CAAD 297/2017-T: IRC Payments to Entities in Favorable Tax Regimes – Deductibility of Expenses Ruling

ARBITRAL DECISION

I – REPORT

On 27 April 2017, A… LDA., NIPC…, with registered office at Rua …, nº…, …, …, …, …-… …, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter abbreviated as RJAT), seeking the declaration of illegality of the act of assessment of Corporate Income Tax (IRC) and autonomous taxation No. 2017…, and respective compensatory interest, relating to the year 2013, in the total amount of € 194,069.32, and of the act of assessment of IRC and autonomous taxation No. 2017…, and respective compensatory interest, relating to the year 2014, in the total amount of € 471,198.92.

To substantiate its request, the Applicant alleges, in summary, the following:

• the omission of an essential formality concerning the absence of the right to a hearing prior to the assessment of compensatory interest;
• the annulment of the assessments on the grounds that the expenses considered by the Tax Authority (AT) as non-deductible have been substantiated;
• the lack of justification for the assessment of compensatory interest.

On 28-04-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Applicant did not proceed to appoint an arbitrator, whereby, in accordance with the provisions of subparagraph a) of article 6, paragraph 2, and subparagraph a) of article 11, paragraph 1, of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who confirmed acceptance of the appointment within the applicable time limit.

On 14-06-2017, the parties were notified of these appointments and neither expressed any objection thereto.

In accordance with the provisions of subparagraph c) of article 11, paragraph 1, of the RJAT, the collective arbitral tribunal was constituted on 30-06-2017.

On 21-09-2017, the Respondent, having been duly notified, filed its answer defending itself solely by means of objection.

On 30-11-2017, the hearing referred to in article 18 of the RJAT took place, at which the witnesses presented by the Applicant were examined. In accordance with the provisions of subparagraphs c) and e) of article 16 and paragraph 2 of article 29, both of the RJAT, the holding of the hearing referred to in article 18 of the RJAT was dispensed with.

Following the granting of a deadline for submission of written submissions, the parties submitted the same, pronouncing on the evidence produced and reiterating and developing their respective legal positions.

Noting the failure to attach the Procedural File (PA) as required by article 17, paragraph 2, of the RJAT, the Respondent was notified on 21-02-2018 to proceed with its attachment, which it only did on 09-04-2018.

The deadline referred to in article 21, paragraph 1, of the RJAT was extended on two occasions, in accordance with paragraph 2 of the same article, by orders of 28-12-2017 and 21-02-2018.

The Arbitral Tribunal is materially competent and regularly constituted in accordance with articles 2, paragraph 1, subparagraph a), 5, and 6, paragraph 1, of the RJAT.

The parties have legal capacity and standing, are properly represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Administrative Order No. 112-A/2011, of 22 March.

The proceedings are free from defects of form.

Accordingly, there is no obstacle to the adjudication of the case.

Having examined all the foregoing, we now proceed to render

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

The Applicant's corporate purpose is "the civil construction industry, purchase, sale, resale of property acquired for that purpose; exchange and lease of urban or rural property, preparation of studies and town planning projects and management of real estate and condominiums".

The Applicant is, and was in 2013 and 2014, subject to IRC under the general regime for income taxation.

The company "B…" was incorporated on 27-09-2012 and has as sole shareholder C…, holding 600,000 shares valued at 1 Hong Kong dollar, corresponding to the entirety of the capital.

The company "B…" operates in all continents except the African continent and provides services to create the conditions for obtaining residence permits under "Golden Visa" programmes or similar programmes for Cyprus, Greece, Ireland, Malta, Portugal, Spain and the United States of America.

"B…" has more than 17 offices, 750 associates and 600 employees and was awarded by the Portuguese-Chinese Chamber of Commerce and Industry on 29 October 2015 with the "Business Merit Award".

The first contacts between the Applicant and "B…" took place in November 2012.

Mr. D… (Project Director) and Mr. E…, representatives of "B…", conducted prospecting activities to obtain promoters and selectable properties for the "Golden Visa" programme and, in this context, contacted Engineer F… .

