Process: 296/2016-T

Date: February 2, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

This arbitral decision addresses whether a law firm organized as a professional partnership can recover excess IRS withholding tax paid on behalf of its partners under Portugal's fiscal transparency regime. The claimant, a lawyers' partnership (sociedade de advogados), made source withholdings totaling €29,996.07 on income allocated to partner B... for tax years 2009-2011. The partner was resident in 2009 and non-resident in 2010-2011. The firm argues it erroneously withheld tax because under the transparent tax treatment regime (Article 20 IRS Code combined with Article 6 IRC), income allocated to partners should not be subject to source withholding under Article 98 IRS Code. The partner subsequently filed IRS declarations and paid tax without crediting these withholdings, resulting in double taxation. The Tax Authority raised a procedural exception of illegitimacy, arguing that only the substituted taxpayer (the partner), not the tax substitute (the firm), has standing to challenge source withholdings. The core legal dispute involves interpreting Article 132 CPPT regarding the substitute's right to contest excess withholdings versus the principle that in transparent entities, partners are the actual IRS taxpayers. The claimant invokes Article 78 LGT on duplication of collection and seeks reimbursement plus compensatory interest under Articles 43 LGT and 61 CPPT. This case highlights the complex interplay between fiscal transparency, tax substitution, withholding obligations for resident and non-resident partners, and procedural standing requirements in Portuguese tax arbitration.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. On 30 May 2016, A…, Lawyers' Partnership, RL, with registered office at Rua…, …, …, nº … …, Lisbon, legal entity no…, came, pursuant to article 10 of the RJAT and articles 132 and 99 et seq. of the CPPT and nos. 1 and 2 of article 95, letter d) of the General Tax Law (LGT), to request the constitution of an arbitral tribunal for the assessment and declaration of illegality of the dismissal of the gracious complaint due to error in source withholding presented against assessment acts relating to PIT for the years 2009 to 2011, requesting reimbursement of the amount of tax paid in excess, in the amount of € 29,996.07, plus compensatory interest. It attached, in addition to the powers of attorney and proof of payment of the initial fee, 10 documents.

  2. In the Request for arbitral pronouncement, the Claimant chose not to appoint an arbitrator, and by decision of the President of the Deontological Council, pursuant to no. 1 of article 6 of the RJAT, the undersigned was appointed as sole arbitrator, who accepted the position within the legally stipulated period.

  3. The arbitral tribunal was constituted on 5 August 2016.

  4. The Tax and Customs Administration (AT or Respondent) submitted, on 30 September 2016, its Response as well as the administrative file (PA) raising an exception of procedural illegitimacy of the Claimant, to which this party, promptly notified to exercise contradictory rights, only replied in closing submissions.

  5. With tacit assent of the Parties, the holding of the meeting referred to in article 18 of the RJAT was dispensed with, successive written submissions were fixed for submission, and 5 February 2017 was set as the date for communication of the arbitral decision. The submissions were presented on 15 December 2016 and 11 January 2017, respectively.

6. The Request for Pronouncement

In the initial Request, the Claimant sustains, in summary (our responsibility):

  • As a partnership constituted on 1 January 1997 to exercise the activity of providing legal services, and subject to the transparent tax treatment regime in the corporate income tax (IRC), it allocated income to its partners for the fiscal years 2009, 2010 and 2011, in accordance with criteria defined in general assemblies and effected the respective source withholdings.

  • It delivered the withheld amounts to the State treasury, pursuant to no. 1 of article 98 of the IRS Code, regarding partner B…, "resident" in 2009 and "non-resident" in 2010 and 2011, by which it committed an "error consisting in withholding, delivery and presentation of declaration of income paid to residents and non-residents".

  • In the years 2009, 2010 and 2011, the slips nos…, … and …, were respectively submitted and paid to the State, in the amounts of €8,000.00, €1,897.91 and €13,343.98, corresponding to income of €39,591.65, €53,375.92 and € 27,016.72, also respectively.

  • Partner B… presented in the years 2009 to 2010 his PIT declarations and proceeded to pay the tax without considering the withholding that had been effected on him, as resident and non-resident, by the Claimant.

  • Thus, the amounts mentioned included in withholding slips, in the total amount of € 29,996.07, were effected twice over, because having been paid in a timely manner to the State treasury they came not to be considered in the declarations of the Claimant's partner - there was subjection to double taxation by source withholding and in the PIT assessment.

  • The facts described were not taken into consideration in the dismissal of the gracious complaint presented, which considered that "in form 30 (…) there is no reference to any payment slips and source withholdings effected" and decided that "the patrimonial sphere of the complainant was not affected: allegedly it withheld and delivered to the state treasury tax that was due in accordance with legally provided terms (…)", without taking into account that the tax paid had no underlying tax obligation.

  • In accordance with articles 132, nos. 1 and 3, of the CPPT and 98, no. 4, of the IRS Code, the substitute may, if it is not possible for it to effect a discount of the tax delivered in excess, challenge, by presenting prior complaint within two years.

  • And no. 4 of article 132 provides that the same regime applies to the substituted, "except when the withholding has the mere nature of payment on account of the tax due finally".

  • And in accordance with article 204, no. 1, g), of the CPPT, opposition to execution may be based on duplication of collection, considering that "there will be duplication of collection when the tax is paid in full in relation to" "the same fact and the same period of time" (article 205 of the CPPT). (sic)

  • Thus, in addition to the requirements being met for presentation of the gracious complaint, the duplication of collection provided for in no. 6 of article 78 of the LGT would always occur in the case, insofar as there was a duplicate payment of tax, because source withholding was effected on the partner without this amount being deducted in the respective PIT assessment.

  • The Claimant proceeded to deliver by way of source withholding within the legal period (article 98, no. 3 of the IRS Code) but there was no legal obligation to assess and pay the tax, because law firms are mandatorily subject to the transparent tax treatment regime, with special allocation of net income to partners pursuant to nos. 1, 2 and 4 of article 20 of the IRS Code.

  • The passive subject to whom the withholding in question is related, taxpayer no. …, B…, proceeded to pay the tax without considering the amounts relating to the source withholding, with tax existing – by way of the withholding effected – in excess (and duplicate) in the reference period.

  • That is, being in the presence of source withholding declared and paid by the Claimant and delivery of declaration by the partner without considering the source withholding of income not subject to withholding or exempt therefrom, double taxation occurs by source withholding and PIT assessment submitted, since the withholding had been reported as effected to the non-resident entity.

  • Taking into account the allocation of taxable matter as transparent taxation which constitutes net income in accordance with article 20 of the IRS Code, there will be no place for source withholding in accordance with article 98 of the IRS Code.

  • There being place for reimbursement of tax delivered in excess and compensatory interest in accordance with articles 43 of the LGT and 61 of the CPPT.

