Process: 317/2015-T

Date: January 4, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This arbitral decision concerns the challenge to a Corporate Income Tax (IRC) assessment for the 2010 tax year, case number 2014..., involving €2,767.79. The claimant, A... LDA, contested the assessment on multiple grounds including statute of limitations violations, procedural defects in the tax inspection procedure, and substantive deductibility issues. The central legal issue involved whether the four-year limitation period under Article 45 of the General Tax Law (LGT) had expired before valid notification of the assessment occurred on 21 November 2014. The claimant argued that the assessment was not validly notified until after 31 December 2014, exceeding the four-year period from the 2010 tax year. Additionally, the claimant raised several procedural irregularities under the Supplementary Regime of Tax Inspection Procedure (RCPIT): failure to provide a copy of the inspection service order; notification of the inspection conclusion note to B..., who ceased being a manager in January 2011; lack of required signatures on the inspection conclusion note and absence of listed tasks performed; and improper notification of the final inspection report sent 'for information' to the attorney rather than personally to the claimant as required by Article 62(2) RCPIT. The claimant also alleged complete absence or insufficiency of reasoning for the assessment, invoking nullity under Article 133(f) of the Administrative Procedure Code (CPA). On substantive grounds, the claimant challenged corrections to vehicle rental expenses (€676.35), business partner study expenses, duplicate invoice registrations, and building depreciation calculations. The Tax Authority defended by demonstrating that the inspection procedure commenced on 5 June 2014 with proper service order notification to C..., the official accountant and authorized representative under Articles 51-52 RCPIT. The Authority invoked the suspension of the limitation period under Article 46(1) CPPT during the inspection procedure, which lasted less than six months, adding 156 days to the 31 December 2014 deadline. The assessment notification through the electronic mailbox on 21 November 2014 occurred within the extended limitation period. Regarding the notification to B..., the Authority argued this resulted from agreement with the claimant given B...'s knowledge of relevant facts from his prior role as managing partner during the critical 2010-2011 period.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. On 21.05.2015, the Claimant, A... LDA, legal person number..., with registered address at Avenue of..., no...., ...-... ..., requested from CAAD the constitution of an arbitral tribunal, in accordance with article 10º of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), against the Tax and Customs Authority, with a view to annulling the assessment of Corporate Income Tax, with the number 2014..., relating to the tax year 2010 and the corresponding account reconciliation statement, with an amount payable of € 2,767.79.

  2. The request for constitution of the arbitral tribunal was accepted by the Esteemed President of CAAD and notified to the Tax and Customs Authority.

In accordance with and for the purposes of article 6º, no. 1, of the RJAT, by decision of the President of the Deontological Board, duly communicated to the parties within the legally applicable periods, the undersigned was designated as arbitrator, and communicated to the Deontological Board and to the Administrative Arbitration Center the acceptance of the appointment within the regularly applicable period.

The Arbitral Tribunal was constituted on 10.08.2015.

  1. The grounds presented by the Claimant in support of its claim were, in summary, as follows:

a. In accordance with article 101º, no. 1, of the Corporate Income Tax Code and article 45º of the General Tax Law, the assessment of Corporate Income Tax must be validly issued within a period of four years from the end of the year in which the taxable event occurred.

b. The assessment object of the present proceeding was not validly notified to the taxpayer until 31.12.2014, having been made beyond those four years, and therefore its expiry should be declared, which affects not only the effectiveness of the act, preventing it from producing the effects to which it was intended, but also its own legality.

Without dispensing with,

c. Given that the tax in question resulted from an inspection procedure, the Claimant never received any copy of the service order or dispatch that determined the inspection, as required by the Supplementary Regime of Tax Inspection Procedure (RCPIT).

d. It is a procedural invalidity, which determines the nullity of all acts subsequently performed and which renders irrelevant the suspension of expiry of the tax, provided for in article 46º, no. 1, of the General Tax Law.

e. It should further be stated that the notification of the inspection conclusion note marking the conclusion of the inspection acts was made to the person of B..., on 3.10.2014, in his capacity as manager, whereas the same person no longer held such position since 19 January 2011, and therefore we are faced with a formal defect that entails its nullity and that of all subsequent acts.

f. It is further added that the said inspection conclusion note was not signed by the officials responsible for the inspection procedure, nor does it contain the list of tasks performed, as required by law.

g. Moreover, on 6.11.2014, the final inspection report was sent to the Claimant's attorney, with the indication "for information" (a/c), that is, for knowledge, but the notification should have been made to the Claimant personally, in accordance with article 62º, no. 2, of the RCPIT, and therefore the omission of formality consisting in the failure to notify the inspection report should be judged and verified, and such omission vitiates the administrative act of the assessment resulting therefrom.

h. The Tax Administration did not communicate to the taxpayer the grounds for the assessment, with no reasoning existing, or if it does, such reasoning is clearly insufficient, and the act lacks reasoning, and therefore, in accordance with article 133º, subsection f) of the CPA, it is null.

i. As to the expenses with vehicle rentals not accepted, in the amount of 676.35 €, such expenses were required in the development of the insurance activity, and the persons indicated in the invoices were third parties contracted for such activity, and therefore such expenses should be borne as if they were of the Claimant, since the Claimant was the one who bore their costs.

j. Regarding the expenses for "business partner study", it was an actual expense of the Claimant, for the provision of services rendered, incurred for the purpose of searching for a business partner, which is of direct interest to the Claimant, because it aims at obtaining customers.

k. As to the registration of invoices in duplicate, it is not understood how the same could not be deductible, since these are own expenses reiterated, common and necessary to the activity, and therefore fiscally relevant.

l. Finally, the expenses relating to the depreciation of the building were recorded in the years of 2010, given that it was the year of the sale of the property, therefore the cost should have been admitted since the sale only occurred in November 2010, and therefore the depreciation is fiscally admitted.

