Summary
Full Decision
ARBITRAL DECISION
The arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president, appointed by the CAAD Deontological Council), Prof. Doctor António Martins and Prof. Doctor Gustavo Courinha, appointed by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 11-04-2019, agree as follows:
1. Report
A... – BRANCH IN PORTUGAL, a legal entity with registration number..., with permanent representation at Rua ..., n.º..., ..., ...-... Lisbon, branch in Portugal of A..., a credit institution with registered office and effective management in ..., ..., ..., ..., United Kingdom (the "Claimant" or "A..."), filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of Articles 2, No. 1, paragraph a), 6, No. 2, paragraph b), and 10, Nos. 1 and 2, of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), with a view to partial annulment of Additional Corporate Income Tax Assessment No. 2018..., of 5 September 2018, as well as of the interest calculation statement No. 2018... and of the accounts adjustment statement No. 2018..., of 7 September 2018, relating to the tax year 2015.
The Claimant further requests restitution of the tax it considers wrongfully paid, together with compensatory interest in accordance with Article 43, No. 1, of the General Tax Code (LGT), calculated from the date of wrongful payment to the date of its effective and total restitution.
The TAX AND CUSTOMS AUTHORITY is the named respondent.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the Tax and Customs Authority on 16-01-2019.
The signatories communicated acceptance of the exercise of their functions within the applicable timeframe.
On 22-03-2019, the Parties were notified of the appointment of the arbitrators and did not manifest a will to challenge, in accordance with the combined terms of Article 11, No. 1, paragraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.
Thus, in conformity with the provision in paragraph c) of No. 1 of Article 11 of the RJAT, the collective arbitral tribunal was constituted on 11-04-2019.
The Tax and Customs Authority responded, raising an exception denominated "the incompetence of the Arbitral Tribunal to order the AT to pay the amount of € 5,657,638.80" and defending the lack of merit of the request for arbitral pronouncement.
By order of 24-05-2019, it was decided to dispense with the holding of the meeting provided for in Article 18 of the RJAT and that the proceedings continue with optional submissions.
The Parties submitted their submissions.
The arbitral tribunal was regularly constituted and is competent.
The parties possess legal personality and capacity, are legitimate (Articles 4 and 10, No. 2, of the same act and Article 1 of Ordinance No. 112-A/2011, of 22 March) and are properly represented.
The proceedings are not affected by any nullities.
It is incumbent upon us to decide.
2. Exception "of the incompetence of the Arbitral Tribunal to order the AT to pay the amount of € 5,657,638.80"
The Tax and Customs Authority raises the issue which it denominates "the incompetence of the Arbitral Tribunal to order the AT to pay the amount of € 5,657,638.80" and understands that "the specific tax amount to be annulled should be ascertained solely in execution proceedings" (Article 25 of the Response).
The Claimant states, in its submissions, that it did not formulate any request for the Tax and Customs Authority to be ordered to pay, but only "partial annulment of the Additional Assessment, with the necessary restitution of wrongfully paid tax" and agrees with the Tax and Customs Authority regarding the ascertainment of the amount to be annulled solely in execution proceedings (Article 18 of the submissions and paragraph C of the conclusions).
With this clarification of the request formulated, which corresponds to the request for arbitral pronouncement, and considering the position of the Claimant in agreement with the Tax and Customs Authority, it should be considered established in the proceedings that there is no dispute on this matter and that it is not necessary to determine in the present proceedings the amount of any order for restitution.
Thus, being unnecessary, the question of incompetence raised by the Tax and Customs Authority will not be considered.
2. Statement of Facts
2.1. Proven Facts
The following facts are considered proven:
–The Tax and Customs Authority carried out a tax inspection of the Claimant, relating to the tax year 2015;
–In that inspection, the Tax Inspection Report (hereinafter "RIT") was prepared, which is contained in document No. 3 attached to the request for arbitral pronouncement, the content of which is reproduced herein;
–Among the adjustments made, the following was included:
"1.4. 1. 2 - NON-DEDUCTIBLE EXPENSES FOR TAX PURPOSES (ARTICLE 18, ARTICLE 28-A AND ARTICLE 31-B, ALL OF THE CIRC) € 201,467,982.16
Addition to the taxable base of the expense recorded in account NCA 728014 - "Other operating expenses incurred - Discontinued operations - Other – F...", relating to "estimated loss" associated with the potential sale of the retail banking business unit, given that the sale transaction did not occur in 2015 and the same has no framework under the regime established for tax-deductible impairment losses" (page 8 of the RIT);
–In the substantiation of this adjustment, the following is referred to in the RIT:
III. 1. 2 - NON-DEDUCTIBLE EXPENSES FOR TAX PURPOSES (ARTICLE 18, ARTICLE 28-A AND ARTICLE 31-B, ALL OF THE CIRC)
€ 201,467,982.16
From the analysis of the trial balance, as of 2015-12-31, it was ascertained that account NCA 728014 - "Other Operating Expenses Incurred - Discontinued operations - Other – F...", presented a debit balance of €203,827,996.17.
In order to validate the amount recorded in account NCA #728014, the Taxpayer was requested to provide the account statement for the tax period of 2015, with a description of the entries.
From the analysis of the respective account statement, it was ascertained that it showed expenses related to "F... - Costs to sell, in the amount of €31,371,998.75 and "F... - Loss on sale", in the amount of €172,455,997.42, both of the F... project, associated with the sale, which occurred in 2016, of the retail banking business unit of A... - Branch in Portugal to B..., S.A., as per Annex No. 5 (1 page).
In this sense, A... was questioned to demonstrate the calculation of the loss, clarify its nature, present copies of all documents evidencing the calculated loss, the tax treatment given to the operation, as well as present the accounting entries.
In response, the A..." clarified that:
–"The expense recorded in account NCA #728014 corresponds to the negative difference between the realization value of the transaction of the retail banking business unit to B... and the book value thereof, as well as the costs associated with the sale operation in the amount of 26.6 million euros (...);
–"The accounting loss recorded in the context of the operation in question was considered deductible for the purpose of determining the taxable income for 2015, with the exception of the portion that was classified as capital losses relating to equity interests in G..., as well as relating to components of tangible fixed assets, in the amount of € 663,813.97 (both added in the income statement Form 22 of 2015, (...) ".
It further made available the so-called "Business Unit Acquisition Agreement" underlying the transaction of the retail banking business unit to B... S.A., dated 2 September 2015 and which only became effective during 2016.
From the accounting and tax treatment adopted by A... Branch
In accordance with the information provided by the Bank, the accounting loss recognized was based on the assumption that B..., S.A, would pay to A... Branch 93.7% of the net book value of the assets on the date of the transaction (during 2016), which implied the recognition of an estimated accounting loss of 6.3%, calculated on the book value of the assets on the date of transfer to non-current assets held for sale, which occurred in the tax period of 2015, having A..., in its understanding, proceeded in accordance with IFRS 5.