Engineer F… represented several companies which, individually, did not meet the requirements imposed by B… regarding the quantity of available properties. However, jointly, the companies A…, G…, H… and I… satisfied these requirements, particularly regarding the number of units for sale in the same location.

A service provision contract was concluded between the Applicant and "B…", designated as "Framework Agreement", through which the Applicant undertook to pay a fee for each property sold to a buyer referred by "B…".

For 2013, payment of an amount equivalent to 15% of the value of each sale, net of taxes, was provided as an "Assistance Fee".

Through this contract, "B…" undertook to promote and publicize the Applicant's properties among Chinese citizens.

"B…" provided the following services:

• preparation of brochures and other promotional material about Portugal and the national real estate market;
• accompaniment of Chinese citizens when traveling to Portugal to visit the properties;
• payment of travel, accommodation, food and other expenses related to stay and property visits;
• interpreter services;
• engagement of drivers to transport Chinese citizens in Portugal, namely between the airport and the hotel, services for foreigners and borders, banks, restaurants and the main tourist attractions in Portugal;
• accompaniment of Chinese citizens in opening bank accounts;
• assistance to citizens in decorating properties and connecting to electricity, gas and water networks;
• provision of legal services.

"B…" conducted promotional campaigns regarding the advantages and benefits of living in Portugal in various cities in China.

These campaigns featured members of the Government of the People's Republic of China, ambassadors, consuls and representatives of the Portuguese Agency for Investment and External Trade (AICEP) as invited speakers.

"B…" engaged former footballer J… to promote Portugal as a good destination for living and investing.

In 2014, through an "Amendment 2 to Framework Agreement", the value of the remuneration mentioned in point 10 was changed from 15% to 20%.

This increase was justified by B… by the need to increase investment in promoting Portuguese real estate in China, given the increased competition from Spanish real estate.

In January 2014, the Applicant increased the price of the units by 5% in order to bear the increase in commission.

Payments to B… were made by bank transfers from K… .

The amounts paid by the Applicant ranged between 15.7%, in 2013, and 18.35%, in 2014, of the price received from the sale of the properties.

The value of the commission was imposed, with the Applicant having no opportunity to discuss its amount.

Real estate brokers providing services equivalent to "B…" charged identical values for the service rendered.

The company "L…, SA" paid on 07 October 2014 the amount of €113,400.00 to the company "M…, Ld.ª", based in Macau, for mediation services in the sale of a property at the price of €630,000.00.

The aforementioned payment corresponds to an 18% commission and was accepted by the Tax Authority as a cost, and was not subject to autonomous taxation, in the inspection procedures relating to service orders OI2016… and OI2016… .

In the fiscal years 2013 and 2014, the Applicant made payments for measurement services to the company "B…", based in Hong Kong, in the amount of €477,250.00 in 2013, and €802,063.00 for the year 2014.

In the accounting records of the Applicant and in the invoices issued, the services provided by "B…" are recorded as Marketing and Advertising services.

In 2014, the marketing and advertising expense account showed a total balance of €959,313.00, which included €157,250.00 of expenses relating to 2013. In the same year, the VAT deductible account showed a balance of €220,701.68, which included €36,167.50 of VAT on those marketing and advertising expenses.

In the fiscal year 2013, the units sold to customers of Chinese nationality with the intervention of "B…" were as follows:

[Details of sales and costs as provided in original]

With regard to the sale of units S and J of property index…, these were accounted for in 2013; however, the expenses accounted for as marketing and advertising, totaling €157,250.00, the VAT charged and the VAT deductible and not deductible of €36,167.50 were accounted for in 2014.

The cost of sale of the units was €2,209,010.66, divided as follows:

[Cost breakdown as provided in original]

In the fiscal year 2014, the units sold to customers of Chinese nationality with the intervention of "B…" were as follows:

[Details of sales as provided in original]

The expenses accounted for as advertising and marketing totaling €157,250.00 of units S and J of Lot 14, as well as the corresponding VAT totaling €36,167.50, were accounted for in 2014, although the respective sales were recorded in 2013.

