CAAD 325/2016-T: IRS and IVA Reassessments Annulled for Invalid Notification and Statute of Limitations Expiry

ARBITRAL DECISION

I – REPORT

1. A…, NIF…, resident at Rua…, …, …-… …, filed, on 14-06-2016, a request for constitution of the arbitral tribunal, under the terms of Articles 2nd and 10th of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in conjunction with Article 102nd of the CPPT, in which the Tax and Customs Authority (hereinafter referred to only as Respondent) is the respondent.

2. The Claimant seeks, with its request, the declaration of illegality of the acts of assessment of Personal Income Tax (IRS) with nos. 2016… and respective demonstrations of settlement of accounts and compensatory interest, relating to the year 2011, and no. 2016… and respective demonstrations of settlement of accounts and compensatory interest, relating to the year 2012.

3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 01-07-2016.

3.1. The Claimant did not proceed with the appointment of an arbitrator, whereby, under the terms of paragraph a) of Article 6th, paragraph 2, and paragraph b) of Article 11th, paragraph 1, of the RJAT, the President of the Deontological Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the prescribed period.

3.2. On 16-08-2016 the parties were notified of the appointment of the arbitrators, with no impediment having been raised.

3.3. In accordance with the provision of paragraph c) of Article 11th of the RJAT, the collective arbitral tribunal was constituted on 02-09-2016.

3.4. In these terms, the Arbitral Tribunal is regularly constituted to examine and decide the subject matter of the proceedings.

1. To support the request for arbitral decision, the Claimant alleged, in summary, the following:

An external inspection procedure was opened by the Tax Authority, conducted under Service Orders nos. OI2015… and OI2015… of the Tax Authority Directorate of Santarém, targeting the years 2011 and 2012.

As a result of such procedure, assessments of VAT and IRS were made, those relating to 2011 being subject to personal notification.

The receptive nature of the tax act, as an administrative act, should today be considered as a perspective properly established by doctrine and jurisprudence, with notification constituting a requirement for perfection of the tax assessment act.

Pursuant to nos. 2 and 3 of Article 149th of the CIRS, the notifications referred to in Article 66th of that code (the acts of determination or amendment provided for in Article 65th), when by postal means, must be carried out by means of registered letter with receipt acknowledgement and the remaining must be made by registered letter, and pursuant to no. 3 of Article 38th of the CPPT, notifications not covered by no. 1, as well as those relating to tax assessments resulting from taxpayer declarations or corrections to the taxable matter which has been subject to notification for the purpose of the right to be heard, are carried out by registered letter.

It follows therefore that, in the case of official assessments relating to the year 2011, which "result from corrections arising from external inspection procedures", the valid form of notification, having been conducted the respective prior hearing procedure, will be registered letter. The legislator chose three distinct forms of notification: i) notification by registered letter with receipt acknowledgement (no. 1 of Article 38th CPPT); ii) notification by registered letter (in the situations provided for in no. 3 of Article 38th CPPT); iii) and notification by simple postal means (in the situations of no. 4 of Article 38th CPPT). The use of these forms of notification is mandatory for the Tax Authority, which cannot opt for other notification modalities, except in cases duly justified, which guarantee the reliability and security of notification (such as, for example, personal notification of the interested party at the Tax Office).

Considering that the Claimant was notified by registered letter with receipt acknowledgement to exercise its right to prior hearing regarding the Tax Authority's draft decision to determine its global net income, motivated by corrections arising from external inspection action, the final report and the additional assessments in question should have been notified to the Claimant by registered letter (cf. no. 2 of Article 38th of the CPPT). Which did not occur.

The Tax Authority instead opted for notification through personal contact with the Claimant, in this case, notification with specified time. However, notification through personal contact with the Claimant would only be admissible if the Tax Authority considered it necessary (cf. no. 5 of Article 38th of the CPPT), so as to ensure effective notification of the Claimant. However, it does not result from the reasons alleged in the notification order what the concrete reason was for which the Tax Authority deemed it necessary to carry out the personal notification of the claimant in the manner in which it was carried out.

It concludes, therefore, that the notifications, both of the final report of the inspection services and of the additional manual assessments, carried out is illegal, due to violation of the provisions, namely in Article 38th of the CPPT.