In fact, in the 2015 Annual Report of A... - Note 44 of the notes to the financial statements, it is stated that:
–"[the] Group applies IFRS 5 Non-current assets held for sale;
–«The group to be divested includes all assets and liabilities of the Portuguese businesses of Retail Banking, Wealth Management and Investment, and part of the Portuguese Corporate Banking business. This sale is included in the divestment of the Non-core segment of the Group;
–«The Portuguese divestment was announced on 2 September 2015, and the sale should be completed in the 1st quarter of 2016".
As stated previously, regarding the "tax treatment" adopted by A... Branch, the accounting loss recognized was considered deductible for the purpose of determining taxable income for 2015, with the exception of the portion that was classified as capital losses relating to equity interests in G..., as well as relating to components of tangible fixed assets, in the amount of € 663,813.97 (both added in the income statement Form 22 of 2015).
Thus, a deduction of € 203,164,182.20 (€ 203,827,996.17 - € 663,813.97) contributed to the formation of taxable income for the tax period 2015.
Notably, for the situation at hand, it is important to note that the "F... - Costs to sell", in the amount of € 31,371,998.75 shown in account NCA 728014 - "Other operating expenses incurred - Discontinued operations - Other – F...", was offset by account NCA 52896 - "Expenses payable - Other expenses payable - Other Accruals – F..." and that according to the available information, actual expenses of the period 2015 were, by use of the said account, in the amount of € 1,696,200.04, as demonstrated in Annex No. 6 (1 page).
However, the procedure adopted by the Bank has no tax framework, as follows:
From the accounting framework
As mentioned, A... Branch in the accounting recognition of the operation in question adopted IFRS 5 - Non-current assets held for sale and discontinued operating units.
The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operating units. In particular, the IFRS requires:
a) that assets that meet the criteria for classification as held for sale be measured at the lower of carrying amount and fair value less costs to sell, and that depreciation of those assets must cease; and
b) that assets that meet the criteria for classification as held for sale be presented separately on the face of the statement of financial position and that the results of discontinued operating units be presented separately in the statement of comprehensive income.
Under § 4, it is stated that: "Sometimes an entity disposes of a group of assets, possibly with some liabilities directly associated with them, together in a single transaction. Such a group for disposal may be a group of cash-generating units, a single cash-generating unit, or part of a cash-generating unit. The group may include any assets and any liabilities of the entity, including current assets, current liabilities and assets excluded by paragraph 5 from the measurement requirements of this IFRS. If a non-current asset within the scope of the measurement requirements of this IFRS is part of a group for disposal, the measurement requirements of this IFRS apply to the group as a whole, so that the group is measured at the lower of its carrying amount and fair value less cost to sell. The requirements for measurement of individual assets and liabilities within the group for disposal are set out in paragraphs 18, 19 and 23".
An entity must classify a non-current asset (or group for disposal) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than continued use.
That is, a non-current asset held for sale (ANCDV) is, by definition, an asset in which sale is highly probable and is expected to be completed within a very short timeframe.
In accordance with that established in § 15, "An entity must measure a non-current asset (or group for disposal) classified as held for sale at the lower of its carrying amount and fair value less costs to sell".
And costs to sell are "The incremental costs directly attributable to the disposal of an asset (or group for disposal), excluding financing costs and income tax expenses" and fair value "is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date".
Regarding the recognition of impairment losses and reversals, it establishes: "'An entity must recognize an impairment loss with respect to any initial or subsequent reduction of the asset (or group for disposal) to fair value less costs to sell, (...)", in accordance with § 20.
As for the measurement process resulting from classification as held for sale, it comprises several phases, namely:
1st Analysis and evaluation of recorded impairment losses;
2nd Measurement of the asset (or group for disposal) in accordance with applicable IFRS;
3rd Remeasurement of the asset (or group for disposal) as a whole at the lower of its carrying amount and fair value less costs to sell. In the event that fair value less costs to sell is less than the carrying amount, IFRS 5 requires recognition of an impairment loss (§ 20 of IFRS 5).
In the situation at hand and in accordance with the information provided by the Bank:
Accounting-wise, from the analysis of the entry made, it was verified that the assets and liabilities associated were transferred to line items NCA 258802 - "Non-current assets held for sale and discontinued operations - Other assets – F-... IFRS5" and 4500 - "Non-current liabilities held for sale and discontinued operations - Other liabilities – F... IFRS5" at their respective carrying amounts, having been adjusted to fair value less costs to sell, through recognition of a loss, in the amount of €203,827,996.17, in account NCA 728014 - "Other operating expenses incurred - Discontinued operations - Other – F...".
Thus, the "estimated loss", which results from the difference between the carrying amount and fair value less costs to sell totals €204 million, and is reflected in account NCA 728014 - "Other operating expenses incurred - Discontinued operations - Other – F...", with a debit balance of €203,827,996.17.
It follows from the foregoing that, accounting-wise, the adjustment made constitutes the recognition of an impairment loss, as provided for in § 20 of IFRS 5.
From the tax framework
Although the life of companies proceeds in a continuous flow and, properly speaking, profit or loss can only be calculated at the end of its activity, the periodization of taxable income by periods, generally coinciding with the calendar year, is one of the structural pillars of corporate income tax, reflected in the economic periodization regime, also known as the accrual regime or principle of specialization of tax periods, a regime mitigated by the "solidarity of tax periods", embodied in the carryforward of losses from prior years (cf. point 7 of the Preamble to the Corporate Income Tax Code), although temporally limited.
Indeed, the concept of taxable income adopted in the Corporate Income Tax Code embraces an extensive notion of income in accordance with the so-called theory of capital appreciation or net worth increment, which is based on the principle that everything that increases the initial net worth of an enterprise is taxable income thereof, including fortuitous, occasional or irregular gains.
Thus, in accordance with No. 2 of Article 3 of the CIRC, profit consists of the difference between the values of net worth at the end and at the beginning of the tax period, with the adjustments established in that Code.
And No. 1 of Article 17 of the CIRC complements what is stated in No. 2 of Article 3, specifying that taxable income is constituted by the algebraic sum of the net result of the period and of the positive and negative changes in net worth verified in the same period and not reflected in that result, determined on the basis of accounting and eventually adjusted in accordance with said Code.
Thus, a model of partial dependence between taxation and accounting is established.
In this manner, the treatment resulting from accounting standards is applicable (and accepted) for tax purposes whenever the Corporate Income Tax Code and any supplementary legislation do not establish specific rules that determine otherwise.