The cost of sale of the units to Chinese customers was €3,421,919.91, divided as follows:

[Cost breakdown as provided in original]

As of 31-12-2012, the applicant had a banking debt of €7,830,390.00.

As interest, the Applicant paid the banks from 2006 to 2014 the following amounts:

• 2006: €63,082.35;
• 2007: €189,572.74;
• 2008: €309,199.00;
• 2010: €282,701.27;
• 2011: €202,617.72;
• 2012: €447,140.72;
• 2013: €473,615.08;
• 2014: €113,830.33.

In the year 2013, the Applicant's sales were as follows:

[Sales details as provided in original]

The evolution of products and business volume from 2012 to 2013 was as follows:

[Evolution details as provided in original]

In the year 2014, the Applicant's sales were as follows:

[Sales details as provided in original]

Of the amounts referred to in 2013 and 2014, €56,605.63 and €34,703.97, respectively, are attributable to a loan to the company "G…" of the Applicant's group.

The company "B…" had partners in China who sourced clients for it, with whom it divided the commission.

Several hundreds of emails were exchanged between the companies of Manager Engineer F… and the company "B…", from 5 months before the sale of the first property until the end of the commercial relationship between the companies.

The sale of properties proceeded as follows:

• A potential buyer referred by "B…" arrived at [location] and was received by a translator who accompanied him throughout his stay at [location] and by a driver who accompanied him on all trips in Portugal to the properties and some major tourist attractions at the gastronomic, scenic and cultural level, both engaged by "B…"
• Potential clients traveled to the law offices "N…" and "O…" where they were presented with the "Golden Visa" programme in Portugal.
• The potential client began a visit to 10 reference real estate developments, and from those 10, chose 2 or 3 to enter into negotiations.
• Once the deal was closed, the translator engaged by "B…" filled out the "Property Purchase Confirmation Form" provided by "B…", written in English and Mandarin, with the business conditions, identified the property, the price, payment conditions and the expected date for the deed.
• This document was signed by the client and the developer and then annexed to the promise to purchase and sell contract.
• The promise to purchase and sell contract was prepared by the law office "N…" or "O…", engaged by "B…", and signed by the client, the developer and the translator.
• The developer issued the receipt corresponding to the earnest money received, followed by a visit to the Service for Foreigners and Borders (SEF) to collect biometric data.
• Finally, the developer requested the registration of the buyer's name in the land registry.

The law offices "N…" and "O…" had offices in China and, in representation of "B…", prepared and accompanied the entire operation.

"B…" brought an action against the Applicant seeking payment of the amount of €75,596.12, titled by invoice No. 069/2015 of 13.04.2015, as commission on a sale, an action which is pending with number …/15…T8… in the Central Instance –… Civil Section, …, of the District of ….

The aforementioned litigation arose because the Applicant refused to pay commissions in respect of which B… did not present document 21RFI and the residence certificate for the year 2015.

The Applicant was subject to an external general inspection procedure for the purpose of controlling compliance with tax obligations for the fiscal years 2013 and 2014, through Service Order No. OI2016… and OI2016…, of 29-09-2016.

In the course of the inspection action, several inaccuracies were detected, namely in the expenses considered for the purposes of determining taxable income relating to the fiscal years 2013 and 2014, in the amounts of €477,250.00 and €802,063.00, respectively.

In Chapter 7 of the Tax Inspection Report, express reference is made to compensatory interest.

The Applicant was notified of the Draft Tax Inspection Report and, if it wished to exercise its right to a hearing, in accordance with article 60 of the General Tax Law (LGT) and article 60 of the Tax Procedure and Process Code (RCIPT).

On 28-12-2016, the Applicant exercised its right to a hearing, having raised the following:

[Details of the hearing arguments as provided in original]

The Tax Inspection Services issued the Final Tax Inspection Report, which contains the following:

[Details of the Final Report as provided in original]

1. The Applicant was notified of the demonstrations of IRC assessment No. 2017 … and No. 2017 … and of the assessment of compensatory interest, which incorporate the corrections made during the inspection.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Justification of Proven and Not Proven Factual Matters

With respect to factual matters, the Tribunal does not need to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish proven from unproven matters (see article 123, paragraph 2, of the Code of Tax Procedure and Process (CPPT) and article 607, paragraph 3 of the Code of Civil Procedure (CPC), applicable pursuant to article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the adjudication are selected and defined in light of their legal relevance, which is established in consideration of the various plausible solutions of the legal question(s) (see former article 511, paragraph 1, of the CPC, corresponding to the current article 596, applicable pursuant to article 29, paragraph 1, subparagraph e), of the RJAT).

