Process: 293/2018-T

Date: January 29, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 293/2018-T) addresses the deductibility of financial charges under Portuguese Corporate Income Tax (IRC) law, specifically concerning loans to parent companies. The taxpayer, A... S.A., challenged IRC assessments for tax years 2013-2015 where the Tax Authority disallowed deductions for interest and stamp tax on bank loans, arguing the borrowed funds were used to provide gratuitous loans to its sole shareholder, D... SGPS S.A. The Tax Authority applied article 23 of the IRC Code, contending that financial charges relating to loans used to finance a parent company lack economic justification and fail the deductibility test. The central legal issue concerns whether interest expenses on third-party borrowings lose their deductible character when the borrowed funds are on-lent interest-free to related parties. The case involves technical corrections totaling €1,381.84 and €7,766.80 across the three tax years. Subsidiarily, the claimant contested specific amounts of €66,327.30, €65,746.36, and €65,539.51 relating to interest and stamp tax on credits from Bank B... and C.... The arbitral tribunal, constituted under Decree-Law 10/2011 establishing the Administrative Arbitration Regime (RJAT), evaluated whether the expense deductions met the requirements of indispensability and business purpose under IRC law. The decision examines the arm's length principle, transfer pricing implications, and the anti-abuse provisions applicable to financial expenses in intra-group financing arrangements, with potential implications for compensatory interest under article 43 of the Tax Procedure Code if the Tax Authority's corrections are deemed unlawful.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Councillor Jorge Lopes de Sousa (arbitrator-president), Dr. José Manuel Aurélio dos Santos and Dr. Adelaide Moura (arbitrator members) appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Court, constituted on 28-08-2018, agree as follows:

1. Report

A..., S.A., with the single number for legal entities and registration in the Commercial Registry of Lisbon ..., with registered office at Rua ..., n.º..., ...-... Lisbon, hereinafter briefly referred to as the "Claimant", has, pursuant to the provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), requested the constitution of an Arbitral Court.

The Claimant intends that the following be declared: "unlawful the acts of dismissal of the gracious complaints submitted, because unlawful the technical corrections (merely arithmetic) made to the taxable matter of the financial years 2013, 2014 and 2015 and consequent additional assessments of Corporate Income Tax and Compensatory Interest and compensations, which should be annulled, with the amounts of € 1,381.84 and € 7,766.80 being reimbursed by the Tax Authority to the Claimant, plus the corresponding compensatory interest, with the other legal consequences, namely with the effects provided for in article 24 of the RJAT".

Subsidiarily, the Claimant intends that the present request for arbitral pronouncement be "judged partially well-founded by proof, declaring unlawful the acts of dismissal of the gracious complaints submitted, as well as the technical corrections (merely arithmetic) made to the taxable matter of the financial years 2013, 2014 and 2015 of A..., S.A., now Claimant, in the part corresponding to the amounts of € 66,327.30, € 65,746.36 and € 65,539.51 (respectively relating to interest and Stamp Tax concerning credits obtained from Bank B... on 20.02.2009, and C..., on 26.10.2010), improperly disregarded as deductible expenses/charges for tax purposes, and consequent Corporate Income Tax assessments and Compensatory Interest and compensations, which should be partially annulled, with the amounts paid in excess by the Claimant being reimbursed by the Tax Authority, plus the corresponding compensatory interest, with the other legal consequences, namely with the effects provided for in article 24 of the RJAT".

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral court was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 19-06-2018.

Pursuant to the provisions of paragraph a) of article 6, paragraph 2, and paragraph b) of article 11, paragraph 1, of the RJAT, the Deontological Council appointed as arbitrators the undersigned, who communicated acceptance of the appointment within the applicable period.

On 06-08-2018, the parties were duly notified of this appointment and did not manifest a wish to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11, paragraph 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of paragraph c) of article 11, paragraph 1, of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral court was constituted on 28-08-2018.

The Tax and Customs Authority responded, defending the lack of merit of the request for arbitral pronouncement.

On 12-12-2018, the meeting provided for in article 18 of the RJAT was held, in which witness evidence was produced and it was decided that the case would proceed with written arguments.

The Parties submitted arguments.

The arbitral court was regularly constituted, in accordance with the provisions of articles 2, paragraph 1, paragraph a), and 10, paragraph 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

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

The case contains no nullities.

2. Material Facts

2.1. Proved Facts

  • The Claimant is registered for the exercise of the activity of "CONDOMINIUM MANAGEMENT", to which corresponds the CAE code 68322 and for the exercise of "PURCHASE AND SALE OF REAL ESTATE" with CAE code 68100, since 2015-12-28, with the shares held entirely by the Company D... SGPS SA, with the NIF..., whose object of the taxpayer is the operation, concession, administration and management of real estate properties regardless of their intended purposes, namely: storage, industrial, office and residential areas; investments in the same areas; purchase of properties for resale; provision of services connected with the mentioned activities and properties, namely: guard services, handling of goods and merchandise and logistics services in general;

  • The Tax and Customs Authority carried out an inspection action on the Claimant, relating to the financial years 2013, 2014 and 2015, based on service orders OI2017.../OI2017.../OI2017...;

  • In the Report drawn up in that inspection, which appears as document no. 1 attached to the request for arbitral pronouncement, whose content is given as reproduced, reference is made, among other things, to the following:

III. DESCRIPTION OF FACTS AND GROUNDS FOR MERELY ARITHMETIC CORRECTIONS

III.1. Corrections in Corporate Income Tax
III.1.1. Financial Charges Not Accepted for Tax Purposes

Financing Obtained

From the analysis made of the accounting elements of the financial years 2013, 2014 and 2015, as well as to the statements submitted by the taxpayer, namely the IES of the referred years, it was found that the same resorts to financing through external capital, namely bank financing, which is recorded in the various sub-accounts of the SNC account "25 - Financing Obtained" (see Annex 3), which present the following final balances.

Expenses Incurred with Bank Loans

Having analyzed the expense accounts, namely the SNC sub-accounts "681220 - Stamp Tax" and "69111 - Financial/Bank Loan Expenses and Losses" (see annex 3), it is verified that A... incurred, in the years under analysis, the following expenses:

Loan Granted

In addition to the loans contracted, and with respect to which the taxpayer incurred the aforementioned interest, A... granted, between 2013 and 2015, credit to an entity that holds all of its share capital, recorded in the SNC sub-account "268 1 – D... SGPS SA" - attached to the present report as annex 3, as can be seen in the following table, which presents the balances at the end of each year.