  • In view of the above, the tribunal should order the annulment of the contested assessment act, as well as the respective demonstration of interest assessment and reconciliation of accounts, as well as condemn the AT to pay compensatory interest, pursuant to articles 24, no. 1, letter b, and no. 5, of the RJAT, 100 and 43, no. 1, of the LGT.

7. The Response

The Respondent replies, in summary (our responsibility):

By Exception

  • The Claimant, a professional partnership under the transparent tax treatment regime (article 6 of the Corporate Income Tax Code), is obliged annually to allocate to partners the taxable matter determined under the Corporate Income Tax Code, even if there has been no distribution of profits, in accordance with what is stipulated in the partnership agreement and partners must, as passive subjects of PIT, declare the portion of income attributable to them, completing annex D of the respective PIT model 3 declaration.

  • Pursuant to articles 71 and 101 of the IRS Code, the professional partnership is obliged to effect source withholding of PIT relating to profits and advances on account of profits, constituting these deliveries deductions in income paid or made available to the holder by the tax substitute (article 34 of the LGT) and, although the tax obligation is required of the tax substitute (article 20 of the LGT), this can only challenge the source withholding in case of error in delivery of tax superior to the amount withheld.

  • The Claimant did not deliver tax to the State in an amount superior to that withheld since it itself alleges that the tax delivered is in the amount of the tax withheld.

  • From the petition it results that the Claimant will have deducted from income paid to B…, with NIF…, amounts as source withholding of tax, with reference to the years 2009, 2010 and 2011, and the said partner will have omitted the said amounts in the PIT model 3 declarations delivered in his name for those tax years.

  • Regardless of proof, it is necessary to conclude that the question in dispute in the case does not have as its object the error in delivery of tax superior to that withheld, for purposes of no. 1 of article 132 of the CPPT, but the alleged error in source withholding effected on income paid, with framework in no. 4 of article 132 of the CPPT, which provides, under the heading "challenge in case of source withholding", in no. 1, that the tax substitute may only challenge the source withholding "in case of error in delivery of tax superior to that withheld" when the tax delivered in excess can no longer be "discounted in the following deliveries of the same nature to be effected in the year of the undue payment".

  • The substituted taxpayer may challenge the source withholding that has been effected on him in an amount superior to that legally due, except when "the withholding has the mere nature of payment on account of the tax due finally".

  • The substitute is only harmed, and therefore has interest in the reimbursement of tax, when the error consists in delivery to the State of tax that it did not withhold from the substituted nor was it legally required to withhold, which is not the case in the present proceedings.

  • As for the tax effectively withheld, the interest in acting falls to the substituted taxpayer, harmed by the deduction from his income of tax in an amount superior to that legally due, who may challenge pursuant to no. 4 of the same legal rule.

  • In the case at hand, considering what comes alleged, although not proved, there was no error in delivery of tax superior to that withheld, capable of harming the legal sphere of the tax substitute, but rather source withholding of tax omitted in the model 3 PIT declaration delivered finally, which constitutes an error capable of harming the legal sphere of the substituted taxpayer, the legitimacy to challenge the withholding that has been effected on him falling to this party, in accordance with article 132 of the CPPT.

  • And the substituted taxpayer has legitimacy to challenge the withholding effected only in cases where the source withholding has a definitive character, when it has the mere nature of payment on account of the tax due finally, it is the annual PIT assessment that should be challenged if the same, by error of the AT or the taxpayer, does not contemplate the withheld tax.

  • The legal-tax situation at issue in the case, relating to PIT, years 2009, 2010 and 2011, is the situation of partner B…, holder of those income – which the AT cannot even discuss here due to the duty of tax secrecy - and not the situation of the Claimant.

  • In accordance with article 132 of the CPPT, there is an exception of procedural illegitimacy of the Claimant, which implies the dismissal of the AT from the instance.

By Substantive Challenge

  • In situations of error in withholding suffered, challengeable by the substituted, only source withholding that has a definitive or liberatory nature is susceptible to challenge, since when the withholding has the nature of payment on account due finally the object of the challenge is no longer the withholding suffered but the PIT assessment act due finally.

  • When no. 4 of article 132 refers "except when the withholding has the mere nature of payment on account of the tax due finally" it is shifting the object of its challenge from the withholding effected to the determination of the tax due finally, after the legal-tax situation has been determined in the case at hand, of PIT for 2009, 2010 and 2011.

  • It is not understood the utility of citing letter g) of no. 1 of article 204 and article 205 of the CPPT on duplication of collection, because this is not a matter of opposition to execution in which the AT demands relating to the same tax fact and the same period of time tax that has already been paid in full - in the case at hand it was the taxpayer himself, in this case the said partner, who allegedly omitted in the delivered PIT declarations those amounts of tax.

  • There is no right of the Claimant to any possible reimbursement of the tax petitioned because the amount invoked as delivered in excess would only be susceptible of reimbursement to the taxpayer who bore the tax, that is, to the substituted taxpayer who suffered the withholding.

  • As for the matter of fact, the documents presented do not allow for the control of the ownership of the income obtained and respective taxation in the context of PIT: the general assembly minutes set criteria that have no basis in the founding deed nor in prior general assembly decisions before the obtaining of the income; the IES statements refer to amounts of income allocated to partner B… but neither in these nor in the model 30 declarations are there any amounts withheld at source on that income; it is not possible to understand in the amounts indicated in the source withholding slips, relating to income earned by non-residents and residents in Portuguese territory, whether they reflect part or the entirety of the alleged withholdings effected on the partner; slips no. … and no. … refer to remuneration of members of statutory bodies of legal entities and as for the periods, they correspond to 2010/04 (…), 2010/11 (…), 2011/11 (…) and 2012/11 (…), with no consistency between these tax periods and the dates of the minutes relating to the distribution of results; the receipts issued and attached to the file by the Claimant only refer to withdrawals on account of profits from 2009 and 2011 and are not entirely consistent with the dates shown on the payment slips, not indicating the NIF of the passive subject to which they relate nor the legal article on the basis of which the PIT withholding is effected.

  • As for the income declared by the partner in his model 3 PIT declarations of those years, and respective assessments, valid and in effect, it should be noted that the PIT declarations in the name of the partner, attached as document no. 9, do not prove which are the last declarations delivered and the respective assessments in effect, a matter that concerns the passive subject who is not a party to the case, with the AT being, consequently, prevented from exercising its contradictory rights regarding them under penalty of violation of tax secrecy.

  • Even if there were place for reimbursement of tax, there would be no place for compensatory interest under article 43 of the LGT because the alleged delivery of tax in an amount superior to that legally due is not imputable to the AT, it being verified that the delivery of withheld tax and the delivery of model 3 PIT declarations relating to the years 2009 to 2011, are imputable to the passive subjects.

  • In these cases, there is only a right to compensatory interest for the delay in the decision as to the reimbursement sought from one year after the request for gracious complaint (article 43, no. 3, c) of the LGT).