Accordingly, having regard to the positions taken by the parties, in light of article 110, paragraph 7, of the CPPT, the documentary evidence and the Procedural File attached to the case record, the facts listed above have been established as proven, with relevance to the decision, bearing in mind that, as stated in the Decision of the Administrative Court of Southern Region of 26-06-2014, rendered in case 07148/13[1], "the probative value of the tax inspection report (...) may have evidential force if the assertions contained therein are not contested".

In particular, the facts contained in points 6 to 8, 12, 13, 14, 21, 22, 40 to 43 and 45 took into account the testimony given at the hearing referred to in article 18 of the RJAT, which corroborated and supplemented the available documentary evidence. Of particular relevance were the statements made by F…, combined with the testimony of P…, who demonstrated direct knowledge of the entirety of the matter contained in the aforementioned points, relating the facts in a coherent and objective manner, in terms which, insofar as they were relevant, were confirmed by the remaining testimony, and were in accordance with the available documentary evidence in the case file, leaving this Tribunal with no reasonable doubt as to the occurrence of the facts as established.

No findings were made as to whether allegations made by the parties, presented as facts, consisting of statements that are strictly conclusive in nature, incapable of proof and whose truthfulness must be assessed in relation to the concrete factual matters consolidated above, were proven or not proven.

No findings were made that facts alleged by the parties, incompatible with the facts established as proven, were not proven.

B. LAW

In the present arbitral action, the issue is to ascertain the legality of the correction and autonomous taxation relating to expenses with payments made by the Applicant to the company "B…".

Let us consider this matter.

Regarding the correction and autonomous taxation relating to expenses with payments to the company "B…", the Tax Authority concluded, in summary, that the Applicant did not demonstrate, as was its burden, the effectiveness of the operations or the reasonableness of the value corresponding to the expenses it accounted for, considering, briefly, that:

• the evidence gathered does not permit, specifically, by reference to the description of the invoices in question, identification of the concrete service provision described therein;
• there is equally no evidence that specifically permits assessment of the real importance of the advantages gained from the conclusion of the contract with the two entities based in Hong Kong;
• the Applicant, in relation to the operation in question, has no proof to demonstrate the normal character thereof.

At issue is the application of articles 65 of the Corporate Income Tax Code (CIRC), as set out in Law No. 64-B/2011, of 30 December (in force in 2013) and 23-A/1/r) (in force in 2014), and 88, paragraph 8 of the same Code, which establish the following, insofar as relevant to the case:

"Article 65

Payments to Non-Resident Entities Subject to a Privileged Tax Regime

1 – Amounts paid or due, in any capacity, to natural or legal persons residing outside Portuguese territory and subject thereto to a clearly more favorable tax regime are not deductible for the purposes of determining taxable profit, unless the taxpayer can prove that such expenses correspond to operations effectively carried out and do not have an abnormal character or an exaggerated amount.

2 – A natural or legal person shall be considered to be subject to a clearly more favorable tax regime when the territory of residence thereof appears on the list approved by order of the Minister of Finance or when it is not subject to income tax identical or analogous to personal income tax or corporate income tax, or when, regarding the amounts paid or due mentioned in the preceding number, the amount of tax paid is equal to or less than 60% of the tax that would be due if the aforementioned entity were considered resident in Portuguese territory.

3 – For the purposes of the preceding number, taxpayers must possess and, when requested by the Tax and Customs Authority, provide the elements demonstrating the tax paid by the non-resident entity and the calculations made for the determination of the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence thereof does not appear on the list approved by order of the Minister of Finance.