The loan entered into between A... S.A. and D... SGPS S.A. is supported by a gratuitous loan agreement, entered into on 31/12/2004, with the amendments made on 31/12/2010, 31/12/2012 and 31/12/2014,

From this contract and subsequent amendments, the following points stand out:

CONTRACT - entered into on 31/12/2004

"First Party: A..., S.A., legal entity no..., registered in the Commercial Registry of Lisbon under number 2614, (...). Second Party: D...-SGPS, S.A., legal entity no..., registered in the Commercial Registry of Lisbon under number ..., (...).

  1. The Second Party is the sole shareholder of the First Party, consequently holding the entirety of its share capital;

  2. The Second Party, due to lack of liquidity for the pursuit of its corporate purpose, has been obtaining from the First Party - given the relationship existing between them and the financial capacity of the latter - gratuitous loans of money, with the need for such financing being foreseen in the coming years;

3- Between the Parties it was established that the amount loaned by the First to the Second Party shall not exceed the annual amount of € 2,500,000.00 (two million five hundred thousand euros) and that, with reference to the same, the amount owed by the Second to the First Party shall not at any time exceed the total sum of € 5,000,000.00 (five million euros);

  1. The Parties intend to reduce such agreement to writing, ratifying the transfers of money already made.

First Clause

One - By this document, the parties agree to the long-term loan, gratuitous, until 31 December 2010, by the First Party to the Second Party, of money up to the annual amount of € 2,500,000.00 (two million five hundred thousand euros), under the following conditions:

a) At no time, during the period of validity of this contract, may the amount owed by the Second to the First Party exceed the value of € 5,000,000.00 (five million euros);

b) The Second Party may at any time amortize all or part of the capital loaned to it;

c) The entire amount loaned under this contract shall be repaid by the Second to the First Party by 31 December 2010."

AMENDMENT TO CONTRACT - entered into on 31/12/2010

"Whereas:

  1. Between the now Parties a loan agreement was entered into on 31 December 2004, which is in force,

  2. Given the treasury requirements still existing on the part of the Second Party, it requested the same to extend the aforementioned contract,

  3. The Parties intend to amend the deadline stipulated in number One of First Clause of the aforementioned contract for 31 December 2012, the present amendment to the loan agreement above identified is agreed and carried out, which is governed by the following clauses:

First Clause

By this document, the Parties agree to amend number One of First Clause of the above-identified contract, which shall have the following wording: One - By this document, the parties agree to the gratuitous loan, until 31 December 2012, by the First Party to the Second Party, of money, up to the annual amount of € 2,500,000.00 (two million five hundred thousand euros), under the following conditions:

a) At no time, during the period of validity of this contract, may the amount owed by the Second to the First Party exceed the value of € 5,000,000.00 (five million euros);

b) The Second Party may at any time amortize all or part of the capital loaned to it;

c) The entire amount loaned under this contract shall be repaid by the Second to the First Party by 31 December 2012."

AMENDMENT TO CONTRACT - entered into on 31/12/2012

"Whereas:

  1. Between the now Parties a loan agreement was entered into on 31 December 2004,

  2. (...) remaining in force;

  3. Taking into account the difficult economic and financial situation that the country is going through, with the reduction of the results of the various companies held by the Second Party and consequent reduction in distribution of results by them, the main source of income for the Second Party, the same is forced to request the First Party a new extension of the deadline of the aforementioned contract;

  4. The Parties intend to amend the deadline stipulated in number One of First Clause of the aforementioned contract - in the wording given to it by the amendment made and carried out on 31 December 2010 - to 31 December 2014, the present amendment to the loan agreement above identified is agreed and carried out, which is governed by the following clauses:

First Clause

By this document, the Parties agree to amend number One of First Clause of the above-identified contract, which shall have the following wording: One - By this document, the parties agree to the gratuitous loan, until 31 December 2014, by the First Party to the Second Party, of money, up to the annual amount of € 2,500,000.00 (two million five hundred thousand euros), under the following conditions:

a) At no time, during the period of validity of this contract, may the amount owed by the Second to the First Party exceed the value of € 5,000,000.00 (five million euros);

b) The Second Party may at any time amortize all or part of the capital loaned to it;

c) The entire amount loaned under this contract shall be repaid by the Second to the First Party by 31 December 2014."

AMENDMENT TO CONTRACT - entered into on 31/12/2014[1]

"Whereas:

  1. Between the now Parties a loan agreement was entered into on 31 December 2004,

  2. (...) remaining in force;

  3. As a consequence of the economic and financial situation of the country, the Second Party, despite the improvements felt, has not yet recovered its usual income in order to amortize the amounts owed to the First Party and to ensure the lack of need for financing of its treasury, therefore requests a new extension of the deadline of the aforementioned contract;

  4. The Parties intend to amend the deadline stipulated in number One of First Clause of the aforementioned contract - in the wording given to it by the amendment made and carried out on 31 December 2012 - to 31 December 2016, the present amendment to the loan agreement above identified is agreed and carried out, which is governed by the following clauses:

First Clause

By this document, the Parties agree to amend number One of First Clause of the above-identified contract, which shall have the following wording: One - By this document, the parties agree to the gratuitous loan, until 31 December 2016, by the First Party to the Second Party, of money, up to the annual amount of € 2,500,000.00 (two million five hundred thousand euros), under the following conditions:

a) At no time, during the period of validity of this contract, may the amount owed by the Second to the First Party exceed the value of € 5,000,000.00 (five million euros);

b) The Second Party may at any time amortize all or part of the capital loaned to it;

c) The entire amount loaned under this contract shall be repaid by the Second to the First Party by 31 December 2016."

From the analysis made of the elements submitted, the following was verified:

• The sub-account "268 1 D... SGPS S.A." presents debit final balances of € 3,791,485.58, in 2013, € 3,821,623.34 in 2014 and € 3,927,078.49 in 2015, with D... SGPS, S.A. holding all of the capital of A...

• The amount in debt throughout the three financial years accrues no interest, as mentioned in the loan agreement itself, with no income or benefit being associated with this granted credit.

Thus, it is verified that the taxpayer, in the years under analysis, while incurring financial expenses, namely interest, resulting from loans contracted, granted loans to a company that holds all of its capital, having obtained no remuneration for the value of the loans granted.

Legal Framework for Financial Expenses

Given that the taxpayer is bearing financial expenses, namely interest, resulting from loans contracted, and is simultaneously, in the years under analysis, granting unremunerated loans to an entity that holds all of its capital, it is important to assess whether these expenses are or are not accepted for tax purposes, in light of article 23 of the CIRC.

