 23 of Annex VIII is attached a schedule regarding the breakdown by customer and by document. However, by analysis of the accounting entry, in which the indirect method is used for purposes of recognition of the debt considered uncollectible, the liability moved the expense and income account by the value of the respective uncollectible debt, resulting in this way that there was no impact on the tax result. However, the impact on the tax result was verified in the fiscal year in which the impairment loss was constituted/reinforced, being that the expense considered in account 683 will only be accepted for tax purposes if the conditions provided for in article 41 of the CIRC are verified."

This is considered perfectly sufficient to understand the reasons – right or wrong – that led the Tax Authority to assess the tax, such assessment not presenting itself from any reasonable point of view as a mere manifestation of arbitrariness, should therefore fail to find merit the alleged lack of substantiation.

In this matter, the Claimant further considers that the adjustments in question lack of legal basis, for if the values in question are adjusted - as results from the RIT - such would mean for the Claimant to accept as legitimate that the registration of those expenses is twice cancelled (i.e., twice taxable income) which would not be acceptable nor legally accepted.

From the elements in the file it is concluded that the Claimant constituted/reinforced impairment losses on the debts of the four customers ("D...", "F...", "C..." and "E...") in years prior to 2014, registering therefore accounting expenses with relevance for tax purposes.

The same elements confirm that the debts with regard to which impairment losses were registered were isolated/accounted for as debts of "doubtful collection" in sub-accounts of '217', as well as that the claimant made effort to collect those debts, although in relation to some of them it later apparently ceased to continue that effort.

It is verified finally that the Claimant reversed the referred impairment losses of the four customers, having in 2014 registered an accounting income in sub-account '76'.

These reversals of impairment losses – on which the Claimant bases the essential of its thesis - correspond with the expenses that had been registered in the prior years (2012 and 2013, namely).

In terms of impact on equity, however, the expenses and the income referred to compensated each other, although their effect there appeared in different fiscal years: expense was first recognized (reduction of equity affecting negatively the fiscal year result) and then the income (increase of equity) in another period.

It is certain that the Claimant cancelled in 2014 the debts of doubtful collection, launching them as Expenses, but concomitantly classified them as uncollectible credits in account 683 Uncollectible credits.

Whether the impairment losses whether the uncollectible credits are expenses, being that the first presuppose/are based on the uncertainty of the possibility of collection (reversible therefore) and the second is based on the certainty of the impossibility of collection (being irreversible).

Now, article 41 of the applicable CIRC, where, as was seen, the adjustment is based now in crisis, provides:

"1 - Uncollectible credits may be directly considered expenses or losses of the tax period provided that:

a) It results from insolvency and company recovery proceedings, of execution proceedings, of an extrajudicial conciliation proceeding for the viability of companies in a situation of insolvency or in a situation of economic difficulty mediated by IAPMEI - Institute for Support of Small and Medium Enterprises and Investment, of a decision by arbitral tribunal in the context of disputes arising from the provision of essential public services or of credits which are time-barred in accordance with their respective legal regime of the provision of essential public services and, in this case, their value does not exceed the amount of € 750; and

b) Impairment loss has not been admitted on uncollectible credit or, being it, this shows itself insufficient."

In this way, in legal terms, the Claimant could only/should cancel the impairment losses if:

i. the customers whose debts had been considered of doubtful collection ultimately came to pay those debts;

ii. the credits were confirmed 'uncollectible' respecting the requirements mentioned in article 41 of the CIRC.

Now in the four cases under analysis, the Claimant reversed the impairment losses but without demonstrating meeting the conditions to cancel those impairment losses, for not having verified neither what was referred to in i. nor what was referred to in ii. above.

Thus, the Claimant does not demonstrate having proceeded properly by considering the uncollectible credits, for:

- with regard to two of them ("D..." and "F...") did not demonstrate the continuity of collection effort, therefore are not demonstrated the prerequisites for not maintaining the impairment loss;

- With regard to two other cases ("E..." and "C...") in PER, the Claimant does not demonstrate to have followed the correct procedure, nor that the period of 2014 chosen to register the uncollectibility of the credits will have been the appropriate one;

Indeed, with regard to "E...", the Claimant demonstrated to have already claimed the credits in 2014, but only in 2016 the customer started the PER, therefore are not demonstrated the prerequisites for the credit to be considered uncollectible in 2014, being that the absence of the PER decision to confirm whether the credit will or will not be uncollectible will be an impediment of the deduction of the expense as such.

As for "C...", was declared insolvent in 2013 and the Claimant was not listed as creditor, the proceeding being closed in 2016 (p.59 of the RIT), having however been claimed the credits, legitimizing that the credit could be considered uncollectible.