4 – The proof referred to in paragraph 1 must take place following notification of the taxpayer, made with a minimum advance notice of 30 days."

"Article 23-A

Non-Deductible Expenses for Tax Purposes

1 - The following expenses are not deductible for the purposes of determining taxable profit, even when accounted for as expenses of the tax period:

(...)

r) Amounts paid or due, in any capacity, to natural or legal persons residing outside Portuguese territory and subject thereto to a tax regime identified by order of the member of the Government responsible for the area of finance as a clearly more favorable tax regime, unless the taxpayer proves that such expenses correspond to operations effectively carried out and do not have an abnormal character or an exaggerated amount."

"Article 88

Autonomous Taxation Rates

(...)

8 - Expenses corresponding to amounts paid or due, in any capacity, to natural or legal persons residing outside Portuguese territory and subject thereto to a clearly more favorable tax regime, as defined in accordance with the Code, are subject to the regime of paragraph 1 or 2, as appropriate, with the applicable rates being, respectively, 35% or 55%, unless the taxpayer can prove that they correspond to operations effectively carried out and do not have an abnormal character or an exaggerated amount. (...)

14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers that present a tax loss in the period to which any of the facts mentioned in the preceding numbers relate, connected to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from corporate income tax."

The territory of Hong Kong was included, in 2013 and 2014, in the "list of countries, territories and regions with privileged taxation regimes, clearly more favorable," which appears in Administrative Order No. 292/2011, of 8 November, which amended Administrative Order No. 150/2004, of 13 February.

As stated, at issue in the case sub iudice is the proof, imposed by both of the aforementioned rules, regarding the effectiveness of the operations and the normal or non-exaggerated character of the operations.

a.

Regarding the first of the points mentioned, there is no basis for any doubt regarding the occurrence of the operations in question.

Indeed, as results from the proven facts, the Applicant experienced an increase in its business volume from 2012 to 2013 of more than 90%, with approximately two-thirds of such volume being directly related to sales to Chinese customers, and in 2014, this clientele represented more than 98% of the Applicant's business volume.

Furthermore, commercial documentation and correspondence exchanged between the Applicant and B… relating to these activities was submitted, and the evidence produced at the hearing in that sense came from those who had direct contact with these activities in Portugal.

Moreover, it is not disputed that the amounts invoiced and accounted for as expenses were actually paid, and it is evident that the Applicant charged and remitted VAT to the State on those amounts.

Finally, and as stated in arbitral case 198/2017T, which dealt with a situation analogous to that in the present case:

"In fact, the undisputed fact that the Applicant sold a large quantity of properties to Chinese citizens is indirect but convincing proof that there was efficient sourcing activity, for without it one cannot see how they could have known that the Applicant had properties for sale. Moreover, the fact that B…'s remuneration was paid precisely if and only if it resulted in the completion of sales ensures that there were no payments that did not have underlying sourcing activity.

For this reason, there is no basis for not considering it proven that the expenses incurred by the Applicant with payments to B… correspond to operations effectively carried out.

In this context, it appears manifestly unjustified to require, as proof of the effectiveness of the activity carried out by B…, the "identification of human resources involved, hours applied and hourly rates per consultant," the "evidence of meetings, surveys," or "knowledge of whether those who executed it have professional experience," for, apart from being information that normally will not be accessible to those contracting a foreign company for sourcing services, there will be little concern for the purchaser when it comes to payments that are made based solely on results.

It should even be said that the requirement of "identification of human resources involved" and the investigation of their professional experience in an activity of the scope described is beyond the limits of reasonableness, for in its literal sense it would encompass the identification of all those who provided services of air transport, services in restaurants and hotels, taxi drivers, etc."

Accordingly, there is sufficient proof that the payments in question correspond to operations effectively carried out.