8. Closing Submissions

In the closing submissions attached, the Parties argued, in summary (our responsibility):

8.1. The Claimant

  • By being subject to the transparent tax treatment regime in the context of corporate income tax (ART. 6 Corporate Income Tax Code), and given the criteria defined in general assemblies regarding the income determined and taxable matter allocated to partners in 2009, 2010 and 2011 - which are of category B only according to a legal fiction, in reality are income excluded from withholding in accordance with the end part of letter h) of no. 1 of article 6 of the IRS Code - the Claimant did not have the legal obligation to assess and pay the amount of tax as source withholding pursuant to nos. 1, 2 and 4 of article 20 and no. 3 of article 98 of the Personal Income Tax Code, and to deliver these amounts pursuant to articles 99 to 101, of the same Code, by reference to the period 2009 to 2011.

  • Its partner, taxpayer no…, B…, for tax purposes "resident" in Portuguese territory in 2009 and "non-resident" in 2010 and 2011, did not deduct the amounts relating to the source withholdings in its declarations, thereby verifying duplicate payment (excess), in the reference period.

  • The Claimant has obvious knowledge of these facts by the direct connection that the latter has with the partnership of which it was the majority partner, whereby it has full legitimacy to request the reimbursement of the tax subject to the withholdings in question.

  • The withholding resulted from error regarding the interpretation of the transparent tax treatment regime, culminating in PIT withholding superior to that due (in excess) relating to income allocated under that transparent taxation regime.

  • The duplication of assessments of the years 2009, 2010 and 2011 is not ruled out by the errors pointed out in the completion of Annex G and Model 30 and the Respondent should have verified any contradictions or errors in the completion of the declarations, being able to request that the same be justified or corrected, within the time limits set in article 78 of the LGT, in relation to all taxes, which to date has not happened.

  • In the request for pronouncement and in the gracious complaint, the Claimant intended to obtain, in accordance with article 132 of the CPPT, the return of PIT wrongly withheld and not deducted (via model 3) by the income recipient, on the basis that it is not possible through the mechanism of offsetting the tax delivered in excess in the following deliveries of the same nature.

  • It is undeniable that there is double economic taxation regarding the same fiscal years, relating to the same period, the same income and the same amounts, (i) by source withholding and in (ii) the PIT assessment submitted and not deducted by the partner.

  • The Claimant suffered an effective patrimonial loss, on account of the effective benefit to the State, since such amount could always be allocated to the life of the partnership and not for the illegitimate benefit of the State (which moreover proceeded with an official assessment) as the Respondent seems unwilling to recognize, now requesting the reimbursement of the amount of € 29,996.07 and interest in accordance with articles 43 of the LGT and article 61 of the C.P.P.T.

8.2. The Respondent

  • Since the Claimant did not deliver tax in an amount superior to that withheld, no. 1 of article 132 of the CPPT is not applicable to the case, because there is no harm to the tax substitute from error in delivery to the State of tax that it did not withhold from the substituted nor was it legally required to withhold.

  • And in the case of application of no. 4 of the same article, only the substituted taxpayer, B…, would have legitimacy for the action as the passive subject who suffered the withholding of the tax delivered to the State, challenging the PIT assessments of 2009, 2010 and 2011.

  • In that case, it could invoke the source withholding effected in an amount superior to that legally due but not when "the withholding has the mere nature of payment on account of the tax due finally", that is, when the withholding effected has a definitive character.

  • It results from the case that the source withholding of tax was omitted in the model 3 PIT declaration delivered finally by the partner but the Claimant does not have legitimacy to discuss the legal-tax situation of a third party, nor can the AT discuss the substantive question that is raised under penalty of violating its duty of tax secrecy regarding the legal-tax situation of a third party who is not a party to the case.

  • Likewise, the Claimant does not have procedural legitimacy to petition at a later time, and on a subsidiary basis (point 33 of the closing submissions), the assessment of the PIT assessments of 2009, 2010 and 2011 in the name of B….

  • The documents presented (minutes no. 15, no. 16 and the separate minute of dissolution and liquidation, subsequent to the fiscal years in question) do not provide prior criteria that allow for the control of the ownership of the income obtained and respective taxation in the context of PIT, given the provision of no. 3 of article 6 of the Corporate Income Tax Code.

  • Neither the declarations delivered by the Claimant, annual simplified business information statements (IES), annex G (referring to income allocated to the partner in question), nor the model 30 declarations (referring to income paid or made available to non-resident passive subjects) refer to any source withholding of tax that has been effected on its income.

  • As for the source withholding slips - slips no. … and no…, relating to income earned by non-residents, and slips no. … and no…, relating to income earned by residents in Portuguese territory – there is an impossibility of confirming whether, part or the entirety of the alleged withholdings effected on the partner, are reflected in the indicated amounts.

  • The nature of the income indicated in slips no. … and no…, item 208 - remuneration of members of statutory bodies of legal entities - does not correspond to the nature of the income at issue in the case.

  • As for the periods indicated in the slips under analysis, they correspond to 2010/04 (…), 2010/11 (…), 2011/11 (…) and 2012/11 (…), with no consistency between these tax periods and the dates of the minutes relating to the distribution of results.

  • And the receipts issued and attached to the case by the Claimant only refer to withdrawals on account of profits from 2009 and 2011 and are not entirely consistent with the dates shown on the payment slips, in addition to not indicating the NIF of the passive subject to which they relate nor the legal article on the basis of which the PIT withholding is effected.

  • As for the income declared by the partner, there is no proof that the model 3 PIT income declarations (document no. 9) are the last declarations delivered and that the assessments are those in effect.

  • The Claimant's claim should be judged entirely without merit, due to lack of proof of what is alleged, with the consequent dismissal of the AT from the claim and, even if this were considered meritorious, there could only be compensatory interest for the delay in the decision, from one year after the request for gracious complaint in question regarding the reimbursement sought (letter c) of no. 3 of article 43 of the LGT).

9. Object of the Claim – Questions to be Decided

The Claimant's Request, a law firm partnership, has as its object the reimbursement of amounts withheld at source in the fiscal years 2009 to 2011, invoking that the partner who suffered the withholding of those amounts did not deduct them in the respective PIT declarations. The decision required implies the analysis of the facts ascertained and the interpretation of the rules relating to the functioning of partnerships under the transparent tax treatment regime, in particular articles 6 of the Corporate Income Tax Code and 20 of the IRS Code.

The applicability of the concept of duplication of collection (articles 204 of the CPPT and 78 of the LGT) is invoked. In the event of the claim being granted, there will also need to be a decision on the existence of a right to compensatory interest.

As a preliminary issue, the Respondent raises the exception of lack of legitimacy of the Claimant pursuant to article 132 of the CPPT. The assessment of this question is, however, in this case, intimately linked to the analysis of the object of the claim, so the decision will, in practice, be joint.

