Process: 320/2017-T

Date: February 8, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 320/2017-T examined autonomous taxation under Article 88(1) of the Portuguese Corporate Income Tax Code (CIRC) concerning undocumented expenses. The taxpayer, a dental services company, challenged an IRC assessment of €66,839.87 arising from a 2012 tax inspection. The case centered on a €220,000 accounting entry recording loans to two shareholders (€110,000 each) that reduced the company's cash and bank deposits account. The Tax Authority determined these amounts constituted undocumented expenses subject to autonomous taxation because no actual loan transaction occurred, bank statements showed no corresponding transfers, and the managing partner admitted the money never existed—it merely regularized years of personal expenses improperly paid through company accounts. During the right to be heard procedure, the taxpayer presented €105,325 in accounting service invoices from 2003-2011 that had never been recorded as expenses. The taxpayer argued that: (1) accounting service invoices cannot qualify as undocumented expenses under Article 88(1) CIRC; (2) the Tax Authority violated the presumption of legality protecting taxpayer declarations under Article 75 of the General Tax Law (LGT); (3) disregarding evidence of a non-bank safe constituted a breach of due process guarantees; and (4) transfers between accounts should not trigger autonomous taxation. The Tax Authority maintained that expenses lacking proper supporting documentation required by law, particularly fictitious accounting entries admittedly covering undocumented personal withdrawals, fall squarely within Article 88(1) CIRC's autonomous taxation regime. This case highlights critical compliance requirements for expense documentation, the limits of the presumption of legality when taxpayers admit accounting irregularities, and procedural safeguards during tax inspections involving shareholder account movements.

Full Decision

The arbitrators José Pedro Carvalho (Presiding Arbitrator), Carlos Lobo and Luís Alberto Ferreira Alves, appointed by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

ARBITRAL DECISION

I – REPORT

On 10 May 2017, A… LDA., NIPC …, with registered office at Rua …, nº…, …, …-… Sines, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as LRATM), seeking the declaration of illegality of the IRC assessment notice no. 2016 … of 2012, in the amount of € 66,839.87.

To support its request, the Claimant alleges, in summary, the following:

The invoices for accounting services provided by the company "B…, Lda." cannot be considered as undocumented expenses under article 88, section 1 of the CITA;

The consideration of such invoices as undocumented expenses would violate the presumption of legality enjoyed by taxpayers' declarations under article 75 of the TLC;

It constitutes a violation of the principle of due process and the taxpayer's defence guarantees to disregard the existence of a non-bank safe, on the basis that such fact was not alleged during the tax inspection procedure;

The Tax Authority cannot consider as "undocumented expense" the transfer of a sum from one account to another based on the identification of an amount that, because it corresponds to cash deposited in a safe, should not be recorded in a demand deposit account.

On 10-05-2017 the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, therefore, under the provisions of paragraph a) of section 2 of article 6 and paragraph a) of section 1 of article 11 of the LRATM, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 04-07-2017 the parties were notified of such appointments, and neither manifested a wish to refuse any of them.

In accordance with the provisions of paragraph c) of section 1 of article 11 of the LRATM, the collective Arbitral Tribunal was constituted on 18-08-2017.

On 29-09-2017, the Respondent, duly notified for such purpose, submitted its reply defending itself by way of objection.

Under the provisions of paragraphs c) and e) of article 16, and section 2 of article 29, both of the LRATM, the hearing referred to in article 18 of the LRATM was waived.

Having been granted a period for submission of written arguments, these were submitted by the parties, addressing the evidence produced and reiterating and developing their respective legal positions.

The Arbitral Tribunal is materially competent and is regularly constituted, under articles 2, section 1, paragraph a), 5 and 6, section 1, of the LRATM.

The parties have legal standing and capacity, are legitimate and are legally represented, under articles 4 and 10 of the LRATM and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

Thus, there is no obstacle to the examination of the merits of the case.

Accordingly, it is necessary to render

II. DECISION

A. MATTERS OF FACT

A.1. Facts Found to be Proven

The Claimant is, and was in 2012, a company with limited liability engaged in minor oral surgery, dentistry, endodontics, periodontology, fixed and removable prosthetics.

The Claimant was, and is, classified for IRC purposes under the general regime for determination of taxable profit.

The Claimant included in the IES return for the fiscal year 2012 the amount of €220,000.00 in field A5118 - Shareholder/Partner, which corresponded to an effective reduction in field A5125 – Cash and bank deposits, as shown in the following table:

The Claimant was subject to an external tax inspection procedure of limited scope – IRC and Source Withholdings – relating to the year 2012, by means of Service Order no. OI2016…, for the purpose of analysing the balance of the shareholder/partner account.