Pursuant to paragraph 1 of said article, in the wording applicable until 2013 "...Expenses are those which are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the productive source, namely: (...) c) Of a financial nature, such as interest on external capital applied in operations..."

For its part, article 23 of the Corporate Income Tax Code, in the wording given by Law no. 2/2014 of 16 January, which republished this Code, and applicable to financial years 2014 and 2015, determines the expenses accepted for purposes of determining taxable income.

Thus "For the determination of taxable income, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to Corporate Income Tax are deductible."

We can therefore conclude that both in the wording in force in 2013, as well as after the republication of the CIRC in 2014, three essential requirements are required for financial expenses incurred to be valued and accepted as tax expense: proof (justification), indispensability and the connection to income subject to tax.

The first requirement relates to the effectiveness of the realization of costs which consists of various forms of written support for accounting entries, that is, documentary proof.

The second requirement makes the tax deductibility of the cost depend on a justified relationship with the company's productive activity and this indispensability is verified provided that these expenses connect with the obtaining of income.

The third requirement that makes up the general clause of deductibility regarding expenses, in the legal formulation introduced by the Corporate Income Tax Code, is the requirement of connection to "income subject to tax or for the maintenance of the productive source". It follows from the general principle of article 23 of the CIRC that expenses incurred by the taxpayer, in order to be tax-deductible, must be limited to either the obtaining of income subject to tax, or the maintenance of the productive source.

This general clause of deductibility regarding expenses, in the legal formulation introduced by the Corporate Income Tax Code, is the requirement of connection to "income subject to tax or for the maintenance of the productive source". It follows from the general principle of article 23 of the CIRC that expenses incurred by the taxpayer, in order to be tax-deductible, must be limited to either the obtaining of income subject to tax, or the maintenance of the productive source.

In the case under analysis, it is verified that the taxpayer contracted loans, bearing expenses with them, and simultaneously "grants" financing, unremunerated, to an entity that holds all of its capital.

From this it results that said expenses are not directly related to the taxpayer's activity. By not being related to the taxpayer's activity, the requirement of indispensability of the financial expenses recorded by the taxpayer is not met, as established in article 23 of the CIRC.

Therefore, with respect to the financial years 2013, 2014 and 2015, the entirety of the interest on bank loans borne by the taxpayer shall not be accepted for tax purposes.

Determination of Financial Expenses Not Accepted for Tax Purposes

To determine the financial expenses not accepted for tax purposes, the following was considered:

• The interest recorded in the sub-accounts "68122099 - Stamp Tax/Other" and "69111 - financing interest obtained/bank loan interest" were considered;

• Given that the amount of loans granted is always greater than loans obtained, resulting in a ratio "loans granted/loans obtained" greater than one, the entirety of financial expenses borne by the taxpayer shall not be accepted.

Based on the foregoing, it is proposed to increase the amounts not accepted as tax expenses, for the determination of taxable income, in the amounts indicated below, which result from the sum of the values entered in the sub-accounts "68122099 - Stamp Tax/Other" and "69111 - financing interest obtained/bank loan interest":

• € 245,618.33, for the financial year 2013;
• € 141,845.48, for the financial year 2014;
• € 130,107.27, for the financial year 2015.

(...)

IX RIGHT OF HEARING - SUBSTANTIATION

On 29 March of the current year, by official letter no... (CTT registration - RD ... PT), sent to the company's registered office, the taxpayer was notified of the Draft Conclusions of the Tax Inspection Report, pursuant to article 60 of the LGT, and article 60 of the RCPITA, in order to exercise the right of hearing.

On 2017-04-17, it exercised this right by mail, with the same being registered under number 2017..., alleging what follows, in summary.

The taxpayer understands that the Tax Inspection cannot make the proposed corrections, under the provisions of article 23 of the Corporate Income Tax Code.

The justification for this understanding is based essentially on the fact that A... resorted to bank loans "to meet its treasury needs" and to "make investments, namely in the conservation and maintenance of its considerable real estate portfolio".

For this purpose, it presents a table where it reproduces the bank loans obtained and their purpose, in order to prove the necessity thereof.

On the other hand, the taxpayer states that there is no "probative evidence that substantiates what is alleged by the inspection, which merely attempts to frame the supposed facts (loans to D...) in article 23 of the CIRC, not displaying any elements from which the necessary correlation flows"

It concludes by saying that "the purposes of the loans were exclusively to meet the financial needs of A...", so that the Tax Authority should not make the proposed corrections.

Given the above, it is necessary to analyze whether the taxpayer's arguments are correct, that is, whether the essential requirements are met for the financial expenses incurred to be accepted as tax expenses, more specifically, to analyze whether they are related to the company's operational activity and are indispensable to obtaining income subject to Corporate Income Tax (since their proof - documentary support - is not in question).

In the case at issue, as already stated in chapter III, the use of external capital is at stake, which generates costs for the entity itself, and at the same time the granting of loans to an entity which holds all the capital of the taxpayer, without any remuneration being stipulated.

From this it results that said expenses, despite having underlying financing to meet the taxpayer's needs within its activity, as the taxpayer itself indicates in its statement, are not all indispensable to that same activity, since there would be no need for part of such financing if the taxpayer did not grant loans, which would consequently reduce its need for financing through external capital and the weight of financial expenses associated with them.

In this measure, the deductibility of financial expenses is at issue, as the requirement of indispensability of all of them, as established in article 23 of the CIRC, is not met.

Regarding this matter of the deductibility of expenses incurred with financing obtained when simultaneously unremunerated loans are granted, which by this means generate patrimonial advantages for third parties, there are three decisions of the Supreme Administrative Court (STA) that point, unquestionably, toward the non-acceptance of financial expenses as a deductible item (Decision of 20 May 2009, case no. 1077/08, Decision of 30 November 2011, Case no. 0107/11 and the Decision of 30 May 2012, case no. 0171/11).

The STA maintains that, even when there is a relationship of dependence or control, companies have distinct legal and tax personality and that unless this were the case, how could the exercise of one company's activity be attributed to another with which it had some relationship.

That is, the STA bases its decisions, emphasizing the autonomous character of the taxpayer, in the consideration of its expenses, expressed in the instructive expression: "must respect from the outset the contributing company itself, that is, in order for a certain sum to be considered a cost of that company, it is necessary that the respective activity be carried out by it itself, not by other companies".

On the other hand, as is also mentioned by the STA, the law does not prohibit a company from assuming commitments in function of another (or others), when there are relationships between them, however it should charge the beneficiary companies with the respective expenses derived from the loan.