10. Sanitation

As to the question of jurisdiction, the arbitral tribunal is materially competent, pursuant to article 2, no. 1, letter a) of the Legal Framework for Arbitration in Tax Matters, with the condition provided in article 2 of Ordinance no. 112-A/2011, of 22 March, verified for the assessment of the Claimant's claim regarding the illegality of source withholding acts.

The parties have legal personality and capacity.

The question, raised by the Respondent, of the procedural legitimacy of the Claimant will be analyzed after the establishment of the facts.

The proceedings are not affected by any nullity.

Deciding,

II GROUNDS FOR DECISION

11. Established Facts

11.1. The Claimant, a law firm partnership with the designation "A…, Law Firm Partnership, RL", with NIF…, proceeded, regarding the fiscal years 2009 to 2011, to allocate income to its partners, in accordance with criteria defined in General Assembly Minutes (article 2 of the Claim and Documents nos. 5, 6 and 7 attached with the Claim).

11.2. In accordance with the said minutes, the partners, B… and C…, representing the entire capital stock of the Claimant, made the following resolutions regarding the determination of income and allocation of results:

11.2.1. On 3 March 2010, the net result of fiscal year 2009 was approved, in the amount of € 64,341.31 and taxable profit of € 65,275.48, and the distribution and allocation to partners was decided in the proportion of 60.659% and 39.35%, taking into account the commitment and volume of billing and contribution of each partner, which gave € 39,591.65 to partner B… and € 25,683.83 to partner C…;

11.2.2. On 31 March 2011, the net result of fiscal year 2010 was approved, in the amount of € 87,717.71 and taxable profit of € 88,959.87, and the distribution and allocation to partners was decided in the proportion of 60% and 40%, taking into account the commitment and volume of billing and contribution of each partner, which gave € 53,375.90 to partner B… and € 35,583.95 to partner C…;

11.2.3. On 25 July 2011, the partners resolved to dissolve the partnership with immediate effect, from the 31st of that July onwards, with a special balance sheet being drawn up for the purpose by the accountant and liquidation of social assets and division among partners after approval of liquidation accounts.

11.3. In the fiscal years in question, the Claimant declared in annexes G (box 034) of corporate income tax, as determined amounts of taxable matter of the entity with NIF … and income allocated to partners:

  • Annex relating to 2009, delivered on 15/07/2010 - taxable matter of € 65,275.48, with allocation to NIF … of € 39,591.65 and to NIF … of € 25,683.83;

  • Annex relating to 2010, delivered on 19/07/2011 – taxable matter of € 88,959.87 and allocation to NIF … of € 53,375.90 and to NIF … of € 35,583.95;

  • Annex relating to 2011 - taxable matter of € 45,027.86, with allocation to NIF…, of € 27,016.72 and to NIF … of € 18,011.14.

11.4. The Claimant attaches to the case documents evidencing payments of source withholdings with nos…, …, … and …[1], relating respectively to periods of April 2010, November 2010, November 2011 and November 2012, in the amounts, also respectively, of € 9,723.10 (€40.00 of dependent employment income and € 9,683.10 of PIT business and professional income), €2,073.25 (€80/ dependent employment income €1,993.25/PIT business and professional income); €13,343.98 (withholding relating to remuneration of members of statutory bodies of legal entities - paid to non-resident) and €6,754.18 (relating to remuneration of members of statutory bodies of legal entities) (Document no. 8 attached with the Claim).

11.5. The Claimant attaches documents referred to as payment receipts to partner Dr. B…, identified with tax identification no. … and containing the following data: (all included in document no. 8 attached with the Claim).

11.5.1. With date of 16 April 2010, in the amount of € 32,000.00, described as a withdrawal of profit of the partnership obtained in 2009 (net amount of €24,000.00, with PIT withholding at the rate of 25%, of €8,000.00);

11.5.2. With date of 16 December 2010, in the amount of € 7,591.65, described as a withdrawal of profit of the partnership obtained in 2009 (net amount of €5,693.74.00, with PIT withholding, at the rate 25%, of €1,879.91;

11.5.3. With date of 15 November 2012, in the amount of €27,016.72, described as a withdrawal of profit of the partnership obtained in 2011 (net amount of €20,262.54, with PIT withholding, at the rate 25%, of €6,754.18).

11.6. The Claimant attached to the case copies of model 3 PIT declarations relating to the fiscal years 2010 and 2011, delivered on 4 December 2013, as the 1st declaration of the year, by B…, with NIF…, and indication of "non-resident"- the declaration relating to 2010 contains mention of the payment of dependent employment income of € 27,720.00 paid by the entity with NIF…, with source withholding of € 6,930.00, and income in the amount of € 53,375.92 obtained under transparent tax treatment, paid by entity with NIF…; the declaration relating to 2011 contains mention of the payment of the amount of € 7,920.00 as dependent employment income with source withholding of €1,980.00, paid by the entity with NIF…, and income obtained under transparent tax treatment, in the amounts of €27,016.72 and €22,509.74, paid, respectively, by entities with NIF … and … Document no. 9 attached with the Claim and pages 21 and 22 of the PA).

11.7. The Claimant attaches PIT assessment demonstrations relating to the taxpayer with NIF…, relating to the fiscal years 2009, 2010 and 2011. These are, respectively, assessments nos. 2013…, 2013… and 2013…, relating to global income of €79,183.30, €81,095.92 and €57,448.46, and with amounts payable of €20,329.07, €14,682.03 and €13,130.62.

11.8. In the Tax Administration system, the following data relating to withholdings effected by the Claimant (NIF…) to a resident abroad are recorded: € 2,073.25 through slip … (€ 80.00 of dependent employment and € 1,993.25 of business and professional income); € 13,343.98 through slip …, relating to remuneration of members of statutory bodies of legal entities; € 6,754.18 through slip no…, relating to remuneration of members of statutory bodies of legal entities (PA, pages 9, 10, 11).

11.9. From the AT system, data from model 30 forms are recorded, referring to income paid to non-residents – no…, on 12-11-2011, € 5,627.43 of dependent employment paid to NIF … resident in Spain with NIF … payment slip no…, issuing entity NIF … (PA, page 23); no…, on 15-07-2010, income € 39,591.65, paid to resident in Spain NIF…; declaration…, on 19-7-2011, income of € 53,375.92 paid to resident in Spain, NIF…; declaration…, on 18-07-2012, income of € 25,016.72, paid to resident in Spain, NIF … (PA, pages 35 to 37).

11.10. On 4 June 2014, the Claimant presented a gracious complaint (no. …2015…) invoking "error in delivery of tax superior to that withheld", through slips nos…, …, … and…, in the years 2009, 2010 and 2011, because it was no longer possible to effect correction of the overpaid tax in the following deliveries of the year. It asked that, if not possible, it should be converted into a request for official revision because, the partner not having deducted the amounts withheld at source, there would have been duplicate payment of tax. (PA, pages 24).

