CAAD 307/2013-T: IRC Cost Documentation & Interior Tax Benefits

Process: 307/2013-T

Date: July 18, 2014

Tax Type: IRC

Summary

CAAD Case 307/2013-T addresses a Corporate Income Tax (IRC) dispute concerning the proper documentation and valuation of business costs in a property transaction. The taxpayer, A, Lda (a real estate company), purchased a property for €180,000 as stated in a public deed dated October 24, 2008, and immediately resold it for €1,245,000. However, the purchase involved assuming a mortgage debt of €561,690.46 to Bank A PLC, which the company argued made the true acquisition cost €741,690.46. The Tax Authority (AT) conducted an external inspection covering 2008-2009 and determined taxable income of €989,038.73, rejecting the inclusion of the mortgage debt as an acquisition cost, relying solely on the €180,000 stated in the original deed. This resulted in IRC Assessment no. … totaling €246,681.15. The taxpayer subsequently executed a rectification deed in February 2012 clarifying the total acquisition cost of €741,690.46, and paid additional stamp duty and fines. The company filed an administrative complaint which was denied, leading to arbitration at CAAD. The case raises fundamental questions about IRC cost documentation requirements, particularly whether substance should prevail over the form of public deed declarations, and the evidentiary standards needed to prove business expenses. The dispute also touches on requirements for maintaining regularized tax status to claim fiscal benefits, including the tax benefit for inland areas (benefício fiscal à interioridade). The arbitral tribunal, composed of three arbitrators, was constituted on February 25, 2014, to resolve whether the AT properly disallowed the mortgage debt as a deductible acquisition cost and whether the company met documentation standards under Portuguese corporate tax law for cost deduction purposes.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case no. 307/2013 – T

Subject Matter: Corporate Income Tax (IRC)/ Costs/ Proof and Documentation of Expenses/ Tax Benefit for Inland Areas / Regularized Tax Status

The arbitrators Dr. José Pedro Carvalho (presiding arbitrator), Dr. Ana Teixeira de Sousa and Dr. Sofia Cardoso Costa (arbitrator members), appointed by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the Arbitral Tribunal, constituted on 25 February 2014, agree as follows:

I - REPORT

1. Claimants

A, Lda, taxpayer no. …, with registered office …, with principal activity of "purchase and sale of real property" (CAE …) and secondary activity of "rental of real property" (CAE), exercising activity since 2005-12-28.

2. Respondent

Tax and Customs Authority (hereinafter AT), represented by Dr. … and Dr. …, legal practitioners in representation of the Director-General of the Tax and Customs Authority, the highest authority of the services, previously and for these purposes appointed pursuant to dispatch issued on 3-01-2014.

3. Constitution and Functioning of the Arbitral Tribunal

The above-identified Claimant filed with the CAAD, on 24 December 2013, a request for constitution of the arbitral tribunal and for arbitral ruling, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters – RJAT).

The request for constitution of the arbitral tribunal was accepted on 26-12-2013 by the President of the CAAD and duly notified to the parties, in accordance with and for the purposes of article 6(1) of RJAT, on 27-12-2013.

The undersigned were appointed by the President of the Deontological Council of the Administrative Arbitration Centre (CAAD) as arbitrators, an appointment which was accepted as they considered there to be no impediment to the exercise of the function.

The Claimant's Representative is Dr. …, attorney with professional credentials …, with professional office at Rua ….

The Arbitral Tribunal was thus legally constituted on 25-02-2014, of which the appropriate minutes were drawn, and the Respondent was forthwith notified to submit a reply within the legal term and as agreed, and 24-04-2014 was set for the holding of the meeting provided for in article 18 of RJAT.

Both the AT's Reply and the respective administrative file were presented in a timely manner and attached to the case.

The meeting provided for in article 18 of RJAT took place on the scheduled date of 24-04-2014, with representatives of both the Claimant and the Respondent in attendance.

4. The Claim and the Basis for the Claim

The above-identified Claimant hereby, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January and article 1 of Order no. 112-A/2011, of 22 March, in accordance with article 99 of the Code of Tax Procedure and Process (CPPT), requests the constitution of a collective Arbitral Tribunal.

The Claimant further requests the annulment of the Corporate Income Tax (IRC) assessment no. ….

The Claimant presents the following grounds for its claim:

The Claimant is a private company limited by shares, with registered office …, whose principal activity is "purchase and sale of real property" (CAE …) and whose secondary activity is "rental of real property" (CAE …), exercising activity since 2005-12-28.
On 2008-10-24, the Claimant acquired, by means of a public deed, a mixed property (urban and rural) located in the parish …, municipality …, with the urban part registered under article no. … and the rural part under article 11, section C of the respective property registers.
The purchase price declared in said deed was €180,000.00.
The property referred to in item 2 was mortgaged to …, to guarantee a loan.
On the same day referred to in item 2 (2008-10-24), the Claimant executed a public deed in which it declared to sell said property for €1,245,000.00 to B and his wife C, represented by their attorney Dr. ….
Following the agreement, Dr. …, in such capacity, made the following payments:
- €249,000 (two hundred forty-nine thousand euros) as deposit and part payment, amount deposited in the account of the Claimant's representative at the time of execution of the transaction;
- €567,809.26 (five hundred sixty-seven thousand eight hundred nine euros and twenty-six cents), to Bank A PLC (€561,690.46 of the borrowed amount + €300 in expenses + €5,818 in early repayment penalty);
- €34,362 (thirty-four thousand three hundred sixty-two euros) concerning real estate agency commission;
- €393,828.74 (three hundred ninety-three thousand eight hundred twenty-eight euros and seventy-four cents), concerning the remainder of the price, amount deposited in the account of the Claimant's representative at the time of execution of the transaction.
At the time of the deed referred to in item 5, the notary public informed the parties that on the property subject to the sale there subsisted a registration of voluntary mortgage in favor of Bank A PLC, registered by entry C-one, and whose cancellation would be assured.
Thus, the actual consideration paid by the Claimant for the acquisition of the property was not solely the €180,000.00 contained in the deed executed on 24 October 2008 but such amount plus the expenses incurred and paid (€561,690.46), which totals €741,690.46.
Pursuant to article 89 of the Corporate Income Tax Code (CIRC), the AT issued an ex officio assessment on 13/12/2009, with taxable income of €5,964.00 and tax payable of €1,208.90.
Within the framework of service order no. …, by dispatch of the Head of Tax Inspection Division of the Finance Directorate, dated 2011-06-03, an external tax inspection action was initiated on 2011-07-08, covering the years 2008 and 2009, relating to Corporate Income Tax.
Accordingly, in the inspection report, approved by the Finance Director on 2012-01-04, a correction to the 2008 taxable income was proposed in the amount of €989,038.73.
By the Tax Authority, in the aforementioned inspection procedure, a taxable income of €989,038.73 was determined, calculated as follows:

[The document contains a table or calculation that is not fully visible in the provided text]

Consequently, on 2012-01-16 the Corporate Income Tax assessment no. … was issued, in the amount of €246,681.15.
On 26 January 2012, the Finance Service issued an administrative violation notice for non-payment of stamp duty, imposing a fine of €898.70, paid by the claimant on 02 February 2012.
Also on 26 January 2012 the Finance Service of Ourique levied additional stamp duty on €561,690.46, and respective interest, which was paid by the Claimant on 8 February 2012.
On 2012-02-10, the Claimant executed a rectification to the deed executed on 2008-10-24, "to the effect that it would now state that the property was acquired for the value of seven hundred forty-one thousand, six hundred ninety euros and forty-six cents [€741,690.46], of which one hundred eighty thousand euros concerning the price initially paid [€180,000.00] and five hundred sixty-one thousand six hundred ninety euros and forty-six cents [€561,690.46] of Bank Loan to Bank A, PLC".
On 2012-05-28, the Claimant filed an administrative complaint of the Corporate Income Tax assessment in question (case no. …), in accordance with article 68 of CPPT.
Dated 2012-12-03, the Head of Tax and Justice Division of the Finance Directorate of Beja issued a dispatch of proposed decision denying the administrative complaint filed, basing this on arguments set forth in Information no. …., of 2012-11-22.
Following the prior hearing in the context of the Administrative Complaint, the Tax Inspection services were requested to provide information on the facts in the context of that complaint.
As a result, on 14 February 2013, information was provided by the Tax Inspector concluding, in light of the rectification deed regarding the value of acquisition of the property, that the rectification made in the accounting is justified, and therefore the value of the cost of goods sold in 2008 is €741,690.46 and the value of taxable income in 2008 is €427,348.27.
Conclusion of the Inspection Services which was not considered in the analysis of the Administrative Complaint.
With regard to tax benefits for inland areas, the AT considered that "in view of the failure to file the declaration here in question, the Claimant should not be recognized as having fulfilled all the requirements defined in the aforementioned law", referring to the failure to file the Corporate Income Tax Form Model 22 for 2008 within the legal deadline.
Thus Corporate Income Tax was assessed at the general rate of 25% and not at the reduced rate provided for in the inland area incentive regime, which the Claimant contends should be 10%.
However, the Claimant filed the Model 22 Corporate Income Tax return on 14 December 2012 (no. …).
The Claimant concludes that, regarding the question of tax benefits for inland areas, that "with the presentation of the missing declaration (14 December 2012), the irregularity noted in the proposed decision was cured, and therefore the Claimant should be recognized as having the right to the Corporate Income Tax rate of 10% (and not 15% as contained in the proposed decision, as that rate is already a subsidiary position)".
However, the income declaration referred to in the preceding items remained in the status of "non-taxable", and its conversion into a complaint was determined.
Following the prior hearing, on 14 February 2013, the information provided by the Tax Inspector considers that:

"As to the question of compliance with the requirements of the tax benefit for inland areas, reference is made to what was previously stated in items 3.4 and 3.5 of this information, with the necessary requirements provided for in article 43(1)(a) of the Tax Benefits Statute appearing to be met."

On 2013-02-26, the Head of Division issued a dispatch, denying the request, basing this on said information and an opinion of the Team Head dated 2013-02-18.
In said opinion, regarding the application of the tax regime of benefits for inland areas, it reads: "I agree with the proposals contained in this information, considering that, through the analysis conducted for the purpose of providing information on the facts in the context of administrative complaint proceedings with the numbers … and …, instituted by company A, Lda, concerning the ex officio Corporate Income Tax assessment for the year 2008, identified by no. …, it is concluded that:
……………..
The prerequisites for applying the tax benefit for inland areas are met, but not its reduced rate, considering that the taxpayer began its activity prior to the entry into force of the provisions of article 39-B of the Tax Benefits Statute, added by article 83 of Law no. 53-A/2005, of 29 December".
By dispatch of 2013-11-20, issued by the Finance Director, attached and grounded in Information no. 105/2013 of the same date, the proposed decision was converted into a final decision, thus denying the administrative complaint request.
The claimant paid on account the sum of €42,650.00 and subsequently €21,452.24.
It should be noted that the Claimant proceeded from January 2006 to construct a property in the parish of ….
In December 2005, the Claimant purchased the rural property called "…", registered under article … of the parish and municipality of …, which it sold in June 2006, to D.
In September 2006, the Claimant purchased the urban property, consisting of a construction lot, located at …, registered under article … of the parish and municipality of …, which it sold in November 2006 to E and F.
In April 2007, the Claimant purchased the rural property called "…", registered under article 19 of Section FF of the parish and municipality of …, which it sold in June 2007 to G and H.
In December 2008, the Claimant purchased, with the stated purpose of resale in the corresponding public deed, three properties, rural properties registered under articles 39, 42 and 41, all of Section Q of the parish of …, which it has not yet sold, but on which it obtained approval for construction projects for a dwelling, swimming pool and agricultural support warehouse.
In 2008 the Claimant had organized accounting.
In 2008, the Claimant had no employees on its staff.
The income declarations of the Claimant for the year 2008 were signed by a certified accounting technician.

The Claimant contends that it proved that the acquisition cost value of the mixed property identified in the proceedings was not solely €180,000.00 contained in the deed executed on 24 October 2008 but such amount plus the expenses incurred and paid (€561,690.46), which totals €741,690.46.
As well as that the legal requirements on which the granting of the tax benefit for inland areas depends, as provided for in the now repealed article 43(1)(a) of the Tax Benefits Statute, are met.
It requested the examination of a witness with the position of certified accounting technician at the Claimant, which took place on 24-04-2014, during the meeting provided for in article 18 of RJAT.
The Tax Authority, for its part, and in summary, defended the following:
The correction to the acquisition cost value was rejected due to the lack of accounting elements and suitable documents to prove the expenses incurred and their necessity, and the tax benefit for inland areas because the respective legal requirements were not met.
Regarding the rectification of the property acquisition value, the following factors are to be considered, among others:

The financial movements that the Claimant alleges in the claim for ruling were not reflected in the accounting at the time of conclusion of the inspection action and were introduced later for the purpose of presenting the administrative complaint;
The sellers declared as the value of the taxable transaction of the property €180,000.00, included in Annex G of the Individual Income Tax Form Model 3 for 2008;
The shareholders of the respondent company were owners of said property and chose to effect the sale through the respondent company with the transaction completed on the same day through successive execution of deeds: I and J sold the property to the Claimant for the declared price of €180,000.00 and the Claimant sold the property to B and C for the price of €1,245,000.00.
The sum of €561,690.46 refers to a loan in debt on 24 October 2008 by I with Bank A PLC.
Irregularities committed in the accounting, the lack of suitable documents to support that amount, and the relationships between sellers and Claimant introduce a lack of transparency that affects the credibility of the documents and the assessment made of them.
One cannot confuse the price or patrimonial consideration of the acquisition of a property with the expenses associated with that transaction, which are distinct from an accounting or tax perspective.
That is to say, while the agreed price constitutes a gain to be reflected in taxable income for Corporate Income Tax purposes, given that it results from the normal exercise of the activity of the taxpayer and has its framework in article 20 of CIRC, in accordance with the notion of extensive interpretation of income based on the theory of patrimonial increase, as stated in the preamble to CIRC.
The legal and fiscal relevance of the expenses incurred should be analyzed in light of the accounting standards and applicable tax law, with their proof required to be properly supported in the accounting through suitable documents, and their deductibility determined in accordance with the rules contained in articles 23 and 42 of CIRC.
This is to say that not all expenses incurred for the purpose of obtaining income subject to taxation are necessarily deductible.
Hence, also, the Stamp Duty assessment was levied on the amount declared by the executing parties as the patrimonial consideration of the transaction, which does not prevent that, for Corporate Income Tax purposes, and considering the principles governing the taxation of business income, such amount may not be considered fiscally deductible.
It appears, however, that even if it were proven that that loan concerned the property in question, and that the financial movements embodied in those checks correspond to expenses actually incurred by the Claimant, which is disputed,
Even so it would remain to be proven the nature of those payments, that is to say, the payment of that amount of €561,690.46 may not have been made as patrimonial consideration for the acquisition of the property but as a loan or advance by the company to the shareholders in order to carry out the transaction.
In this respect, note what is provided in article 371 of the Civil Code, from which it follows that the rectification deed executed on 10/02/2012 does not constitute a means of full proof to obtain confirmation that the Claimant incurred expenses with the property in the amount of €714,690.46, and its assessment for purposes of proof is subject to the free appreciation of the Tribunal.
As for the application of the reduced tax rate, the AT considered that the 10% reduced Corporate Income Tax rate would never be applicable to it since it began its activity on a date prior to that provided for in article 83 of the 2007 Budget Law (Law no. 53-A/2006, of 29/12) which added subparagraph b) to article 39-A(1) of the then Tax Benefits Statute.
And that the 15% reduced rate also could not be applied since the Claimant failed to comply with the legally provided obligations, namely it did not file the Corporate Income Tax Form Model 22 for 2008 or the Financial Statement Information (IES).
And that it does not have a regularized tax situation since it is pending regularization, in a fiscal execution proceeding no. … of the assessment now in dispute, as it has not been suspended given that the necessary guarantee was not provided for such purpose.