  1. The ATA – Tax and Customs Authority, called upon to respond, contested the Claimant's claim, defending itself by opposition, in summary, with the following grounds:

a. As to the question of the expiry of the right to assess Corporate Income Tax for 2010, the Claimant has no reason whatsoever, as the inspection procedure commenced on 2014-06-05 with the notification of the service order and, subsequently, on 2014-11-07, the Claimant was notified of the tax inspection report, and therefore the inspection procedure did not exceed six months in duration, and in accordance with article 46º, no. 1, of the CPPT, the period of expiry of the right to assess remained suspended during the conduct of the inspection procedure, adding to the time limit of 2014-12-31 a further 156 days.

However, the assessment at issue was notified to the Claimant within the very year of expiry, more precisely on 2014-11-21, at which time the Claimant accessed its electronic mailbox, and is considered notified on that same date, and consequently the first formal defect invoked by the Claimant is completely unfounded.

As to the failure to deliver the service order, once again the Claimant's allegations are without merit, as the service order was signed by the person of C..., in his capacity as official accountant of the Claimant and representative for relations with the Respondent, in accordance with articles 51º and 52º of the Supplementary Regime of Tax Inspection Procedure ("RCPIT"), and a copy of said service order was left with him.

As a third formal defect verified in the procedure that led to the assessment at issue, the Claimant sustains that the notification of the inspection conclusion note was made to the person of B..., on 2014-10-03, in his capacity as manager, when in fact that person no longer held such position since 2011-01-19, however, neither does the Claimant have reason in this case, as, according to the tax inspection report, the circumstances, on the one hand, of the change of strategy in the corporate scope of the Claimant carried out in 2010 and 2011, and on the other hand, the changes made to the managing partners and to the official accountant made in those years, led to Mr. B... being notified of the inspection conclusion note, since he had been a managing partner of the Claimant and, consequently, had full knowledge of the facts that occurred in those years, and this notification resulted from an agreement with the Claimant itself.

The Claimant further argues that the inspection conclusion note is not signed by the officials responsible for the inspection procedure, nor does it indicate the tasks performed in accordance with article 61º, no. 3 of the RCPIT, but as to this point, it is important to note that article 61º of the RCPIT does not provide for the mandatory signing of the inspection conclusion note by the technicians responsible for the inspection procedure.

As to the tasks performed, it should be noted from the outset that in table no. 4 of the inspection conclusion note, and in compliance with article 61º, no. 2 of the RCPIT, the tasks performed are identified, similar to what was noted in the service order, and in turn, article 46º, no. 7 of the same statute provides that only inspection actions aimed at mere consultation, collection and cross-referencing of elements with the taxpayer are carried out by means of delivery by the official of the note indicating the task executed.

As to the failure to notify the inspection report to the Claimant, similar to the preceding points, such argument is not apt to proceed, as, according to the case file, during the pendency of the inspection procedure the Claimant appointed legal representatives, having given the Respondent knowledge of this fact on 2014-10-17, and therefore the Respondent complied with article 40º of the Code of Tax Procedure and Process ("CPPT"), having notified the Claimant's attorney of the final inspection report, and the Claimant was also notified that its legal representative had been notified of the contents of the inspection report.

However, and as repeatedly held by the case law, in the CPPT notifications to interested parties that have appointed a representative shall be made to such representative and at his office, this rule applying to notifications to representatives both in tax procedure and in tax judicial proceedings, and therefore, the Claimant having appointed a representative, notification of the final report shall be made to such representative and at his office, and therefore the arguments invoked by the Claimant fail.

As to the lack of reasoning for the assessment, the arguments raised by the Claimant are without merit, as the Corporate Income Tax assessment is fully reasoned and reflects the inspection procedure that precedes it.

Finally, and should it be argued that the reasoning is insufficient – a hypothesis which is only admitted in theory and without conceding – it would always be incumbent upon the Claimant to request the issuance of the certificate provided for in article 37º of the CPPT.

k. As was mentioned in the inspection report, expenses were recorded relating to vehicle rental expenses incurred in the development of the insurance activity, and therefore such expenses are not expenses of the Claimant.

l. The Claimant equally contests the correction relating to the value recorded in respect of invoice no. 222/2010, of 2010-07-13, issued by company D… Lda., (NIPC...), in the amount of € 4,235.00€, with VAT included, but such expense was for the interest and use of the holders of capital of the company, in order to find interested parties in the purchase of the company's shares, and therefore the recorded expense is not eligible as a cost for the company, and, consequently, in accordance with article 23º, no. 1, of the Corporate Income Tax Code, it is not fiscally accepted.

m. With regard to the correction of the entry made in duplicate, the deductibility of the expense is not contested but rather the recording of the same expense twice.

n. Regarding the expenses relating to the depreciation of the building sold to the partners in November 2010, and given that depreciations are practiced on an annual basis, they were being carried out from the year of entry into operation until that of its transfer, and therefore the Claimant's claim has no basis.

  1. Verifying the non-existence of any of the situations provided for in article 18º, no. 1, of the RJAT, which would have made necessary the arbitral meeting provided therein, its holding was dispensed with, on the basis of the prohibition of the performance of useless acts.

