Process: 309/2018-T

Date: June 27, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 309/2018-T) addresses the calculation of IRC withholding tax credits for unit holders in a special closed-end investment fund (Fundo Especial de Investimento Mobiliário Fechado). The petitioner, A..., challenged the Tax Authority's (AT) determination that only proportional IRC withholding tax based on the holding period of participation units could be recovered. The company acquired 100% of the fund's units between July and September 2014, immediately before liquidation. The Managing Company calculated recoverable tax at €457,215.28, representing the proportional period of ownership, while the petitioner claimed entitlement to €3,243,949.00—the entire IRC withholding tax suffered by the fund throughout its existence since 2009. The dispute centers on interpreting Article 22(3) of the Investment Funds Statute (EBF), which grants IRC taxpayers the right to credit withholding tax suffered by the fund as advance payment. The AT relied on binding information from process 283/93 supporting proportional allocation. The petitioner argued this administrative doctrine contradicts the principle of fiscal neutrality underlying investment fund taxation, which should treat unit holders as if they invested directly in the underlying assets. The case examines whether the timing of unit acquisition affects the quantum of tax credits available upon fund liquidation, involving complex issues of tax attribution, the nature of investment fund taxation, and the interaction between withholding tax mechanisms and self-assessment procedures under Portuguese IRC law.

Full Decision

ARBITRAL DECISION (consult complete version in PDF)

The arbitrators Fernanda Maças (arbitrator-president), Dr. Nuno de Oliveira Garcia, Prof. Doctor Manuel Pires (arbitrator members), who constitute this Arbitral Court, agree as follows:

I. Report

  1. A... (hereinafter referred to as "A..." or "Petitioner"), with headquarters in ..., ..., ..., ...-... Lisbon, holder of tax identification number ..., filed a request for constitution of a collective arbitral tribunal, in accordance with article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter RJAT), and articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, in which the Tax and Customs Authority (hereinafter AT or Respondent) is named Respondent, with a view to the declaration of illegality of the decision to dismiss the administrative complaint filed on 3 April 2018, handed down within the scope of Process no. ...2017..., filed against the act of self-assessment of Corporate Income Tax (IRC) relating to the taxation period 2014 and, likewise, the declaration of illegality and partial annulment of the aforementioned IRC self-assessment.

  2. The request for constitution of the arbitral tribunal, in which the arbitrator to be designated by the Petitioner was identified (Dr. Nuno Oliveira Garcia), was accepted by the President of CAAD and notified to the Tax and Customs Authority (AT) which, subsequently, designated Prof. Doctor Manuel Pires as its arbitrator.

  3. As there was no agreement between the above-identified arbitrators, CAAD designated Counselor Maria Fernanda Maçãs as arbitrator president, who communicated acceptance of the task within the deadline.

  4. The parties having been notified of this designation, no reservation was raised and therefore, in compliance with the provision of article 13, paragraph 1 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Collective Arbitral Tribunal was declared constituted on 9 October 2018.

  5. The Petitioner based its request arguing, in summary, that:

a) In field 359 of Form 22 declaration relating to 2014, the Petitioner entered the amount of € 794,766.74, as title of withholdings at source suffered.

b) This value comprised the amount of € 457,215.28, relating to the tax supported within the sphere of B... – Special Closed-End Mutual Investment Fund (hereinafter abbreviated as "B..." or "Fund"), associated with the Units of Participation (UPs) held by the Petitioner, as per the declaration issued by the respective Managing Company.

c) The Fund was created on 30 September 2009.

d) The Petitioner was holder of all UPs of the Fund between July 2014 and September 2014 (date of fund liquidation).

e) The calculation of the tax to be recovered by the Petitioner, as performed by the Managing Company, was based on the proportion of tax attributable to the period of holding of the UPs by the Petitioner.

f) Conversely, the Petitioner considers that the correct amount to be considered for this purpose in Field 359 of Form 22 declaration relating to the 2014 period is € 3,243,949.00, relating to the entire income tax supported by the Fund during its term, and not merely the portion of tax supported by the Fund based on the proportional period of holding of the UPs (which would amount to € 457,215.28).

g) The Fund in question assumed the nature of a closed-end capitalization fund, having been established with initial capital of € 40,000,000, corresponding to 8,000,000 Units of Participation ("UPs") with nominal value of € 5 each.

h) Within the scope of the private subscription offer made, the Petitioner subscribed 1,200,000 UPs, the remaining UPs having been subscribed by other entities.

i) The Petitioner maintained its initial position until July 2014, from which date it proceeded to acquire the UPs held by the remaining Participants, since the liquidation of the Fund would entail the dispersal of part of the future credits over athletes by third parties, there being a strategic interest on the part of the Petitioner to recover them.

j) Thus, on 30 September 2014 (i.e. on the date of liquidation of the Fund and, consequently, of redemption of the UPs) the Petitioner was the sole holder of the 8,000,000 UPs that composed the Fund.