II. FACTS PROVED

The Claimant is a private company limited by shares, with registered office in the parish and municipality …, whose principal activity is "purchase and sale of real property" (CAE) and whose secondary activity is "rental of real property" (CAE), exercising activity since 2005-12-28.
On 2008-10-24, the Claimant acquired, by means of a public deed, a mixed property (urban and rural) located in the parish of …, municipality of …, with the urban part registered under article no. … and the rural part under article 11, section C of the respective property registers.
The purchase price declared in said deed was €180,000.00.
The property referred to in item 2 was mortgaged to Bank A to guarantee a loan.
On the same day referred to in item 2 (2008-10-24), the Claimant executed a public deed in which it declared to sell said property for €1,245,000.00 to B and his wife C, represented by their attorney Dr. ….
Following the agreement, Dr. …, in such capacity, made the following payments:
- €249,000 (two hundred forty-nine thousand euros) as deposit and part payment, amount deposited in the account of the Claimant's representative at the time of execution of the transaction;
- €567,809.26 (five hundred sixty-seven thousand eight hundred nine euros and twenty-six cents), to Bank A PLC – lending entity (€561,690.46 of the borrowed amount + €300 in expenses + €5,818 in early repayment penalty);
- €34,362 (thirty-four thousand three hundred sixty-two euros) concerning real estate agency commission;
- €393,828.74 (three hundred ninety-three thousand eight hundred twenty-eight euros and seventy-four cents), concerning the remainder of the price, amount deposited in the account of the Claimant's representative at the time of execution of the transaction.
At the time of the deed referred to in item 5, the notary public informed the parties that on the property subject to the sale there subsisted a registration of voluntary mortgage in favor of Bank A PLC, registered by entry C-one, and whose cancellation would be assured.
On 26 January 2012, the Finance Service issued an administrative violation notice for non-payment of stamp duty, imposing a fine of €898.70, paid by the claimant on 02 February 2012.
Also on 26 January 2012 the Finance Service levied additional stamp duty on €561,690.46, and respective interest, which was paid by the Claimant on 8 February 2012.
The Claimant did not file the Corporate Income Tax Form Model 22 for the tax year 2008 within the respective legal deadline.
Pursuant to article 89 of CIRC, the AT issued an ex officio assessment on 13/12/2009, with taxable income of €5,964.00 and tax payable of €1,208.90.
Within the framework of service order no. …, by dispatch of the Head of Tax Inspection Division of the Finance Directorate, dated 2011-06-03, an external tax inspection action was initiated on 2011-07-08, covering the years 2008 and 2009, relating to Corporate Income Tax.
Notified of the draft inspection report, the Claimant did not timely exercise its right to prior hearing.
In the context of such procedure, it was concluded that it had not proceeded to account for revenue in the amount of €1,245,000.00 resulting from the alienation of the mixed property, located in the parish of …, municipality of …, with the urban part registered in the register under article no. … and the rural part registered under no. 11, section C, referred to above.
Accordingly, in the inspection report, approved by the Finance Director … on 2012-01-04, a correction to the 2008 taxable income was proposed in the amount of €989,038.73.
The Claimant, for the year 2008, accounted for in account 86.1 - Corporate Income Tax, the amount of €98,755.65, deducting it from taxable income for such year.
Were not declared in the accounting of the Claimant, for the year 2008, financial income paid by Bank A PLC, NIPC …, in the amount of €1,482.26, with the entity having withheld, at the time of payment, the amount of €296.43.
Were accounted for by the Claimant, and accepted by the Tax Authority, the costs of €180,000 (merchandise and materials) and €77,443.53 (supplies/external services).
By the Tax Authority, in the aforementioned inspection procedure, a taxable income of €989,038.73 was determined, calculated as follows:

[Document contains calculation table not fully visible]

Consequently, on 2012-01-16 the Corporate Income Tax assessment no. 2012 8310000372 was issued, in the amount of €246,681.15.
On 2012-02-10, the Claimant executed a rectification to the deed executed on 2008-10-24, "to the effect that it would now state that the property was acquired for the value of seven hundred forty-one thousand, six hundred ninety euros and forty-six cents [€741,690.46], of which one hundred eighty thousand euros concerning the price initially paid [€180,000.00] and five hundred sixty-one thousand six hundred ninety euros and forty-six cents [€561,690.46] of Bank Loan to Bank A, PLC".
On 2012-05-28, the Claimant filed an administrative complaint of the Corporate Income Tax assessment in question (case no. …), in accordance with article 68 of CPPT.
Dated 2012-12-03, the Head of Tax and Justice Division of the Finance Directorate issued a dispatch of proposed decision denying the administrative complaint filed, basing this on arguments set forth in Information no. …, of 2012-11-22.
In the above-identified information, regarding the rectification of the acquisition value, it was concluded that "The taxpayer did not offer, in the context of the inspection action or in the administrative complaint proceedings, accounting that reflects the accounting or financial movements concerning the operations it alleges to have carried out.", and that "because the Claimant brought no element to the proceedings capable of contradicting the facts verified by the Tax Inspectors, its claim should not be granted".
On the other hand, regarding the payments to company L, Construction Services, Lda., it was concluded that, as the respective invoices had not been presented, "it appears that the Claimant provides no documents to the proceedings that conclusively and unequivocally prove the accounting value it seeks to consider as a cost".
With regard to tax benefits for inland areas, it was written that "in view of the failure to file the declaration here in question, the Claimant should not be recognized as having fulfilled all the requirements defined in the aforementioned law".
By Official Notice no. …, of the Finance Directorate, of 2012-12-04, the Claimant was notified of said proposed decision.
The Claimant exercised its right to hearing, alleging, in summary, as to the value of the property in question, that "as can be seen from the attached trial balance and extract from the purchases account now attached, it is possible to confirm that the value currently accounted for is €741,690.46", in which terms the value of the consideration paid for the acquisition of the property "was not solely €180,000, but also the value of the expenses that burdened it - €561,690.46".
Presenting, for that purpose, a new closing trial balance relating to the accounts for the year 2008, resulting from certain correcting entries of the values initially recorded, calculating a new net result of €383,279.40 and declaring a taxable income of €425,866.01.
As for the question of tax benefits for inland areas, the Claimant stated that "with the presentation of the missing declaration (14 December 2012), the irregularity noted in the proposed decision was cured, and therefore the Claimant should be recognized as having the right to the Corporate Income Tax rate of 10% (and not 15% as contained in the proposed decision, as that rate is already a subsidiary position)".
On 14 December 2012 the income declaration Model 22 for the year 2008 (no. …) was filed, in which the claimant declared a taxable income of €425,866.01, thus broken down:

[Document contains calculation table not fully visible]

The declaration referred to in the preceding item remained in the status of "non-taxable", and its conversion into a complaint was determined.
Between 2013-02-06 and 2013-02-14, an inspection action was conducted for the purpose of providing information on the facts in the context of the administrative complaint proceeding no. … .
Following the same, information was prepared on 2013-02-14 by the Finance Directorate.
In said information, it is stated, among other things, that: "3.7 Said rectification of the purchase value of the merchandise was motivated by the fact that the amount of €561,690.46 paid by the taxpayer to Bank A PLC was not taken into account in the price initially declared for the deed, concerning a debt of the sellers, necessary for the cancellation of the mortgage that burdened the property and its sale free of encumbrances or expenses. 3.8 In light of said notarial document, the rectification made in the accounting is justified, and therefore the value of the cost of goods sold for the year 2008 is €741,690.46 ..."; and that "thus, it is reported that the value of the Taxable Income for the year 2008 is €427,348.27, therefore not coinciding with what results from the values recorded in the accounting of the taxpayer nor with the value calculated by it in the income declaration indicated in item 3.3".
In that same information, it is further stated that:

On 2013-02-26, the Head of Division issued a dispatch, denying the request, basing this on said information and an opinion of the Team Head dated 2013-02-18.
In said opinion, it reads: "I agree with the proposals contained in this information, considering that, through the analysis conducted for the purpose of providing information on the facts in the context of administrative complaint proceedings with the numbers … and …, instituted by company A, Lda, concerning the ex officio Corporate Income Tax assessment for the year 2008, identified by no. …, it is concluded that:
The values declared by the taxpayer in Declaration Model 22 filed on 2012-12-14 are not coincident with those revealed by its accounting, and therefore it is not possible to validate the taxable income declared in said Model 22;
The documents that support the taxpayer's claim to have considered as a cost of future years the amount of €95,957.68 do not constitute unequivocal proof that it was actually incurred and necessary for the purpose of obtaining income;
The prerequisites for applying the tax benefit for inland areas are met, but not its reduced rate, considering that the taxpayer began its activity prior to the entry into force of the provisions of article 39-B of the Tax Benefits Statute, added by article 83 of Law no. 53-A/2005, of 29 December".
By dispatch of 2013-11-20, issued by the Finance Director, attached and grounded in Information no. 105/2013 of the same date, the proposed decision was converted into a final decision, thus denying the administrative complaint request.
The Claimant was notified of the final dispatch by official notice, by registered mail with acknowledgment of receipt, received on 25-11-2013.
The claimant paid on account the sum of €42,650.00 and subsequently €21,452.24.
The Claimant proceeded from January 2006 to construct a property in the parish of ….
In December 2005, the Claimant purchased the rural property called "…", registered under article 19 of Section FF of the parish and municipality …, which it sold in June 2006, to J.
In September 2006, the Claimant purchased the urban property, consisting of a construction lot, located at …, registered under article … of the parish and municipality of …, which it sold in November 2006 to E and F.
In April 2007, the Claimant purchased the rural property called …, registered under article 19 of Section FF of the parish and municipality of …, which it sold in June 2007 to G and H.
In December 2008, the Claimant purchased, with the stated purpose of resale in the corresponding public deed, three properties, rural properties registered under articles 39, 42 and 41, all of Section Q of the parish of …, which it has not yet sold, but on which it obtained approval for construction projects for a dwelling, swimming pool and agricultural support warehouse.
In 2008 the Claimant had organized accounting.
In 2008, the Claimant had no employees on its staff.
The income declarations of the Claimant for the year 2008 were signed by a certified accounting technician.