This means that a company cannot, merely because it has a group relationship, substitute itself for another in the assumption of liabilities, resulting therefrom tax effects different from those that would be obtained if the financing were allocated to the company that needs it for the exercise of its activity, nor even accepting that the application of the capital thus transferred to D... may contribute to the activity of its participant and in this way allow it to increase its respective capacity to generate income from which the taxpayer might eventually benefit in the future.

Conclusions

In accordance with what has been exposed, part of the financial expenses incurred do not represent for A... an expense indispensable for the realization of income subject to tax nor for the maintenance of its productive source, given that they would not be necessary to the extent that the taxpayer channels financial resources to another entity.

Thus, since the taxpayer's arguments are not correct, and no changes result from the proposed corrections in the Draft Conclusions of the Tax Inspection Report, these shall become definitive.

  • Following the inspection, the Tax and Customs Authority made the following corrections:

  • the correction of taxable income in Corporate Income Tax, with respect to the financial year 2013, comprised the value of financing interest obtained from bank loans of € 236,179.23 and Stamp Tax in the amount of € 9,439.10, making the referred total of € 245,618.33;

  • the correction of taxable income in Corporate Income Tax, with respect to the financial year 2014, comprised the value of financing interest obtained from bank loans of € 135,934.17 and Stamp Tax in the value of € 5,911.31, making the referred total of € 141,845.48;

  • the correction of taxable income in Corporate Income Tax, with respect to the financial year 2015, comprised the value of financing interest obtained from bank loans of € 124,186.39 and Stamp Tax in the value of € 5,920.88, making the referred total of € 130,107.17;

  • Following notification of that Tax Inspection Report, the Claimant was notified:

a) with respect to the financial year 2013:

i) of the statement of (additional) Corporate Income Tax assessment (Document no. 12 attached to the request for arbitral pronouncement, whose content is given as reproduced);

ii) of the statement of compensatory interest assessment (arising from alleged delay in the assessment of said tax) (Document no. 13 attached to the request for arbitral pronouncement, whose content is given as reproduced), and

iii) of the settlement statement, from which resulted the amount to pay of € 1,381.84; (Document no. 14 attached to the request for arbitral pronouncement, whose content is given as reproduced);

b) with respect to the financial year 2014:

i) of the statement of (additional) Corporate Income Tax assessment (Doc. 15);

ii) of the statement of compensatory interest assessment (arising from alleged delay in the assessment of said tax) (Document no. 16 attached to the request for arbitral pronouncement, whose content is given as reproduced), and

iii) of the settlement statement, from which resulted the amount to pay of € 7,766.80; (Document no. 17 attached to the request for arbitral pronouncement, whose content is given as reproduced);

c) with respect to the financial year 2015:

i) of the statement of (additional) Corporate Income Tax assessment (Document no. 18 attached to the request for arbitral pronouncement, whose content is given as reproduced) and

ii) of the settlement statement, from which resulted no amount to pay (Document no. 19 attached to the request for arbitral pronouncement, whose content is given as reproduced);

  • The Claimant proceeded on 09.11.2017 and 11.08.2017, respectively, to the payment of the tax and compensatory interest assessed with respect to the financial years 2013 and 2014 (Documents no. 20 and 21 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

  • On 03-10-2017, the Claimant submitted gracious complaints of the aforementioned assessments to which were assigned the following numbers:

a) ...2017..., referring to the additional assessment for the financial year 2013;

b) ...2017..., referring to the additional assessment for the financial year 2014, and

c) ...2017..., referring to the additional assessment for the financial year 2015. (Documents no. 22 to 24 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

  • On 20-02-2009, the Claimant contracted a loan from Bank B... (currently E...), in the amount of € 250,000.00, intended to restore the liquidity thereof which had been affected by the investment made on 16-07-2008, for the price of € 180,000.00 (to which was added Municipal Tax on Onerous Real Estate Transfer, in the amount of € 11,700.00, and Stamp Tax, in the value of € 1,465.00, in addition to the respective notarial fees), in the acquisition of the autonomous fraction designated by the letter "A" of the urban property currently entered in the urban land registry under article ... of the parish of ..., municipality of Lisbon (Documents no. 7, 22 to 24 and 25 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

  • On 26-10-2010, the Claimant contracted a loan from C..., in the amount of € 722,500.00, intended to restore its liquidity which had been affected by the investment made on 05-02-2010, in the acquisition, for the total price of € 950,000.00 (to which was added Municipal Tax on Onerous Real Estate Transfer, in the value of € 48,445.00, and Stamp Tax, in the value of € 7,600.00, in addition to the respective notarial fees), of the urban property entered in the land registry under article ... of the parish of ..., municipality of Cascais, and of the rural property entered in the land registry under article ... of Section 41 of the parish of ..., municipality of Cascais (Documents no. 8, 22 to 24 and 26 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

  • With respect to the credits referred to in the previous paragraphs, the Claimant incurred the following expenses:

a) in the year 2013, the total amount of € 66,327.30 (of which € 5,055.78 relate to the credit contracted with B.../E... and € 61,271.52 to the credit contracted with C...) as interest and the total amount of € 2,655.74 (of which € 204.85 relate to the credit contracted with B.../E... and € 2,450.89 to the credit contracted with C...) as Stamp Tax; (Documents no. 1 and 22 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

b) in the year 2014, the total amount of € 65,746.36 (of which € 3,745.40 relate to the credit contracted with B.../E... and € 62,000.96 to the credit contracted with C...) as interest and the total amount of € 2,639.68 (of which € 159.65 relate to the credit contracted with B.../E... and € 2,480.03 to the credit contracted with C...) as Stamp Tax; (Documents 1 and 23 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

c) in the year 2015, the total amount of € 65,539.51 (of which € 4,251.14 relate to the credit contracted with B.../E... and € 61,188.37 to the credit contracted with C...) as interest and the total amount of € 2,631.69 (of which € 180.13 relate to the credit contracted with B.../E... and € 2,451.56 to the credit contracted with C...) as Stamp Tax. (Documents 1 and 24 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

  • The aforementioned properties remain the property of the Claimant;

  • On 25-03-2018 identical decisions of dismissal of the gracious complaints were issued, in the three aforementioned cases (documents no. 36, 37 and 38 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

  • In the decisions of dismissal of the gracious complaints, reference is made, among other things, to the following:

4.2 - Nevertheless, despite what is alleged, based on the elements presented, the causal nexus between these two loans obtained and their application to meet the treasury needs resulting from the acquisition of the properties was not proved.