11.11. In a report of 2 December 2015, dismissal of the gracious complaint was proposed, concluding that "the complainant does not have the Claimant's legitimacy to petition its reimbursement (of the amounts subject to source withholding), on the ground that they were not reported by the holder of the respective income and therefore were not considered in the context of assessment in the years 2009, 2010 and 2011", because "the patrimonial sphere of the complainant was not affected: allegedly it withheld and delivered to the State treasury the tax that was due, in accordance with legally provided terms", which merited higher agreement with the draft decision being subject to notification to the Claimant for prior hearing by offices of the Lisbon Finance Office, no. … of 7 December 2015 and no…, 30 December (2nd notification) (PA, pages 40 to 51).

11.12. The Claimant did not respond in the context of prior hearing, with a final dismissal order being issued on 19 February 2016, notified by office no… of the Lisbon Finance Office, dated 22-02-2016 and received on 1 March 2016.

11.13. On 30 May 2016, the present Request for arbitral assessment was presented.

12. Unproven Facts

It was not proven the exact amount of source withholdings effected by the Claimant on its partner B… regarding the income earned in the years 2009, 2010 and 2011.

13. Grounds for Established and Unproven Facts

The establishment of the facts was made on the basis of the facts alleged by the parties and not contested, as well as on the documentation attached to the case, including the administrative file attached by the Respondent, documentation which is hereby taken as reproduced.

14. Application of Law

14.1. The Legal Framework of the Established Facts

Before identifying the legal norms relevant to the decision of the case, it is important to draw some conclusions about the established facts.

The claimant law firm partnership in the case was composed of only two partners, who, regarding the fiscal years 2009, 2010 and 2011, resolved in a general assembly regarding the net results of the fiscal year and fixed the criteria for allocating income to partners, taking into account the commitment and volume of billing and contribution of each.

The Claimant attached to the case, on one hand, reference to documents of payments made to the State of amounts withheld at source throughout the years 2010 to 2012, by payments identified as dependent employment, business and professional income and remuneration of members of statutory bodies (relating to periods of April 2010, November 2010 and November 2011, for payment respectively until 20-5-2010, 20/12/2010 and 20/12/2011) and, on the other hand, a copy of three documents designated as "receipt" (dated 16/04/2010, 16/12/2010 and 15/11/2012) relating to payments effected by the Claimant to partner B… (identified in them by NIF…) where mention is made of deduction of amounts withheld at source as PIT, identifying the amounts paid as "withdrawal on account of the profit of the partnership". It intended to evidence the relationship between the payment slips and the receipts relating to payments to partner B… so as to demonstrate that, having been made, by the Claimant, deductions from the income paid to the partner, the latter did not deduct them in the PIT declarations of the years 2009, 2010 and 2011, as would be evidenced by the attachment of copies of declarations and assessments.

However, from the combination of the various elements in question, there results the difficulty of reconciling the payment documents with the receipts due to non-coincidence of amounts and due to lack of clarity and precision of the respective contents. In addition to the non-conformity in the qualification of the income.

That is, there is no proof regarding the cause and quantity of the deductions effectively made to partner B… regarding the income paid to it by the Claimant in the years 2009, 2010 and 2011, at issue in the case.

But, independently of this aspect – essential for the analysis sought by the Claimant - let us examine the questions of law that arise. Since legitimacy is a logically prior question, it is, in this case, nevertheless dependent on the very analysis of the regime of transparent partnerships.

14.2. The Transparent Tax Treatment Regime and Professional Partnerships

The coexistence of taxation of partnerships and natural persons includes measures to alleviate double economic taxation. There are types of partnerships in which the personal element is so dominant that it can justify taxation exclusively of the income obtained by the partners through the use of the partnership form.

In the Portuguese tax system this situation was enshrined in article 6 (article 5 in the original wording) of the Corporate Income Tax Code under the heading "transparent taxation", whose no. 1 provides: "The taxable matter, determined under the terms of this Code, is allocated to the partners, integrating, under the terms of the legislation that may be applicable, in their taxable income for purposes of PIT or corporate income tax, as the case may be, of the following partnerships, with registered office or effective place of management in Portuguese territory, even if there has been no distribution of profits: a) Civil partnerships not constituted under commercial form; b) Professional partnerships; c) Simple asset management partnerships, whose majority capital stock belongs, directly or indirectly, for more than 183 days of the fiscal year, to a family group, or whose capital stock belongs, on any day of the fiscal year, to a number of partners not exceeding five and none of them is a public law legal entity." [2](wording in effect at the time of the facts).

Professional partnerships constitute the most important aspect of the transparent tax treatment regime. According to letter a) of no. 4 of article 6 of the Corporate Income Tax Code, in the wording in effect at the time of the situation in the case, professional partnership, "is the partnership constituted for the exercise of a professional activity specifically provided for in the list of activities referred to in article 151 of the Personal Income Tax Code, in which all natural person partners are professionals in that activity".[3]

According to this definition what is relevant is the activity pursued and not the legal form, being able to take any legal form, with the exception of requirements resulting from legislation relating to certain professional activities (such as, for example, the case of the activity of lawyers).

14.3. Rules for Taxation of Professional Partnerships

The transparent tax treatment regime can be considered as a form of taxing the income formed within a partnership, preventing it from becoming a tax subject as regards corporate income tax liability although it is as regards cooperation duties[4].

Thus, in accordance with no. 1 of article 6 of the Corporate Income Tax Code, the taxable matter, determined under the terms of the same Code "is allocated to the partners, integrating, under the terms of the applicable legislation, in their taxable income for purposes of PIT or corporate income tax", such allocation being made to partners in accordance with what results from the founding deed of the entities in question or, in the absence of elements, in equal shares.

As to this aspect, notes Rui Duarte Morais that it results from the law that the profits are allocable in accordance with what is enshrined in the partnership agreement, or, in the absence of elements (for example, oral agreement, as in the case of civil partnerships not constituted under commercial form), in equal shares. [5]

The allocation of income to partners is made in category B (article 20, no. 2 of the IRS Code)[6] as net income because the costs were considered in the determination of the taxable profit of the partnership, under the rules of the corporate income tax.

As for the payment of tax, with the obligation falling on partners, there will need to be a distinction of several aspects. On one hand, there is no place for payments on account – just as the partnership is not subject to tax, it does not effect "anticipation" of payment as credit of a non-existent debt. Payments on account will be paid by partners as holders of category B income as a result of the allocation of their share of partnership profits. The final payment will be by partners as a result of the combination of the income earned in the taxable matter of the respective PIT[7].

And as to income paid or made available to partners?