k) Article 22, paragraph 3 of the EBF provided, at the date of the facts, that: "With regard to income relating to units of participation in the funds referred to in paragraph 1, of which holders are IRC taxpayers or IRS taxpayers, who obtain them within the scope of a commercial, industrial or agricultural activity, resident in Portuguese territory or which are attributable to a permanent establishment of a non-resident entity located in this territory, these are not subject to withholding at source and are by their holders considered as income or profits, and the amount of tax withheld or due in accordance with paragraph 1 shall have the nature of tax paid on account, for purposes of the provision of article 83 of the IRC Code and article 78 of the IRS Code."

l) As such, the fiscal regime in force at the date was based on a model of "taxation at entry," granting investors the possibility of deducting from their IRC assessment the tax paid by the fund with respect to the income from UPs recognized in the taxation period in question.

m) According to the Respondent, the Managing Company acted in accordance with the position of the AT on the matter, which is set out in a response to a binding information request, issued within the scope of process no. 283/93.

n) In accordance with the aforementioned binding information: "the withholding at source to be attributed with respect to these securities [UPs] should be proportionally corresponding to the period of holding of the securities by the Fund and not the totality of the withholding at source suffered by the same at the moment of maturity of the income from these securities."

o) Thus, according to the AT's understanding, the amount of tax to be refunded to the various participants with reference to the income from UPs resulting from "profits, redemption, liquidation, etc.," "will logically have to be in proportion to the UPs held by them in relation to the others."

p) The AT's understanding set out in the aforementioned information was made over 15 years ago, constitutes merely administrative doctrine and arises, naturally, from a specific legal-tax framework presented by a particular taxpayer, whereby its effect is limited to the concrete issue analyzed, not being opposable to third parties.

q) Additionally, both binding information and generic guidelines shall be limited by the principle of legality, their content being valid insofar as it is compatible with the provisions of the applicable normative provisions (in this sense see arbitral decision no. 705/2016, of 22 September 2017, pages 24 to 26).

r) Now, with respect to "income relating to UPs," paragraph 3 of article 22 of the EBF establishes that "these are not subject to withholding at source," suggesting that this expression only relates to income susceptible to taxation through the mechanism of withholding at source.

s) As results from the intention underlying the creation of the investment funds figure, and their legal and fiscal treatment, as confirmed by various successive legislative choices, holders of UPs should be taxed as they would be if, instead of investing through the fund, they invested directly in the assets that comprise its patrimony.

t) Now, paragraph 3 of article 22 of the EBF embodies this principle of neutrality, granting Participants the possibility of deducting from their IRC assessment the tax supported by the Fund with respect to income earned.

u) Indeed, paragraph 3 of article 22 of the EBF implicitly presupposes the existence of some action on the part of the Fund, namely a payment of advance tax by it and, therefore, the susceptibility of the income in question being taxed by means of withholding at source.

v) In the case of entities which, by virtue of benefiting from IRC exemption, are not obliged to submit Form 22 Declaration (the means by which other IRC taxpayers recover the tax supported by the Fund), the legislator provided that the amount of tax to be recovered would be paid by the Fund simultaneously with the "income relating to UPs."

w) In light of the current regime for taxation of Collective Investment Undertakings, it is beyond question that income resulting from the onerous transfer of UPs is distinct from income resulting from the redemption of UPs or the liquidation of the CIU.

x) Given the foregoing, and assuming as a guiding principle of legal interpretation that the legislator expressed its will correctly, the expression "income relating to UPs" for purposes of paragraph 3 of article 22 of the EBF at the date of the facts should be understood to include the capital gains obtained as a result of the redemption of the UPs and the liquidation of the funds, but not capital gains resulting from the onerous transfer of UPs, given that:

a) It follows from the literal element of the norm that it only refers to income taxed by the mechanism of withholding at source, which is not applicable to income resulting from the onerous transfer of UPs;

b) Capital gains determined as a result of the onerous transfer of UPs do not represent income generated or paid by the Fund;

c) There is no involvement of the Fund in the investment decision of onerous transfer of the UPs; capital gains resulting from the onerous transfer of UPs result, simply, from the unilateral decision by the holder of the UPs to sell an asset for a value greater than its acquisition cost, whereby there is no justification in this context for the intervention of the legislator in order to ensure the principle of neutrality;

d) Paragraph 4 of article 22 of the EBF, relating to entities not obliged to submit Form 22 Declaration and which hold UPs in funds, provides that the reimbursement of tax supported within the sphere of the funds will be "paid together with the income relating to these units," suggesting that income relating to UPs comprises only income paid by the funds and, as such, susceptible to taxation through withholding at source;

e) Recent amendments introduced under the IRS Reform and the regime for taxation of CIUs reflect the legislator's clear intention to distinguish between capital gains resulting from the onerous transfer of UPs and capital gains resulting from the redemption of UPs or liquidation of funds;

f) Whereas the former result from an isolated decision of the holder of the UPs, without any influence from the fund, the latter presuppose the intervention of the fund, as an entity that pays/distributes an income and which, as such, are susceptible to being taxed by means of withholding at source.

y) Concludes, therefore, that the correct amount to be considered for this purpose in field 359 of Form 22 declaration relating to the 2014 period is € 3,243,949.00, and the recovery of the remaining amount of € 2,786,733.72 should be allowed in the Petitioner's sphere (since the amount of € 457,215.28 was already recovered).