It argues that the lack of notification of the assessment before the expiry of the limitation period also constitutes grounds for judicial challenge by implying subsequent illegality of the assessment act, there being, therefore, a twofold possibility of invoking the lack of notification in the face of Article 45th, no. 1 of the LGT.

Furthermore, the report notified to the taxpayer does not fully comply with the provisions of no. 3 of Article 62nd of the Supplementary Regime for Tax Inspection Procedure, incurring even formal defects which, in the Claimant's view, call into question the entire procedure.

Regarding the corrections resulting from the inspection procedure, it argues that the subsidy relating to Project no. 2002…, which started in 2002, and ran for a period of 10 years, with the change of regime of the taxpayer from the general regime (2009) to the simplified regime (2010) should, at most, have been taxed in 2009 or 2010 (See Article 36th-A of the CIRS); they were not taxed in those years, but were subsequently, in the IRS declarations of the years 2012 and 2013. On the other hand, the years 2009 and 2010 were outside the scope of the inspection action, since the limitation period for the respective assessment had even been exceeded (See Article 45th LGT).

Regarding the subsidies relating to the year 2012, the final report states Point III.3.1 – Doc. 14 that "On 31/12/2012, account 59.3 – Other changes in equity – subsidies and donations, presented a credit balance of €224,016.96. Of this amount, the taxpayer considered for the purpose of determining the result for the year, in account 78.8.3 – allocation of investment subsidies - the amount of €44,803.35". This amount determined by the taxpayer results from the sum of €10,928.11 of project 2002… IFAP, €3,125.70 of Operation …, €632.40 of Operation …, €2,901.67 of Operation …, €27,161.47 of Operation …, from which the total of €44,749.35 is obtained, disregarding the accounting error of €54.00 to the detriment of the Claimant.

The amount declared by the Claimant actually corresponds to 1/5 (Article 31st, no. 7 CIRS) of €164,145.40 (being €73,438.44 of investment subsidy receipts in 2011, and €90,706.99 of investment subsidy receipts in 2012). Furthermore, the value of investment subsidies in 2012 (Table XIX, pages 33 of final report) contains an error, since the sum of that Table XIX should be €90,706.99, and not €90,074.60.

It is false that the taxpayer stated that in 2012 only investment and exploitation subsidies were taxed as contained in the IFAP information, nor is it false that the taxpayer omitted in the right to be heard the quota portion of amortization that was subject to taxation, especially since the respective values appear in official IFAP documents delivered to the inspection services, and were also available to the Tax Authority from that entity.

The taxpayer, in total, declared income and paid IRS, regarding the projects in question, in the year 2013 (not subject to inspection), on income of €232,526.50 (with taxable matter being 75% of this value), while the investment subsidies received were even less than that value: €219,873.00. For this reason, the correction made regarding this 2012 year creates, by this route, duplication of collection.

The Claimant was classified for IRS purposes in the general regime (Organized), by choice, from 2007 to 2009 and in the year 2011, and in the simplified regime in the year 2010 and 2012, as results from nos. 2 and 4 of Article 28th of the CIRS.

However, investment subsidies were correctly taxed because the investment projects were still in the execution phase, and according to SNC standards, there is only taxation of investment subsidies after there is certainty that the investment projects are in perfect conditions of eligibility. The existing operating subsidies, and relating to the projects that had them – not those mentioned in the draft report – in the years 2011 and 2012, were accounted for and declared. Income from investment subsidies could never be considered as earned in 2011, because the projects were ongoing, and only came to be completed in 2012 and 2013, having been in those years that they were declared and taxed.

On the other hand, even if such income had not been declared and taxed, it is clear that the Tax Authority considered, as inferred from the final report that based the assessment, only income earned, with disregard of the offsetting of this against costs incurred.

If the portion of such subsidies were to be attributed to the last year of application of the organized accounting regime, such attribution, regarding the investment subsidy of project 2002…, would have to be made to the year 2009 (organized accounting) and not to 2011; as for the remaining subsidies, the attribution was correctly made in 2012, the moment when they were completed.

In accordance with the assessment and respective bases recommended by the Tax Authority – moreover contrary to the provisions of Articles 36-A CIRS and 22nd CIRC, and therefore illegal – the taxpayer could never perform the phased offsetting of expenses.