Respect for the principle of partial dependence of the Corporate Income Tax Code in relation to accounting requires that, absent a prior ruling by the tax legislator, that which is established in the accounting standards in force at the date should be followed for purposes of determining taxable income.
However, in the present case, there is a clear tax provision in the CIRC regarding the question under analysis. See Article 18 of the CIRC, under the heading "Periodization of taxable income:
"1 - Income and expenses, as well as other positive or negative components of taxable income, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic periodization regime.
2 - Positive or negative components considered as relating to prior periods are only attributable to the tax period when on the date of closing the accounts of the period to which they should have been attributed they were unforeseeable or manifestly unknown.
3 - For purposes of application of No. 1:
a) Revenue from sales is generally considered realized, and the corresponding expenses incurred, on the date of delivery or shipment of the corresponding goods or, if earlier, on the date when transfer of ownership occurs:
(...)
9 - Adjustments resulting from the application of fair value do not contribute to the formation of taxable income, being attributed as income or expenses in the tax period in which the elements or rights that gave rise to them are disposed of, exercised, extinguished or settled(...)".
From the foregoing, it follows that only realized income and expenses contribute to the formation of taxable income, that is, those that are the reflection of effective economic transactions, regardless of their receipt or payment.
See in this regard the Judgment of the Supreme Administrative Court (STA), of 2017-03-15, case No. 0869/13, where it is concluded: "Where there is a mere possibility of loss, or potential or latent loss, the same cannot be considered in determining taxable income by virtue of the principle of realization".
And, on the principle of specialization of tax periods, in accordance with the Judgment of the Central Administrative Court - South, of 2015-05-03, case No. 03108/09 "(...), it was established in the Judgment of the STA, of 27.4.2008, case No. 0807/07, that the principle of periodization of tax periods « (...) aims to tax the wealth generated in each tax period, regardless of its effective receipt, which gains special relevance in cases where there is no coincidence between the tax period in which gains or losses are accounted for and the tax period in which the corresponding receipts or expenses occur. That principle thus applies to cases in which costs are accounted for in one tax period but the actual expense is only incurred in another, and to cases in which the gain, although accounted for in one tax period, is only actually received in another. Now in such situations, in which there is a discrepancy between the accounting of costs and income and their effective realization, the law orders that they be accounted for as they are obtained and incurred, and not as their respective receipt or payment occurs. Hence the charges that emerge from operations carried out in the tax period must be allocated to that period, even if not incurred in it, just as income resulting from operations carried out in that tax period must be allocated to that period even if collected in another»".
In the case "subjudice", since the transfer (sale of the retail banking business unit) was made in 2016, only in that tax period should the expenses associated with the realization of the operation in question be relevant for tax purposes.
However, and taking into account the said model of partial dependence between taxation and accounting, provided for in Article 17 of the CIRC, it remains to analyze whether the recognition of the impairment loss provided for in § 20 of IFRS 5 is tax-deductible for purposes of corporate income tax in the tax period of its accounting recognition, in the case, in the tax period of 2015.
In the matter of expenses, for purposes of corporate income tax, Article 23 of the CIRC establishes as a general principle that, for the determination of taxable income, all expenses and losses incurred or borne by the taxpayer to obtain or ensure income subject to corporate income tax are deductible, where it includes, in accordance with paragraph h) of No. 2 of that article, impairment losses.
However, in Subsections II - Measurement and impairment losses in current assets, Articles 26 to 28-C of the CIRC, and III - Depreciation, amortization and impairment losses in non-current assets, Articles 29 to 34 of the CIRC, both of Section II - Legal entities and other resident entities that carry on, as a principal activity, a commercial, industrial or agricultural activity of Chapter III - Determination of taxable income, the specific regime of tax-deductible impairment losses is established.
For the situation at hand, it is important to note No. 2 of Article 28-A of the CIRC, which establishes: "Impairment losses and other value adjustments for specific credit risk may also be deducted for purposes of determining taxable income", in securities and in other applications, accounted for in accordance with applicable accounting standards, in the same tax period or in prior tax periods, by entities subject to supervision by the Bank of Portugal and by branches in Portugal of credit institutions and other financial institutions with registered office in another Member State of the European Union or European Economic Area, on the terms and within the limits provided for in Article 28-C and No. 1 of Article 31-B of the CIRC, which provides "[i]mpairment losses in non-current assets from abnormal causes proven, namely disasters, natural phenomena, exceptionally rapid technical innovations or significant adverse changes in the legal context, may be accepted as tax expenses".
From the foregoing, it is readily apparent that the recognition of the impairment loss, in 2015, in the amount of € 203,827,996.17, corresponding to the lower of the carrying amount of the assets and liabilities constituting the retail banking business unit and fair value less costs to sell, is not contemplated in the tax-deductible impairment losses described above, and therefore, in the tax period of 2015, it does not contribute to the formation of taxable income.
Analysis of the elements presented by A... Branch
From the information provided by the Bank, which was requested with the aim of clarifying the nature and tax treatment of the said operation, it was ascertained that:
–» On 2015-09-02, a contract denominated "Business Unit Acquisition Agreement" or "Business Purchase Agreement" was executed between A... and B..., S.A., relating to the potential acquisition of the retail banking unit of A... Branch in Portugal;
–» The acquisition by B..., S.A, - Branch in Portugal, of the retail, private and corporate banking business of A... - Branch in Portugal, only took place in the first quarter of 2016;
–» The accounting recognition of an "estimated loss" in the amount of € 203,827,996.17, under IFRS 5, in account NCA 728014 - "Other operating expenses incurred - Discontinued operations - Other – F..." and thus itemized: "F... - Costs to sell, in the amount of € 31,371,998.75 and "F...-Loss on sale", in the amount of € 172,455,997.42;
–» Of the amount of € 31,371,998.75 relating to "F... - Costs to sell", accounted for in 2015 in account NCA #728014, only the amount of € 1,696,200.04 was an actual expense of the tax period 2015, as the Bank clarified, in response to question 9.8 of the request for information No. 3, dated 2018-03-08, and in which it demonstrated the use of the '''F... Accrual" (account NCA #52896) during the year 2015;
–» The amount of € 663,813.97 was added to net accounting income, field 736 of Table 07 of the income statement Form 22, relating to capital losses of equity interests in G..., as well as the portion relating to components of tangible fixed assets, which influenced the amount of the "estimated loss" shown in account NCA #728014 - "Other operating expenses incurred - Discontinued operations - Other – F... "62.