  2. By order of 18.10.2015, an arbitral meeting was scheduled for 17.11.2015 for the questioning of witnesses.

  3. On 2.11.2015, the Claimant presented a request in which it waived the production of witness evidence it had presented.

  4. On 4.11.2015, the Respondent presented a Request in which it also waived the production of witness evidence it had presented, but simultaneously requesting the use of witness evidence already produced in proceeding 259/2015-T, ongoing in this Arbitration Center, between the same parties, which, after hearing the Claimant, was granted by order of 9.11.2015, and the scheduled arbitral meeting for questioning of witnesses was adjourned without effect.

  5. The Claimant presented arguments maintaining what had already been alleged in the request for arbitral pronouncement, but adding, in summary, the following:

a. The notification of the Corporate Income Tax statement was sent to the company here Claimant, through the use of electronic means, by electronic notification – via CTT.

b. However, article 110º of the Corporate Income Tax Code (CIRC) provides as follows: "1 - In cases of assessment made by the Tax and Customs Authority, the taxpayer is notified to pay the tax and interest that are due, within 30 days from the notification. / 2 - The notification referred to in the preceding number is made in accordance with the Code of Tax Procedure and Process."

c. In accordance with article 38º of the Code of Tax Procedure and Process, "Notifications shall be made compulsorily by registered mail with proof of receipt, whenever they concern acts or decisions capable of altering the tax situation of taxpayers or convening them to attend or participate in acts or proceedings", with article 36º no. 2 adding that "Notifications shall always contain the decision, its grounds and means of defense and time limit to react against the notified act, as well as the indication of the entity that performed it and whether it did so in the use of delegation or subdelegation of powers."

d. From this it follows, therefore, that notifications relating to determination, fixing or alteration of income must always be reasoned and, as such, acts notified must be by registered mail with proof of receipt.

e. Which did not occur.

f. An alternative means was resorted to, which was the use of electronic notification.

g. Thus, the notification did not comply with the formal requirements for its completion, and therefore it cannot be considered validly made.

h. In the Electronic Citation and Notification System of the Tax Authority such notification is recorded as received by the Claimant on 21-11-2014.

i. However, from the analysis of the Corporate Income Tax assessment statement it appears that it contains no date (with the exception of the date of the assessment).

j. Therefore it becomes impossible to assert the date on which it was received.

k. Being, however, certain that the Claimant did not receive the assessment in question during the course of the year 2014.

  1. The Respondent also presented arguments, in which it maintained what had been sustained in the Response, further submitting, in summary, the following.

a. In the Final Arguments, the Claimant comes to raise the question that notification of the tax act did not comply with formal requirements and, consequently, cannot be considered validly made.

b. This line of argument constitutes an inadmissible expansion of the cause of action.

c. In the initial petition, the Claimant did not raise such issue expressly or implicitly, and therefore cannot now seek to raise it in the Final Arguments, as such faculty has long since been foreclosed.

d. Notwithstanding this illegal and inadmissible manner of litigating, the Respondent will always state that the arguments adduced by the Claimant, beyond being completely irrelevant, clearly denote a complete ignorance of the law, as, given the new and formalistic line of argument by the Claimant, it appears that its basis is not rested on the expiry of the assessment, but rather on the failure to notify the assessment within the period of expiry.

e. If such be the case, then we would be faced with the unsuitability of this procedural means to discuss this issue, as the failure to notify the assessment act constitutes grounds for Opposition to Execution [article 204º, no. 1, subsection i) of the CPPT].

f. In fact, in accordance with the cited legal provision, Opposition to Fiscal Execution is, unequivocally, the proper means of reaction when the failure to notify within the period of expiry is invoked as grounds (and not judicial challenge).

g. The unsuitability of the means or the error in the form of the process constitutes an unnamed dilatory exception whose consequence is the absolution of the Respondent from the instance (cf. nos. 1 and 2 of article 493º of the CPC ex vi of subsection e) of art. 2º of the CPPT).

h. Therefore, the claim now formulated does not fall within the scope of the competencies assigned to arbitral tribunals in tax matters in accordance with article 2º of the RJAT.

i. Thus, the incompetence of the Arbitral Tribunal to consider the claim formulated is manifest, if this is directed at the annulment of the assessment act, on the basis of the failure to notify the assessment act within the period of expiry, as it appears to be the case given the arguments now presented by the Claimant.

j. Even if this is not understood, it is certain that the assessments at issue, as the Claimant itself confesses, were validly notified, having been sent to its electronic mailbox, and therefore the Claimant is considered notified, in view of the provision of article 39º no. 9 of the CPPT.

k. This means that the act of assessment of tax, here at issue, was validly notified to the Claimant within the period of expiry, as, according to what has been set out above, it is concluded not only that the assessments were sent to the Claimant's electronic mailbox but also were received by it, and therefore the goal intended by it of transmitting to the recipient the contents of the assessment was achieved.

  1. The tribunal is materially competent and is regularly constituted in accordance with the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate them.

  1. The following issues must be resolved:

a) Expiry of the right to assess.

b) Procedural admissibility of consideration of the issue of invalidity of notification of the assessment by electronic means raised by the Claimant in the arguments and, if in the affirmative, solution of such issue.

c) Invalidity resulting from the failure to deliver the service order to the Claimant

d) Invalidity of the notification of the inspection conclusion note;

e) Invalidity resulting from the alleged failure to notify the inspection report to the Claimant.

f) Defect of lack of reasoning for the assessment.

g) Defect of violation of law by error in the factual and legal grounds.