The complainant's argument is also not correct insofar as it alleges that if the loans obtained had been intended entirely for financing D... SGPS SA (even though without any remuneration), the interest relating to their obtaining would be framed in article 23 of the Corporate Income Tax Code, taking into account a group strategy.

In fact, even when there is a group or control relationship, the companies that are part of it do not lose their legal and tax personality, and their accounts must be organized with independence in relation to the others, which implies that each company has its own expenses and thus, in the present situation, A... cannot substitute D... SGPS SA in the assumption of that amount of € 245,618.33, and all the more so since it cannot be left unsaid that in the case there are no loans to D... SGPS SA, A... would not have the need, in its treasury, to resort to the loans that generated the expenses in discussion.

Thus, based on the foregoing, it appears that the corrections made by the Tax Inspection are correct, and the complainant's claim for the annulment of assessment no. 2017 ... and its respective compensatory interest assessment cannot be accepted.

(...)

5.1 - Arguments in Right of Hearing:

The Complainant argues in the right of hearing, in summary:

• The purchase of the properties, made in periods long before, was not made directly through resort to such financing, based on the data and perspectives existing at those times, the administration of the complainant understood that this was not the best option, having subsequently the company had to resort to financing;

• Regarding the interpretation of article 23 of the CIRC in what concerns costs arising from loans in the case of the taxpayer having financed a company of which it is the sole participant, everything alleged in the complaint is reiterated and it is concluded by the inadmissibility of what was carried out by the Tax Authority which leads inexorably to the incompatibility between the regime instituted by the Commercial Companies Code and the Corporate Income Tax Code, which is considered unacceptable.

5.2 - Analysis in Right of Hearing:

• From the arguments presented, the complainant does not demonstrate nor justify the relationship existing between the financing obtained and its application to meet the treasury needs resulting from the acquisition of the properties;

• Even if there is a group or control relationship, the companies that are part of it do not lose their legal and tax personality, and their accounts must be organized with independence in relation to the others, which implies that each company has its own expenses. The complainant could not substitute D... SGPS SA in the assumption of the loans.

  • The Claimant contracted the following loans between 2005 and 2012:

Documents no. 5 to 11 attached to the request for arbitral pronouncement, whose contents are given as reproduced;

  • The Claimant's main activity was the operation of leases, namely of properties in industrial-type condominium complexes, earning rents which were its largest source of income (testimony of witness F...);

  • The Claimant resorted to financing to make investments, namely purchase of land, to develop later (testimony of witness F...);

  • The Claimant managed the condominiums, making improvements, expanding some of the enterprises (testimony of witness F...);

  • D... SGPS SA was constituted by the Claimant to carry out business that would verticalize and maximize the gains of the Claimant and make the business more resilient to economic crises, varying sources of income with different, but connected activities (in crises there are clients who fall into arrears and do not pay rents or become insolvent) (testimony of witness F...);

  • With D... SGPS SA, the Claimant intended to obtain more income through activity diversification, to reduce its exposure to the constraints of the real estate market, namely customers who fall into arrears and do not pay rents or become insolvent (testimony of witness F...);

  • A logistics company was created within the scope of the SGPS, because the Claimant was not vocated for the activity of managing social shareholdings (testimony of witness F...);

  • That logistics company which for a long time was the main client of the Claimant, occupying about 30% of the area of the Claimant's main industrial park (testimony of witness F...);

  • The Claimant obtained through the occupation of its real estate park a return on the financing it made to D... SGPS SA (testimony of witness F...);

  • The Claimant bought properties to increase its real estate park, namely offices in Lisbon, land in Cascais, which appeared to it as good investment opportunities (testimony of witness F...)

  • The Claimant had some own funds which it used for the acquisition of land and financed itself so as not to be left without means for the current activity of maintaining the properties, which has high costs, in addition to needing flexibility, having money available for business opportunities that might appear (testimony of witness F...);

  • The Claimant did not resort to bank financing to grant loans to D... SGPS SA (testimony of witness F...);

  • The loans to D... SGPS SA in 2013, 2014 and 2015 were intended for its activity that generated income for the Claimant, namely logistics, in which a complete warehouse was equipped (testimony of witness F...);

  • The Claimant had an indirect interest in this financing to D... SGPS SA, as it financed businesses that had returns through the occupation of the Claimant's real estate (testimony of witness F...);

  • The entirety of the capital of D... SGPS SA is held by the Claimant;

  • The Claimant paid on 09-11-2017 the sum of € 1,381.84 relating to the assessment for the financial year 2013 and on 11-08-2017 the sum of € 7,766.80 relating to the assessment for the financial year 2014 (documents no. 20 and 21 attached to the request for arbitral pronouncement, whose contents are given as reproduced);

  • On 18-06-2018, the Claimant filed the request for constitution of the arbitral court that gave rise to the present case.

2.2. Unproved Facts and Justification for the Fixing of Material Facts

There are no facts relevant to the decision of the case that were not proved.

The facts were given as proved on the basis of what was alleged by the Claimant, the documents attached by it and what appears in the administrative file.

In the points where such was mentioned, the fixing of the material facts was based on the testimony of witness F..., who appeared to testify with impartiality and with personal knowledge of the facts he mentioned.

This witness was an administrator of the Claimant until 2014 and subsequently continued to collaborate with the company, working with the Claimant for more than 20 years.

3. Law

The Tax and Customs Authority carried out an inspection action on the Claimant in which it found that in the financial years 2013, 2014 and 2015, it incurred financial expenses with bank loans, having made unremunerated loans to a company of which it held all of the share capital, D... SGPS SA.

The Tax and Customs Authority understood, on page 17 of the Tax Inspection Report, that "with respect to the financial years 2013, 2014 and 2015, the entirety of the interest on bank loans borne by the taxpayer shall not be accepted for tax purposes" (that is, in no measure would the referred expenses be deductible from taxable income), in light of the provisions of article 23 of the CIRC.

Subsequently, after exercising the right of hearing, the Tax and Customs Authority concluded that "said expenses, despite having underlying financing to meet the taxpayer's needs within its activity, as the taxpayer itself indicates in its statement, are not all indispensable to that same activity, since there would be no need for part of such financing if the taxpayer did not grant loans, which would consequently reduce its need for financing through external capital and the weight of financial expenses associated with them".

However, despite having recognized that some part of the financing were contracted to "meet the taxpayer's needs within its activity" and that only "part of the financial expenses incurred do not represent for A... an expense indispensable for the realization of income subject to tax nor for the maintenance of its productive source, given that they would not be necessary to the extent that the taxpayer channels financial resources to another entity" ("Conclusions" of the Tax Inspection Report), the Tax and Customs Authority maintained the understanding that was contained in the draft Tax Inspection Report that in no measure would the financial expenses incurred be deductible.