Regarding the considerations of the Respondent, based on the description of the invoices in question, which characterize the services as "Marketing" in the period in question, apart from having been duly explained by the witness testimony produced, it should be noted that it is now well established that "For the purposes of corporate income tax, the documentary evidence and substantiation of costs for the purposes of articles 23, paragraph 1, and 42, paragraph 1, subparagraph g), of the CIRC need not assume the essential formalities required for invoices for VAT purposes, since the requirement of documentary proof is not confused with nor exhausted in the requirement of an invoice, requiring only a written document, in principle external and with mention of the fundamental characteristics of the operation, since unlike VAT, for corporate income tax purposes, the substantiation of the cost constitutes a probative formality and is thus replaceable by any other form of proof."[2]

This is itself recognized expressly in the Inspection Report, so the considerations made by the Respondent in its Response lack support when it states:

• "the Administration cannot, and with due respect, and the Tribunal cannot either, apply another qualification to the operations in question";
• "assigning another qualification to the invoices issued and what is recorded in the accounting records means from the outset that the expenses with marketing and advertising that the Applicant intends to deduct cannot be legally admitted";
• "the invoices issued do not correspond to the services that were actually provided".

Indeed, as the Tax Authority itself also concedes, invoices for corporate income tax purposes do not have a substantive nature, so their possible insufficiencies or irregularities do not, in any way, conflict with the materiality that may be established, especially when, as is the case, such insufficiencies or irregularities do not assume, in light thereof, any relevance regarding the calculation and determination of tax due. It should be noted in this regard that in the Inspection Report itself it states that "regardless of the qualification of the intermediary's intervention, what matters for tax purposes will rather be investigation of possible compliance with the requirements that prevent disregard as expenses of the period" and that "For the purposes of assessing the requirements for deductibility in corporate income tax the tax legislation places emphasis on payment to an entity located in a jurisdiction with privileged taxation, regardless of the qualification that may be given to its activity, be it as a real estate broker, commission agent, commercial agent, or any other".

Thus, there is no fiction here, but rather the contrary (fiction would be to consider that certain services are at issue, in the face of clear evidence that this is not the case), but solely to assess "compliance with the requirements that prevent disregard as expenses of the period" of the payments in question.

Regarding the lack of proof permitting assessment of the real importance of the advantages gained from the conclusion of the contract with the two entities based in Hong Kong, it is considered that it is evident, both from the evolution of the Applicant's business volume before and during the existence of the commercial relationship with those companies, and from the weight of the clientele residing in China during the validity of that same relationship, and from the evolution of the price of the units traded by the Applicant, as evidenced by its invoicing.

b.

Regarding the normal and non-exaggerated character of the operations in question, it is also considered that sufficient proof has been produced in that sense.

Indeed, considering both the scale of the operation to procure, transport and accompany customers for properties valued at hundreds of thousands of euros from China to Portugal, overcoming the notoriously existing geographical and cultural divide, and considering the publicly known state of the real estate sector in Portugal in the years 2012 and following, and considering the appreciation of the properties that occurred and which the documentation collected by the Tax Authority itself evidences, the scale of the commission values that the Applicant paid will be understood.

Furthermore, as results from the proven factual matters, the Applicant was heavily indebted, and the clearance of its stock through the Chinese clientele provided by B… allowed a substantial reduction in its liabilities, and correspondingly in the financial charges incurred, a gain which must necessarily be taken into account in assessing the normality and non-exaggeration of the operations in question.

It should further be noted that in the case at hand the commissions in question amounted to values between 15% and 20%, and it is proven that a competitor of the Applicant paid a commission of 18% to a company based in Macau, with the Tax Authority accepting the corresponding expense, which evidences that what impresses the Tax Authority is not the value of the commission but the location of those receiving it.

Hence there is no doubt that the values in question correspond, in their context, to normal operations and do not have an exaggerated character.

Restating what was written in the aforementioned arbitral decision rendered in case 198/2017T:

"In deciding whether or not there is exaggeration, one cannot take as terms of comparison the percentages of commissions that the Tax and Customs Authority says are normally charged by real estate companies, between 3% and 5%, since what was carried out by B… is not limited to what is normally done in real estate mediation, which does not involve expenses of the order of those proven to be borne by B… (payment of travel, accommodation, food, transport, interpreters, etc.).

On the other hand, assessment of the requirement of non-exaggeration should be carried out taking into account the situation of the taxpayer, seeking to determine whether the payment should be considered excessive from its perspective in the context in which it must decide to pay for the services.