II – THE RELEVANT FACTUAL MATTER

  1. The following facts are considered proven:

  2. The Claimant is a commercial company with the corporate purpose of accounting, audit and tax consulting, registered under CAE 69200.

  3. The Claimant's actual activity is the provision of accounting services to companies.

  4. E... appears in the commercial register as manager of the company from 6.03.1991 to 20.12.2010.

  5. B... appears in the commercial register as manager of the company from 17.02.2010 to 20.12.2010, the date on which he resigned from management.

  6. F... appears in the commercial register as manager of the company from 6.03.1991 to 20.12.2010, the date on which he resigned from management.

  7. E... and B... are married to each other.

  8. The Claimant used the trademark "G..." for commercial purposes.

  9. The partner B... exercised personal insurance activity, using the trademark "G...".

  10. During the year 2010 the partners and managers of the company sought interested parties in the acquisition of the shares they held in the company, and an agreement was reached with H... and I...

  11. On 20.12.2010 H... and I..., became the managers of the company.

  12. H... and I... came to acquire the shares of the Claimant, corresponding to the totality of the capital stock, by a share transfer contract dated 30.10.2012, where is contained, among other things, the following:

[Note: The document references specific contractual clauses numbered 6, 7, and 8 but the actual text is not provided in the source document]

  1. The official accountant of the company was from 1995 to 17.10.2011 J... and from this date onwards was official accountant C...

  2. Following service order no. O ... 2012.., an inspection action commenced on 5.06.2014 against the Claimant, of general scope, initially relating to the tax years 2010 and 2011 but subsequently limited to the tax year 2010, and the opening of a new service order for the tax year 2011 was determined.

  3. In the draft conclusions of the report, as well as in the final inspection report, the following proposed corrections appear:

[Note: The document references proposed corrections but specific details are not provided in the source]

  1. In the draft conclusions of the report as well as in the final inspection report, regarding the corrections in Corporate Income Tax, the following appears:

[Note: The document references specific corrections but the detailed content is not provided in the source]

  1. In the exercise of the right to be heard by the Claimant, following notification of the draft conclusions of the Report, is contained, among other things, the following:

[Note: The document references contents of the right to be heard but specific details are not provided in the source]

  1. In the exercise of the right to be heard, the Claimant did not pronounce itself on the corrections proposed in Corporate Income Tax.

  2. Entries no..., ... and ... in the purchase journal for April 2010, in the total amount of 676.35 €, relate to vehicle rentals not related to the activity of the Claimant.

  3. Entry no..., in the purchase journal for July 2010, relating to invoice no. …/2010 of 13.07.2010, issued by D..., Lda, in the amount of 4,235.00 €, with VAT included, relates to a service related to the solicitation of interested parties in the acquisition of the company's shares from the partners.

  4. Entry 212004 in the purchase journal for December 2010, in the amount of 104.16 €, is repeated by entries... and..., both in the Cash journals December 2010.

  5. In the tax year 2010 the Claimant recorded as a cost the depreciation of the property registered in the property register on article no..., in the amount of 3,578.18 €, and also the cost of depreciation of modification work on the same, in the amount of 1,343.43€.

  6. According to an internal entry document no. ... in the cash journal, in November 2010, this property had been sold to the partners E... and F..., at the price of 175,000.00 €.

  7. On 20.05.2014, by official letter ... the Respondent proceeded to notify the Claimant in advance, by registered mail, of an external inspection procedure, of general scope and relating to the tax years 2010 and 2011.

  8. On 5.06.2014 the Respondent delivered to C..., in his capacity as Official Accountant of the Claimant, a copy of the Service Order of the inspection procedure.

  9. On 1.07.2014, B..., in the alleged capacity as manager of the Respondent, H..., in his capacity as manager of the Respondent and C..., in his capacity as Official Accountant of the Respondent, were notified to present elements and clarifications, on 11 July 2014 at the headquarters of the Respondent.

  10. On 11 July 2014, at the headquarters of the Respondent, C..., in his capacity as Official Accountant, made statements in which he stated it was not possible to answer the questions posed because the Official Accountant at that time was out of the country, having requested an extension of the period until 6 August at 9:30 a.m., at the same location.

  11. On 6 August 2014 B..., in the alleged capacity as manager of the Respondent, and C..., in his capacity as Official Accountant of the Respondent, made statements.

  12. On 03.10.2014 B... was notified of the inspection conclusion note relating to the procedure in question in the alleged capacity as manager of the Respondent.

  13. On 16.10.2014 the attorney of the respondent requested from the Finance Department of ... to consult the tax inspection process for 17 October.

  14. On 7 October 2014 the Respondent, represented by its managers, issued the following statement:

[Note: The document references a statement but the specific content is not provided in the source]

  1. On 13 October 2014 the agency of the new Bank of … addressed F... an e-mail with the following content:

[Note: The document references an email but the specific content is not provided in the source]

  1. Manager H... was present during the inspection visits and witnessed the intervention of B... and C... in the context of the inspection procedure.

  2. On 7.10.2014 the Respondent notified the Claimant of the draft tax inspection report and to exercise the right to be heard within 15 days, in writing or orally.

  3. On 29.10.2014 the Claimant exercised, in writing, the right to be heard in the inspection procedure, through its lawyer, appointed representative.

  4. On 7.11.2014 the attorney of the Respondent was notified of the tax inspection report, by registered mail with proof of receipt, sent the day before.