This was also the understanding that was maintained in the decisions on the gracious complaints.

The Tax and Customs Authority also stated that "even if there is a group or control relationship, the companies that are part of it do not lose their legal and tax personality, and their accounts must be organized with independence in relation to the others, which implies that each company has its own expenses. The complainant could not substitute D... SGPS SA in the assumption of the loans".

3.1. Concept of Indispensability of Expenses

Pursuant to article 23 of the Corporate Income Tax Code (in the wording of Decree-Law no. 159/2009, of 13 July, in force in 2013), "expenses are those which are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the productive source".

With Law no. 2/2014, of 16 January, article 23, paragraph 1, of the CIRC came to establish that "for the determination of taxable income, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to Corporate Income Tax are deductible".

The concept of indispensability has been repeatedly appreciated by arbitral jurisprudence, namely with respect to the enhancement of investment by a company in its participates, so the jurisprudence shall be adopted in general terms, namely the substantiation of the decision of 13-02-2015, issued in case no. 585/2014-T.

"The legal notion of indispensability is cut out (...) on an economic-business perspective, by fulfillment, direct or indirect, of the ultimate motivation for obtaining income. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumed in a profitable profile." (...) "Indispensability is subsumed to each and every act carried out in the interest of the company (...) The legal notion of indispensability thus represses acts that are not in conformity with the company's scope, not insertable in the social interest, above all because they do not aim at income".[2]

"Indispensability does not mean, therefore, a mandatory causal nexus with income/earnings, nor that, a posteriori, one must necessarily verify or prove profitable economic effects resulting from such expenses. Provided that expenses result from management acts that, based on information known at the time of their execution, could have as objective the expected obtaining of income or the maintenance of the productive source (physical, intangible, financial or other), this should lead to the acceptance of its deductibility".[3]

It is stated in the decision issued in case no. 585/2014-T the following:

"Indispensability emerges as a determining factor for the admissibility of costs. Its delimitation is thus fundamental to assess whether the expenses were incurred in the interest of the participating company.

It is that one should not always exclude the possibility of deduction of investment costs of companies in their participates.

The concept of indispensability contained in article 23 of the CIRC should correspond to costs incurred in the interest of the company, to expenses borne within the scope of the activities covered by its statutory purpose, in the case of a company.

It is not, therefore, necessary a connection to earnings, a mandatory causal nexus between expenses and earnings. On the other hand, the assessments of the Tax Administration about the correctness of management decisions are not relevant for that purpose, it being sufficient that the same be taken within the scope of the interest of the company.

The South Central Administrative Court, in proc. no. 06754/13 CT - 2nd Court of 16.10.2014 points to the following solution "It is the understanding of jurisprudence and doctrine that the Tax Administration cannot evaluate the indispensability of costs in light of criteria relating to the opportunity and merit of the expense. A cost is indispensable when it relates to the company's activity, with only those costs being extraneous to the company's activity in which it is not possible to ascertain any causal nexus with earnings or gains (or with income, in the current expression of the code - see article 23, paragraph 1, of the C.I.R.C.), explained in terms of normality, necessity, congruence and economic rationality (see STA Decision - 2nd Section, of 21.04.2010, case no. 774/09; STA Decision - 2nd Section, of 13.02.2008, case no. 798/07; TCASouth Decision - 2nd Section, of 17.11.2009, case no. 3253/09).

Now, an 'asset is a resource controlled by the entity as a result of past events and from which it is expected that economic benefits will flow to the entity' - point 49 (a) of the Conceptual Framework of the System of Accounting Standardization approved by the dispatch published in Notice no. 15 652/2009, Official Journal, II Series, of 7 September.

Thus, the 'activity' of a company is not exhausted in the set of productive or operational operations. 'Activity' is also the set of operations that aim at the realization of investments or the disposal of assets, the acquisition of financial shareholdings and their subsequent disposal, the application of liquidity in short-term investments or securities and their management, the receipts and payments resulting from operational or non-operational earnings and expenses, and many others. It will be activity both the management of a physical asset, and that of an intangible asset, and that of a non-current asset held for sale, and that of a financial asset.

The business activity that generates deductible costs must be that which is translated in operations that have a purpose, an intent to obtain income or the purpose of maintaining the potential of an income-producing source.

In cases of investment by a company in its participates, the financing coming from the participant will be made in the interest of the latter, provided that it serves to result therefrom an expectation of future income directly resulting from it.

The deductibility of interest borne by the participant will depend on the fact that the financing contributes to, according to normal management rules, increase the expectation of future benefits or to maintain the productive source (financial asset).

The fact that decisions made in the sphere of the participant influence the patrimony of the participates does not mean that they are carried out in the interest of third parties. They are taken from the interest of the participant in ensuring the operationalization and profitability of its investment in the participates.

The participates uses funds that are provided to it, but that provision of funds is made in the interest of the participant, that is, in the context of normal management acts that can be encompassed in its scope or profitable purpose.

In situations where the participant holds all of the capital of the participates and, therefore, holds the total possibility of intervening in the management of the participates and ensuring that the investment is used in its interest, the investment in the participates recurs to the management of the participation and constitutes indirect exercise by the participant of the economic activity that the participates carries out, whose positive or negative effects end up being reflected in the legal sphere of the participant through the appreciation or depreciation of its participation, so that the expenses necessary to ensure the investment that enhances the obtaining of future benefits are framed in the concept of economic indispensability, with the referred sense of expenses entirely incurred in the interest of the company."

This is also the sense of recent jurisprudence of the Supreme Administrative Court, as can be seen from the decision of the Plenary of 27-06-2018, issued in case no. 01402/17, drawn unanimously, in which it was understood that "the concept of indispensability of costs, to which article 23 of the CIRC refers to, concerns costs incurred in the interest of the company or borne within the scope of activities falling under its company purpose. Only when costs result from decisions that do not meet such requirements, namely when they do not present any affinity with the company's activity, is that they should be disregarded".

The situation of the Claimant and its participates D... SGPS SA is fundamentally identical to that appreciated in this decision, since the capital thereof is held entirely by the Claimant, and, therefore, all effects of the investments made end up being reflected in the patrimonial sphere of the Claimant, through the appreciation or depreciation of the shareholdings, so that its interest in carrying them out is obvious.