  1. In its Answer, the Respondent argued that the claim should be dismissed as unfounded, because:

a) Investment Funds are IRC taxpayers, by virtue of subparagraph b) of paragraph 1 of article 2 of the IRC Code and, notwithstanding that they are subject to a special fiscal regime, provided for in article 22 of the EBF, the tax aspects not covered by the special regime, namely those related to liquidation and distribution are governed by the provisions of that Code and the IRS Code, where applicable.

b) Article 82 of the IRC Code provides that: "The provisions of the preceding articles are applicable, with the necessary adaptations, to the liquidation of legal entities that are not companies," which means that in the distribution operation, the positive difference determined between the value made available to the partners/participants less the acquisition value of the corresponding participations is considered a capital gain subject to taxation and that the negative difference is considered a deductible loss, in general terms (see, numbers 1 and article 81 of the IRC Code, (as amended by Law no. 2/2014, of 16 January).

c) Given this, it must be concluded that if the Petitioner determined a positive difference as a result of the liquidation of the Fund, such gain or capital gain must be included in taxable profit and if it determined a loss or capital losses, the same would prima facie be deductible from taxable profit.

d) But it is important to note that the capital gain or loss determined with the liquidation of the Fund expresses the positive or negative difference determined between the amounts invested by the Petitioner, being that, for the most part, it was in the acquisition of the 85% of UPs that belonged to other investors and not in direct investment in the Fund, consequently, it cannot be considered that such difference reflects in exact terms the results accumulated by the Fund during its term.

e) The model of taxation applicable to movable and real estate investment funds in force until 2015 was assumed to be a quasi-transparency regime, in that it combined, within the sphere of the Funds, a taxation regime, relating to capital income and movable property capital gains, almost identical to that provided for in the IRS Code, with a specific regime for the taxation of other types of income.

f) In any case, it cannot be affirmed that there was neutrality between the taxation of income obtained by direct investment of the participants and income obtained through investment in a closed-end fund, because, there being no place, in each year, for the imputation or distribution of income by the participants, the possibility of associating the income generated by the UPs which flowed to the participants' sphere as a result of their disposal or upon the liquidation of the Fund, with the income or gains realized within the Fund's sphere, was largely eliminated.

g) Consequently, the alleged neutrality which the Petitioner invokes, according to which "the holders of the UPs should be taxed as they would be if instead of investing through the fund they invested directly in the assets that comprise its patrimony," does not fully correspond with the reality of closed-end capitalization funds, in particular, due to the different nature of the income obtained by the Funds and the gains or losses realized by the participants through the disposal of the UPs or liquidation of the Funds.

h) Even more striking is this difference with respect to B..., because if the investment in economic rights associated with football players were to be made by the Petitioner in case of definitive or temporary transfer of these rights, it would realize a capital gain or loss in intangible fixed assets, whereas the capital gain or loss determined at the moment of liquidation qualified as a gain or loss in financial investments, in one case and another subject to differentiated taxation regimes.

i) Therefore, the neutrality argument in this context is fallacious, not serving any purpose for the elucidation of the central issue at hand.

j) Regarding whether the material scope of paragraph 3 of article 22 of the EBF encompassed all income and gains associated with units of participation in investment funds, whether they assumed the nature of capital income or capital gains and whether these were determined through onerous disposal of the UPs, by redemption, or by liquidation of the funds, the answer can only be affirmative, in line with that stated, in particular in points 32 and 41, of Information no. A...-AIR2/2018, of the UGC (Decision on Administrative Complaint).

k) Indeed, looking at the wording of paragraph 3 of article 22: "With regard to income relating to units of participation in the funds referred to in paragraph 1, of which holders are IRC taxpayers or IRS taxpayers, who obtain them within the scope of a commercial, industrial or agricultural activity, resident in Portuguese territory or which are attributable to a permanent establishment of a non-resident entity located in this territory, these are not subject to withholding at source and are by their holders considered as income or profits, and the amount of tax withheld or due in accordance with paragraph 1 shall have the nature of tax paid on account, for purposes of the provision of article 83 of the IRC Code and article 78 of the IRS Code," it is easy to conclude that when the legislator uses the term "income" and refers to accounting recognition as "income or profits," an expression that also comes from the Official Chart of Accounts, it is encompassing all "current" or normal income and sporadic or irregular income, without distinction.

l) Although there is some imprecision in the wording of the norm, nowhere is support found to affirm that only income subject to withholding at source and paid by the Fund itself is encompassed, therefore, contrary to what the Petitioner argues, it is not sufficient grounds to exclude from paragraph 3 of article 22 of the EBF capital gains resulting from the onerous disposal of the UPs, to argue, solely, that such income is excluded from the obligation of withholding at source and that the legislator only aimed at income whose origin is in the Funds.

m) It becomes necessary to recognize that the expression used by the legislator "income relating to units of participation" has sufficient breadth to include all income that may flow to a holder of UPs, whatever its nature, provided it is framed within one of the categories of income defined in the IRS Code.

n) According to consistent case law of the STA, norms on tax benefits, given their exceptional nature, although they can be interpreted extensively, as a rule, are subject to a strict or declarative interpretation which does not have to be restrictive.