  5. According to this notification "In the near future the Services of the Tax and Customs Authority (AT) will proceed with the notification of the respective assessment, which will contain the means of defense, as well as the payment period, if applicable"

  6. On the same date, the Respondent was notified, by registered mail with proof of receipt, sent the day before, that the Tax inspection report was issued accompanied by the respective notification to the representative.

  7. On 13.11.2014 the assessment object of the present proceeding was made.

  8. The assessment was notified to the Claimant through the electronic system "VIA CTT", through a document created on 20.11.2014 which the Respondent accessed on 21.11.2014.

  9. This notification contains the following:

[Note: The document references notification contents but specific details are not provided in the source]

With interest for the decision of the case, there are no unproven facts.

  1. The Tribunal's conviction regarding the decision on the factual matter was based on the documents contained in the administrative file, as well as on the documents attached to the pleadings presented.

Specifically regarding the facts mentioned in nos. 9 and 19, the Tribunal's conviction also results from the testimony of witnesses B... and F... who stated that in 2010 they intended to separate themselves from the Claimant, the first due to lack of successors and the second due to illness, which is compatible with the search for interested parties to purchase their share positions and not with the search for business partners for the activity of the Claimant.

This conviction was reinforced by the fact that in the response to the clarifications requested about such expense it was answered that the invoice in question issued by D..., Lda relates to the service provided by this company "in order to search for a business partner, which in fact came to happen".

Now, from the facts it does not emerge (nor did the Claimant indicate) any "business partner" other than the purchasers of the shares, which is in complete harmony with the statements of B... and F....

The Tribunal's conviction regarding the fact in no. 32 results from the statements of the tax inspector R... and the Inspector S..., reinforced by the signature of manager H... in the notification made to the company on 1.07.2014 and not contradicted by any other means of proof.

III – THE APPLICABLE LAW

  1. As the challenger attributed various defects to the tax acts at issue, it is necessary to determine the order of examination of the same, and the order of article 124º of the CPPT must be observed, applicable by virtue of article 29º, no. 1, subsection a) of the RJAT (Cf. Jorge Lopes de Sousa, Commentary on the Legal Framework for Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, pag. 202). (Cf. JORGE LOPES DE SOUSA, Commentary on the Legal Framework For Tax Arbitration, in Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, pág. 202).

The success of any of the defects invoked by the claimant will lead to the annulment of the tax act. However, the defect of violation of law is the one that will lead to the "most stable or effective protection of the offended interests" insofar as its possible success will prevent the renewal of the act, which does not occur with the annulment resulting from the other defects.

Accordingly, the Tribunal will first examine the alleged defects of violation of law.

Let us examine them.

DEFECTS OF VIOLATION OF LAW

  1. The Respondent disregarded expenses for vehicle rentals related to the insurance activity, considering them not to be expenses of the taxpayer.

It results from the proven factual matter that entries no..., ... and ... in the purchase journal for April 2010, in the total amount of 676.35 €, relate to vehicle rentals not related to the activity of the Claimant, which has as its actual activity the provision of accounting services to companies.

In accordance with article 23º, no. 1, of the Corporate Income Tax Code:

"For the determination of taxable income, all expenses and losses incurred or borne by the taxpayer for the purpose of obtaining or securing income subject to Corporate Income Tax are deductible".

Thus, in light of this article, it is manifest that the expense in question, as it was not incurred for the purpose of obtaining or securing income of the Claimant, cannot be deductible, and the correction made by the Respondent is not illegal.

  1. For identical reasons, no other conclusion can be reached regarding entry no..., in the purchase journal for July 2010, relating to invoice no. …/2010 of 13.07.2010, issued by D..., Lda, in the amount of 4,235.00 €, with VAT included, relating to payment for a service related to the solicitation of interested parties in the acquisition of the company's shares by the partners.

Also the disregard of the deduction of this expense, as it was not incurred for the purpose of obtaining or securing income of the Claimant, deserves no criticism in light of article 23º, no. 1, of the CIRC.

  1. As for entry... in the purchase journal for December 2010, in the amount of 104.16 €, being the same duplicated by entries... and..., both in the Cash journals December 2010, manifestly no other position could have been taken by the AT. In truth, it is not a matter of disregarding an expense but rather of preventing the same from being considered twice, which is also, as is plain to see, prohibited by no. 1 of article 23º of the CIRC.

  2. Regarding the corrections made by the Respondent, we finally have the disregard of the alleged expense related to the recording as a cost of the 2010 tax year of the depreciation of the property registered in the property register on article no. …, in the amount of 3,578.18 € and also the cost of depreciation of modification work on the same in the amount of 1,343.43€, given that, in accordance with an internal entry document no. ... in the cash journal, in November 2010 this property had been sold to the partners E... and F....

Let us see.

As Rui Duarte Morais writes[1]:

"Reinstatements and depreciation of elements of fixed assets subject to deterioration are accepted as costs (…).

If the company did not record the loss in value of assets that form part of its assets in the 'fixed assets' section, it would be misleading all those who used the balance sheet to read its financial position. And it would systematically overvalue its distributable profit.

This shows clearly that the question of depreciation, before being 'tax', is a manifestation of truth of accounting records.

The value of such depreciation in each year corresponds to a cost borne by the company. Such cost is, both accounting and fiscally, disclosed by the depreciation quota, recorded as a cost of each year."[2]

In accordance with article 8º, no. 1, of the CIRC "Corporate Income Tax, except as otherwise provided in no. 10, is due for each tax period, which coincides with the calendar year, without prejudice to the exceptions provided for in this article".