III. FACTS NOT PROVED

There are no facts which should be considered as not proved that are relevant for the decision.

IV. LEGAL REASONING OF THE PROVED AND NOT PROVED FACTS

Regarding the facts, the Tribunal need not pronounce on everything alleged by the parties; rather, its duty is to select the facts that matter for the decision and to discriminate the proved from the not proved facts (see article 123(2) of CPPT and article 607(3) of the Code of Civil Procedure, applicable ex vi article 29(1), subsections a) and e), of RJAT).

Accordingly, the relevant facts for the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see former article 511(1) of the Code of Civil Procedure, corresponding to current article 596, applicable ex vi article 29(1), subsection e), of RJAT).

Thus, taking into account the positions assumed by the parties, the documentary and testimonial evidence, and the administrative file attached to the proceedings, the facts listed above were considered as proved, relevant for the decision.

V. LEGAL REASONING

Having analyzed and reached conclusions on the merits of the claim, it falls to the constituted Arbitral Tribunal to decide on the illegality of the Corporate Income Tax assessment no. …, for the year 2008, in the amount of €246,681.15.
With the facts established, the Tribunal will decide on the subsumption of the facts proved to the constituted law or the abstract tax framework.
The following are decisive issues:

a. The question of whether the application of the reduced rate applicable to companies benefiting from the inland area incentive regime, as provided for on the date in article 39-B of the Tax Benefits Statute, should apply to the 2008 Corporate Income Tax assessment in dispute;

b. The acceptance as a fiscally deductible cost of the amount of €561,690.46 corresponding to the value of the mortgage in favor of Bank A PLC that burdened the mixed property located in the Parish of …, municipality of …, with the urban part registered under article no. 3223 and the rural part under article no. 11 section C of the respective property registers and which was, as consideration for the acquisition of the property here identified.

Application of the Reduced Corporate Income Tax Rate to the Claimant

The Tribunal will first evaluate the possibility of applying, to the disputed assessment, the reduced Corporate Income Tax rate applicable to companies benefiting from the inland area incentive regime, as provided for on the date in article 39-B of the Tax Benefits Statute.
Let us examine the tax rules abstractly applicable.
Law 53-A/2006, of 31 December, introduced article 39-B to the Tax Benefits Statute which provided as follows:

Article 39-B
Benefits relating to inland areas

1 - To companies that exercise, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, hereinafter called "beneficiary areas", the following tax benefits are granted:

a) The Corporate Income Tax rate provided for in article 80(1) of the respective Code is reduced to 20%, for entities whose principal activity is located in the beneficiary areas;

b) In the case of establishment of new entities, whose principal activity is located in the beneficiary areas, the rate referred to in the preceding number is reduced to 15% for the first five years of activity;

c) .....

d) ......

2 - The following are conditions for enjoying the benefits provided for in the preceding number:

a) The determination of taxable income is made using direct valuation methods;

b) They have regularized tax status;

c) They have no overdue wages;

d) They do not result from a spin-off carried out in the two years preceding the enjoyment of the benefits.

3 - ...............

4 - ...........

5 - ............

6 - .........

7 - The definition of the criteria and the delimitation of the beneficiary territorial areas, in accordance with the preceding number, as well as all regulatory rules necessary for the proper execution of this article, are established by order of the Minister of Finance.

8 - ...........

Prior to the entry into force of article 39-B of the Tax Benefits Statute, the tax regime for inland area incentives was contained in Law no. 171/99, of 18 September, with the last amendment introduced by the 2005 Budget Law (Law no. 55-B/2004, of 30 December), which provided in its article 7 for the application of a general Corporate Income Tax rate for entities exercising, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, hereinafter called "beneficiary areas", of 20% and a rate of 15% for new entities whose principal activity is located in the beneficiary areas.
In turn, Decree-Law no. 55/2008, of 26 March, which takes effect from 1 January 2007, regulated the rules necessary for the execution of article 39-B of the Tax Benefits Statute, concerning inland area recovery incentive measures for Portuguese regions suffering from inland area problems, establishing a set of obligations for entities benefiting from the incentive provided for in article 39-B of the Tax Benefits Statute.
Article 2 of the Decree-Law establishes as conditions of access for beneficiary entities, among others, the following:

a) Being legally constituted and complying with the legal conditions necessary for the exercise of their activity;

b) Having regularized status with the tax administration, social security and the respective municipality;

c) Having organized accounting, in accordance with the Official Chart of Accounts;
Its article 4 establishes, among others, the following obligations:

1 - Beneficiary entities are subject to the following obligations:

a) Maintain regularized status with the tax administration, social security and the respective municipality;

b) Provide all elements related to the granting of the incentive that are requested by the responsible entity referred to in article 3;

c) Communicate to the responsible entity referred to in article 3 any change or occurrence that jeopardizes the prerequisites underlying the assignment of the incentive;

d) Maintain the legal conditions necessary for the exercise of their respective activity;

e) Maintain organized accounting in accordance with the Official Chart of Accounts;

f) Maintain in the company, duly organized, all documents capable of proving the declarations made at the time of assignment of the incentive.

Finally, article 5 of this same Decree-Law provides for the consequences of non-compliance with the obligations set out in the preceding item, which are now expressed:

Non-Compliance

Non-compliance with any of the obligations defined in the preceding article, as well as the provision of false information, implies the loss of the incentives enjoyed, leaving beneficiary entities obligated, within 30 days from the respective notification, to pay the amounts corresponding to the uncollected revenues, plus any compensatory interest calculated at the legal rate in force plus 3 percentage points.
...........
The tax benefit provided for in article 39-B of the Tax Benefits Statute constitutes a temporary tax benefit, automatic in that it does not depend on recognition by the Tax Authority, but conditional in that, once the requirements for access to it are met, the benefit is not maintained if there is non-compliance with any of the obligations imposed on entities benefiting from it.
As to the time at which the prerequisites for enjoyment of the tax benefit should be verified, article 11 of the Tax Benefits Statute provides that the right to benefits arises with the historical verification of the objective or subjective prerequisites of its provision, which are truly its constitutive fact, even though the tax benefit is dependent on unilateral declaratory recognition by the Tax Administration, and even if its efficacy is, at times, deferred in time, by virtue of a suspensive condition.
Where the provision of the article granting the tax benefit is met, in the case sub judice article 39-B, the same benefit is "lost" if there is non-compliance with the conditions of access, corresponding to the prerequisites for enjoyment of such benefit or to the maintenance of compliance with the obligations imposed on the taxpayer.
Also relevant to the decision is article 14 of the Tax Benefits Statute, regarding the extinction of tax benefits, which provides in the following terms:

1 - The extinction of tax benefits has as a consequence the automatic restoration of normal taxation.

2 - Tax benefits, when temporary, expire by the lapse of the time for which they were granted, and when conditional, by the verification of the prerequisites of the respective resolutive condition or by non-observance of the obligations imposed, attributable to the beneficiary.

3 - When the tax benefit concerns the acquisition of goods intended for the direct realization of the purposes of the acquirers, it ceases to have effect if they are alienated or given another purpose without authorization from the Minister of Finance, without prejudice to other sanctions or different regimes established by law.