"The participates is not some foreign entity to the activity and interests of the participant. There is no expense in the sphere of the latter that has nothing to do with its company interest. The expense with interest incurred with capitals obtained and subsequently provided to the participates is made in the interest of the participant, as a direct consequence of its activity of managing an asset that emerges from a shareholding, which is real or potentially income-producing".[4]

In the case at issue, it results from the evidence produced that the investments were made by the Claimant not only with a view to obtaining income through the appreciation of its social shareholdings, but also directly, through the rents paid to it by the logistics company held by the SGPS, which occupied an important part of the Claimant's real estate portfolio.

It is thus clear that the loans to D... SGPS SA were made in the interest of the Claimant.

From the foregoing it follows that the corrections made relating to the deductibility of financial expenses incurred by the Claimant in 2013, 2014 and 2015 to finance its participates violate article 23, paragraph 1, of the CIRC, which constitutes a defect of violation of law, which justifies the annulment of the assessments.

3.2. Error in the Appreciation of the Presuppositions of the Assessments

Furthermore, the evidence produced partially contradicts the factual presuppositions underlying the assessments.

In fact, the evidence produced does not allow concluding that the loans that generated the financial expenses incurred in 2013, 2014 and 2015 had been contracted solely to make the loans to D... SGPS SA.

The bank financing was obtained between 2005 and 2012, in a total amount of € 3,453,827, as is concluded from documents no. 5 and 9 and the table that appears in paragraph N) of the material facts fixed.

As witness F... stressed, some of the loans were connected to the acquisition of properties, identified in paragraphs H) and I) of the fixed material facts, so there is no basis for concluding that all loans contracted were made to make the loans to D... SGPS SA.

On the other hand, the Tax and Customs Authority concluded in the Tax Inspection Report that there was no "income or benefit associated with this granted credit" and witness F... coherently explained the Claimant's interest in making these loans, which allowed D... SGPS to acquire and maintain the logistics company that paid rents to the Claimant, obtaining this, by this means, pecuniary return on the loans it made.

Thus, it cannot be concluded that, if it had not made the loans to D... SGPS SA, the Claimant would not have obtained the income it obtained in the years 2013, 2014 and 2015.

From the foregoing, it is concluded that the position of the Tax and Customs Authority suffers from an error as to the factual presuppositions, as it is based on the understanding that the Claimant obtained no income connected to the loans made.

On the other hand, in light of article 23, paragraph 1, of the CIRC, both in the wording of Decree-Law no. 159/2009, of 13 July (in force in 2013), and in the wording of Law no. 2/2014, of 16 January, for the deductibility of expenses it is not essential that the expenses be indispensable for the realization or obtaining of income, as it is sufficient that they have been intended for the "maintenance of the productive source" or "to guarantee the income" (respectively).

In the case at issue, as results from the evidence produced, namely from the testimony of witness F..., the financing of D... SGPS SA aimed not only at direct obtaining of income (rents due by the occupation of part of the Claimant's real estate portfolio), but also to ensure the source of income that constituted this company, whose capital was entirely held by the Claimant.

From the foregoing, the impugned assessments suffer from defects due to error on the factual and legal presuppositions, which justify their annulment, pursuant to article 163, paragraph 1, of the Administrative Procedure Code, subsidiarily applicable pursuant to article 2, paragraph c), of the LGT.

3.3. Compensatory Interest

The assessments of compensatory interest have as presupposition the Corporate Income Tax assessments, so they suffer from the same defects, also justifying their annulment.

4. Reimbursement of Amount Paid in Excess and Compensatory Interest

The Claimant paid on 09-11-2017 the sum of € 1,381.84 relating to the assessment for the financial year 2013 and on 11-08-2017 the sum of € 7,766.80 relating to the assessment for the financial year 2014 and requests the reimbursement of these amounts, plus compensatory interest.

In accordance with the provisions of paragraph b) of article 24 of the RJAT, the arbitral decision on the merit of the claim to which no recourse or challenge applies binds the Tax Administration from the end of the period provided for recourse or challenge, and this must, in the exact terms of the merit of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of sentences of tax court decisions, "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been made, adopting the acts and operations necessary for that purpose", which is in harmony with the provision of article 100 of the LGT [applicable by virtue of the provision of paragraph a) of paragraph 1 of article 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial merit of a complaint, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation object of litigation, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2, paragraph 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral courts that operate in the CAAD, making no reference to condemnatory decisions, it should be understood that the powers that, in judicial challenge proceedings, are attributed to tax courts are included in its competencies, and this is the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as a first directive, that "the arbitral tax process must constitute an alternative procedural means to judicial challenge proceedings and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge procedure, although essentially a process of annulment of tax acts, admits the conviction of the Tax Administration to the payment of compensatory interest, as is inferred from article 43, paragraph 1, of the LGT, in which it is established that "compensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than that legally owed" and from article 61, paragraph 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds paragraph 2 in the original wording), that "if the decision that recognized the right to compensatory interest is judicial, the payment period counts from the beginning of the period of its spontaneous execution".

Thus, paragraph 5 of article 24 of the RJAT, in saying that "payment of interest is due, regardless of its nature, under the terms provided for in general tax law and in the Code of Procedure and Tax Procedure", should be understood as allowing the recognition of the right to compensatory interest in the arbitral process.

As the payment of compensatory interest depends on the existence of a sum to be reimbursed, it is within the scope of the competencies of the arbitral courts operating in the CAAD to assess whether there is a right to reimbursement and to what extent.

It is thus necessary to appreciate the requests for reimbursement of the amount paid unduly plus compensatory interest.

Following the illegality of the assessment, the Claimant is entitled to be reimbursed for the sums that it paid unduly.

With regard to the right to compensatory interest, it is regulated in article 43 of the LGT, which establishes, to the extent relevant here, the following:

Article 43

Undue payment of the tax obligation

1 - Compensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than that legally owed.

(...)

  1. The rate of compensatory interest is equal to the rate of compensatory interest.

In the case at issue, following the annulment of the assessments, there is grounds for reimbursement of the tax paid, by virtue of the referred articles 24, paragraph 1, paragraph b), of the RJAT and 100 of the LGT, since this is essential to "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been made".

With regard to compensatory interest, article 43, paragraphs 1 and 2, of the LGT establishes that "compensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than that legally owed".

In the case at issue, it was the Tax and Customs Authority that made the impugned assessments, on its own initiative, so the illegalities affecting them are attributable to it.