The financing to which it resorted was, without a doubt, obtained on an entrepreneurial basis, and moreover at a very favorable interest rate and spread, at a time when few or no banks made financing available, with an annual spread of 2% in 2011 (1% after applications), when banks did not finance companies, due to lack of liquidity, and the connected applications required served as guarantee for the aforementioned spread well below market values in that year. The financing contract in the amount of €500,000.00 has as a banking condition the subscription of an application of €150,000.00, as described on the first page of the contract.

Regarding the imputation made to the Claimant of not having an account dedicated to activity movements, in supposed violation of Article 63rd-C LGT, it should be clarified that none of the subsidies were received through the account of B…, just as none of the payments of investment expenses were made through that account, only because such payments necessarily had to have a dedicated bank account, by requirement of IFAP – in this case the C… account PT50 … – being the only account that could be moved between the taxpayer and its suppliers. It should be noted that the taxpayer of account no. …, dedicated to the activity, in 2011, carried out business movements debits of €650,818.27, which exceed, and greatly, the €500,000.00 borrowed.

The taxpayer, besides an agricultural tractor, has, in 2011, a single vehicle dedicated to the activity – the …-… -…. Now, since the tractor is prohibited by road law from circulating on the motorway, it is not apparent why the tolls costs actually incurred by the taxpayer in circulation with the …-… -… should not be considered. The fact that the receipts do not have the vehicle registration plate has a logical explanation that follows immediately from common sense: pure and simple green lane identification systems have breakdowns, which is why, pending such breakdown, the taxpayer can use manual toll, and it is certain that the issued receipts do not contemplate the notation of the vehicle registration plate, as is well known by any user. Added to all this is that in the year 2011, the taxpayer had tax domicile in Lisbon, whereby there is no surprise in the fact that the tolls had their origin and destination in various points of the national territory.

As for meals, the taxpayer does not know which restaurant establishment issues individual invoices to each and every participant in meals, nor that discriminates their names, tax identification and menu chosen.

The Claimant understands that the indispensability of the costs incurred was more than demonstrated, as the Tax Authority nowhere succeeded in demonstrating that they were not intended or did not intend to obtain income.

The tourist hunting concession is part of the taxpayer's activity; once the concession is obtained – for a period of 10 years – and the respective fee is paid, it is the only way the taxpayer has to actually exercise the activity. Knowing whether it exercised it or not, or what reasons justify one or other situation, would already be a question in the domain of futurology, as it was not possible to sell hunting in 2011, which does not mean its usefulness of the concession and respective fee for the activity.

The grounds for the disregard of the charges are based by the Tax Authority on the circumstance that the respective supporting invoices do not contain the identification of the vehicle registration plate. However, the Corporate Income Tax Code has no legal provision requiring this indication (cf. contrario, no. 4 of Article 23rd CIRC). Moreover; in fact, to sustain the correction, the Tax Authority applies Article 23rd-A, no. 1, letter j) of the Corporate Income Tax Code, and it should be noted that, in this way, the Tax Authority applies to income for 2011 and 2012, a rule that only entered into force in 2014.

The taxpayer, when responding to the clarifications it made, used the expression "undocumented expenses" in the common sense and not in the technical sense, as is evident from a careless interpretation of what was written. The sense of the expression intended to illustrate the non-existence of documents for the aforementioned bank movements, either because they were personal expenses of the taxpayer, or because they were day-to-day expenses and not business life expenses.

Of one thing the taxpayer has no doubts: the bank movements carried out were made on a personal basis, in the distant year 2011, and such movements were not taken as costs of the business activity. Not being costs and having no interference in the determination of taxable profit, they do not even have to be justified, neither to the Tax Administration, nor to anyone. The particular expenses of the entrepreneur supported by the company are not dedicated to its production process, so they are not deductible expenses for Corporate Income Tax purposes. Not being an expense accounted for as an expense for the taxation period (see point 2, 3 and 5), there is no issue of its deduction for the purpose of determining the company's taxable profit, nor obviously its autonomous taxation (Article 23rd-A and 88th of the CIRC).

Such movements cannot be considered undocumented and/or confidential expenses subject to autonomous taxation – even if the taxation is under the simplified regime – because although the company's bank account should only record payments and receipts relating to business activity (no. 1 of Article 63rd-C of the LGT), the situation at hand in no way interferes with the company's expense structure, and as such, we will never be faced with undocumented expenses.