Conclusion
In light of the foregoing, and given that the recognition of the accounting loss in account NCA 728014 - "Other operating expenses incurred - Discontinued operations - Other – F...", in the amount of €203,827,996.17, has no framework under Article 18 of the CIRC, since it was realized only in 2016, nor is it shown to be deductible under the regime established for impairment losses, namely Articles 28-A and 31-B of the CIRC, it cannot contribute to the formation of taxable income for the tax period 2015.
However, and as referred to previously, since the amount of € 1,696,200.04 corresponds to actual expenses of the tax period 2015, and the amount of € 663,813.97 was added in field 736 of Table 07 of the income statement Form 22, the adjustment to be made to taxable income will be € 201,467,982.16 (€ 203,827,996.17 - € 1,696,200.04 - € 663,813.97), in accordance with the legal provisions mentioned.
Furthermore, notably for the situation at hand, it is important to note that, considering what is provided for in Article 18 of the CIRC, the loss that did not contribute to the formation of taxable income in the tax period 2015, will be deductible in the tax period of the realization of the sale transaction, that is, in 2016. However, the fact that it would be considered deductible in the tax period 2015 or in the tax period 2016 is not without significance, since by complying with what is provided for in Article 18 of the CIRC, A... Branch determines taxable income in 2015, giving rise to the consequent corporate income tax assessment and other legal consequences.
In this regard, the jurisprudence reflected in the Judgment of the Central Administrative Court - South (TCAS), case No. 3769/10, of 2011-04-12, states that "(...) the provision of Article 18, No. 2 of the CIRC (...) aims to safeguard the allocation of costs from prior tax periods to following ones and not the reverse, costs from future and/or prior years (...)", that is, A... Branch cannot allocate a clear loss from the year 2016 in the tax period 2015, under the pretext that in this year it was already "foreseeable".
It should be noted that this adjustment conditions the value entered in Table 10, Field 365 - Autonomous taxation of the income statement Form 22 (see point III.2.1.1 of this document).
–On 02-09-2015, a Business Unit Acquisition Agreement (the "Agreement") was executed between A... and B..., S.A. (hereinafter "B..."), which is contained in document No. 4 attached to the request for arbitral pronouncement, the content of which is reproduced herein;
–In the Agreement, the Claimant agreed to dispose of and B... agreed to acquire the retail banking business unit, private banking and almost all of the corporate banking business of the branch in Portugal of A... (the "Business Unit");
–The disposal of the Business Unit (the "Transaction") implied, among other relevant facts, the closure of A... branches, the transfer of the employment contracts of its employees to B..., and the near-total disappearance of advertising and other elements intended for customer acquisition for A...;
–The Transaction was disclosed on B...'s website (https://...pt) on 02-09-2015, in the terms set forth in document No. 5 attached to the request for arbitral pronouncement, the content of which is reproduced herein, in which it is stated, among other things, the following:
B... acquires the retail business of A... in Portugal
The bank will pay a multiple of 0.4x the book value of the business actually transacted, which is equivalent to an approximate price of 100 million euros.
This acquisition reflects a strong commitment to the bank's growth strategy and to consolidating B... as a bank with European vocations and scope.
B... is one of the financial entities with the highest solvency and profitability in Spain. It is a reference for high technological development and pioneering in digital multichannel banking, having been awarded several times as the best company to work for.
B... today concluded with A... the acquisition operation of its Retail & Wealth Portugal business, which includes the retail banking, private banking and corporate banking segments that the British entity manages in Portugal.
Under the purchase agreement signed today, the Spanish entity will pay a multiple of 0.4x the book value of the business actually transacted, which is equivalent to an approximate price of 100 million euros.
In round figures, A... Portugal's retail business includes a loan portfolio of 4,881 million euros, 2,936 million euros in assets managed in extra-patrimonial accounts, a network of 84 branches, a team of 1,000 employees and 185,000 customers, of which 20,300 are companies.
The operation, which is subject to obtaining authorizations from the competent authorities and regulatory entities, excludes the purchase of the investment banking and card business, as well as a small number of corporate customers of the entity, which will continue to be managed by A... .
In parallel with the purchase of the banking activity already mentioned, B... Life Insurance, a company 50% controlled by B... and C..., agreed with A... to acquire its life insurance and pension business in Portugal, for an estimated value of 75 million euros. A... Portugal's Life and Pensions branch, which manages more than one billion euros in assets, obtained 150 million in premiums and 12.7 million euros in net profit in 2014.
The acquisition of A... Retail & Wealth Portugal represents the most important corporate operation carried out by B... in its internationalization strategy in 50 years of history. This is the second acquisition completed by the bank outside Spain, after, in December 2012, acquiring the infrastructure and banking license of the Luxembourg branch of Dutch bank D... .
This acquisition in Portugal represents a qualitative leap for the bank's business strategy, which, while continuing to favor organic growth in Spain, will now extend its physical presence, business volume, customer base and scope of action to another European Union country.
In this sense, E..., CEO of B..., stated that this operation "marks a milestone in the recent history of banking and constitutes an excellent opportunity for B... and its shareholders, from which we will achieve a rapid return in the short term."
–On the same date, A... publicized the transaction in terms that appear in document No. 6 attached to the request for arbitral pronouncement, the content of which is reproduced herein;
–The operation to buy and sell the Business Unit occurred "well below its book value";
–After the execution of the Agreement, on 2 September 2015, the Claimant recorded in account NCA 728014 – "Other Operating Expenses Incurred – Discontinued operations – Other –F...", the amount of € 203,827,996.17;
–In the statement of account NCA #728014, the following was recorded:
• The expense in the amount of € 31,371,998.75, relating to F...– Costs to Sell; and
• The expense in the amount of € 172,455,997.42, relating to F... - Loss on Sale.
–In the accounting recognition of the operation in question, the Claimant adopted International Financial Reporting Standard ("IFRS") 5;
–The amount at issue corresponds to the recognition of an estimated accounting loss of 6.3%, calculated on the book value of the assets on the date of classification as non-current assets held for sale, which occurred in the tax year 2015;
–The inclusion of the business acquired by A... by B... became effective on 1 April 2016 (page 13 of B...'s 2016 Annual Report, cited by the Claimant in note 3 of page 1 of the request for arbitral pronouncement, available at https://webcorporativa...pt/documents/20499/58521/Relat%C3%B3rio+e+..., the content of which is reproduced herein, and Article 87 of the request for arbitral pronouncement);
–Following the inspection, the Claimant was notified of the Additional Corporate Income Tax Assessment relating to the tax year 2015 with No. 2018..., of 05-09-2018, as well as the interest calculation statement No. 2018... and the accounts adjustment statement No. 2018..., of 07-09-2018, in which the total amount of € 6,152,821.01 is determined (document No. 1 attached to the request for arbitral pronouncement, the content of which is reproduced herein);
–The Claimant paid this amount on 09-10-2018 (document No. 2 attached to the request for arbitral pronouncement, the content of which is reproduced herein);
–On 15-01-2019, the Claimant filed the request for arbitral pronouncement that gave rise to the present proceedings.