In turn, no. 9 of the same article provides that "The taxable event is considered to have occurred on the last day of the tax period".

From this it follows that depreciation of an asset is only justified in relation to assets which, at the time of the occurrence of the tax event, form part of the assets of the taxpayer and not in relation to those which have been sold at an earlier time. Moreover, having the asset been sold during the year, any potential loss in value was reflected in the sale price, and furthermore, as a rule, assets subject to deterioration are depreciable in the very year of entry into operation or use, regardless of the moment in the year in which such occurs.[3]

Thus, the correction in question made by the Respondent also conforms with the legal order, and the defect of violation of law attributed to the tax act is wholly without merit.

It remains, therefore, to examine the other defects attributed to the assessment object of the present proceeding.

EXPIRY OF THE RIGHT TO ASSESS AND PROCEDURAL ADMISSIBILITY OF THE INVOCATION OF INVALIDITY OF NOTIFICATION OF THE ASSESSMENT BY ELECTRONIC MEANS RAISED BY THE CLAIMANT IN THE ARGUMENTS

  1. It results from the evidence that the assessment object of the present proceeding was made on 13.11.2014 and that the same assessment was notified to the Claimant through the electronic system "VIA CTT", through a document created on 20.11.2014 which the Respondent accessed on 21.11.2014.

In the request for arbitral pronouncement the Claimant alleged that the assessment was made beyond the four years following the occurrence of the taxable event, requesting consequently the declaration of its expiry.

Differently in the arguments, implicitly admitting that the assessment was made within the four-year period, it came to argue that the assessment was not validly made within such period because, in its understanding, the notification should be made by registered mail with proof of receipt and it was made by electronic notification, understanding therefore that the notification did not comply with the formal requirements for its completion, and that therefore it cannot be considered validly made.

Jorge Lopes de Sousa writes, in commentary on article 108º of the CPPT that "The indication of the claim or claims and the facts on which they are based, as well as the indication of the defects which the challenger attributes to the act, must be made in the petition, and subsequently, as a rule, new claims cannot be formulated or new facts invoked or other defects attributed, specifically in the arguments provided for in article 120º of this Code"[4]. We endorse this understanding which is clearly applicable to the arbitral proceeding having regard to article 10º, no. 1, subsection c) of the RJAT, and therefore the allegation of invalidity of notification of the assessment made on 21.11.2014 cannot fail to be considered as made out of time, when in the initial petition the Claimant alleged that the same assessment had not been made until 31.12.2014.

Still and all, it shall always be said that the notification of the assessment in question was correctly made in accordance with article 38º, no. 9 of the CPPT, being considered made on 21.11.2014, in accordance with article 39º, no. 9 of the CPPT.

The defect of expiry of the right to assess, invoked by the Claimant, is therefore without merit.

DEFECT OF ILLEGALITY RESULTING FROM THE FAILURE TO DELIVER THE SERVICE ORDER TO THE CLAIMANT AND DEFECT OF INVALIDITY OF NOTIFICATION OF THE INSPECTION CONCLUSION NOTE;

  1. Regarding these issues invoked by the Claimant, it is to be observed that manager H... was present during the inspection visits and witnessed the intervention of B... and C... in the context of the inspection procedure (no. 32 of the evidence).

This fact suggests, in light of the rules of experience and normal occurrence, that the Claimant accepted being represented by those individuals, especially since, as mentioned by Joaquim Freitas da Rochas and João Damião Caldeira in annotation to article 52º of the RCPIT "This is (…) an 'informal' representative who will not need to be equipped with any document of representation of the inspected entity. It may, therefore, be a manager, an official, or the Official Accountant. Important is that it be someone who knows the reality of the inspected entity and in this way better ensures compliance with the obligations imposed during the inspection procedure"[5]

This conclusion is, moreover, reinforced by the fact that the same H..., in his capacity as manager of the Respondent, B..., in the alleged capacity as manager of the Respondent and C..., in his capacity as Official Accountant of the Respondent, were notified to present elements and clarifications on 11 July 2014 at the headquarters of the Respondent, such clarifications which came to be provided only by B... and C... and not by H..., from which it is inferred that the same considered the intervention of those sufficient.

And in the same sense, on 11 July 2014 at the headquarters of the Respondent C..., in his capacity as Official Accountant, made statements in which he stated it was not possible to answer the questions posed because the Official Accountant at that time was out of the country, having requested an extension of the period until 6 August at 9:30 a.m., at the same location.

On the other hand, the appointment of B... as representative is perfectly understandable in light of nos. 11 (specially clauses 6, 7 and 8 of the contract in question), 16, 30 and 31 of the evidence.

In this measure, B... and C... being representatives of the Claimant in the inspection procedure, they were the same legitimated to receive and sign the service order and receive notification of the inspection conclusion note, and the alleged defects do not occur.

Still and all, it shall always be said that, given what is contained in nos. 29, 33 and 34 of the evidence, it is manifest that the acts in question in no way prejudiced the defense and intervention of the Respondent in the procedure, and therefore, in light of the principle of beneficial use of the act and the principle of good faith, it would always be deemed that the invocations of the Claimant are without merit.

As to the notification of the inspection conclusion note, the Claimant further argues that the same was not signed by the officials responsible for the inspection procedure, nor does it contain the list of tasks performed, as required by law.