4 - The administrative act granting a tax benefit is not revocable nor can the respective grant agreement be rescinded, or the acquired rights be diminished, by unilateral act of the tax administration, except in case of non-observance attributable to the beneficiary of the obligations imposed, or if the benefit was wrongly granted, in which case that act may be revoked.

5 - In the case of permanent or temporary tax benefits dependent on recognition by the tax administration, the administrative act that granted them ceases its effects in the following situations:

a) The taxpayer has ceased to pay any tax on income, expenses or property, and contributions relating to the social security system and maintains the situation of non-compliance;

b) The debt has not been subject to complaint, challenge or opposition with the provision of suitable guarantee, when required.

6 - Where the situations provided for in subsections a) and b) of the preceding number occur, automatic benefits do not produce their effects in the year or period of taxation in which their prerequisites occur.

7 - The provisions of the preceding numbers apply whenever the situations provided for in subsections a) and b) of article 5 occur, with respect to periodic taxes, at the end of the year or period of taxation in which the tax fact occurred and, in taxes of single obligation, on the date the tax fact occurred.

From this provision it follows immediately that conditional tax benefits are extinguished by the verification of the prerequisites of the resolutive condition or by non-observance of the obligations imposed on beneficiaries.
And that, where the cessation of effects of the tax benefit is verified, it does not produce its effects in the period of taxation in which its prerequisites occur.
This exclusion being expressly referred to in the case where the taxpayer does not have a regularized tax situation.
The Tax Benefits Statute does not contain its own concept of "regularized tax status". A concept which is, however, referred to in various tax legislation, with a univocal meaning.
Cite article 6 of article 64 of the General Tax Law: It is considered to have regularized tax status, for the purposes of the provision of the preceding subsection, the full payment of any taxes, the absence of default situations or their regularization in accordance with the provisions and plans provided for in the Code of Tax Procedure and Process and other applicable legislation.
And, on the other hand, Decree-Law no. 236/95, of 13 September, which provides in its article 2 that the taxpayer has regularized tax status under the following conditions:

It is considered that they have regularized tax status the taxpayers who meet one of the following requirements:

a) They are not debtors to the National Treasury of any taxes or tax payments and respective interest;

b) They are proceeding to pay the debt in installments in the terms and conditions authorized;

c) They have complained, appealed or judicially challenged those debts, except if, by the fact that suitable guarantee was not provided in accordance with article 255 of the Tax Procedure Code, the respective execution was not suspended.

A concept corresponding to that contained in article 14(5) of the Tax Benefits Statute, duly cited.
Let us then see whether, in the present case, the Claimant fulfilled the legally provided obligations to enjoy the tax benefit provided for in article 39-B of the Tax Benefits Statute in the 2008 tax period.
And specifically, whether it has regularized tax status.
As to the obligation to file the Corporate Income Tax Form Model 22, the Claimant did not proceed to do so within the legally provided deadline, by 31 May 2009, nor did it file it during the inspection action nor with the filing of the Administrative Complaint on 28 May 2012, having it been filed only after the legally provided deadlines had been exceeded in accordance with article 120 (former article 112) of the Corporate Income Tax Code and article 59 of CPPT.
The Claimant also did not file the Financial Statement Information (IES) for the year 2008.
The Claimant acknowledged that its accounting for the year 2008 did not reflect the reality of its legal transactions and made corrective movements to the accounting for the year 2008 after the Tax Inspection in December 2012.
Furthermore, with reference to the Corporate Income Tax assessment … in the amount of €246,681.15, a fiscal execution proceeding no. … is pending regularization which has not been suspended by the provision of guarantee for its suspension, with the Claimant having made installment payments in the amount of €42,650.00 and subsequently €21,452.24.
In these considerations, the Tribunal concludes that the Claimant does not have regularized tax status.
As well as it did not comply with the obligations provided for in Decree-Law no. 55/2008, in particular the obligation to maintain organized accounting in accordance with the Official Chart of Accounts and to maintain in the company, duly organized, all documents capable of proving the declarations made at the time of assignment of the incentive.
Therefore, in accordance with article 14 of the Tax Benefits Statute and article 5 of Decree-Law no. 55/2008, it should lose the right to the tax benefit enjoyed, and is not entitled to be taxed by the Corporate Income Tax rate provided for in article 39-B of the Tax Benefits Statute but rather by the general Corporate Income Tax rate.

Acceptance as a Fiscal Cost of the Amount of €561,690.46 as an Expense incurred in the Acquisition of the Mixed Property in Question