2.2. Unproven Facts and Substantiation of the Decision on Matters of Fact
The facts were proven on the basis of the Tax Inspection Report, on the allegations by the Claimant not challenged by the Tax and Customs Authority, documents attached to the initial petition and which are part of the administrative file.
The Tax and Customs Authority does not challenge the allegations by the Claimant as regards the matters of fact it alleges, and the Claimant accepts the matters of fact referred to in the Tax Inspection Report.
3. Matters of Law
3.1. Subject Matter of the Dispute
The Tax and Customs Authority carried out a tax inspection of the Claimant in which it made various adjustments, among which one relating to «NON-DEDUCTIBLE EXPENSES FOR TAX PURPOSES (ARTICLE 18, ARTICLE 28-A AND ARTICLE 31-B, ALL OF THE CIRC), in the amount of € 201,467,982.16, which is the object of challenge in the present proceedings.
In that tax inspection, it was ascertained that account NCA 728014 - "Other Operating Expenses Incurred - Discontinued operations - Other – F...", presented a debit balance of €203,827,996.17, and that the account statement evidenced expenses related to "F... - Costs to sell, in the amount of €31,371,998.75 and "F... - Loss on sale", in the amount of €172,455,997.42, both of the F... project, associated with the sale, which occurred in 2016, of the retail banking business unit of A... - Branch in Portugal to B..., S.A.,
Following the explanation provided by the Claimant, the Tax and Customs Authority understood that:
–«The accounting loss recognized was based on the assumption that B..., S.A, would pay to A... Branch 93.7% of the net book value of the assets on the date of the transaction (during 2016), which implied the recognition of an estimated accounting loss of 6.3%, calculated on the book value of the assets on the date of transfer to non-current assets held for sale, which occurred in the tax period 2015, having A..., in its understanding, proceeded in accordance with IFRS 5»;
–«the group to be divested includes all assets and liabilities of the Portuguese businesses of Retail Banking, Wealth Management and Investment, and part of the Portuguese Corporate Banking business. This sale is included in the divestment of the Non-core segment of the Group»;
–«the Portuguese divestment was announced on 2 September 2015, and the sale should be completed in the 1st quarter of 2016»;
–«a deduction of € 203,164,182.20 contributed to the formation of taxable income for the tax period 2015».
The sale agreement between the Claimant and B... for the retail banking business unit was executed in 2015 and its effects began to take effect as of 01-04-2016.
After analyzing the Claimant's situation and the application of IFRS 5, the Tax and Customs Authority concluded in the Tax Inspection Report that «accounting-wise, the adjustment made constitutes the recognition of an impairment loss, as provided for in § 20 of IFRS 5». The Tax and Customs Authority does not challenge the manner in which the accounting recognition of the impairment loss was made, reaffirming in its Response in the present proceedings that «at no point in the tax inspection report is any remark formulated regarding how the operation of disposal of the business unit was accounted for, and even less regarding the detection of any non-compliance with accounting standards».
For this reason, the Parties are in agreement regarding the Claimant's correct application of IFRS 5 and the accounting recognition of the loss referred to in the tax year 2015.
The disagreement between the Parties concerns only the tax treatment of that loss.
In fact, the Tax and Customs Authority understood, in conclusion:
Conclusion
In light of the foregoing, and given that the recognition of the accounting loss in account NCA 728014 - "Other operating expenses incurred - Discontinued operations - Other – F...", in the amount of €203,827,996.17, has no framework under Article 18 of the CIRC, since it was realized only in 2016, nor is it shown to be deductible under the regime established for impairment losses, namely Articles 28-A and 31-B of the CIRC, it cannot contribute to the formation of taxable income for the tax period 2015.
However, and as referred to previously, since the amount of € 1,696,200.04 corresponds to actual expenses of the tax period 2015, and the amount of € 663,813.97 was added in field 736 of Table 07 of the income statement Form 22, the adjustment to be made to taxable income will be € 201,467,982.16 (€ 203,827,996.17 - € 1,696,200.04 - € 663,813.97), in accordance with the legal provisions mentioned.
Furthermore, notably for the situation at hand, it is important to note that, considering what is provided for in Article 18 of the CIRC, the loss that did not contribute to the formation of taxable income in the tax period 2015, will be deductible in the tax period of the realization of the sale transaction, that is, in 2016. However, the fact that it would be considered deductible in the tax period 2015 or in the tax period 2016 is not without significance, since by complying with what is provided for in Article 18 of the CIRC, A... Branch determines taxable income in 2015, giving rise to the consequent corporate income tax assessment and other legal consequences.
In this regard, the jurisprudence reflected in the Judgment of the Central Administrative Court - South (TCAS), case No. 3769/10, of 2011-04-12, states that "(...) the provision of Article 18, No. 2 of the CIRC (...) aims to safeguard the allocation of costs from prior tax periods to following ones and not the reverse, costs from future and/or prior years (...)", that is, A... Branch cannot allocate a clear loss from the year 2016 in the tax period 2015, under the pretext that in this year it was already "foreseeable".
Thus, two are the grounds on which the Tax and Customs Authority understood that the accounting loss in question «cannot contribute to the formation of taxable income for the tax period 2015»:
–«it has no framework under Article 18 of the CIRC, since it was realized only in 2016» (so that the principle of specialization of tax periods, enunciated in that article, will be an obstacle to its tax relevance);
–«nor is it shown to be deductible under the regime established for impairment losses, namely Articles 28-A and 31-B of the CIRC».