However, it should be said that article 61º of the RCPIT does not provide for the mandatory signing of the inspection conclusion note by the technicians responsible for the inspection procedure. On the other hand, from articles 61º, no. 2 and 46º, no. 7 of the RCPIT it results that only inspection actions aimed at mere consultation, collection and cross-referencing of elements with the taxpayer are those that require the mandatory indication of the tasks performed.

In this sense it can be read in the Decision of the Administrative Supreme Court, of 2013-11-13, handed down in the context of proceeding no. 0483/13:

"I - The law only requires that the 'inspection conclusion note' contain mandatory indication of the tasks performed in the inspection action in the cases provided for in subsections a) and c) of no. 4 of article 46º of the RCPIT (cf. no. 2 of article 61º of the RCPIT); II - Hence, in cases other than those, the omission of such indication does not constitute a formal defect."

Thus, also on this basis, the allegation of invalidity of notification of the inspection conclusion note is without merit.

ILLEGALITY RESULTING FROM THE ALLEGED FAILURE TO NOTIFY THE INSPECTION REPORT TO THE CLAIMANT.

  1. According to the proven factual matter, on 7.11.2014 the attorney of the Respondent was notified by registered mail with proof of receipt, sent the day before, of the tax inspection report, and on the same date, the Respondent was notified, also by registered mail with proof of receipt sent the day before, that the Tax inspection report had been issued to the representative, accompanied by the respective notification.

In accordance with article 40º, no. 1, of the Code of Tax Procedure and Process "Notifications to interested parties that have appointed a representative shall be made to such representative and at his office".

As can be read in the Decision of the Administrative Supreme Court, handed down on 2014-09-02, in the context of proceeding no. 01094/12:

"Now as to the failure to notify the final inspection report to the representative (appointed when exercising the right to be heard), it is important to note both the provision of no. 1 of article 40º of the CPPT, according to which notifications to interested parties that have appointed a representative shall be made to such representative and at his office, and the above-transcribed subsection e) of no. 1 of article 60º of the General Tax Law (right to be heard before the conclusion of the tax inspection report).

And, as pointed out by Advisor Lopes de Sousa, the provision of no. 1 of article 40º of the CPPT «applies to notifications to representatives both in tax procedure and in tax judicial proceedings, as is concluded from the heading of Section IV, «Of Procedural and Judicial Acts» in which the rule is inserted.» (Code of Tax Procedure and Process, Annotated and Commented, Vol. I, 6th ed., Áreas Editora, 2011, annotation 5 to article 40º, p. 398.)"

This understanding is subscribed to, which constitutes the correct application of article 40º, no. 1, of the CPPT, and it is further added that, in the case, the Respondent, although not obligated to do so, even communicated to the Claimant the notification made to its representative.

Thus, the alleged defect in question cannot fail to be deemed without merit.

DEFECT OF LACK OF REASONING FOR THE ASSESSMENT.

  1. The Claimant, alleging that the tax in question resulted from an inspection procedure, still argues that the Tax Administration did not communicate to the taxpayer the grounds for the assessment, and the act lacks reasoning.

Nor does the Claimant have reason here, with no violation of article 77º of the General Tax Law.

In fact, the assessment at issue contains the following:

"Additional assessment made on the basis of correction made by the Tax Inspection Services."

On the other hand, in the notification of the inspection report, the following had been stated:

"In the near future the Services of the Tax and Customs Authority (AT) will proceed with the notification of the respective assessment, which will contain the means of defense, as well as the payment period, if applicable."

It is therefore manifest that the inspection report forms part of the reasoning of the tax act, as indeed the Claimant unequivocally understood, expressly stating that the assessment results from the inspection procedure and having defended itself against the respective conclusions, both in the exercise of the right to be heard in that procedure and in the present proceeding.

Thus, and without need for other considerations, the alleged defect of lack of reasoning is also deemed without merit.

IV – DECISION

Accordingly, the arbitral tribunal decides to deem the request for arbitral pronouncement wholly without merit, maintaining the assessment object of the present proceeding in the legal order.

Value of the action: € 2,767.79 (two thousand seven hundred sixty-seven euros and seventy-nine cents) in accordance with article 306º, no. 2, of the CPC and 97º-A, no. 1, subsection a), of the CPPT and 3º, no. 2, of the Regulation of Costs in Arbitration Proceedings.

Costs borne by the Claimant, in accordance with no. 4 of article 22º of the RJAT.

Let it be notified.

Lisbon, CAAD, 4 January 2016

The Arbitrator

Marcolino Pisão Pedreiro

[1] NOTES ON CORPORATE INCOME TAX, Almedina, 2007, pag. 102)

[2] Emphasis ours.

[3] Cf. articles 29º, no. 4 and 31º, no. 7, of the CIRC and article 1º, no. 2, subsection a) of Regulatory Decree no. 25/2009 of 14 September.

[4] CODE OF TAX PROCEDURE AND PROCESS ANNOTATED, 4th Edition, 2003, Pag. 479.

[5] SUPPLEMENTARY REGIME OF TAX INSPECTION PROCEDURE ANNOTATED AND COMMENTED, Coimbra Editora, 2013, pags 278-279.