However, beyond that prerequisite, it would be necessary to demonstrate that the year 2014 (or at least a prior one) the appropriate to do so.

In this regard, it is verified that there was expense in impairment loss and there was income of reversal of impairment loss that compensated each other, and that occurred in different years.

If it were accepted the expense with uncollectibility (balance of account 683), it would be only once.

Moreover, we are facing situations that present characteristics of impairment loss and not of uncollectibility: uncollectibility requires, as was seen, the requirements of article 41 of the CIRC and the 'legal certainty' of the impossibility of collection, that are not demonstrated respected, not therefore being to accept the tax expense registered in account 683 Uncollectible credits.

The referred four cases, with regard to 2014, that the Tax Authority selected by sampling, amount to € 61,248.61 of the total of € 98,346.98 of the uncollectible credits that the Claimant accounted for, that is, 62.02% of that total. The remaining part, excluding the referred difference of € 406.06, is € 37,098.37 and relates to 16 other customers in relation to which the Tax Authority, having acted by sampling, did not ask for additional elements for verification of the conditions of uncollectibility. However, the volume of sampling, as well as the absence of any effort of the Claimant in demonstrating the requirements of the deductibility of the credits in question, as was its duty, are objectively suitable to, on the basis of a judgment of normalcy, conclude by non-demonstration, also with regard to the referred 16 customers, will not be met the prerequisites for the accounting made by the Claimant.

In this way, and in summary, there being no doubt that it was verified that the amount of € 98,346.98 classified as uncollectible credit was reversed in the same fiscal year, it is verified that, as the Tax Authority considered, once the indirect method was used for purposes of recognition of the debt considered uncollectible, the taxpayer moved the expense and income account by the value of the respective uncollectible debt, therefore there was in this way no impact on the tax result.

Thus, because the impact on the tax result was verified only in the fiscal year in which the impairment loss was constituted/reinforced, that expense of € 98,346.98 will not be accepted for tax purposes for not respecting the conditions provided for in article 41 of the CIRC, failing to find merit in this respect therefore the arbitral request.

*

As for the request for indemnificatory interest filed by the Claimant, No. 1 of article 43 of the General Tax Code establishes that indemnificatory interest is due when it is determined that there was error attributable to the services from which results payment of the tax debt in the amount higher than legally due.

In the case, the error that affects the assessment relating to the year 2012 is attributable to the Tax and Customs Authority, which made the assessment act partially illegal by its initiative.

Has therefore the right to be reimbursed the Claimant of the amount which it paid wrongfully (in accordance with the provisions of articles 100 of the General Tax Code and No. 1 of article 24 of the RJAT) and also to be indemnified for wrongful payment through payment of indemnificatory interest by the Respondent, from the date of payment of the amount until reimbursement, at the legal supplementary rate, in accordance with Nos. 1 and 4 of article 43 and No. 10 of article 35 of the General Tax Code, of article 559 of the Civil Code and of Ordinance No. 291/2003 of 8 April.

*

C. DECISION

Terms in which it is decided in this Arbitral Tribunal to judge partially upheld the arbitral request filed and, in consequence,

a) Partially cancel the Corporate Income Tax assessment act No. 2016..., relating to the year 2012, in the part relating to the adjustment corresponding to an expense not accepted for tax purposes in the amount of € 754,951.42;

b) Condemn the Respondent in the restitution of the wrongfully paid tax by the Claimant in compliance of the partially cancelled assessment, increased by indemnificatory interest, in accordance with the terms fixed above;

c) Judge not upheld the remaining requests filed by the Claimant;

d) Condemn the parties in the costs of the proceeding, in the proportion of their respective unsuccessful parts, fixing the amount of € 1,248.00, to the charge of the Claimant, and € 4,260.00 to the charge of the Respondent.

D. Value of the Proceeding

The value of the proceeding is fixed at € 316,468.93, in accordance with the terms of article 97-A, No. 1, a) of the Tax Procedural and Procedural Code, applicable by force of paragraphs a) and b) of No. 1 of article 29 of the RJAT and of No. 2 of article 3 of the Costs Regulation in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at € 5,508.00, in accordance with Table I of the Costs Regulation of Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective unsuccessful parts, fixed above, once the request was partially upheld, in accordance with the terms of articles 12, No. 2, and 22, No. 4, both of the RJAT, and article 4, No. 4, of the said Regulation.

Notify.