o) Precisely, by intending to include in paragraph 3 of article 22 only the income paid by the Fund, in which it actually has some intervention, the Petitioner advocates a thesis that is based on a restrictive interpretation of the norm, instead of attending to the exact meaning of the term "income," in light of the concept defined by the IRS Code.

p) Being certain that capital gains resulting from onerous transfers are excluded, in general terms, from the obligation of withholding at source, it must be concluded that, in this respect, paragraph 3 of article 22 says nothing new, when it prescribes that "these [income] are not subject to withholding at source."

q) Consequently, gains or capital gains resulting from the disposal of the UPs and gains or capital gains determined upon the liquidation of the Fund are subsumed within the expression "income relating to units of participation in the funds," and this means that, alongside the inclusion of such gains in taxable profit so that taxation of such income is effected within the sphere of the respective holders, they have the right to deduct the "amount of tax withheld or due in accordance with paragraph 1 having the nature of tax paid on account, for purposes of the provision of article 90 of the IRC Code and article 78 of the IRS Code."

r) Having reached this point, it is time to conclude that resident entities that disposed of the UPs to the Petitioner, if they had realized capital gains, could have invoked in their income declaration the amount of tax withheld and/or due by the Fund in the portion that proportionally corresponded to them.

s) Certainly, it was in consideration of this reality that the managing company did not mention in the declaration it issued to the Petitioner the totality of tax due or owed by the Fund, having only indicated the portion relating to the percentage of participation held until July 2014.

t) Concluded, therefore, that

i. As a consequence of the liquidation of B..., the Petitioner determined a capital gain or loss, corresponding to the positive or negative difference between, on the one hand, the amounts invested in the subscription of 1,200,000 UPs and in the acquisition of UPs from other participants and, on the other, the value of the Fund's net assets;

ii. In the event of realization of a capital gain, the respective amount is not equivalent strictu sensu to income distributed by the Fund, but rather a composite reality that reflects the income accumulated and reinvested within the Fund's sphere which contributed to the appreciation of its assets but also being influenced by the acquisition value of the UPs from other participants;

iii. Therefore, the neutrality argument is not relevant, in this context, because the income that was taxed within the Fund's sphere is not the income that flowed to the Petitioner at the moment of liquidation;

iv. The capital gain integrates the scope of "income relating to units of participation in funds," being thus subsumed within paragraph 3 of article 22 of the EBF and, as such, is subject to inclusion in taxable profit together with the tax withheld at the Fund or owed by the Fund (see paragraph 2 of article 68 of the IRC Code) which the Petitioner has the right to deduct, in accordance with paragraph 2 of article 90 of the same Code;

v. Similarly, capital gains that may have been realized by the participants who disposed of the UPs to the Petitioner on dates prior to the liquidation of the Fund, are also qualified as "income relating to units of participation in funds," insofar as the quotation of the UPs reflects the value of the Fund's net assets, therefore, if the resident entities disposing of them, included those gains in their income declaration, could have invoked the deduction of tax withheld or owed by the Fund proportionally corresponding;

vi. In line with this understanding, the managing company, in the declaration it issued to the Petitioner, mentioned, as imputed tax, the sum of €451,215.28, which it considered to correspond to the time and percentage of participation held in the Fund, with no grounds being apparent, in law or in fact, which could impugn this procedure;

vii. Moreover, the fairness of this procedure could be appreciated, prefiguring the hypothesis that the Fund had proceeded to distribute income annually, in which case the Petitioner would have the right to 15% of the income and 15% of the tax withheld or owed by the Fund, until the date it became the sole holder of the UPs.

  1. By order of 16 November 2018, the meeting provided for in article 18 of the RJAT was dispensed with and 9 April 2019 was designated as the date for pronouncing the Arbitral Decision.

  2. The parties filed written arguments, insisting particularly on the implications of the deduction of the tax supported by the Fund for the determination of the Petitioner's taxable profit.

  3. By order of 5 April 2019, the Tribunal extended the deadline for pronouncing the arbitral decision by two months, setting 9 June as the deadline. By order of 5 June, this deadline was extended for a further two months.

II. Dismissal of Preliminary Objections

The arbitral tribunal was regularly constituted and is materially competent, as provided for in article 2, paragraph 1, subparagraph a) and article 4, both of the RJAT.

The parties have legal capacity and standing, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same regulation and articles 1 to 3 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are not subject to nullity and there is no obstacle to appreciation of the merits of the case.

III. Matter to be Decided

In its answer to the Request for Arbitral Pronouncement, the Respondent stated that the Taxpayer would not be entitled to the totality of the deduction of the tax supported by the Fund "since the deduction from the IRC assessment of this amount would entail the corresponding increase to taxable profit, by virtue of paragraph 2 of article 68 of the IRC Code which imposes the inclusion of net income" (article 7 of Answer), an argument developed in counter-arguments.

However, from reading the instructional proceedings and the reasoning contained in the dismissal of the administrative complaint (see Information no. B…-AIR2/2018 and Information no. A...-AIR2/2018), this reference is not found.