The Claimant seeks recognition as a fiscal cost of the amount of €561,690.46 as an expense on the acquisition of the identified property.
An amount which it seeks to have added to the price declared in the deed of purchase and sale executed with the sellers on 24 October 2008 and accounted for in the amount of €180,000.00.
Let us see whether this addition to the cost accounted for as "acquisition cost" by the Claimant may be fiscally deductible as a fiscal cost within the framework of the Corporate Income Tax Code and specifically its article 23.
In the wording in force in 2008, costs or losses are considered to be those that are demonstrably indispensable for the realization of income or gains subject to tax or for the maintenance of the source of production (article 23(1) of CIRC).
Following Joana Catarina de Jesus Dias in "Accounting Expenses and Their Deductibility in Portugal and Spain" (Dissertation presented in 2009 to the University of Aveiro to meet the requirements necessary to obtain a Master's degree in Accounting), this norm is included in a group called "general rules" in which the starting point is to accept the costs accounted for, unless there are express tax rules that exclude their deductibility.
The legislator seeks essentially to achieve two objectives in defining what are accepted costs and in restricting the scope thereof.
On the one hand, it respects the principle of freedom of management of companies when it accepts fiscally those costs that result from normal acts in the pursuit of the company's objectives.
On the other, it establishes rules to prevent abuses by taxpayers.
Tax Law must safeguard what is understood as a cost incurred in the interest of the company and what is incurred in the interest of individuals, and this is another of the reasons that led the legislator to need its restriction.
It is in this sense that within the scope of Tax Law there are some exceptions that prevent the deductibility of costs, such as article 33 of CIRC – Depreciations and Amortizations not accepted as a cost and article 42 of CIRC – Expenses not deductible for tax purposes, referring to these articles as worded in 2008.
The starting point for determining taxable income is the net result for the year, based on a prior quantification carried out by the accounting.
In a second step, this net result is subject to various corrections, provided for in tax legislation, which are justified essentially by three types of reasons: combating tax evasion and erosion of tax revenues, to prevent situations of double taxation, and to resolve situations of non-coincidence between the timing rules of results for accounting purposes and for tax purposes (in "The Deductibility of Costs in Portuguese Tax Case Law", António Moura Portugal, Coimbra Editors, page 99 et seq.).
We can affirm that, from an accounting perspective, the cost or expense is accepted, provided it is properly documented and has occurred in the context of the pursuit of the company's activity.
From a tax perspective, these are not the only requirements that must be met. Thus, and initially, for the acceptance of a cost it is essential that a set of general requirements be met: proof, necessity and connection to gains subject to tax.
Specifically, other requirements arise such as actual occurrence, accounting entry and temporal allocation.
The requirement of actual occurrence presupposes that, in order for a cost to be accounted for, it is necessary that it be incurred by the taxpayer, and for the purpose that the company intends to achieve. Thus, this requirement is met when it is verified that there is indeed a cost, and that it occurred in the interest of the company.
The issue of actual occurrence is directly linked to the issue of existence, that is, the objective of this requirement is to show that a given cost can be accounted for if the company can demonstrate its existence and truthfulness through valid supporting documents.
Reasons of legal certainty influenced the legislator, who came to require proper documentation of the facts in order to prevent practices of tax evasion.
On the other hand, and directly linked with the above, it is important to know whether there was actually a cost borne by the company, or whether it was borne by any third party, leading to an impoverishment of the company with fictitious costs that reduce its taxable result.
Finally, another of the essential requirements for a cost to be recognized in a company's accounting and be fiscally deductible relates to the verification that it is properly accounted for.
According to António Moura Portugal, in "The Deductibility of Costs in Portuguese Tax Case Law", Coimbra Editors, page 154 et seq., one of the essential prerequisites and even of a nature prior to the discussion of the fiscal deductibility of a cost relates to its accounting entry or recording in a taxpayer's records.
Indeed, the limitation on the deductibility of certain costs is related to reasons of various kinds, namely formal requirements and legal certainty, combating fraud and tax evasion, and derives from the fundamental principle of accounting that any accounting entry must be supported by an adequate document, as a rule an external document, that allows one to clearly and precisely understand the operation, evidencing the cause, nature and amount.
Accounting entries are made on the basis of supporting documents that meet legal requirements and constitute a mandatory condition for accepting their deductibility.
Compliance with formal requirements is thus one of the most important issues within the scope of the tax regime for costs.
This issue is taken up forcefully when one ceases to believe in the truthfulness of the accounting and accounting entries, especially since, in this matter, the rule is to consider the truthfulness of accounting entries when they are in accordance with commercial and tax law.
By requiring documentary support and the accounting entry of the transaction and by limiting deductibility, the legislator is controlling compliance with tax obligations, which derive namely from article 17(3) of CIRC, from applicable accounting rules and from constitutional principles that impose that the taxation of companies is based on their real and effective income, which is to be determined in accordance with a declaration by the taxpayer, observed, among other things, the rules relating to the documentation of costs and income.
It happens that, in the present case, the Tax Authority advances evidence as to the non-proof of the cost corresponding to the amount of €561,690.46 as an expense on the acquisition of the identified property.
The Tax Authority proceeded with the assessment in question, setting out quite explicitly the reasons that led to the challenged act.
Indeed, it is established as proved that the Claimant presented a public deed dated 24-10-2008 in which it declares to have acquired the mixed property in question, for the amount of €180,000.00 and sold it, in the same act, for €1,245,000.00.
It did not file its income declaration for the year 2008.
The elements of the company's accounting showed as "Sale of merchandise" the value of €1,245,000.00 as well as the value of €180,000.00 as "Cost of Merchandise".
The sellers of the property, K and L, included in their Individual Income Tax Form Model 3 for the year 2008, as the value of alienation of the property, the value of €180,000.00.
The Claimant did not exercise its right to hearing before the Tax Inspection report presented on 4 January 2012.
The Claimant filed an Administrative Complaint of the Corporate Income Tax assessment for the year 2008 on 28-05-2012, acknowledging that its accounting did not reflect the reality of its legal transactions, namely regarding the consideration paid for the acquisition of the property identified above.
For purposes of fiscal deduction of a cost under article 23 of CIRC, the formal test of cost deductibility appears in the reference to the requirement "demonstrably".
That is, expenses properly documented must be presumed to be truthful for purposes of determining taxable income for Corporate Income Tax purposes, in light of articles 17 and 98 of CIRC and article 74 of the General Tax Law.
However, where the documentary requirements are not initially fully observed, i.e., where there are apparent insufficiencies in the documentation supporting the accounting and tax consequent entries in the present proceedings, as in the present case, the presumption of truthfulness of the taxpayer's declarations ceases, and the burden of demonstrating the underlying costs falls on the taxpayer.
In the wake of Counselor Jorge Lopes de Sousa (Code of Tax Procedure and Process Annotated, 2nd edition, page 470), "the burden of proof of the facts constituting the rights of the tax administration or taxpayers falls on whoever invokes them. Although this rule (article 74/1 of the General Tax Law) is provided for in the tax procedure, its content should be transposed to the judicial process that follows it, so that whoever had the burden of proof in the tax procedure has the respective burden in the tax judicial process...".
Therefore, in the presence of expenses "undocumented or insufficiently documented," the burden of proving the respective cost falls on the taxpayer, by demonstrating that the transactions were actually carried out, and it is possible for them to resort to other means of proof, namely documentary and testimonial evidence, demonstrating the facts they allege to justify their claim and the challenge to the Corporate Income Tax assessment by the Tax Authority.
Notwithstanding, given the facts proved, in the Tribunal's view, the Claimant did not present documentary evidence supporting the thesis it invokes and demonstrating, in particular, the "ratio" underlying the alleged expense corresponding to the charge with the mortgage to Bank A PLC to guarantee a loan contracted by the seller of the property to the Claimant, one of its two shareholders.
Being that the rectification deed constitutes proof of what was declared by the parties before the Notary who celebrated it but not before tax law.
The Tribunal points out that, before tax law, documents, even if authentic, do not bind the Tax Authority as to the qualification of the legal transaction made by the parties, as provided in article 36 of the General Tax Law.
Thus, the fact that the Claimant subsequently altered, in 2012, the amount of the cost of acquisition of the merchandise, when it did not do so in the appropriate forum, without it actually demonstrating that such alteration is truthful cannot, therefore, be accepted.
On the other hand, the testimonial evidence produced did not allow this Tribunal to correlate the disputed expenses with the commercial activity of the challenger, and therefore does not constitute sufficient proof to demonstrate the necessary causal relationship of the necessity of the costs.
The Tribunal recalls that, when the accountant was questioned about how the outflow of money to pay off the mortgage constituted in favor of Bank A PLC was recorded, the same was unable to answer.
Moreover, the testimonial evidence also failed to prove the existence of a bank account of the Claimant, through which the expense relating to the payment of the mortgage to Bank A PLC would have been paid, in violation of the General Tax Law which requires the existence of a bank account allocated to the company's activity.
Now if the taxpayer has everything recorded as cash, "cash does not speak," and therefore the taxpayer failed to prove, also through testimonial evidence, the incurrence of the expense corresponding to the payment of the mortgage that burdened the mixed property transferred and which constituted a guarantee of a loan made to one of the Claimant's shareholders.
Another issue is whether, when a given transaction is not supported by an external document, or the document is incomplete or has been substantially altered, the tribunal should decide directly on the preclusion of the deductibility of the cost, or whether, on the contrary, it should still admit proof of the commercial transaction.
In our view, notwithstanding all the above, the formal requirements of documentation and accounting entry are not absolutely mandatory and can give way before fundamental tax principles such as the principle of substance over form or the principle of tax capacity.
Indeed, it is established jurisprudence of our courts (see, among others, Court of Accounts decisions of 12/11/1971 and 21/04/1972, published respectively in Court Reports no. 121, pp.139 et seq. and Court Reports no. 130, pp.1480 et seq. and Supreme Administrative Court decision of 21/04/1993) the application of the principle of substance over form, considering that the formal entry of a good in the accounting may be disregarded for tax purposes when it does not correspond to the substance of the function that the good in question performs in the specific company.
It is thus systematically necessary a subsequent task, by the judge, of determining that cost, in order to conclude whether it should be relevant for tax purposes, namely when the requirements of documentation and entry in the accounting of that cost are not met.
The Tribunal must in this way decide on one of two theses: that the property was actually acquired for the value of €180,000 and sold on the same date for €1,245,000, with the Claimant having paid the mortgage, but subrogating itself in the rights of the (bank) creditor, thus maintaining the debt of the individual taxpayers guaranteed by the mortgage, of which the Claimant would now be creditor.
In this case the Claimant had the income which was taxed, in that the expense with the mortgage would have had the counterpart of a credit against the individual taxpayers. These would have had no income, since they would remain debtors of the amount guaranteed by the mortgage.
Or that the expense in question should be admitted as not implausible, given good commercial practices, that the Claimant embarked on a transaction that would appear to be detrimental to it.
We follow here the thesis set out in the Supreme Administrative Court decision in case no. 0658/11, of 05-07-2012, to admit that, if on one hand, by requirement of the principle of tax capacity, costs, even if not documented, may contribute to the determination of income, provided the taxpayer alleges and demonstrates the necessity and amount of the expense, on the other, these principles are not absolute and must give way before the principle of justice and the prevalence of the protection of the public interest underlying formal requirements.
Following the cognitive and conclusive path of the cited decision, the principle of tax capacity and taxation on actual income are not absolute, but rather have as limits other constitutionally protected values, and the principle of justice cannot provide cover for situations such as those in the present case, in a global weighing of the interests at stake.
Indeed, it must be recalled and taken into account that formal requirements and the documentation of costs have underlying the protection of the public interest in combating tax evasion and fraud.
Thus, if on one hand the imperative of taxation on actual income is relevant, on the other hand, the interests underlying formal requirements must be weighed and assessed.
Tax regulations establish the obligation of companies to "have organized accounting in accordance with commercial and tax law… that allows the control of taxable income" (article 115(1) of CIRC) as well as the requirement for a rigorous organizational procedure for accounting, which, in addition to the chronological entry of transactions, must be supported by supporting documents, dated and capable of being presented whenever necessary.
According to Tomás Castro Tavares, (See ibid., pp. 114 and 115) this emphasis on rigorous documentary requirements "in addition to causing effective control over the taxpayer's activity, also results in an invisible mechanism promoting reality (and eliminating the temptation for tax fraud, by mere absence of declaration of income earned and/or artificial inflation of expenses incurred).
In light of the above, it is understood that the law establishes a tight punitive framework for the violation of ancillary and formal obligations regarding supporting documents of company expenses: non-deductibility of costs.
The issue thus revolves around the analysis of the specific situation, weighing the degree of prejudice to the public interest that results from the violation of the formal duties in question.
The legal and tax relevance of the expenses incurred should be analyzed in light of applicable accounting standards and tax law, with their proof required to be properly supported in the accounting through suitable documents, and their deductibility determined in accordance with the rules contained in articles 23 and 42 of CIRC.
And, in light of these rules, it was not demonstrated by the Claimant, either through documentary or testimonial evidence, the proof and actual occurrence of the cost or the necessity thereof for the obtaining of the profit derived from the sale of the property.
It appears to the Tribunal that, even if it were proven that the loan concerned the property in question, and that the financial movements embodied in those checks corresponded to expenses actually incurred by the Claimant, it would remain to prove the nature of those payments, that is, that the payment of that amount of €561,690.46 was made as patrimonial consideration for the acquisition of the property.
The irregularities committed in the accounting, the lack of suitable documents to support the nature of that amount, and the relationships between sellers and Claimant introduce a factor of uncertainty that affects the suitability and credibility of the documents submitted and the consequent assessment made of them for purposes of proof.
Given the insufficient documentation of the cost, the burden of proof of this fact fell on the Claimant. In accordance with article 414 of the Code of Civil Procedure, in case of doubt, the decision shall be against the party to whom the fact is beneficial.