During the tax inspection procedure, the Claimant submitted a new IES return for the years 2012, 2013, 2014 and 2015, through which it altered the amount that was recorded in field A5118 - Shareholder/Partner to field A5125 – Cash and bank deposits, with the following values now appearing:

From the opening trial balance of the Claimant, relating to the period in question, it appears, in sub-account "1201 – Banks – D.O.", that the opening balance was € 203,781.05, and in the closing trial balance a closing balance of € 3,303.04 was determined, appearing in this trial balance in the account "26601 – Loans granted to Shareholders/Partners" the amount of € 220,000.00.

This accounting entry was made on 31-12-2012, appearing in the extracts from accounts "26601 –C…" and "26602 – D…", in which appears as debit, in each of the accounts the amount of € 110,000.00, for a total of € 220,000.00, with no supporting document for such loan appearing in the accounting records.

The managing partner of the Claimant, C…, in a statement dated 04-10-2016, declared that "Over the years I have been using the company account for family use, family expenses, and in 2012, with the contentious divorce (of the other partner), together with the accountant we thought it better to transfer the amount that was in cash and that did not exist to loans granted to partners (€ 110,000.00 – Mr. C… and € 110,000.00 – Ms. D…). This money has already been spent, it does not exist in reality. It was spent from the beginning of the company by both partners. No loan was actually made by the partners to the company.".

The trial balances do not show account "11 – Cash".

Following a verbal request from the Tax Authority, on 04-10-2016, the said managing partner submitted a copy of the bank statements for the year 2012, from account …, corresponding to NIB …, from bank E…, SA., held in the name of the company.

The said statements do not show any transfer from the taxpayer's account to the partners' accounts.

From the same statements it appears that the balance on 31-12-2012 fluctuated between € 988.67 and € 1,226.88 (final balance on 31-12-2012), with no transfer/loan occurring during the month in the amount of € 110,000.00 for each of the partners.

In the context of said inspection action, the Claimant was notified of the draft Tax Inspection Report, proposed by the Tax Inspection Services of the Finance Department of …, which proposed the following correction:

The Claimant was notified, under article 60 of the RCTPM and article 60 of the TLC, to exercise, if it wished, its right to be heard, on 30-11-2016, which it did.

In the Request for exercise of the right to be heard, the Claimant presented the following invoices, in the total amount of €105,325.00, issued by "B…, Lda", in the years 2003 to 2011:

The invoices presented, relating to the company that provides accounting services to the Claimant, were not recorded as expenses of the periods from 2003 to 2011.

By means of letter no. … of 13-12-2016, the Tax Inspection Services issued the Final Tax Inspection Report, with the amendments introduced following the exercise of the right to be heard.

The tax inspection report contains the following:

Regarding the exercise of the right to be heard, the RIT states that:

The Claimant was notified of the IRC assessment notices no. 2016 … and of the statement of account adjustment no. 2016…, which incorporate the corrections made during the inspection.

A.2. Facts Found Not to be Proven

The Claimant has been the owner, since 2005, of a non-bank safe.

That the invoices referred to in point 15 of the facts found to be proven were paid in cash.

A.3. Reasoning for the Facts Found and Not Found to be Proven

With regard to the facts, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that are important for the decision and distinguish the proven from the unproven facts (cf. article 123, section 2, of the CTPM and article 607, section 3 of the CPC, applicable ex vi article 29, section 1, paragraphs a) and e), of the LRATM).

Thus, the facts relevant to the judgment of the case are selected and delimited based on their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former article 511, section 1, of the CPC, corresponding to the current article 596, applicable ex vi article 29, section 1, paragraph e), of the LRATM).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the CTPM, the documentary evidence and the file attached to the record, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Judgment of the Court of Tax Audit – South of 26-06-2014, handed down in case 07148/13[1], "the probative value of the tax inspection report (…) may have probative force if the assertions contained therein are not contested".

The facts found not to be proven are based on insufficient evidence regarding them, and on circumstantial evidence to the contrary reflected in the proven facts, in light of the free evaluation of the judges, in accordance with a criterion of normalcy.

Thus, with respect to the first of the unproven facts, it does not appear credible that the accounting firm – with special obligations of knowledge and application of the rules relating to invoicing – was from 2003 to 2011 providing services and receiving payments without issuing a single document.

Similarly, it is not credible, in the absence of any credible explanation, that a commercial company would be making payments owed by it in cash during that period without requiring any proof thereof, thereby subjecting itself to the real possibility of the debts being paid twice.