Rui Duarte Morais distinguishes: «Here the general rules will be followed, that is, there will or will not be place for source withholding depending on the nature of the income in question (for example, income paid by the partnership to partners as salaries will be subject to source withholding, just as provided for category A). However, as regards distribution of profits (including advance distributions, such as monthly payment of a certain amount on account of the profits that, presumably, that partner will be entitled to at the end of the fiscal year) there is no place for any source withholding. Which is understood, for in this regime everything happens as if the holders of such profits were originally the partners, so that, for tax purposes, there is no "distribution"» [8] (our emphasis)

14.4. Characterization of the Situation in the Case

Returning to the situation in the case – a law firm partnership with two partners seeking reimbursement of tax on the basis of error in effecting source withholdings on one of the partners and duplication of collection, it appears that the Claimant did not argue (at least not clearly)[9], neither in the presentation of the gracious complaint pursuant to article 132 of the CPPT, nor in the Request for constitution of an arbitral tribunal, that it did not pay income subject to withholding, explaining the reason why it would not have had to withhold tax and in what the excess withholding consisted.

What it always concludes, yes, is that there was overpayment of tax because the partner did not deduct the amounts already paid through source withholding (article 21 of the complaint and 25 of the Claim).

In the closing submissions phase, the Claimant appears to alter somewhat the argument, highlighting, as to the interest it has in the action, that income not subject to source withholding is at issue because it concerns income allocated to partners in accordance with resolutions in general assemblies. That is, as argued in point 9 of the closing submissions, since the final part of letter h) of no. 1 of article 6 of the IRS Code expressly excludes from the category of capital income, the profits and advances on account of profits made available to partners by entities subject to the transparent tax treatment regime and since by virtue of article 19 of the IRS Code what constitutes income (category B) of the partner is the result of the allocation effected under the terms of article 5 of the Corporate Income Tax Code, the withdrawals of partners on account of profits are not subject to source withholding. (article 6, no. 1 letter h) and article 19 of the IRS Code)".

But, without doubt, its argument for obtaining the reimbursement of the amount paid continues to be that the passive subject to whom the withholding in question is related, partner B…, proceeded with the submission of its PIT declarations and payment of taxes without deducting the amounts relating to the withholdings in which it incurred regarding the period 2009, 2010 and 2011, because it concerns a passive subject to whom the transparent tax treatment regime applies, and therefore duplication of collection occurs, with reimbursement to the Claimant needing to take place.

Now let us see: the Claimant law firm partnership, which claims to have ceased business in 2011, seeks to be reimbursed for payment of amounts delivered to the State treasury by way of source withholding, arguing that these are amounts withheld when payments were made to a partner, in the fiscal years 2009, 2010 and 2011, as a result of the allocation of profit from the activity of the said partnership, in accordance with resolutions made in general assemblies of partners regarding the respective fiscal years.

In the previous point, we saw that in payments made by professional partnerships to partners there will or will not be place for source withholding depending on the nature of the income in question – there is no place for any source withholding regarding distribution of profits, including payment of amounts on account of profits, but there are subject to source withholding, just as provided for category A, income paid by the partnership to partners as salaries (and, we would add, as remuneration of social positions).

We also saw in the point above that profits are allocable in accordance with what is enshrined in the partnership agreement, or, in the absence of elements, in equal shares. Although it can be admitted different positions regarding the value to attribute to decisions of allocation made in general assembly, there would always need to be adequate proof that the participation in profits superior to that to which statutorily they would be entitled does not, in the concrete cases, take the nature of profit, as remuneration of management, gratification for extraordinary work, or other.

Now, it does not result from the case what the participation stipulated in the partnership agreement is regarding the allocation of partnership profits. Likewise, the relationship between the payments made whose reimbursement is sought and the withholdings made in payments to the partner whose declarations presented, with dates of 2013, did not include deductions at source, is not adequately proved.

And, beyond all of this, one will still ask – even if it were a matter of allocation of profits, and the Claimant were not obliged to withhold at source the amounts in question, could it request its reimbursement?

This is where the substantive question – incidence of tax – corporate income tax and personal income tax – in the case of partnerships under the transparent tax treatment regime, and the procedural question, existence of an exception for lack of legitimacy, become interwoven.

Let us see.

14.5. Challenge in Case of Source Withholding

Source withholding occurs when monetary deliveries are made by deduction from income paid or made available to the holder by the tax substitute (article 34 of the LGT).

Regarding the substitute, there is only a right of challenge in cases where it has made delivery of tax in a quantity superior to that which it withheld, as results from the very terms of no. 1 of article 132 of the CPPT [10] . «This is a special rule on legitimacy which, because it is, limits the generic recognition of legitimacy of substitutes made in nos. 1 and 4 of article 9 of the CPPT. In fact, the reference to the possibility of challenge in these cases of tax superior to that withheld has as its only utility the exclusion of the possibility of challenge by the substitute in other cases. If the substitute delivered what it withheld or less than it withheld, it is not affected in its legal sphere and therefore, in the perspective of the legislature, it is not justified to recognize it the right to challenge. If, eventually, the withholding was excessive, having been withheld more than was due, or if there should not even have been withholding, the party harmed is the substituted, who was deprived of receiving the withheld amounts, and not the substitute. Therefore, even if more was withheld than was due, as long as the substitute has not made delivery to the State of more than what it withheld, it will have no right to challenge."[11] (our emphasis).

It should be emphasized that even regarding cases in which the substitute delivered to the State more than what it withheld, no. 2 of article 132 requires that, if there is place for deliveries relating to the same passive subject and regarding the same tax, the entity that made deliveries in a superior amount must discount the tax delivered in excess in subsequent withholdings. And only in the case where there is no place for new source withholdings, is it admitted that the substitute challenge judicially the acts, although preceded by prior complaint (unless it is only a matter of law and the withholding was made in accordance with generic orientations of the AT), in the following deliveries of the same nature to be effected in the year (nos. 3 and 6 of article 132 and no. 3 of article 131)[12].

In cases of substitution, what then is the intervention of the substituted? According to no. 4 of article 132 of the CPPT, the provision in the preceding number (that is, presentation of prior gracious complaint) applies to challenge by the substituted of the withholding that has been effected on it, except when the withholding has the mere nature of payment on account of the tax due finally.

This means that in the case where it is not possible for the substitute to effect correction or in the case of excessive withholding without delivery superior to that withheld, the same type of procedure is followed (prior complaint for the administration to make pronouncement), but by the substituted.

The law provides nothing for the case where withholding is made on account of final payment, but there will be place for combination of income to be taxed with inclusion of income paid and deductions already made through deliveries, there naturally being place for challenge of the respective tax act[13].

14.6. The Case Sub Judice

Now returning to the case at hand, and bearing in mind both the established facts and the framework attempted above, it appears that the Claimant partnership effected withholdings between 2009 and 2011 and only on the basis of the PIT declarations of one of its partners relating to those periods, dated 2013, does it come to allege that the withholdings effected and respective payments were made erroneously.