Frequently Asked Questions

Automatically Created

What are the grounds for challenging an IRC tax assessment based on inspection procedure defects under Portuguese tax law?
Under Portuguese tax law, IRC tax assessments resulting from inspection procedures can be challenged on several procedural grounds pursuant to the RCPIT (Supplementary Regime of Tax Inspection Procedure). Key grounds include: failure to properly notify the taxpayer of the inspection service order as required under Articles 51-52 RCPIT, which is considered a procedural invalidity that may render subsequent acts null; improper notification of inspection results to persons lacking legal authority to represent the company; absence of required elements in the inspection conclusion note under Article 61(3) RCPIT such as listing of tasks performed; failure to properly notify the final inspection report personally to the taxpayer as mandated by Article 62(2) RCPIT rather than sending it 'for information' to legal representatives; and lack of proper reasoning (fundamentação) in the assessment act itself, which constitutes a nullity ground under Article 133(f) of the Administrative Procedure Code. These procedural defects can affect both the validity of the inspection procedure and the resulting tax assessment, potentially leading to annulment of the liquidation acts.
How does the four-year statute of limitations apply to IRC tax assessments under Article 45 of the General Tax Law (LGT)?
Article 45 of the General Tax Law (LGT) establishes a four-year statute of limitations for IRC tax assessments, calculated from the end of the year in which the taxable event occurred. For the 2010 tax year, this period would normally expire on 31 December 2014. However, Article 46(1) of the Tax Procedure Code (CPPT) provides for suspension of this limitation period during the conduct of inspection procedures. The suspension lasts for the duration of the inspection procedure, with a maximum of six months. In practice, the Tax Administration must notify the service order initiating the inspection before the expiry date, which suspends the limitation period. The days consumed by the inspection procedure (up to 180 days maximum) are then added to the original deadline. For an assessment to be valid, it must be notified to the taxpayer within the original four-year period plus the days of suspension. Electronic notification through the taxpayer's mandatory electronic mailbox is considered effective on the date the taxpayer accesses the mailbox or is deemed to have accessed it under applicable notification rules. Courts strictly enforce these deadlines, and assessments notified after expiry are void.
What happens when the tax inspection order is not properly notified to the taxpayer under the RCPIT?
Under the RCPIT, proper notification of the tax inspection service order is a fundamental procedural requirement that must be fulfilled at the commencement of any inspection procedure. Articles 51 and 52 of the RCPIT govern who may receive notification on behalf of the taxpayer, including legal representatives, official accountants (TOC - Técnico Oficial de Contas), and persons designated by the taxpayer for relations with the Tax Authority. When the service order is not properly notified according to these provisions, it constitutes a procedural invalidity that affects the legality of the entire inspection procedure. This defect can render all subsequent acts of the inspection procedure null, including the inspection report, corrections made to the tax return, and the resulting tax assessment. Additionally, improper notification of the service order may affect the suspension of the statute of limitations under Article 46(1) LGT, as the suspension only operates from the date of valid notification. Taxpayers challenging assessments on this ground must demonstrate that notification did not comply with legal requirements - for example, that no copy of the service order was delivered, that it was delivered to an unauthorized person, or that required formalities were omitted. The Tax Authority bears the burden of proving proper notification occurred.
Can an IRC tax assessment be annulled due to lack of proper reasoning (falta de fundamentação) in the liquidation act?
Yes, an IRC tax assessment can be annulled due to lack of proper reasoning (falta de fundamentação) in the liquidation act. The duty to provide reasoning for administrative acts, including tax assessments, is enshrined in Article 77 of the General Tax Law (LGT) and constitutional principles of administrative transparency. Article 133(f) of the Administrative Procedure Code (CPA), applicable to tax matters, establishes that administrative acts lacking legally required reasoning are null. For tax assessments resulting from inspection procedures, the reasoning requirement is satisfied through the inspection report, which must explain the factual and legal grounds for any corrections made to the taxpayer's declaration. The reasoning must enable the taxpayer to understand the basis for the assessment and exercise the right to challenge it effectively. Insufficient reasoning - where explanations are overly generic, conclusory, or fail to address the specific circumstances - may also constitute a ground for annulment, though typically treated as an annulability defect rather than nullity. In inspection-based assessments, the Tax Administration must communicate the grounds for corrections through the inspection report as required by Article 62 RCPIT. Failure to properly notify the inspection report or to include adequate explanation of the legal and factual basis for adjustments can vitiate the subsequent assessment act. Courts distinguish between complete absence of reasoning (nullity) and insufficient reasoning (annulability), with different procedural consequences.
What are the consequences of notifying inspection results to a person who is no longer a legal representative of the company?
When inspection results are notified to a person who is no longer a legal representative of the company, this constitutes a defective notification that can affect the validity of subsequent procedural acts. Under Portuguese tax procedural law, notifications must be made to persons with legal authority to represent the taxpayer or receive notifications on its behalf. If a person ceased to be a legal representative (such as a manager/administrator) before the notification date, they lack capacity to validly receive official communications binding the company. Such defective notification can result in: (1) the notification being considered legally ineffective, meaning procedural deadlines do not begin running; (2) potential nullity of subsequent acts that depend on valid prior notification; and (3) possible restart of notification procedures to proper representatives. However, case law recognizes exceptions where the former representative actually had knowledge of relevant facts and the notification resulted from agreement or acquiescence by the taxpayer. The Tax Authority may also argue that notification was valid if made to other authorized persons such as the official accountant (TOC) or designated representatives under Articles 51-52 RCPIT. The burden typically falls on the Tax Authority to demonstrate that notification was made to a person legally authorized to receive it at the time of notification. Taxpayers challenging defective notifications must raise this ground promptly and demonstrate prejudice to their procedural rights, particularly regarding the right to be heard and contest findings before final assessment.