VI. DECISION

For all the foregoing reasons, it is decided to render the claim entirely without merit.

In accordance with article 315(2) of the Code of Civil Procedure and article 97-A(1)(a) of CPPT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the case value is fixed at €272,300.47.

The arbitration fee is fixed at €4,896.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid in full by the Claimant, since the claim was entirely denied, in accordance with articles 12(2) and 22(4), both of RJAT, and article 4(4) of the cited Regulation.

Notify the parties.

Lisbon, 18 July 2014

The Arbitrators

José Pedro Carvalho
(Presiding Arbitrator – Dissenting as per dissenting opinion)

Ana Teixeira de Sousa
(Arbitrator Member - Rapporteur)

Sofia Cardoso Costa
(Arbitrator Member)

Text prepared by computer, in accordance with article 131(5) of the Code of Civil Procedure, applicable by reference to article 29(1)(e) of RJAT, drafted according to the spelling of the Portuguese Language Orthographic Agreement, approved by Resolution of the Assembly of the Republic no. 26/91 and ratified by Presidential Decree no. 43/91, both of 23 August.

DISSENTING OPINION

I voted against the final decision, disagreeing with its outcome on both issues it addressed.

Thus, as to "the question of whether the application of the reduced rate applicable to companies benefiting from the inland area incentive regime, as provided for on the date in article 39-B of the Tax Benefits Statute, should apply to the 2008 Corporate Income Tax assessment in dispute," it seems to me that the prevailing decision does not give sufficient weight either to the structure of article 39-B of the Tax Benefits Statute itself, or to the rule of article 12 of the Tax Benefits Statute, which states that "The right to tax benefits must be dated to the date of verification of the respective prerequisites."

Regarding the first of the aforementioned rules, it should be noted from the outset that it provides for several tax benefits, and not a single tax benefit, as appears to underlie the prevailing decision[1].

Indeed, article 39-B itself refers in its paragraph 1 to "the following tax benefits are granted," making it clear that there is not a single tax benefit at stake.

That is to say, in that rule, notwithstanding having common prerequisites, there are several tax benefits at stake, which must be treated distinctly and assessed autonomously, and not indiscriminately.

Accordingly, in the present proceedings, one must never lose sight of the fact that the tax benefit at issue is the reduction of the Corporate Income Tax rate applicable to the income for the year 2008.

Thus, where the Corporate Income Tax for the tax year 2008 is at issue, the prerequisites of the tax benefits relating to such tax year should be verified – or not – on 31 December 2008. Consequently, subsequent facts – and it would be the case of the failure to file timely, during the year 2009, the income declaration for 2008 - would be incapable of obstructing the constitution of the tax benefit. Thus, where the right to the benefit in question was already formed on 1 January 2009, the non-filing of the income declaration of the prior year within the legal deadline that expired during that year, would not be capable of obstructing such right.

It is understood, in summary, in light of article 12 of the Tax Benefits Statute, that the right to the tax benefit corresponding to the Corporate Income Tax rate applicable in the year 2008 was formed on 31 December of that year. Thus, the rate applicable to the income earned in that year will be the one that, on that date, results from the application of the law to the facts as they present themselves on that date.

What has been said will not be obstructed by the provision of article 5(1) of Decree-Law no. 55/2008, of 26 March. Indeed, and at the limit, such rule would permit the AT to demand "payment of the amounts corresponding to uncollected revenues" and not to proceed with a new assessment for the years "past," applying to it a higher tax rate – as happened in the case.

However, it is understood that this would not even be the case, as the correct application of article 5 of Decree-Law no. 55/2008, of 26 March, to the benefit in question would be limited to each year/period in which there was enjoyment of the benefit. That is to say, if, for example, in the year 2009 a beneficiary "failed to maintain the conditions necessary for the exercise of their respective activity" (subsection d) of article 4(1) of said Decree-Law), they would only be deprived of the benefit relating to the Corporate Income Tax rate for that year, with no reason seeing why the benefit already enjoyed in a prior year or years could be withdrawn from them. Indeed, to the contrary, and at the limit, it would lead to that if, for example, a beneficiary ceased their activity – thus failing to comply with the obligations presupposing the exercise of an activity - they would have to restore the benefits relating to the Corporate Income Tax rate of the years in which, complying with all their obligations, they enjoyed similar benefits.

Additionally, as to this first issue, the final conclusion of the prevailing decision cannot be subscribed to, according to which "the Tribunal concludes that the Claimant does not have regularized tax status," not only for the reason that, in the follow-up of what was set out above, it is understood that what will be relevant for the present decision is not whether the Claimant has regularized tax status, but whether it had it on 31 December 2008, but also because it could only be considered that it did not have it in the case of the occurrence of any of the situations listed in the decision itself, namely:

a) Not being a debtor to the National Treasury of any taxes or tax payments and respective interest;

b) Proceeding to pay the debt in installments in the terms and conditions authorized;

c) Having complained, appealed or judicially challenged those debts, except if, by the fact that suitable guarantee was not provided in accordance with article 255 of the Tax Procedure Code, the respective execution was not suspended.

which would not be – in light of the facts given as proved – the case.

With respect to the question of acceptance as a fiscally deductible cost of the amount of €561,690.46 corresponding to the value of the mortgage in favor of Barclays Bank that burdened the mixed property located in the Parish of Estói, municipality of Faro, I equally cannot subscribe to the prevailing decision.

Indeed, with the Claimant itself having configured its claim to the effect that recognition should be given as a fiscal cost of the amount of €561,690.46 as an expense on the acquisition of the property in question, it is from this angle that such issue should be assessed, as occurs in the above-referenced decision.

However, it appears that the decision taken rests on two misunderstandings.

The first is that the burden of proof as to the actual occurrence and necessity of the cost is a subjective burden. That is to say, it places the emphasis of the discourse on the insufficiency or incipience of the Claimant's proving effort, when the assessment of the sufficiency or otherwise of the relevant body of evidence should be reported to the facts actually determined in the proceeding, independently of whether they come from the activity of the Claimant, the AT, or the Tribunal itself, within the scope of its duty to investigate the material truth.

Thus, it is considered that the assessment of the demonstration of the actual occurrence and necessity of the costs should be made in light of the facts actually given as proved – and not in light of what the Claimant did or failed to do – and the judgment should focus on demonstrating the necessary causal relationship and necessity of the costs.

The second is the consideration that the factor of uncertainty detected results in prejudice to the Claimant, without giving due weight to the provision of article 100(1) of CPPT[2].

In these terms, and looking at the reality as it is configured from the facts given as proved, and not looking at the actions or omissions of the Claimant (judging the facts and not the Claimant, in summary), it appears that the minimum body of evidence is brought together for the conclusion, at least, of a founded doubt as to the non-occurrence or non-necessity of the cost in question in the present proceedings, justifying the intervention of such procedural rule.