Lisbon, 20 November 2017

The Arbitrator President

(José Pedro Carvalho)

The Arbitrator Member

(Carla Castelo Trindade)

The Arbitrator Member

(Leonor Fernandes Ferreira)

Frequently Asked Questions

Automatically Created

What are the rules for deducting impairment losses on credits under Article 36 of the Portuguese IRC Code?
Article 36 CIRC allows deduction of impairment losses on credits of doubtful collection when uncollectibility risk is duly justified. The rules reference specific situations including pending insolvency proceedings, company recovery proceedings, execution proceedings, or judicial/arbitral claims. CAAD Process 284/2017-T clarified that recognition should not depend on formalistic dates like insolvency judgment publication, but rather on when uncollectibility becomes reasonably justified. The court emphasized substance over form: taxpayers may recognize impairment when, under a plausible interpretation of applicable legal framework and absent manipulation signs, there exists sufficient certainty of uncollectibility compatible with legislative intent. The timing determination requires reasonable business judgment rather than strict adherence to technical procedural dates from other legal branches.
How does Article 41 of the CIRC regulate the tax treatment of bad debts (créditos incobráveis) for corporate income tax purposes?
Article 41 CIRC governs tax deductibility of uncollectible credits (bad debts). Until its 2014 amendment, Article 41(2) imposed a dual requirement: taxpayers must prove communication to the debtor recognizing the expense for tax purposes, and the debtor must recognize that amount as taxable income. CAAD Process 284/2017-T enforced this requirement strictly for fiscal years 2012-2013, rejecting arguments that judicial proceedings inherently provided debtor knowledge. The provision aimed to ensure symmetric tax treatment - deduction for creditor matched by income recognition for debtor. Non-compliance with the communication/proof requirement resulted in disallowance of €84,098.21 (2012) and €73,354.83 (2013) in claimed bad debt deductions, demonstrating that procedural formalities cannot be waived despite their perceived excessive formalism.
What changed with the repeal of Article 41(2) CIRC by Law 2/2014 regarding bad debt write-offs for 2012-2014?
Law 2/2014 of 16 January repealed Article 41(2) CIRC effective 2014, eliminating the requirement to prove communication to debtors when recognizing bad debt expenses. However, CAAD Process 284/2017-T definitively established this repeal had no retroactive effect. For fiscal years 2012-2013, taxpayers remained bound by the original Article 41(2) communication requirement. The tribunal rejected arguments that the 2014 repeal demonstrated the provision's excessive formalism justified non-application to prior years. The court held that legislative evolution and law improvement cannot serve as basis for non-applying repealed provisions to periods when they were in force. This ruling clarifies temporal application: taxpayers must comply with laws as written during relevant fiscal periods, regardless of subsequent legislative changes recognizing those requirements as unduly burdensome or formalistic.
How does the periodization of taxable profit under Article 18 CIRC affect the timing of impairment loss deductions?
Article 18 CIRC establishes the accrual principle for periodization of taxable profit, requiring income and expenses to be attributed to the fiscal year they economically relate to. In Process 284/2017-T, the court applied Article 18 to determine when impairment losses should be recognized. The tribunal rejected rigid approaches tying recognition to specific procedural dates (insolvency judgment pronouncement or Official Journal publication), as these would force taxpayers to file replacement declarations when learning of relevant facts after year-end, creating unnecessary administrative burden. Instead, the court established that periodization should reflect when uncollectibility becomes duly justified under reasonable assessment. The decision emphasizes that Article 18's periodization principle supports flexible, substance-based timing determinations for impairment losses, allowing recognition when taxpayers reasonably conclude uncollectibility risk is sufficiently certain, rather than mechanically applying extrafiscal legal timelines.
Can taxpayers challenge IRC assessments on impairment losses and bad debts through CAAD tax arbitration?
Yes, taxpayers can challenge IRC assessments regarding impairment losses and bad debts through CAAD (Centro de Arbitragem Administrativa) tax arbitration. Process 284/2017-T demonstrates successful arbitral challenge on impairment timing issues while also showing limits of such challenges. The tribunal exercised substantive review of Tax Authority adjustments, evaluating both factual determinations and legal interpretations. For Article 36 impairment issues, CAAD found merit in the taxpayer's position, canceling adjustments based on formalistic timing criteria. However, for Article 41(2) bad debt communication requirements, CAAD upheld Tax Authority adjustments despite taxpayer arguments about excessive formalism. This demonstrates CAAD's balanced approach: willing to overturn unreasonable formalistic interpretations but enforcing clear statutory requirements. Tax arbitration provides an effective forum for contesting IRC assessments when substantive disagreements exist about technical tax law application, though procedural non-compliance with unambiguous requirements typically cannot be excused through arbitral review.