For its part, the Claimant understands, in summary, that
–the accounting loss should be recognized in 2015, so it could only have recognized, in 2015, the tax expense resulting from the impairment loss;
–by virtue of the principle of partial dependence between accounting and taxation, «only in the face of a specific, express and prior tax provision, can it be concluded that an impairment loss that necessarily must be recognized for accounting purposes is not deductible for tax purposes»;
–that provision is not Article 18 of the CIRC, neither in the part referring to the principle of specialization of tax periods nor with respect to adjustments resulting from the application of fair value;
–the impairment loss recognized in accounting by the Claimant indisputably relates to the tax period 2015 and cannot be recorded in any other manner than under IFRS 5;
–the special accounting rule relating to adjustments resulting from the application of fair value, by virtue of the application of IFRS 5 to a group of assets and liabilities classified as a group for disposal, does not imply that there is a question of measuring assets and liabilities at fair value;
–none of the provisions contained in Articles 28-A to 31-B of the Corporate Income Tax Code even pronounces on the tax deductibility of the impairment loss recognized by the Claimant;
–the CIRC simply does not establish specific rules for impairment losses on groups for disposal classified as held for sale;
–as the respective deduction is not prohibited by any particular provision, the same must be considered deductible on general terms, under the provision of paragraph h) of No. 2 of Article 23 of the Corporate Income Tax Code;
–therefore, the impairment loss referred to is relevant for tax purposes, in light of the provision of Articles 17 and 23, No. 1, paragraph h), of the CIRC, because it is correctly accounted for and there is no provision of the CIRC that excludes its deductibility;
–no accounting rule – nor Article 18 of the CIRC – would permit recognition of the loss at issue in the tax period 2016, so that the Claimant could then, in that year, deduct the unequivocal and actually borne loss;
–and therefore the interpretation made by the Tax and Customs Authority is incompatible with the constitutional principles of equality, of capacity to pay and of taxation of real income, which are recognized in Articles 13 and 104 of the Constitution (CRP), unconstitutionality from which Articles 18 and 23 of the CIRC suffer in the interpretation advocated by the Tax and Customs Authority.
The Tax and Customs Authority in the present proceedings defends the understanding adopted in the RIT, stating, in conclusion:
–the operation of disposal of the Business Unit to B... was not completed in the year 2015, the year in which the sale agreement was signed, and therefore, under the principle of specialization of tax periods, stated in No. 1 of Article 18 of the Corporate Income Tax Code, only in the year (2016) in which the revenue is considered realized and the corresponding expenses are borne, can the loss effectively borne be allocated to the taxable income of that period;
–the impairment loss recognized in the tax year 2015, in terms provided for in paragraph 20 of IFRS 5, resulting from the difference between the carrying amount and fair value less costs necessary for sale, cannot be accepted from a tax perspective as deductible for determining taxable income due to the absence of an express legal provision for that purpose, since, as confirmed by the Claimant, Articles 28, 28-A and 28-C or Article 31-B, of the Corporate Income Tax Code, no reference is made to impairment losses on Non-Current Assets Held for Sale and Discontinued Operating Units;
–the mere mention, in paragraph h), No. 2 of Article 23 of the same Code, of impairment losses, means only that they are deductible, that is, capable of being deducted, but in order to be deducted they must comply with the requirements and conditions established in the standards that regulate impairment losses, which, however, do not encompass all asset categories, including Non-Current Assets Held for Sale and Discontinued Operating Units;
–contrary to what is suggested by the Claimant, in the tax year 2016, it could deduct the unequivocal and actually borne loss, with the sale of the Business Unit completed in 2016, the loss obtained should be reflected in the tax result of that year, through a negative adjustment to be made to the accounting result, when determining taxable income in the periodic income statement Form 22;
–the non-acceptance of the deduction of the impairment loss to the taxable income of 2015 does not result in disregard of the true capacity to pay of the Claimant and an unjustified postponement of its real income, resulting in a blatant violation of the basic principles of equality and tax justice, in manifest violation of Articles 13 and 104 of the Constitution", since the loss became effective in the period in which the operation to sell the Business Unit to B... was completed, that is, in 2016, and should be allocated to the taxable income of that period.
In defining the subject matter of the dispute, it must be taken into account that the tax arbitration procedure, as an alternative means to the judicial review process (No. 2 of Article 124 of Law No. 3-B/2010, of 28 April), is, like this, a procedural means of mere legality, aiming at the elimination of the effects produced by illegal acts, annulling them or declaring their nullity or non-existence [Articles 2 of the RJAT and 99 and 124 of the CPPT, applicable by virtue of the provision in Article 29, No. 1, paragraph a), thereof] ( [1] ).
For this reason, the assessment acts that are the subject of requests for declaration of legality by arbitral tribunals operating in CAAD must be assessed as they were made, and the tribunal cannot, when noting the invocation of an illegal ground as support for the administrative decision, assess whether its action could be based on other grounds, of fact or of law, even if they are invoked subsequently by the Tax and Customs Authority in administrative or contentious proceedings. ( [2] )
In the case at hand, although the Tax and Customs Authority accepts that an impairment loss should have been recognized in accounting in the tax year 2015, it argues that Article 18 of the CIRC makes clear that the loss did not contribute to the formation of taxable income in the tax year 2015, by virtue of the principle of specialization of tax periods and because it was not «deductible under the regime established for impairment losses, namely Articles 28-A and 31-B», but was deductible in the tax year 2016 (not explicitly stating whether as an impairment loss or realized capital loss), as is evident from this extract from the "Conclusion" with which it ends the assessment made in the Tax Inspection Report on this adjustment:
«notably for the situation at hand, it is important to note that, considering what is provided for in Article 18 of the CIRC, the loss that did not contribute to the formation of taxable income in the tax period 2015, will be deductible in the tax period of the realization of the sale transaction, that is, in 2016. However, the fact that it would be considered deductible in the tax period 2015 or in the tax period 2016 is not without significance, since by complying with what is provided for in Article 18 of the CIRC, A... Branch determines taxable income in 2015, giving rise to the consequent corporate income tax assessment and other legal consequences.
Thus, the controversy boils down to knowing whether the principle of specialization of tax periods, on the one hand, and Articles 28 and 31-B of the CIRC, on the other, do not permit the tax relevance of the accounting impairment loss recognized in the tax year 2015.
Namely, it is to be noted that, although the Tax and Customs Authority included in the RIT a transcription of No. 9 of Article 18 of the CIRC, which establishes the rule of tax relevance of adjustments for fair value, it does not invoke it as ground for the adjustment made, that is, at no point in the RIT does it suggest that it might be a fair value adjustment and that the provision of this No. 9 might be an obstacle to the tax relevance of the loss.
For this reason, the new hypothetical ground for the adjustment made that is invoked by the Tax and Customs Authority in its Response (post-hoc justification), in which it states that «it will thus be necessary to conclude that the impairment loss recognized by the Claimant in 2015 is not tax-deductible in that period, insofar as it is an adjustment resulting from the application of fair value to which the Corporate Income Tax Code does not attribute tax relevance in the year of its recognition» (Article 85 of the Response), cannot be relevant to the decision of the case.
Having two independent grounds for the Tax Authority's non-acceptance of the tax relevance of the said impairment loss, it is sufficient that one of them has legal support to ensure the legality of the act. In fact, as the Supreme Administrative Court has understood, when an administrative act has more than one ground, each of them with the potential to, by itself, ensure the legality of a tax act (or administrative act), it is irrelevant that one of them is illegal, since «the tribunal, in order to annul or declare null the challenged decision, issued in the exercise of mandatory activity of the Administration, cannot merely establish the lack of basis of one of the grounds invoked, since only after verification of the lack of merit of all of them is the tribunal enabled to invalidate the act». ( [3] )
3.2. Question of the Application of the Principle of Specialization of Tax Periods
In the Preamble to the CIRC, "the concept of taxable income adopted in the Corporate Income Tax Code takes into account the evolution that has been taking place in most of the legislation of other countries in the direction of adoption, for tax purposes, of an extensive notion of income, in accordance with the so-called theory of capital appreciation".