The Claimant concludes, therefore, the illegality of the assessments subject to the arbitral request.

1. The Tax and Customs Authority presented its response, invoking in summary, the following:

By way of exception, it alleged the existence of error in the form of proceedings and/or lack of material jurisdiction of the Arbitral Tribunal to rule on the lack of notification of assessments within the limitation period for the right to assess. In fact, it argues that, contrary to what the claimant contends, the lack of notification of the assessment within the limitation period is solely grounds for opposition to tax execution, under paragraph e) of no. 1 of Article 204th of the CPPT.

Therefore, in this case, the claimant invoking that there was no notification of the assessments and "as the limitation period for the right to assess in which notification must be made has already elapsed", when tax execution proceedings were instituted, the assessment act was ineffective, therefore there is grounds for opposition to tax execution which, under the jurisprudence cited, if not framed within paragraph e) of no. 1 of Article 204th of the CPPT, will certainly be framed within paragraph i) of the same no. 1. Therefore, being certain that the claimant should have resorted to the tax execution opposition procedure to invoke the lack of notification of the assessments that gave rise to the tax execution proceeding, it was not legitimate for it to resort to the present arbitral jurisdiction, as it does not fall within the competences of this to examine the request for declaration of ineffectiveness of the assessment, because the assessment suffers from the defect of limitation of the right to assess.

By way of challenge, it defended itself in the following terms:

The option for personal notification was made under no. 5 of Article 38th of the CPPT by the entity responsible for the procedure and within its discretionary power given the consideration that this form of notification would be the one offering the best guarantees that the now claimant would become aware of the Report and the tax assessments.

In the concrete case, the Tax Authority respected all the formalities prescribed by law.

In the course of the inspection procedure, the services determined that on 31-12-2011, account 59.3 – Other Changes in equity – Subsidies and donations, presented a credit balance of €128,375.97, with sub-account 59.3.01 – Subsidy Project no. 2002… including the amount of €54,910.53, relating to a project that the taxpayer never came to identify and which was never taxed under the terms of Article 22nd of the CIRC by reference to Article 32nd of the CIRS.

Article 36th-A of the CIRS provides that, ceasing the determination of taxable income based on accounting, in the course of the period established in Article 22nd of the CIRC (subsidies related to non-current assets), the part of subsidies not yet taxed will be attributed to the last year of application of that regime.

By the claimant having incurred a violation of Article 36th-A of the CIRS, taxation was carried out of the amount of €128,375.97, which corresponds to investment subsidies received up to 31-12-2011, shown in account 59.3.

Regarding the year 2012, in which the Claimant was classified under the simplified regime, the Inspection Services determined that on 31-12-2012, account 59.3 – Other Changes in equity – Subsidies and donations, presented a credit balance of €224,016.96. During that year, various financial support were received as investment subsidies, whose taxation obeys the rules of no. 7 of Article 31st of the CIRS.

From the conjunction of Articles 31st, no. 7 of the CIRS and 22nd of the CIRC, it results, without a shadow of doubt, that taxation does not depend on the entry into operation of the financed equipment, occurring upon exit from the organized accounting regime to another taxation regime. Article 37th of the CIRS stipulates that subsidies or allowances not intended for operation will be considered, for the purpose of determining taxable income under the simplified regime, in equal fractions, during five years, with the first being that of receipt of the subsidy.

Contrary to what is invoked by the claimant, it is very clear in the Tax Inspection Report the reason and justification for not considering the cost of financing interest as falling within Article 23rd of the CIRC. In fact, it results from the factual description there that in account 79.1.1 there was a credit balance of €12,280.58 on 31/12/11 which concerns the accounting recognition of capital income resulting from financial applications made by the taxpayer, which is shown in account 14.2.1.2.3 – Bonds and participation securities – other companies for the amount of €150,000 and account 14.2.1.3.1 – Public debt securities – Luxembourg for the amount of €200,000.

From the documents submitted by the claimant, during inspection proceedings, it was not possible to determine what the purpose of the financing was, as the only reference to that loan appears in the letter sent to the claimant by B…, communicating the approval of financing obtained, cf. Annex 3, pages 5 of the Tax Inspection Report.