Thus, the Claimant is entitled to compensatory interest at the legal default rate counted from 09-11-2017 with respect to the sum of € 1,381.84 relating to the assessment for the financial year 2013 and from 11-08-2017 with respect to the sum of € 7,766.80, until full reimbursement, pursuant to articles 43, paragraphs 1 and 4, and 35, paragraph 10, of the LGT, 61, paragraphs 2, 3, 4 and 5, of the CPPT, and article 559 of the Civil Code and Ordinance no. 291/2003, of 8 April.

5. Decision

In these terms, the Arbitral Court agrees to:

  • Judgement that the request for arbitral pronouncement has merit;

  • Annul the following acts:

– assessment of Corporate Income Tax and compensatory interest no. 2017... of 09-06-2017 and compensation no. 2017... of 12-06-2017;

– assessment of Corporate Income Tax and compensatory interest no. 2017... of 09-06-2017 and compensation no. 2017... of 14-06-2017, and

– assessment of Corporate Income Tax no. 2017... of 06-09-2017 and compensation no. 2017... of 14-06-2017.

  • Condemn the Tax and Customs Authority to reimburse the Claimant the sum of € 9,148.64;

  • Judgement that the request for compensatory interest has merit and condemn the Tax and Customs Authority to pay it to the Claimant under the terms referred to in point 4 of this decision.

6. Value of the Case

In accordance with the provisions of article 306, paragraph 2, of the CPC and 97-A, paragraph 1, paragraph a), of the CPPT and 3, paragraph 2, of the Regulation of Court Costs in Tax Arbitration Proceedings, the value indicated by the Claimant not having been questioned, the value of € 139,255.91 is fixed for the case.

7. Court Costs

Pursuant to article 22, paragraph 4, of the RJAT, the amount of court costs is set at € 3,060.00, in accordance with Table I attached to the Regulation of Court Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 29-01-2019

The Arbitrators

(Jorge Lopes de Sousa)

(José Manuel Aurélio dos Santos)

(Adelaide Moura)

[1] By oversight, the Tax Inspection Report refers to the date of "31/12/2012".

[2] TOMÁS TAVARES, "On the relationship of partial dependence between accounting and tax law in determining the taxable income of legal entities: some reflections at the level of costs", in Science and Tax Technique, no. 396, 1999, pages 136-137.

[3] Arbitral decision of 21-04-2015, issued in case no. 644/2014-T, issued on a situation of gratuitous financing to participates.

[4] Arbitral decision of case no. 264/2016-T.

Frequently Asked Questions

Automatically Created

Are financial charges and interest on loans to subsidiaries deductible as expenses for IRC (Corporate Income Tax) purposes in Portugal?
Under Portuguese IRC law, financial charges on loans to subsidiaries or parent companies are generally not deductible as business expenses unless they meet strict criteria established in article 23 of the IRC Code. The expenses must be indispensable for the realization or maintenance of taxable income and properly documented. When a company borrows funds at interest from banks and on-lends those funds interest-free to related parties (particularly parent companies), the Tax Authority typically disallows the deduction of the associated interest expenses, arguing they lack economic justification and business purpose. The CAAD applies substance-over-form principles, examining whether the financing arrangement serves a legitimate business purpose beyond mere tax optimization.
What criteria does the CAAD apply to determine the deductibility of financial costs related to intercompany loans under Portuguese tax law?
The CAAD applies a multi-factor test to determine deductibility of financial costs in intercompany loan scenarios: (1) whether the expenses are indispensable for generating taxable income under article 23 of the IRC Code; (2) whether the transaction has economic substance and business rationale beyond tax benefits; (3) whether arm's length principles were observed, particularly when loans are gratuitous (interest-free); (4) whether the arrangement constitutes an abuse of legal forms or tax avoidance under General Anti-Abuse Rules (GAAR); and (5) proper documentation and compliance with transfer pricing rules under articles 63 and 138 of the IRC Code. The tribunal examines the actual cash flows, corporate structure, and commercial justification for the financing arrangement, not merely its formal legal structure.
Can the Portuguese Tax Authority (AT) disallow deductions for interest and stamp tax on bank loans used to finance subsidiaries?
Yes, the Portuguese Tax Authority can disallow deductions for interest and stamp tax on bank loans when it determines the borrowed funds were used to finance parent companies or subsidiaries without economic justification. This disallowance is based on article 23 of the IRC Code, which requires expenses to be indispensable for business operations and income generation. When a subsidiary borrows commercially and on-lends gratuitously to its parent (upstream financing), the AT typically argues the interest expenses fail the indispensability test because they don't serve the subsidiary's business purpose. Such corrections are classified as 'merely arithmetic' adjustments under article 77 of the Tax Procedure Code (LGT). Taxpayers can challenge these corrections through gracious complaint procedures and, if unsuccessful, through CAAD arbitration under the RJAT framework, seeking reimbursement plus compensatory interest.
What is the legal basis for challenging IRC additional assessments through CAAD arbitration proceedings in Portugal?
The legal basis for challenging IRC additional assessments through CAAD arbitration is established in Decree-Law 10/2011 of 20 January, which created the Administrative Arbitration Regime for Tax Matters (RJAT). Article 2 grants taxpayers the right to arbitral resolution of disputes concerning legality of tax acts, including IRC assessments. Article 10 establishes procedural requirements for initiating arbitration. Taxpayers must first exhaust administrative remedies (gracious complaints under article 68 of the Tax Procedure Code) before accessing arbitration. The substantive grounds for challenge typically invoke: violation of article 23 IRC Code (expense deductibility requirements); incorrect application of transfer pricing rules (articles 63, 138 IRC Code); breach of General Anti-Abuse provisions; and violation of fundamental tax principles including legality, equality, and proportionality under articles 8 and 55 of the General Tax Law (LGT). The tribunal has jurisdiction to review both the factual determinations and legal interpretations underlying the Tax Authority's corrections.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when IRC corrections are declared illegal by the CAAD?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when IRC corrections are declared illegal by the CAAD, pursuant to article 43 of the General Tax Law (LGT) and article 61 of the Tax Procedure Code (CPPT). Article 24(5) of the RJAT specifically provides that arbitral decisions annulling tax acts produce the same effects as administrative or judicial decisions, including the right to reimbursement. Compensatory interest accrues from the date of undue payment until actual reimbursement, calculated at the legal rate established annually by Ministerial Order. The interest compensates taxpayers for the State's unlawful retention of funds and is automatic—no separate request is required. The CAAD decision triggers the Tax Authority's obligation to reimburse both the principal amount incorrectly collected and the corresponding compensatory interest. This right is constitutionally protected under article 20(5) of the Portuguese Constitution as part of effective judicial protection, ensuring taxpayers are made whole when subjected to unlawful tax assessments.