The tax arbitral process, as an alternative means to judicial challenge proceedings (paragraph 2 of article 124 of Law no. 3-B/2010, of 28 April), is, like that, a procedural means of mere legality, aimed at declaring the illegality of acts of the types indicated in article 2 of the RJAT and eliminating the legal effects produced by them, annulling them or declaring their nullity or non-existence [articles 99 and 124 of the CPPT, applicable by virtue of the provision of article 29, paragraph 1, subparagraph a), thereof].

Therefore, as was stated in Tax Proceeding 400/2015-T, "being the object of appreciation of the Arbitral Tribunal the act performed, its legality must be appreciated in light of its tenor, as it was performed, and the tribunal cannot, in the face of verification of the invocation of an illegal basis as support for the administrative decision, appreciate whether its action could be based on other grounds.

Thus, subsequent reasoning is irrelevant."

Therefore, in view of the reasoning contemporaneous with the impugned act, it falls to this Arbitral Tribunal to determine whether the sole holder of the Units of Participation (UP) at the moment of the liquidation of the Fund has the right to deduct from the IRC assessment the entire amount of income tax supported by the Fund – as the Petitioner seeks – or if it can only do so in the proportion of the UP held and during the respective period of holding – as the AT understands.

IV. On the Merits

IV.1.1. Proven Facts

  1. The Petitioner promoted, with C..., S.A., the establishment of a special investment vehicle, whose main activity would consist of the acquisition of credit rights associated with the sale or temporary transfer for consideration of professional football players.

  2. The establishment of B... – Special Closed-End Mutual Investment Fund (hereinafter abbreviated as "B..." or "Fund"), was authorized by the Securities Market Commission (CMVM) on 24 September 2009, for a term of five years, with the said Fund commencing operations on 30 September 2009.

  3. The Fund assumed the nature of a closed-end capitalization fund, having been established with initial capital of € 40,000,000, corresponding to 8,000,000 Units of Participation ("UPs") with nominal value of € 5 each.

  4. Within the scope of the private subscription offer made, the Petitioner subscribed 1,200,000 UPs (as per Document no. 5 attached to the administrative complaint), the remaining UPs having been subscribed by other entities.

  5. The Petitioner maintained its initial position until July 2014, from which date it proceeded to acquire the UPs held by the remaining Participants, since the liquidation of the Fund would entail the dispersal of part of the future credits over athletes by third parties, there being a strategic interest on the part of the Petitioner to recover them.

  6. On 30 September 2014 (i.e., on the date of liquidation of the Fund and, consequently, of redemption of the UPs), the Petitioner was the sole holder of the 8,000,000 UPs that composed the Fund.

  7. In field 359 of Form 22 declaration relating to the year 2014, the Petitioner entered the amount of € 794,766.74, as title of withholdings at source suffered.

  8. The amount in question comprises the amount of € 457,215.28, relating to the tax supported within the sphere of the Fund associated with the Units of Participation (UPs) held by the Petitioner, as per the declaration issued on 20.01.2015 by the respective Managing Company (currently D... MUTUAL FUNDS).

  9. The amount of tax that the Petitioner claims is entitled to deduct from the IRC assessment based on the provision of paragraph 3 of article 22 of the EBF, is that which results from the sum of the amounts of taxes withheld on income earned by the Fund and/or owed within the sphere of the Fund, as evidenced in the published financial statements:

  10. At a meeting on 09 September 2014, the Petitioner, in its capacity as holder of all UPs of the Fund on that date, resolved not to extend the Fund's term, whereby liquidation occurred on the date provided for in the Management Regulations, i.e., on 30 September 2014, the distribution of part of the Fund's excess liquidity, in the amount of 15,500,000 euros, also being approved.

IV.1.2. Unproven Facts

The Respondent did not demonstrate that any deduction of tax supported by the Fund was made by the Transferors of the UPs, by reference to the period of holding between September 2009 and July 2014.

It also was not proven that the tax supported by the Fund by reference to the holding of the UPs was deducted by another taxpayer different from the Petitioner or by reference to an act of the Fund.

There are no other facts relevant to the appreciation of the case that have not been proven.

IV.1.3. Reasoning for the Determination of the Factual Matter

The facts given as proven were so on the basis of the position assumed by the parties freely appreciated by the Tribunal and on the documents submitted by the parties, in official information and other documentation contained in the administrative proceedings.

IV.2. Matter of Law

The fiscal regime of investment funds in force in the year 2014, as provided for in article 22 of the EBF [reproduced in 1.6.k) in force in 2014], resulted from a choice by the legislator for a system through which the participants were taxed in a manner similar to that to which they would be subject if the investment were made directly.

This consideration was present in the wording of paragraph 3 of article 22 of the EBF in force in 2014, when it established that "With regard to income relating to units of participation in the funds referred to in paragraph 1 [namely Movable Investment Funds], of which holders are IRC taxpayers (…), who obtain them within the scope of a commercial, industrial or agricultural activity, resident in Portuguese territory (…), these are not subject to withholding at source and are by their holders considered as income or profits."

Let us see.

The provision in the above-cited norm results from the fact that taxation has already occurred within the Fund's sphere. This taxation was linked to the nature of the UP and not to the sphere of its holder.

In the same sense, follows the interpretation by the Respondent when, in article 28 of its Answer, it states that "(…) there being no place, in each year, for the imputation or distribution of income by the participants, the possibility of associating the income generated by the UPs which flowed to the participants' sphere as a result of their disposal or upon the liquidation of the Fund, with the income or gains generated within the Fund's sphere, was largely eliminated."