Such factuality demonstrates the well-founded doubt on the part of the Tax Authority that the financing contracted was not intended to finance forestry and agricultural exploitation, but rather was carried out on a private or personal basis and was intended to acquire financial instruments which, obviously, are foreign to the taxpayer's activity. Now, the claimant, faced with this well-founded doubt of the Tax Authority, failed to demonstrate the indispensability of the cost (and it was incumbent upon the claimant to prove that such operation falls within the respective company scope).

From the supporting documents presented, there is the existence of various toll receipts, whose registration plate is not identified, as well as monthly receipts issued by …, relating to toll expenses, whose identifier is associated with a vehicle with registration plate …-… -….

In this way, only the expenses with the vehicle …-… -… were accepted and which were invoiced monthly by…, given the fact that the claimant can only have one motorized vehicle dedicated to the exercise of the activity carried out as a category B income earner, cf. no. 2 of Article 33rd of the CIRS, and so that the charges are accepted as a tax expense, it is necessary that 3 requirements are met: substantiation, indispensability, and connection to income or gains subject to tax. And, once again, the claimant, faced with this well-founded doubt of the Tax Authority, was not able to demonstrate the indispensability of the cost.

The same occurred, mutatis mutandis, regarding meal expenses, the claimant not having, faced with the Tax Authority's well-founded doubt, been able to demonstrate the indispensability of such costs.

The claimant is taxed for the exercise of the secondary activity of hunting-related services, to which CAE 01902 corresponds, however, did not demonstrate that it ever exercised such secondary activity. In this way, it results that there was no, either in 2011 or in previous years, any income from the exploitation of the hunting concession space, in relation to which the claimant incurred the cost, therefore, it did not contribute to obtaining the gains subject to tax. Thus, there was always a lack of the ultimate motivation that each cost must have, which is the contribution to obtaining the company's profit.

An expense carried out by a company, to be fiscally relevant, given its indispensability, must be potentially apt to provide benefits or gains regardless of the result that it actually provides, and in the concrete case, the now Claimant had perfect and full knowledge that this potentiality did not exist, especially because it expressly admitted it before the Tax Authority.

The reasons that led the Tax Authority to disregard the expenses incurred with the acquisition of diesel fuel are the same as those that led to the disregard of expenses with tolls and meals.

Under no. 1 of Article 63rd-C of the General Tax Law, Corporate Income Tax taxpayers, as well as Personal Income Tax taxpayers who have organized accounting, are obliged to have at least one bank account through which must be, exclusively, moved the payments and receipts relating to the business activity developed.

Having analyzed the accounting records of these accounts, it was verified that the B… account was used not only to record bank movements relating to financing obtained, but also to movements related to financial applications of which the Claimant is a holder, with the C… account being used essentially to record bank movements relating to business activity.

Having analyzed the supporting documents to the accounting records made in the two accounts, the existence of many payments was found, some to beneficiaries without any identification, and others to persons in whose payment means only the first two names are mentioned.

Having fulfilled the prerogatives enjoyed by the Tax Administration, and given the impossibility of determining the veracity of the facts recorded in the taxpayer's accounting, it can only be concluded that the outflows of monetary means from bank accounts dedicated to the taxpayer's business activity, by not being documented, the latter having admitted they are undocumented expenses, fall within the concept of undocumented expense provided for in no. 1 of Article 73rd of the CIRS.

Thus, considering that the taxpayer violated the provisions of Article 63rd-C of the General Tax Law, autonomous taxation was carried out in Personal Income Tax at the rate of 50%, of undocumented expenses carried out by the Claimant who has organized accounting, under no. 1 of Article 73rd of the CIRS, and in relation to which not only was the charge not identified, as no invoices or any other legally issued document were presented, justifying the payments made, nor were the respective beneficiaries identified.

It concludes, therefore, the Respondent for the legality of the tax assessment acts contested by the Claimant which should, therefore, be upheld.

1. By order of 06-02-2017, the meeting of Article 18th of the RJAT was waived.

2. The parties submitted pleadings, having maintained the positions set out in their respective motions.

II – PRELIMINARY EXAMINATION

8.1. The tribunal is competent and regularly constituted.

8.2. The parties have legal personality and capacity, are properly interested and are regularly represented (Articles 4th and 10th, no. 2, of the RJAT and Article 1st of Order no. 112-A/2011, of 22 March).

8.3. The proceedings are not affected by any nullities.

8.4. The Claimant raised the exception of error in the form of proceedings and/or lack of material jurisdiction of the Arbitral Tribunal to rule on the lack of notification of assessments within the limitation period for the right to assess.