The lack of credibility is also based on the circumstances pointed out by the Respondent that the invoiced amounts are disproportionate to the activity recorded of the entity issuing the invoices and, at least in certain years.

To all this is added the incongruity of the Claimant attributing serious accounting irregularities and allegedly paying a notoriously high amount for accounting services, given the size of the company in question.

With regard to the second unproven fact, it is considered that the mere allegation of its existence, not supported, for example, by documentation relating to its acquisition and respective accounting, is insufficient for the conclusion, beyond any reasonable doubt, of its verification.

Both facts found not to be proven were also considered in light of the context in which the inspection procedure unfolded, documented in the RIT, in particular the circumstances that, given their relevance, it is not credible that the Claimant would have been unaware of the existence of high amounts paid without supporting documentation, and of the existence of a materially evident thing, such as a safe, also containing high amounts, and that the managing partner of the Claimant acknowledged that "Over the years I have been using the company account for family use, family expenses".

No findings were made regarding allegations made by the parties and presented as facts, consisting of assertions that are strictly conclusive in nature, incapable of proof and whose truthfulness must be assessed in relation to the concrete facts consolidated above.

B. ON THE LAW

At issue in the present arbitral action is the assessment of the legality of the application of autonomous taxation, under article 88, section 1 of the CITA, to two groups of expenses, namely:

one in the total amount of € 105,325.00, which the Claimant alleges relates to accounting services invoiced, paid, but not recorded;

another in the total amount of € 9,785.00, which the Claimant alleges relates to amounts deposited in a safe.

In view of the facts proven and not proven, no conclusion can be reached other than that the corrections in question are legal.

Indeed, it is not minimally demonstrated either that the amount of € 105,325.00 relates to accounting services invoiced, paid, but not recorded, nor that the amount of € 9,785.00 relates to amounts deposited in a safe.

With regard to the first amount, contrary to what the Claimant states, it is not agreed that "the only documentary proof possible of payment is the receipts issued by the person who received the money, which have already been attached to the record with the initial petition", since other evidence relating to the flow of the amounts could be obtained and presented, whether at the level of the paying entity or the receiving entity, in particular at the level of banking and accounting documentation.

As for the allegation that "reasoning (…) based on assessments of the value of the services invoiced is not for the Tax Authority to make since the law does not authorize the value fixed between the parties in a contract to merit, except in specific cases that are not at issue here, censure by the Tax Authority", it does not preclude that, in the context of assessing the credibility of the alleged facts and the evidence presented to support them, the context and normalcy thereof be considered, the same applying to the allegation that "payment in cash of the sums in question was permitted at that time.".

It should be noted, moreover, that the Claimant's reasoning on this matter is based on an inversion of the burden of proof, which in the initial petition is based on article 75 of the TLC, no longer invoked in the arguments, but the same is not applicable to this case.

In fact, as stated in the Judgment of the Superior Administrative Court of 04-05-2016, handed down in case 0415/15, "Contrary to what occurs in cases where the income declaration is submitted in accordance with the provisions of the law – this including the legal deadline for its submission, since the provisions of the law include it as well – a belatedly submitted income declaration does not benefit from the presumption of truth established in article 75 of the General Tax Law, being freely valued.".

Furthermore, in this case, the provision of paragraph a) of section 2 of said article 75 applies, which provides that:

"2 - The presumption referred to in the preceding paragraph does not apply when:

a) The declarations, accounting records or books reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent knowledge of the actual taxable matter of the taxpayer;".

Thus, we are not dealing with any presumption of non-correspondence to reality of the documentation presented by the Claimant, but, exclusively, with the assessment of its sufficiency, in the context in which it emerges, to overcome the burden of proof that lies with the Claimant.

Thus, it was incumbent upon the Claimant to prove, beyond any reasonable doubt, that the documentation it presents corresponds, in fact, to the expenses that were, admittedly, made, which, as mentioned, did not occur.

It is thus concluded, contrary to what the Claimant alleges, that the expenses in question are not "documented through the invoices issued by the accounting services company", since it is not proven that the invoices in question relate to the expenses in question, and, given that the matter in question is one of fact – that is, the circumstance that the said circumstance was not proven – there will be no extensive interpretation or unconstitutionality.

With regard to the amount of € 9,785.00, which the Claimant alleges relates to amounts deposited in a safe, the existence thereof was equally not proven.

It should be noted that the issue is not one of timeliness by virtue of the existence of the alleged safe not having been invoked during the inspection procedure, but rather one of insufficient proof of such fact, in light of criteria of normalcy where the circumstance that nothing was mentioned in the inspection procedure is covered by the assessment judgment made, with no violation thus occurring of the principle of due process and/or the taxpayer's defence guarantees.