But it does not invoke any error in delivery of an amount superior to that withheld. Rather it says that the amounts withheld were delivered (the documents presented show amounts even superior to those it claims to have withheld from the partner in question), arguing (in a confused manner), years after the withholdings, that it had no obligation to withhold tax when making payments to the partner, because this concerns allocation of profits. Nor even, as the Respondent argues, was an error in withholding committed as provided for in article 132 of the CPPT. And even if there was, each delivery should have been corrected in the subsequent delivery. In this case, it appears that all withholdings were claimed only in 2014, more than two years after the majority of the withholdings in question...

Now, in a situation where it is sought that partner B… should not have suffered withholdings, it was then incumbent on this party to react against the situation. As we saw above, it is incumbent on the substituted to react in the case of wrong withholdings not susceptible of correction or that were based on error regarding the conditions. If it is argued that the income allocated to partners constituted withdrawals on account of profits and therefore were not subject to source withholding (article 6, no. 1 letter h) and article 19 of the IRS Code)", it was incumbent on the partner to react, possibly invoking article 133 of the CPPT, as referred to above[14].

Nor does the Claimant's claim merit acceptance, at the end of its closing submissions, that, if it is considered to be a party without legitimacy, "the correction be made in the context of the PIT assessment of the passive subject B…, taxpayer no. … relating to the period 2009, 2010 and 2011 under penalty of duplication of collection as requested in the gracious complaint". It is not understood what the legitimacy of the Claimant is to act in the name of partner B….

And, as to the argument of duplication of collection, beyond the reference to article 204 being out of place in a case in which an execution does not concern, it would always be difficult to identify a duplication of collection regarding source withholding of PIT, which constitutes an amount paid on account of the tax to be paid finally and the PIT determined after combination of income subject to taxation[15]. That is, as regards the possibility of requesting revision of a tax act within the period of four years on the basis of duplication of collection (no. 4 of article 78 of the CPPT), it would, at most, be invocable by the partner of the Claimant. And regarding the subsequent act of assessment, not the original withholding act.

Thus, and as a result of the analysis undertaken of the facts and the applicable norms, it is concluded that the Claim is without merit. The decision that assessed the gracious complaint committed no illegality in considering that the Claimant did not prove the amounts of source withholding effected on its partner B…, in the period between 2009 and 2011, nor did it meet the conditions to request reimbursement of amounts allegedly withheld invoking payment of duplicate tax on the basis of failure to deduct in the income declarations of the partner relating to the same period, of the amounts withheld by the Claimant.

Since the Claim for declaration of illegality is without merit, the claim for condemnation for compensatory interest is also without merit[16].

15. Decision

With the grounds exposed, the arbitral tribunal decides:

a) To adjudge the request for arbitral pronouncement without merit both as regards the declaration of illegality of the decision dismissing the gracious complaint that had as its object source withholdings in the amount of € 29,996.07 (twenty-nine thousand nine hundred ninety-six euros and seven cents), effected by the Claimant between 2009 and 2011 and contained in documents attached to the case, and as regards the illegality of the withholdings themselves.

b) To condemn the Claimant to costs.

16. Value of the Proceedings

In accordance with the provision of no. 2 of article 315 of the Code of Civil Procedure, in letter a) of no. 1 of article 97-A of the CPPT and also of no. 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 29,996.07 (twenty-nine thousand nine hundred ninety-six euros and seven cents).

17. Costs

For the purposes of the provision of no. 2 of article 12 and no. 4 of article 22 of the RJAT and of no. 4 of article 4 of the Regulations on Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 1,530.00 (one thousand five hundred thirty euros), in accordance with Table I attached to the said Regulations, to be borne entirely by the Claimant.

Lisbon, 2 February 2017.

The Arbitrator

(Maria Manuela Roseiro)

[1] This was omitted from article 5 of the Claim (by evident oversight given the value of the case) but included in the complaint and recognized in the AT's Response.

[2] Possibly constituting an adequate regime for the taxation of partnerships as a whole, in the Portuguese case the legislature appears to have intended to prevent recourse to legal forms solely with the intention of reducing the tax burden, being therefore its scope of application for professional partnerships, for civil partnerships not constituted under commercial form and for simple asset management partnerships whose capital belongs to a family group (Saldanha Sanches, Manual of Tax Law, Coimbra Editora, 3rd edition, p. 294).

[3] The recent revision of the code expanded this concept of professional partnerships (see Rui Duarte Morais, On PIT, Almedina, 2014, 3rd edition, pp.207 et seq.). In the case of law firm partnerships, there will always need to be taken into account the specificities that arise from rules of the respective Bar Association.

[4] Saldanha Sanches, Manual of Tax Law cited, p. 297. Rui Duarte Morais considers somewhat reductive the vision that partnerships are only a passive subject of accessory obligations provided for in the Corporate Income Tax Code namely that of having organized accounting that will serve as the basis for the determination of its profit, emphasizing that they are legally holders of taxable income, considering them a legitimate and necessary party in any procedure concerning the quantification of such profit, even if for tax purposes. Thus, it moves away from the position subscribed to in the Supreme Administrative Court judgment of 3 January 2001, regarding notification of the act of determination of taxable matter (in "On PIT", p. 212/213, note 454). A different position appears to be subscribed to by Saldanha Sanches (op. cit. p. 297).

[5] And considers that it results from the law that if the general assembly decides to allocate to a partner a participation in profits superior to that to which statutorily they would be entitled, such value is not covered by the transparent tax treatment regime as it takes a nature different from that of profit (remuneration of management, gratification for extraordinary work, etc.). It adds, however, that seeming contradictory that in a partnership in which the professional contribution of each partner stands out, the right to profits is determined as a function of capital participation and not by the personal contribution of each to the success of the partnership in that fiscal year, it does not repel him that at least in partnerships that do not take commercial form, the distribution of profits by partners, decided, in each year, by the general assembly, would be accepted). (in On PIT, cited, p. 214, and note 457).

[6] Article 20 - 1- Constitutes income of the partners or members of the entities referred to in article 6 of the Corporate Income Tax Code, who are natural persons, that resulting from the allocation effected under the terms and conditions contained therein or, when superior, the amounts that, as advance on account of profits, have been paid or made available during the year in question. 2 - For purposes of the provision in the preceding number, the respective amounts are integrated as net income in category B.

[7] See Circular no. 8/90, point 6: "The said partnerships do not have to effect payments on account, obligation that falls to PIT holders as partners as holders of Category B income."

[8] See Circular 8/90, point 8: "Should furthermore, in accordance with articles 91 et seq. of the IRS Code, the said entities effect source withholding of PIT regarding income paid or made available to their partners, with the exception of that relating to profits or advances on account of profits made in accordance with the Code of Commercial Partnerships, in view of not taking, in accordance with the provision of letter h) of article 6 of that Code, the nature of capital income. (our emphasis).

[9] In article 10 of the complaint reference is made to "such income not subject to source withholding or exempt therefrom" but this is a sentence interjected in an argument in which it highlights the existence of double taxation due to non-deduction in the PIT declaration of the amount withheld, without any reference to the type of income at issue. Also the Claim, in article 24, mentions the lack of legal obligation to assess and pay tax wrapped in the argument of tax delivered in excess and duplication of collection.