Deciding the exception:

The Claimant intends to have declared the nullity of the notification of the Personal Income Tax assessment relating to 2011 on the grounds that it occurred when the limitation period for the right to assess had already elapsed.

According to the Respondent, the lack of notification of the assessment within the limitation period is, by requirement of paragraph e) of no. 1 of Article 204th of the CPPT, solely grounds for opposition to tax execution, given that only a request for declaration of ineffectiveness of the assessment is at issue, a matter that would be excluded from the material jurisdiction of the Arbitral Tribunal.

Ruling on the exception:

It is established that judicial opinion is oriented to the effect that the absence of notification of the assessment act, whether before or after the expiry of the limitation period for the right to assess, constitutes ineffectiveness of that tax act and is therefore grounds for opposition to tax execution.

In fact, this is the orientation followed, e.g., in judgments handed down by the Tax Contentious Section on 2/02/2011, in case no. 0803/10, on 28/09/2011, in case no. 0473/11, on 20/06/2012, in case no. 0378/12, on 26/09/2012, in case no. 0251/12, all in line, moreover, with the jurisprudence contained in the judgment handed down by the Plenary of the Section on 7/07/2010, in case no. 0545/09, which endorses, in turn, the reasoning set out in the judgment also handed down by the Plenary on 20/01/2010, in case no. 0832/08.

This understanding does not conflict with another understanding embodied in the possibility of raising a judicial challenge based on illegality of the assessment act, just as, moreover, the Supreme Administrative Court judgment (Plenary) cited by the Claimant [of 18-9-2013 – Case no. 0578/13) defends.

And in this same line, go the Supreme Administrative Court judgments (Plenary) of 20-1-2010 [Case no. 832/08] and of 7-7-2010 [Case no. 545/09].

To be specific: it is not prohibited to the taxpayer to raise a judicial challenge (or request for arbitral decision) based on that ground. And this results even from the aforementioned judgment cited by the Claimant (Supreme Administrative Court judgment of 18-9-2013, handed down in Case no. 0578/13) when, to that conclusion, it adds: "independently of, if it is considered grounds for illegality of the assessment act, it can also be invoked in judicial challenge. It is, moreover, what occurs in other situations in which the legality of the assessment act can be examined in opposition to tax execution, namely those falling within paragraphs a) and g) of no. 1 of Article 204th, which can both be invoked in judicial challenge as in opposition to tax execution [in the situations referred to in paragraph h) by definition, the illegality of the assessment of the enforceable debt can only be examined in opposition to tax execution]".

In the same line spoke the Supreme Administrative Court in more recent decisions – see Judgments of 18-06-2014 in Case 0344/13 and of 27-10-2016 – Case 09810 – saying in that of 18-06-2014 that "Just as with abstract illegality and duplication of collection, the lack of notification of the assessment within the limitation period also constitutes a defect invocable both in opposition to tax execution and in judicial challenge, there being, therefore, no error in the form of proceedings if invoked in challenge".

Equal understanding was also followed in the arbitral decisions handed down within the framework of CAAD in Cases nos. 725/2014-T and 126/2012-T.

Thus, adhering to the grounds contained in the various decisions indicated, the exception invoked is declared to be without merit.

There are no other issues or exceptions to be examined which would obstruct knowledge of the merits and which it behooves to examine.

III – MATTERS OF FACT AND LAW

III.1. Matters of Fact

1. Matters of Fact

9.1. It is important, first of all, to emphasize that the Tribunal does not have to pronounce on everything that was alleged by the parties, rather it falls to it to select the facts that matter for the decision and to distinguish the proven matter from the unproven matter (cf. Article 123rd, no. 2, of the CPPT and Article 607th, nos. 3 and 4, of the Code of Civil Procedure, applicable ex vi Article 29th, no. 1, paragraphs a) and e), of the RJAT). In this framework, the facts pertinent to the judgment of the case are chosen and outlined in function of their legal relevance, which is established in attention to the various plausible solutions of the legal question(s).