Now, this situation is typical of closed-end investment funds, as is now determined by paragraph 3 of article 10 of the General Regime of Collective Investment Undertakings, approved by Law no. 16/2015, of 24 February, and republished by Decree-Law no. 56/2018, of 9 July ("3 - Units of participation of closed collective investment undertakings cannot be subject to redemption, save as provided by law or regulation."), and already resulted either from paragraph 3 of article 9 of the Legal Regime of Collective Investment Undertakings, approved by Decree-Law no. 63-A/2013, of 10 May – in force on the date of redemption – or from paragraph 2 of article 22 of the Legal Regime of Collective Investment Undertakings, approved by Decree-Law no. 252/2003, of 17 October – in force at the date of the Fund's establishment.

It can thus be seen that the taxation supported by the Fund before the redemption was intrinsically linked to the UP and not to its holder, as stated above. From this fact it must be concluded that the participants' income as such is determined from the moment when the redemption operation takes place. There being no redemption, it is determined at the moment of liquidation of the Fund. Up to either of those moments we are facing Fund income. A disposal/onerous transfer of units of participation between participants of an Investment Fund, not being prohibited, has always been fiscally qualified as an autonomous operation, extraneous to the Fund, and generating capital gains, as "onerous disposal of securities," whether for purposes of IRS or IRC, without any interference of the Fund's Managing Company, nor any possibility of invoking any tax credit for juridical double taxation. And it is well understood why this is so, because, strictly speaking, this onerous transfer of the units of participation in the investment fund represents nothing more than a cession of position in the fund itself and the fund suffers no quantitative alteration. Contrary to what occurs in redemption, in which the Fund extinguishes the redeemed UPs and reconstitutes its value in accordance, naturally including in the amount of the tax it declares to the redeemer so that he, if he wishes to include the income, or is obliged to do so, can invoke the corresponding tax credit.

For this purpose, article 22 of the EBF, in force at the date of the facts, and in a different sense from the system present in the current regime, dealt first with taxation that should occur within the Fund's own sphere and, secondly, with taxation within the participant's sphere. And, although for specific purposes and situations, it expressly provided that the amount of tax due in accordance with paragraph 1 have "the nature of tax paid on account."

From this it results that, whether at the moment of distribution to IRC Taxpayers of the Fund's income, or upon occasion of the redemption of the UPs, those should be recognized as income or gains by the holder at the value paid by the Fund to the UP holder, as the Petitioner sustains. It further adds that in accordance with the regime in force at the date, it will necessarily have to be concluded that the amount of tax already supported by the Fund can be deducted from the assessment of the holder in full and in the year in which, by whatever means, the distribution of the income occurs: mere distribution, redemption of UP, or liquidation of the fund.

See even that only in this way could investors be taxed in a manner similar to that to which they would be subject if the investment were made directly in the desired investment asset, i.e., to comply with the regime of fiscal neutrality that must underlie, whatever modality the legislator opts for, investment funds. It is as a corollary of "fiscal neutrality" that the taxation regime of funds, applicable at the date of the facts, was commonly referred to as the regime of 'taxation at entry, exemption on exit.' That is, the taxation of income, and curiously already segmented by categories, occurred in the Fund, whether by withholding, or by self-assessment, exonerating, as a rule, its participants. Only those who obtained such income within the scope of a business activity could not exonerate themselves, given the preponderance of this and the corresponding attraction, which they were necessarily obliged to include in the income of the activity carried out. And the faculty of option for inclusion to taxpayers could not be denied, in personal income tax and in accordance with the constitutional aspiration, who understood that they could have more favorable taxation thereon. In both cases, obviously, with the tax credit supported by the Investment Fund, in the name of fiscal neutrality.

According to the AT, income that may flow to the participants' sphere upon liquidation of the Fund are integrated in the taxable matter at net amounts, which entails an increase to taxable profit of the amount of the tax, invoking the provision of paragraph 2 of article 68 of the IRC Code ("Whenever there has been withholding of IRC at source with respect to income included for purposes of taxation, the amount to be considered in the determination of the taxable matter is the respective gross amount of the tax withheld at source."). The AT understands that this rule also applies to income from investments in Investment Funds (as occurs herein), not considering that the provision of paragraph 3 of article 22 of the EBF is a special norm that provides in a different sense.

Conversely, the Petitioner sustains that, contrary to other income included in the tax base of IRC taxpayers subject to taxation, in the case of the investment funds in question at issue there is only the tax supported by the funds, which entails that the fiscal regime of investment funds allows the holders of the UPs to deduct from their IRC assessment the tax supported by the fund with respect to the income from UPs recognized in their sphere.

In our view, this is precisely what the legal text – the provision of paragraph 3 of article 22 of the EBF – intends, namely, that the income to be recognized by the UP holder should correspond to the amount paid by the Fund, without there being any place for the increase of the value relating to the tax paid by the latter with respect to that income. Even if this regime is understood to be more favorable than the general regime (which is not the case in all instances, note), the truth is that it is in this sense that the letter of the law militates, and it is not incumbent on the interpreter to make interpretative conclusions that depart from the letter and spirit of the law. It further adds that the law in question precisely regulates the so-called tax benefits, that is, measures of exceptional character instituted for the protection of extra-fiscal relevant interests.