Indeed, it is determined that a property was purchased by the claimant for €180,000.00, and that property was sold – on the same day – for €1,245,000.00.

From this it follows – in the absence of any element to the contrary – that the value of the property in question was much higher than the value of acquisition by the Claimant.

It is further determined that on the same property there was a mortgage relating to a loan of which the original sellers were debtors and that that mortgage was paid off by the final acquirers, delivering the part of the price equivalent to the value thereof – €561,690.46 – to the bank creditor holding the mortgage, so that it would discharge the mortgage.

At this point, as is referred to in the prevailing decision, two hypotheses remain:

i. The property was actually acquired for the value of €180,000 and sold on the same date for €1,245,000, with the Claimant having paid the mortgage, but subrogating itself in the rights of the (bank) creditor, thus maintaining the debt of the individual taxpayers guaranteed by the mortgage, of which the Claimant would now be creditor; or

ii. The property was acquired with the obligation to discharge the mortgage, freeing the original sellers from it, and therefore the price (cost) of acquisition was the value of the purchase plus the cost of discharging the mortgage.

Now, the first of these hypotheses, which is the one into which the position underlying the prevailing decision flows, suffers from a marked deficit in plausibility, in that it implies that someone – the original sellers – sells, without any plausible motive, a property worth more than €1,000,000.00, for €180,000.00, and still has a charge of €561,690.46!

In that no circumstance that would in any way contextualize or explain this notorious deviation from normality was determined, it is not understood how such a result could be accepted without, at least, concluding for a founded doubt as to what actually occurred in relation to it, and which licenses the application of the rule of article 100(1) of CPPT.

This will not be obstructed by the violations of ancillary tax duties, detected and listed in the prevailing decision. It is understood, rather, that the sanction for the violation of such duties should be based, as it is based, in the regime of tax violations, and not in the application of a tax, as a "punishment" for more or less "tax-deviant" conduct.

Let it be said, finally, that the situation sub judice is a clearly anomalous situation in which – without doubt – maneuvers were carried out with the purpose, if not sole, then at least principal, of causing prejudice to the public treasury. However, such a finding will not authorize that "one write straight on crooked lines." Rather, one must actually detect where and how that prejudice operated and, in accordance with the law, effect the respective corrections, in addition to sanctioning in the appropriate forum any breach of ancillary tax duties. Now, in the present case, and unless I am mistaken, the epicenter of any harmful conduct to the Tax Authority will be located in the sphere of the individual taxpayers – the original sellers – who will have earned the income corresponding to the price in cash of the sale - €180,000.00 – plus the value of the discharge of the mortgage - €561,690.46 - being the sum of such values that should have been taxed, as income to them. In light of the facts given as proved, it would be there that the AT should have acted, and not – as it did – in the sphere of the Claimant.

For the reasons set out, I voted against the decision that precedes.

(José Pedro Carvalho)

[1] It reads there: "The tax benefit provided for in article 39-B of the Tax Benefits Statute constitutes a tax benefit (...)".

[2] "Whenever the evidence produced results in founded doubt as to the existence and quantification of the tax fact, the challenged act should be annulled."

Frequently Asked Questions

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What are the requirements for documenting and proving business costs under Portuguese IRC (Corporate Income Tax)?

Under Portuguese IRC law, business costs must meet strict documentation and proof requirements established in Article 23 of the Corporate Income Tax Code (CIRC). Expenses must be properly documented with invoices or equivalent documents, clearly related to the company's business activity, and necessary for generating taxable income or maintaining the income source. For property acquisition costs, the documentation in public deeds is particularly significant, though courts have recognized that the economic reality may differ from deed declarations. Companies must maintain accounting records that accurately reflect transactions, and any discrepancies between declared values and actual payments can trigger tax adjustments. The burden of proof lies with the taxpayer to demonstrate that expenses were actually incurred and properly documented.

How does the tax benefit for interior regions (benefício fiscal à interioridade) apply to IRC taxpayers in Portugal?

The tax benefit for interior regions (benefício fiscal à interioridade) under Portuguese law provides incentives for businesses operating in designated inland areas to promote economic development in less populated regions. To qualify for this benefit under IRC, companies must have their registered office and effectively carry out their activity in qualifying interior municipalities. The benefit typically includes reduced IRC rates or deductions from taxable income for investments and job creation. However, access to this benefit requires maintaining a regularized tax situation, meaning all tax obligations must be current without outstanding debts to the Tax Authority. The benefit is subject to State aid rules and requires proper application and verification of eligibility criteria.

What constitutes a regularized tax situation (situação tributária regularizada) for claiming fiscal benefits in Portugal?

A regularized tax situation (situação tributária regularizada) is a mandatory requirement for claiming most fiscal benefits in Portugal, including IRC benefits and the inland area incentive. This status means the taxpayer has no outstanding tax debts (or has them properly secured or suspended), has filed all required tax returns on time, and complies with all tax obligations. Tax authorities verify this status through certificates issued by the Finance Services. Without a regularized tax situation, taxpayers are barred from receiving tax benefits, participating in public procurement, or obtaining certain licenses. Companies must request and maintain valid certificates demonstrating their tax compliance status, which typically have limited validity periods and must be renewed regularly.

Can the Tax Authority (AT) disallow business expenses due to insufficient documentation under IRC rules?

Yes, the Tax Authority (AT) has explicit legal authority under IRC rules to disallow business expenses that lack sufficient documentation or fail to meet deductibility requirements. Article 23 of CIRC establishes that costs must be documented, proven, and related to business activity. During tax inspections, the AT can reject expenses that are not supported by proper invoices, that appear excessive or not necessary for the business, or that lack clear business purpose. The AT can also disallow costs when there are discrepancies between declared values and supporting documentation, as occurred in this case. When expenses are disallowed, the AT issues corrective assessments increasing taxable income. Taxpayers have the right to challenge these decisions through administrative complaints and arbitration, where they must prove the expenses were legitimate and properly documented.

How does CAAD arbitration resolve disputes over cost deductions and fiscal benefits under Portuguese corporate tax law?

CAAD (Centro de Arbitragem Administrativa) arbitration provides an alternative dispute resolution mechanism for IRC cost deduction and fiscal benefit disputes. The process begins when a taxpayer files a request for arbitration after exhausting administrative complaints or choosing direct arbitration. An arbitral tribunal of one or three arbitrators is constituted to review the case independently. The tribunal examines the administrative file, hears both parties, and evaluates whether the Tax Authority properly applied IRC rules regarding cost deductibility and benefit eligibility. Unlike court proceedings, arbitration is typically faster and more specialized in tax matters. The tribunal issues a binding decision that can annul or uphold tax assessments. In disputes over costs and benefits, CAAD arbitrators analyze documentation requirements, the economic substance of transactions, compliance with fiscal benefit conditions, and whether the AT's interpretation of tax law was correct, providing taxpayers an effective remedy against potentially incorrect tax assessments.

IRC Tax Arbitration: Cost Documentation, Interior Tax Benefits & Tax Compliance

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I - REPORT

1. Claimants

2. Respondent

3. Constitution and Functioning of the Arbitral Tribunal

4. The Claim and the Basis for the Claim

II. FACTS PROVED

III. FACTS NOT PROVED

IV. LEGAL REASONING OF THE PROVED AND NOT PROVED FACTS

V. LEGAL REASONING

Application of the Reduced Corporate Income Tax Rate to the Claimant

Acceptance as a Fiscal Cost of the Amount of €561,690.46 as an Expense incurred in the Acquisition of the Mixed Property in Question

VI. DECISION

DISSENTING OPINION

Frequently Asked Questions

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Table of Contents

IRC Tax Arbitration: Cost Documentation, Interior Tax Benefits & Tax Compliance

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I - REPORT

1. Claimants

2. Respondent

3. Constitution and Functioning of the Arbitral Tribunal

4. The Claim and the Basis for the Claim

II. FACTS PROVED

III. FACTS NOT PROVED

IV. LEGAL REASONING OF THE PROVED AND NOT PROVED FACTS

V. LEGAL REASONING

Application of the Reduced Corporate Income Tax Rate to the Claimant

Acceptance as a Fiscal Cost of the Amount of €561,690.46 as an Expense incurred in the Acquisition of the Mixed Property in Question

VI. DECISION

DISSENTING OPINION

Frequently Asked Questions

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FRESH Legal Group

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