From this perspective, payment will be exaggerated when it is shown that the taxpayer could obtain the same service for a lesser amount.

It results from the evidence produced that the Applicant intended to sell the properties as quickly as possible, as it was provided that the process of construction and sale of the properties would be completed by 2010, five years after the start of the construction process, and it had still not managed to sell them by 2013 and 2014, due to the economic and financial crisis situation affecting Portugal.

The evidence produced is also to the effect that the Applicant could not obtain customer acquisition at commission rates lower than those of B…, which would not accept them, nor from other service providers for customer acquisition, as none provided it with customers who would pay the sale prices that the Applicant intended to obtain for itself.

Under these circumstances, the payment cannot be considered exaggerated, as it is justified by the need to obtain sourcing services and there being no alternative at a lower price.

The reasonableness of the payments made to B… is further reinforced by the fact that the Applicant was not adversely affected by the payments it made thereto, as it only paid when it completed the sale of the properties and what it paid to B… was added to the sale price that the Applicant itself set and intended to obtain for itself.

For the foregoing reasons, it is concluded that the Applicant proved that the payments made to B… were not abnormal nor exaggerated."

As stated in the transcribed decision, it is considered that assessment of the normal and non-exaggerated character of the operations should be based on the specific case, taking into account the specific situation in which such operations were carried out, and one cannot formulate "tables" or a priori formulas that would mechanically exclude certain types of operations from the scope of reasonableness or relegate them to the plane of exaggeration, a path which apparently was followed in the Inspection Report, where it can be read that "on the basis of common sense and from an empirical judgment, without need to resort to technical knowledge (...) the rate paid by A… appears exaggerated".

In the case at hand, however, the commissions in question arise in a scenario of acute economic crisis, in which the market was practically stalled, and in which the services remunerated by those commissions bring significant added value to the product sold, primarily, and in the case, by permitting its sale, freeing funds for reduction of liabilities and corresponding associated financial charges.

On the other hand, with the service being paid solely based on results, there is increased risk for the service provider, which must bear – notoriously – substantial costs to bring clients "from the other side of the world," and additional security for the service buyer, who only undertakes the obligation to pay, having assured the return from completion of its sales, and it should be noted that the activity in question allowed accommodation of the additional cost, ensuring a profit margin for the seller.

Finally, in the case there is no detection, nor is it substantiated by the Tax Authority, of any concrete evidence of fraud or tax evasion.

Thus, and in light of all the foregoing, it is considered that the tax act subject to the present arbitral action, regarding this part, is affected by errors in the factual assumptions and consequent error in law, and should therefore be annulled, with the correspondingly procedent arbitral request.

The assessment of compensatory interest is premised on the assessment of tax, the annulment of which determines the consequent annulment thereof.

Given the total procedence of the arbitral request, on the basis of the grounds set forth, knowledge of the remaining issues raised by the Applicant is rendered moot.

C. DECISION

For these reasons, this Arbitral Tribunal decides to find the arbitral request entirely procedent and, in consequence:

• Annuls the act of assessment of IRC and autonomous taxation No. 2017…, and respective compensatory interest, relating to the year 2013, in the total amount of € 194,069.32, and the act of assessment of IRC and autonomous taxation No. 2017…, and respective compensatory interest, relating to the year 2014, in the total amount of € 471,198.92;
• Condemns the Respondent to bear the costs of the proceedings in the amount determined below.

D. Value of the Proceedings

The value of the proceedings is set at € 665,266.24, in accordance with article 97-A, paragraph 1, subparagraph a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of the RJAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is set at € 9,792.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was entirely procedent, in accordance with articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and article 4, paragraph 4, of the cited Regulation.

Let notification be made.

Lisbon, 30 April 2018

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Nuno Cunha Rodrigues)

The Arbitrator Member

(Sérgio Pereira da Silva)

[1] Available at www.dgsi.pt, as is the remaining case law cited without citation of source.

[2] Decision of the Supreme Administrative Court of 05-07-2012, rendered in case 0658/11, available at www.dgsi.pt.