Contrary to the AT's understanding, including in the administrative doctrine invoked, the tax supported by the Fund to be attributed to the participating taxpayers who, in accordance with paragraphs 2 and 3 of article 22 of the EBF, consider the income relating to units of participation should correspond to the totality of the tax ascertained and previously supported at the moment of maturity of the respective income by the holder. Indeed, only on the date of maturity can the holder proceed to taxation in its sphere of the income it earns and, as such, attribute – deducting – the tax supported by the fund. Any participant who had previously been a holder of UPs and disposed of them also on an earlier date, saw its gain taxed in full, given that at that stage in the fund, for the reasons already invoked, there is no intrusive relationship in the investment fund.

In our view, and always in the sense, "income from units of participation in Investment Funds" constitute capital income, as defined in the IRS Code in Category E [subparagraph j) of paragraph 2 of article 5 of the IRS Code]. Whereas gains obtained with the onerous disposal of securities are framed within Category G, capital increments [subparagraph b) of paragraph 1 of article 10 of the IRS Code]. The relevance of this qualification is determinative in the present case in light of the provision of subparagraph b) of paragraph 1 of article 3 of the IRC Code which determines that "global income" of commercial companies corresponds to "the algebraic sum of income from the various categories considered for purposes of IRS" (quoted). Thus, the AT is incorrect in seeking to attribute to "income from units of participation in Investment Funds" a nature distinct from income (of capital). In the event that the appreciation of the UP is positive, the gain resulting from its disposal does not benefit from the regime provided for in the Tax Benefits Statute, whereby it is important to underline that there is a distinction between situations to which correspond income generated by the UP (liquidation or redemption) and the situation in which gains are envisioned as generated by the disposal of the UP. As is widely recognized by Doctrine, the former is close to the concept of income-product, and the latter to income-increment, not being confused.

For all that has been stated, the adequate interpretation of the above-mentioned norm must take into account, in addition to the rational or teleological element aimed at by the legislator in enshrining the tax benefit in question, the systematic element, namely, the legal regime of investment funds and, in particular, the distinction between onerous transfer or disposal of units of participation to third parties during the life of the Fund (in this case a closed-end capitalization fund), without any reflection in the income generated by it, on the one hand, and redemption or liquidation of the same fund, as occurs in the proceedings, on the other. An interpretation that takes into account the elements of rational or theological legal hermeneutics and the systematic element leads to the expression "income relating to units of participation…" being understood as referring only to this latter situation, since only here does the determination of income accumulated by the fund occur.

It should be noted, finally, that the Respondent never alleged, nor presented proof, that the tax supported by the Fund was deducted in full or in part, and even improperly, by any other holder, nor was it alleged or demonstrated by the Respondent that, upon the disposal of the UPs, the loss of the possibility of deduction of the paid tax was provided for or even considered, whereby it was always considered that the tax supported remained in the Fund's sphere and not in the sphere of the holders of the participations. Moreover, let it always be said that, even if the AT had demonstrated the deduction of the tax supported by the Fund by one or more holders of UPs at the moment of the disposal of these to the Petitioner at a time prior to the redemption, the tax correction would have to occur in the sphere of the transferors for improper deduction contrary to paragraph 3 of article 22 of the EBF, and not in the sphere of the Petitioner which, by law, can benefit from the deduction of the entire tax withheld or owed by the fund during its term.

Terms in which the Taxpayer's claim must be upheld, with the legal consequences.

V. DECISION

In view of the foregoing, this Collective Tribunal decides:

a) To find the present arbitral action well-founded and, to that extent, to declare the illegality of the decision to dismiss the administrative complaint handed down in Process no. ...2017..., with the corresponding annulment;

b) To annul (partially) the act of self-assessment of Corporate Income Tax (IRC) relating to the taxation period 2014.

VI. Value of the Process

The value of the process is set at € 2,786,733.72 (two million, seven hundred and eighty-six thousand, seven hundred and thirty-three euros and seventy-two cents), in accordance with the provision of article 32 of the CPTA and article 97-A of the CPPT, applicable by virtue of the provision of article 29, paragraph 1, subparagraphs a) and b), of the RJAT, and article 3, paragraph 2, of the Regulation of Fees in Tax Arbitration Proceedings (RCPAT).

Notify.

Lisbon, 27 June 2019.

The Arbitrator President
(Fernanda Maçãs)

The Arbitrator Member
(Nuno de Oliveira Garcia)

The Arbitrator Member
(Manuel Pires), dissenting as per attached statement of dissent.

STATEMENT OF DISSENT

My disagreement with the decision, with the inherent effects, is fundamentally based on the character of the findings from the determination of the factual question relating to the amounts in question, the inquiry into the consequences of applying to the case the distinction between income-product and income-increment, considering in particular the investment made in the acquisition of the units of participation, and the assessment of the administrative guidance relating to the matter, as well as in the consideration of the necessary gross-up relating to the attributable income, so that there is no tax credit on a basis different from that which gave rise to the same tax, the income before taxes having been, moreover, what would have been earned had the investment been direct.