As is also stated in that Preamble, it follows from that concept that taxable income should "relate to the difference between net worth at the end and at the beginning of the tax period", which has explicit confirmation in No. 2 of Article 3 of the CIRC, which establishes that "profit consists of the difference between the values of net worth at the end and at the beginning of the tax period, with the adjustments established in this Code".
The basis for determining taxable income is accounting, as is also explained in the Preamble:
Given that taxation is levied on the economic reality constituted by profit, it is natural that accounting, as an instrument for measuring and informing that reality, plays an essential role as a basis for determining taxable income.
The relationships between accounting and taxation are, however, a field that has been marked by a certain controversy and where, therefore, different ways of conceiving those relationships are possible. Having ruled out absolute separation or complete identification, a solution marked by realism continues to be favored, which, in essence, consists of the relationship of taxable income to the accounting result, to which extracontabilistic adjustments - positive or negative - enunciated in the law are introduced to take into account the objectives and constraints specific to taxation.
Although in order to implement the broad notion of taxable income adopted it would have been possible to take as a point of reference the result obtained through the difference between equity at the end and at the beginning of the fiscal year, the traditional methodology of relating taxable income to the net result of the fiscal year shown in the statement of comprehensive income is maintained, to which are added the positive and negative changes in net worth verified in the same period and not reflected in that result.
In the other rules stated with respect to the aspects that were understood to need regulation, wherever possible, the concern to bring taxation closer to accounting was reflected.
However, legislative concerns to ensure the stability of tax revenues and prevent tax evasion translated into multiple departures from the tax relevance of accounting solutions, primarily in matters where considerable scope for subjectivity in accounting is possible.
It is in this context that Article 17 of the CIRC enunciates the general rules for determining taxable income, establishing, the following, which is relevant here, in the version in force in 2015:
Article 17
Determination of taxable income
1 - Taxable income of legal entities and other entities referred to in paragraph a) of No. 1 of Article 3 is constituted by the algebraic sum of the net result of the period and of the positive and negative changes in net worth verified in the same period and not reflected in that result, determined on the basis of accounting and eventually adjusted in accordance with this Code.
As can be seen from No. 1 of this Article 17 of the CIRC, a generic reference is made to accounting standards, it being on the basis of their application that taxable income is determined, but the result of their application «in accordance with this Code».
In this context, it can be said that "accounting provides a conceptual basis for the operational determination of taxable income, but, given the objectives and principles that frame taxation, there cannot be an identification between it and the accounting result, since accounting also has objectives and principles that are its own and that must be safeguarded. In some countries, there is even a choice for a complete separation between these two quantities, but the tradition in which we are inserted is that of partial dependence of taxable income in relation to the accounting result" ( [4] )
Having the Tax and Customs Authority recognized that the Claimant's application of IFRS 5 was correct and that it results from this that the recognition of the loss should have been made in 2015, the departure from the tax relevance of this expense in that year can only be based on the existence of norms of the CIRC that, in harmony with the latter part of No. 1 of its Article 17, exclude its tax relevance in the tax year 2015.
The Tax and Customs Authority understood that the exclusion of tax relevance of that accounting loss recorded in 2015 is supported by the principle of accrual or specialization of tax periods, enunciated in Article 18 of the CIRC, denominated "periodization of taxable income", which in the version in force in that year establishes the following, which is relevant here:
Article 18
Periodization of taxable income
1 - Income and expenses, as well as other positive or negative components of taxable income, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic periodization regime.
2 - Positive or negative components considered as relating to prior periods are only attributable to the tax period when on the date of closing the accounts of the period to which they should have been attributed they were unforeseeable or manifestly unknown.
In Article 63 of its Response, the Tax and Customs Authority also refers to No. 3 of Article 18 of the CIRC, which concerns only revenue, so it is clear that it has no relevance for the application of the principle of specialization of tax periods in the case at hand, since what is at stake is its application to negative components of assessment and not positive ones. Moreover, what this rule establishes relates to revenue. Now revenue, according to IAS 18 and NCRF 20, relates to ordinary transactions, or the normal or recurring activity of an entity. In this case, there is a loss derived from the sale of assets, which does not constitute operating activity.
Among the "negative components of taxable income" referred to in No. 1 of Article 18, losses resulting from asset write-downs are included, as is concluded from the reference made in paragraph h) of No. 1 of Article 23 of the CIRC to "impairment losses".
In fact, an asset is described as impaired when "it is carried at more than its recoverable amount", which occurs "if its carrying amount exceeds the amount to be recovered through use or sale of the asset" (IAS 36, § 1, and NCRF 12, § 1), with these accounting standards requiring "that the entity recognize an impairment loss".
In this context, when an impairment loss is recognized, there is a negative component of taxable income, capable of being considered a loss "borne by the taxpayer to obtain or ensure income subject to corporate income tax", for purposes of Article 23, No. 1, and paragraph h), of the CIRC), which, if its relevance for tax purposes is not excluded, is potentially relevant for determining taxable income.
In light of the provision in No. 1 of Article 18 of the CIRC, that impairment loss borne by the taxpayer is attributable to the tax period in which it is borne, regardless of its translation into monetary value, through receipt of the amount from the sale of the asset.
It is with this scope that the principle of specialization of tax periods must be applied, when there are negative components of taxable income, even when their pecuniary effects only materialize in the future or are even uncertain, as evidenced, with respect to provisions, by the Judgment of the Supreme Administrative Court of 28-01-2015, case No. 0652/14, in which it was written:
The consideration of a provision as a cost of a given tax period gives practical expression to two of the healthy principles of accounting:
• the principle of prudence (foreseeable risks and possible losses arising from a fact occurring in that period are taken into account in determining the results of the period);
• the principle of specialization of tax periods (the cost attributed to the period in which the fact occurred, even if only merely possible);
• The non-constitution of the provision in a given tax period (or its constitution for an insufficient amount) results in a violation of this principle insofar as it will have the effect of shifting costs belonging to that period to other periods.
This jurisprudence is transposable, by even stronger reason, to impairment losses, in which the occurrence of a decrease in net worth is more probable than when there is mere foreseeable risk of a loss coming to occur.