Nor is it a matter of considering as "undocumented expense" the transfer of an amount from one account to another based on the identification of an amount that, because it corresponds to cash deposited in a safe, should not be recorded in a demand deposit account, given that, as noted, the existence of the alleged safe was not proven and, consequently, the truthfulness of the alleged movement.

*

C. DECISION

For these reasons, this Arbitral Tribunal decides to judge entirely without merit the arbitral claim filed and, consequently,

Dismisses the Respondent of the claim;

Condemns the Claimant to pay the costs of the proceedings, in the amount of € 2,448.00, taking into account what has already been paid.

D. Value of the Case

The value of the case is fixed at € 66,839.87, under article 97-A, section 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of section 1 of article 29 of the LRATM and section 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at € 2,448.00, under Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the claim was entirely without merit, under articles 12, section 2, and 22, section 4, both of the LRATM, and article 4, section 4, of the cited Regulation.

Let notification be made.

Lisbon 8 February 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Carlos Lobo)

The Arbitrator Member

(Luís Alberto Ferreira Alves)

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

Frequently Asked Questions

Automatically Created

What qualifies as an undocumented expense subject to autonomous taxation under Article 88(1) of the Portuguese IRC Code?
Under Article 88(1) of the Portuguese Corporate Income Tax Code (CIRC), undocumented expenses subject to autonomous taxation are costs, losses, or expenses for which the taxpayer lacks proper supporting documentation as required by applicable legislation. This includes expenses without valid invoices, receipts, or other legally required documents that substantiate the business nature, amount, and economic reality of the transaction. The autonomous taxation regime imposes additional tax burdens on such expenses regardless of whether they are deductible for ordinary IRC purposes, serving as a deterrent against tax evasion and ensuring proper documentation standards.
Can accounting service invoices be reclassified as undocumented expenses for IRC autonomous taxation purposes?
Accounting service invoices can potentially be reclassified as undocumented expenses for IRC autonomous taxation purposes if they lack proper substantiation or if the services were never actually rendered. However, valid invoices issued by registered service providers that comply with invoicing requirements generally should not be treated as undocumented merely because they were presented late or during inspection proceedings. The key determinant is whether the invoice meets formal legal requirements and corresponds to real services provided. In Process 320/2017-T, the complexity arose because the invoices were presented only during the right to be heard, had never been recorded as expenses in the relevant years, and emerged in the context of defending fictitious accounting entries.
How does the presumption of legality under Article 75 of the LGT protect taxpayer declarations in IRC disputes?
The presumption of legality under Article 75 of the General Tax Law (LGT) provides that taxpayer declarations are presumed accurate and truthful until the Tax Authority demonstrates otherwise with substantial evidence. This presumption protects taxpayers from arbitrary assessments and places the burden of proof on the Tax Authority to substantiate corrections. However, this presumption is rebuttable and loses force when taxpayers admit irregularities, when objective evidence contradicts declarations, or when accounting records lack supporting documentation. In IRC disputes involving undocumented expenses, the presumption does not shield fictitious entries or transactions that admittedly never occurred from autonomous taxation.
What procedural rights does a taxpayer have when the Tax Authority disregards evidence not raised during a tax inspection?
Taxpayers have fundamental procedural rights under Portuguese tax law, including the right to be heard (Article 60 LGT) before final assessment, the right to present evidence throughout inspection proceedings, and due process guarantees. When the Tax Authority disregards evidence not raised during the inspection phase, such as the existence of a non-bank safe, the critical question is whether the taxpayer had reasonable opportunity to present such evidence during the inspection and right to be heard procedures. Generally, evidence should be presented timely during the inspection process. However, if the Tax Authority prevents or restricts evidence presentation, or if the evidence's relevance only became apparent later, procedural rights may be violated. Courts examine whether the taxpayer exercised reasonable diligence in presenting evidence.
Does transferring funds between accounts constitute an undocumented expense triggering autonomous taxation under IRC?
Transferring funds between company accounts does not inherently constitute an undocumented expense triggering autonomous taxation under IRC. Normal business transfers between demand deposit accounts, savings accounts, or other company accounts are internal movements that do not generate taxable expenses. However, autonomous taxation may apply when a purported 'transfer' lacks economic substance, involves fictitious accounting entries, or attempts to disguise undocumented expenses or shareholder withdrawals. In Process 320/2017-T, the issue was not a legitimate account transfer but rather an accounting entry recording non-existent loans to shareholders that the managing partner admitted were fictitious entries covering years of undocumented personal expenses, thus qualifying for autonomous taxation treatment.