(Manuel Pires)

Frequently Asked Questions

Automatically Created

How is IRC withholding tax calculated for unit holders of real estate investment funds in Portugal?
IRC withholding tax for real estate investment fund unit holders in Portugal is calculated based on Article 22(3) of the Investment Funds Statute (EBF). When income from participation units is received by IRC taxpayers conducting commercial, industrial, or agricultural activities, this income is not subject to withholding at source at the participant level. Instead, the withholding tax paid by the fund itself on its underlying income has the nature of advance payment (pagamento por conta) that unit holders can credit against their IRC liability under Article 83 of the IRC Code. The Tax Authority's position, as expressed in binding information 283/93, holds that the creditable withholding should be proportional to the period during which the taxpayer held the units, not the entire amount suffered by the fund. However, this interpretation is contested on grounds that it violates the fiscal neutrality principle that should equate fund investment with direct investment in underlying assets.
Can a company recover IRC withholding tax suffered through a special closed-end investment fund (Fundo Especial de Investimento Mobiliário Fechado)?
Yes, a company can recover IRC withholding tax suffered through a special closed-end investment fund under Portuguese law. According to Article 22(3) of the EBF (Investment Funds Statute), when participation units are held by IRC taxpayers who obtain them within the scope of commercial, industrial, or agricultural activities, the withholding tax paid by the fund is treated as advance payment (pagamento por conta) creditable against the holder's IRC assessment. The unit holder declares this amount in Field 359 of Form 22 (IRC annual return). The controversy in this case concerns the quantum of recoverable tax: the Tax Authority maintains that only the proportional amount corresponding to the unit holding period is creditable (€457,215.28), while the taxpayer argues that acquiring all units before liquidation entitles recovery of all withholding tax the fund suffered throughout its existence (€3,243,949.00). The resolution depends on whether tax credits are intrinsically linked to the units themselves or allocated based on temporal holding patterns.
How is the proportional tax recovery calculated based on the holding period of participation units in Portuguese investment funds?
The proportional tax recovery calculation for participation units in Portuguese investment funds follows the Tax Authority's interpretation expressed in binding information process 283/93. According to this administrative position, the withholding tax creditable by unit holders should be 'proportionally corresponding to the period of holding of the securities by the Fund' participant, not the totality of withholding suffered by the fund. This means if a taxpayer holds units for 3 months of a fund's 5-year existence, only 3/60ths of the accumulated withholding tax would be creditable. The Managing Company in this case applied this methodology, calculating €457,215.28 as the proportional amount for the July-September 2014 holding period. However, this approach is disputed by taxpayers who argue it contradicts Article 22(3) of the EBF and the fiscal neutrality principle. Critics contend that withholding tax credits should attach to the units themselves as economic rights, transferring fully to subsequent holders, similar to how dividend rights or other economic attributes transfer with ownership. The proportional method may disadvantage secondary market purchasers and those acquiring units near fund liquidation.
What is the procedure for filing a tax reclamation (reclamação graciosa) against an IRC self-assessment in Portugal?
The procedure for filing a tax reclamation (reclamação graciosa) against an IRC self-assessment in Portugal is governed by Articles 68-75 of the Tax Procedure and Process Code (CPPT). The taxpayer must submit a written complaint to the Tax Authority within 120 days from the date of notification of the tax assessment or payment notice (Article 70 CPPT). The reclamação graciosa is filed with the tax service that issued the contested act, identifying the taxpayer, the contested act, the grounds for challenge, and the relief sought. In this case, A... filed the administrative complaint on April 3, 2018, against the IRC self-assessment for the 2014 taxation period (process ...2017...). After the Tax Authority dismissed the complaint, the taxpayer exercised the right to judicial review by requesting constitution of an arbitral tribunal under the RJAT (Regime Jurídico da Arbitragem Tributária). Taxpayers must exhaust this administrative remedy before accessing arbitration or judicial review, unless the deadline for administrative decision expires (currently 4 months under Article 57 of the General Tax Law).
How does the liquidation of an investment fund affect the IRC withholding tax credits available to unit holders under Portuguese tax law?
The liquidation of an investment fund significantly affects IRC withholding tax credits available to unit holders under Portuguese tax law, particularly regarding timing and attribution. Upon liquidation, the fund distributes its assets or liquidation proceeds to unit holders, triggering recognition of income from participation units that must be included in the IRC tax base per Article 22(3) of the EBF. At this moment, unit holders become entitled to credit the withholding tax previously paid by the fund as advance payment against their IRC liability. The controversy in this case illustrates competing interpretations: (1) the Tax Authority's proportional approach allocates credits based on the temporal holding period of each unit holder, potentially fragmenting tax credits across multiple holders over the fund's lifetime; (2) the taxpayer's position that credits transfer with unit ownership, so the final holder at liquidation who acquired all units receives all accumulated credits. The liquidation context intensifies this dispute because the petitioner strategically acquired all outstanding units specifically before liquidation to consolidate ownership, expecting to recover all accumulated withholding tax totaling €3,243,949.00 rather than only the €457,215.28 corresponding to its brief holding period.