In fact, both in the case of provisions and in the case of impairment losses, there are situations where, as was understood in that Judgment, the principle of specialization of tax periods not only permits but even requires that the tax relevance of the negative component of assessment be attributed in the tax period in which the provision must be constituted or the loss must be recognized, anticipating this relevance relative to the moment when the negative occurrence will materialize pecuniarily.
For this reason, the argument of the Tax and Customs Authority that "only income and expenses that are realized contribute to the formation of taxable income, that is, that are the reflection of effective economic transactions, regardless of their receipt or payment", that "during the tax year 2015, not all conditions associated with realization were met, and therefore the recognition of the corresponding revenue and associated expenses cannot be allocated to the taxable income of that tax period" and that only in 2016 "were the most significant advantages and risks most important related to the business unit transferred to B...", has no legal basis, since the regime for recognizing impairment losses aims precisely to give tax relevance to losses prior to the realization of capital losses that may result from the sale (which has as a corollary that the value of the impairment loss will no longer be relevant for tax purposes when capital gains come to be realized, as follows from No. 2 of Article 46 of the CIRC).
Thus, interpreting Article 18, No. 1, of the CIRC, in conjunction with Article 23, No. 1, of the same Code, it is concluded that impairment losses are considered a negative component of the taxable income of the tax period in which they should be recognized, that is, they are considered borne in that tax period and not in the one in which their pecuniary effects materialize through the sale of assets. And, in principle, only in that tax period in which the impairment loss should be recognized can tax relevance be attributed to it, without prejudice to possible application of the principle of fairness, invoked by the Claimant, which the Supreme Administrative Court has understood should attenuate the rigidity of the principle of specialization of tax periods. ( [5] )
For this reason, immediately it is concluded that there is an error in the interpretation of Article 18, No. 1, of the CIRC, underlying the adjustment made, insofar as the Tax and Customs Authority understood that the impairment loss that it accepts was correctly recognized in 2015, should only be tax relevant in the tax year 2016, by being in this that the business had pecuniary effects. In fact, by virtue of the principle of specialization of tax periods, impairment losses correctly recognized in accounting, when its tax relevance is admitted, have this relevance in the tax period in which accounting-wise they should be recognized, regardless of when the business generating the losses will produce effects.
Thus, the impairment loss should be recognized in accounting in the tax year 2015, as it was, and if it has tax relevance, it is in this tax year 2015 that it should be attributed, as such, as an impairment loss (and not as a realized capital loss, which only materialized in 2016).
For this reason, it remains to clarify whether there are other norms of the CIRC that obstruct that impairment loss from having tax relevance, namely its Articles 28 and 31-B invoked in the RIT.
3.2. Question of the Tax Relevance of the Impairment Loss Recognized in 2015
3.2.1. The regime of tax relevance of impairment losses introduced by Decree-Law No. 159/2009, of 13 July
Article 17 of the CIRC, in the version prior to Decree-Law No. 159/2009, of 13 July (version of Decree-Law No. 198/2001, of 3 July) established the general rule for determining taxable income that "taxable income of legal entities and other entities referred to in paragraph a) of No. 1 of Article 3 is constituted by the algebraic sum of the net result of the period and of the positive and negative changes in net worth verified in the same period and not reflected in that result, determined on the basis of accounting and eventually adjusted in accordance with this Code".
In the CIRC regime prior to Decree-Law No. 159/2009, of 13 July, capital losses and capital gains that were merely potential or latent were not relevant for purposes of determining taxable income, only realized ones being relevant [Articles 20, No. 1, paragraph f), 21, No. 1, paragraph b), 23, No. 1, paragraph i), and 24, No. 1, paragraph b), in the version of Decree-Law No. 198/2001, of 3 July].
With Decree-Law No. 159/2009, of 13 July, although the rule that only capital gains and losses realized are relevant for the formation of taxable income was maintained, it passed to admit, besides the tax relevance of some adjustments at fair value, the relevance of impairment losses, which are reduced to latent or potential capital losses.
For what is relevant here, Article 23, No. 1, of the 2009 CIRC passed to establish the following:
1 – Expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source, namely:
(...)
h) Adjustments in inventories, impairment losses and provisions;
But the legislative opening to the tax relevance of impairment losses for determining taxable income was limited, as explained in the Preamble to Decree-Law No. 159/2009:
On the other hand, considering the difficulties in controlling both the reasonableness of the decision to recognize impairment and its quantification, only impairment losses on credits are tax-deductible prior to actual realization, as well as those consisting of exceptional write-downs verified in tangible fixed assets, intangible assets, non-consumable biological assets and investment properties arising from abnormal causes duly proven.
The restriction of generalized tax relevance of impairment losses was justified because they are dependent on expectations or estimates and have inherent a significant margin of subjectivity and the tax legislator, despite announcing with the 2009 reform the intention of approaching accounting, would certainly be more concerned with the stability of revenue, the fight against evasion and fraud and greater objectivity in determining income and expenses. ( [6] )
In this context, despite the fact that in that paragraph h) of No. 1 of Article 23 of the CIRC (2009 version) it passed to generically allude to impairment losses, among the "expenses" that "are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source", the explanation provided by the Preamble to Decree-Law No. 159/2009 leaves no room for any reasonable doubt that this generic reference did not constitute expression of legislative intention to open globally the tax relevance of accounting impairment losses, being only an indication of one of the types of expenses admissible as deductible for determining taxable income.
For this reason, in harmony with that explanatory preamble, the tax relevance of impairment losses only occurred to the extent that it is specially indicated in Articles 35 to 38 of the CIRC, in that 2009 version.
This limited tax relevance of impairment losses was confirmed by Article 35, which in that 2009 version established:
Article 35
Tax-deductible impairment losses
1 – The following impairment losses accounted for in the same tax period or in prior tax periods may be deducted for tax purposes:
a) Those related to credits resulting from normal activity that, at the end of the tax period, may be considered doubtful of collection and are evidenced as such in accounting;
b) Those relating to receivables recognized by insurance companies;
c) Those that consist of exceptional write-downs verified in tangible fixed assets, intangible assets, non-consumable biological assets and investment properties.
2 – Impairment losses and other value adjustments accounted for in the same tax period or in prior tax periods may also be deducted for tax purposes, when mandatorily constituted, by virtue of standards issued by the Bank of Portugal, of a generic and abstract character, by entities subject to its supervision and by branches in Portugal of credit institutions and other financial institutions with registered office in another Member State of the European Union, intended to cover specific credit risk from country risk and for capital losses on securities and other applications.
3 – Impairment losses and other value adjustments referred to in the preceding numbers that must not subsist, because the objective conditions that determined them have ceased to apply, are considered positive components of the taxable income of the respective tax period.
4 – Impairment losses on depreciable or amortizable assets that are not accepted from a tax perspective as exceptional
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