[10] "Source withholding is susceptible of challenge by the substitute in case of error in delivery of tax superior to that withheld".

[11] See Jorge Lopes de Sousa, CPPT annotated, áreas publisher, 2011, II volume, p. 416. The Author considers the solution sensible, emphasizing that "if challenge by the substitute were permitted, without guarantee of knowledge by the substituted, it would provide it, in case of success in the challenge, with the availability of amounts wrongly withheld without any guarantee that the same would come to be delivered to the substituted, who was the one wrongly deprived of them" (ibidem, p. 414 and 417).

[12] Questioning whether this type of limitation is compatible with the guarantee of the right to contentious challenge of administrative acts (article 268, no. 4, of the Constitution), Jorge Lopes de Sousa, replies: "(…) in the situations referred there was no action by the tax administration that produces harmful effects for the taxpayer, nor is any administrative act detected, in face of the definition given by article 120 of the Administrative Code, wherefore it will be outside the scope of protection of that constitutional rule". (op. cit. p. 418).

[13] Jorge Lopes de Sousa suggests that, being a potentially harmful act, excessive withholding can be challenged by the taxpayer under article 133 of the CPPT, challenge in cases of payment on account, provision justified by the saving clause of the final part of no. 4 of article 132 (CPPT annotated, II vol. 422).

[14] Being incumbent on it then to effect proof of the type of income (profit and not remuneration of management or gratification for extraordinary work) that had been paid to it and of the effective withholdings and payments carried out.

[15] In a certain way in duplication of collection the opposite occurs, when having been paid a tax in full, it is being demanded of the same person or different person another tax of equal nature, relating to the same tax fact and the same period of time (see article 205 of the CPPT).

[16] Which moreover in this case would not be due on the basis of attribution of error to the AT, being only exigible from the dismissal of the complaint which thus constituted error of law attributable to the services (see Supreme Administrative Court judgment of 28 October 2009, case 0601/09). As Jorge Lopes de Sousa refers (CPPT annotated, 6th edition, I vol. p. 536), in the case of source withholding (just as in that of payment on account) "both the determination of taxable matter and the assessment are carried out by the taxpayer himself or by substitute, wherefore will be ruled out, as a rule, the possibility of the existence of error attributable to the services of the Tax Administration, at the moment the acts are carried out that determine the amount to be paid".

Frequently Asked Questions

Automatically Created

What is the fiscal transparency regime for professional partnerships under Portuguese IRC and how does it affect IRS withholding tax?
Under Portuguese law, professional partnerships (sociedades de profissionais) including law firms are mandatorily subject to fiscal transparency per Article 6 of the IRC Code and Articles 20 and 6 of the IRS Code. This means the partnership itself does not pay corporate tax; instead, net income is allocated directly to partners in proportion to their participation, even without actual profit distribution. Partners must declare their allocated share in Annex D of their IRS Model 3 declaration and pay personal income tax. Critically, income subject to this transparency regime should not be subject to source withholding under Article 98 IRS Code, as withholding applies to profits distributed by non-transparent entities. The allocated income flows directly to partners as taxable income, not as dividends or distributions requiring withholding.
Can a law firm (sociedade de advogados) file an arbitral claim to recover excess IRS withholding tax paid on behalf of its partners?
This is the central procedural issue in the case. The Tax Authority argues that under the tax substitution regime, only the substituted party (the partner who suffered the withholding) has procedural legitimacy to challenge excess withholdings and seek reimbursement, not the substitute (the law firm). However, Article 132(1) and (3) of the CPPT allows tax substitutes to present complaints regarding source withholding errors if they cannot offset the excess amount, with a two-year time limit. The law firm argues it falls within this exception because it delivered the withheld tax to the State treasury as required by Article 98(3) IRS Code but the underlying tax obligation was invalid due to the transparency regime. The outcome depends on whether courts interpret the substitute's standing narrowly (limited to collection issues) or broadly (including challenges to the legal basis of withholding obligations).
What constitutes procedural illegitimacy (ilegitimidade processual) in Portuguese tax arbitration proceedings involving substitute taxpayers?
Procedural illegitimacy (ilegitimidade processual) occurs when the party bringing a tax claim lacks legal standing under Portuguese procedural law. In tax substitution cases, this issue is particularly complex. While Article 20 LGT establishes that tax substitutes have autonomous tax obligations, Article 132(4) CPPT states that the substituted party has the same complaint rights as the substitute, 'except when the withholding has the mere nature of payment on account of the tax due finally.' The Tax Authority argues that in transparent partnerships, since partners are the ultimate IRS taxpayers and must declare allocated income, only they can challenge withholdings affecting their final tax liability. The partnership, as mere substitute, lacks the legal interest to contest because its patrimonial sphere was not affected—it correctly withheld and delivered amounts, even if the underlying obligation was erroneous. This exception is critical in determining whether substitute or substituted party must seek redress.
How are withholding tax errors on resident and non-resident partners of transparent entities corrected under Portuguese tax law?
Correcting withholding tax errors on partners of transparent entities requires understanding whether the substitute or substituted party must act. Article 132 CPPT provides that tax substitutes may present complaints within two years if unable to discount excess withholdings. For resident partners in 2009, the error involves withholding tax on income that should only be taxed upon the partner's IRS declaration of allocated transparent income. For non-resident partners in 2010-2011, the issue is compounded by different withholding rates and reporting obligations. The correction mechanism depends on who has standing: if the partner, they must request revision of their IRS assessments under Article 78 LGT (duplication of collection) or Article 100 LGT (tax paid in excess). If the substitute partnership has standing per Article 132 CPPT, they can directly challenge the withholding acts. The partner's failure to credit withholdings in their IRS returns creates a coordination problem requiring either correction of the withholding or amendment of the partner's IRS assessments.
What are the rights to reimbursement and compensatory interest (juros indemnizatórios) when excess IRS retention is made by a professional partnership?
Rights to reimbursement and compensatory interest depend on establishing both substantive entitlement and procedural legitimacy. Article 43(1) LGT establishes the right to compensatory interest (juros indemnizatórios) when tax paid in excess is not reimbursed within the legal timeframe, calculated from the payment date until reimbursement. Article 61 CPPT governs the reimbursement procedure for undue payments. The professional partnership argues it has direct reimbursement rights under Article 132 CPPT as tax substitute, plus compensatory interest under Article 43 LGT for the €29,996.07 excess withholding. However, if the Tax Authority's procedural illegitimacy exception succeeds, only partner B... could claim reimbursement through revision of his IRS assessments for 2009-2011, potentially recovering excess tax paid plus compensatory interest. The substantive right exists regardless—either the withholding was invalid under the transparency regime, or the partner's IRS payments should have credited the withholding—but the procedural path and entitled party remain disputed. Article 78(6) LGT on duplication of collection provides an alternative basis for relief.