In this framework, the following facts with relevance for the decision are considered proven:

a) The Claimant was subject to an external inspection procedure, conducted under Service Orders nos. OI2015… and OI2015… of the Tax Authority Directorate of Santarém, targeting the years 2011 and 2012.

b) On 29/12/2015, an order of notification was issued by the Head of the Tax Office of … as follows:

• "I order the officials Ms. D…, Func. … and Mr. E…, Func. … that, in accordance with legal terms and formalities, proceed to the personal notification of the below-identified taxpayer:

Taxpayer: A…

NIF/NIPC: …

Tax Domicile: Rua…, …

…-… …

Of the manual assessments and respective compensatory interest, determined as a result of the inspection action carried out for the year 2011 (Service Order OI215…), with the following identification (…)".

c) The identified officials drew up, on 29/12/2015, a citation note with the following tenor:

• "I certify that today, 29 December 2015, at 4:30 p.m., having traveled to Rua…, no.…, …, in order to notify of the assessment of Personal Income Tax and VAT, year 2011, taxpayer A…, NIF…, I was unable to carry out this diligence, due to not having found in the indicated place any administrator/manager/representative of the taxpayer.

For this reason I leave you with the indication of Specified Time, in accordance with the provisions of Article 240th, no. 1 of the Code of Civil Procedure, being hereby notified that on the next day 30/12/2015, at 4:30 p.m. you will be contacted at this location, to carry out the procedure that I intended to do today.

Being hereby notified that, if on the day above designated you are not present, personal notification will be made to any person capable of transmitting the terms of the act (Article 240th, no. 2 of the Code of Civil Procedure). If collaboration of third parties is not possible, notification will be effected by posting (Article 240th, no. 4, of the Code of Civil Procedure".

d) On 30/12/2015, a certificate of verification of specified time was posted at no.… of Rua …, no.…, in the …, with mention of the fact that notification is considered to have been made under Article 240th Code of Civil Procedure, and that the Personal Income Tax, VAT assessments and compensatory interest resulting from inspection action for the year 2011 were available to the Claimant at the Tax Office of the ….

e) On 4/1/2016, a Notice no. … from the Tax Inspection Division… of the Tax Authority Directorate of Santarém was sent to the Claimant, received by it on 15/1/2016, with the following tenor:

• "Communication pursuant to Article 233rd of the Code of Civil Procedure", in which it is stated that "notification was carried out, under no. 3 of Article 232nd of the Code of Civil Procedure, on 30 December 2015, of the Tax Inspection Report relating to the years 2011 and 2012 under OI2015… and OI2015…, with the elements being at your disposal at the Tax Authority Directorate of Santarém, located at …, in Santarém.

So that they, attached to this notice, are the following

• Photocopy of Notice no. … of 28/12/2015

• Photocopy of the Specified Time Marking Note

• Photocopy of the Certificate of Verification of Specified Time".

f) The notes of the disputed assessments were received in the Electronic Postal Box (Via CTT) of the Claimant on 13/1/2016.

g) The Claimant personally received at the Tax Office of the…, on 13-1-2016, the manual assessments of Personal Income Tax, VAT and compensatory interest, having then signed "Document Delivery Record".

h) The Claimant is registered with the tax office of the…, since 18/04/1998, for the exercise of the main activity of forestry and other forestry activities and, as a secondary activity, hunting-related services and game repopulation, to which correspond CAE 2100 and 1702.

i) For Personal Income Tax purposes, it was classified under the general taxation regime provided for in Article 28th of the CIRS, having opted for the application of the organized accounting regime, under no. 3 of the same article, regime in which it was classified until 31/12/2011 and, again, after 01/01/2014.

j) In the period between 01/01/2012 and 31/12/2013 it was classified under the simplified regime for determining business and professional income, under no. 2 of Article 28th of the CIRS.

k) For Value Added Tax purposes, it is a non-exempt taxpayer.

l) As a result of the inspection procedure, the inspection services determined that corrections were due, within the scope of Personal Income Tax, as they understood that situations had occurred of improper deduction of expenses not accepted fiscally for Personal Income Tax purposes, as well as the failure to tax investment subsidies in 2011 and 2012, which determined corrections to the declared fiscal loss in the following terms:

m) The Claimant had in effect, in the years 2011 and 2012, the following investment projects:

I - Operating subsidies: operations with premium payments awarded for income loss

Operation… – Arrangement and Recovery of Stands

Operation … – Management of Forestry and Agro-Forestry Space – Action Arrangement and Recovery of Stand

II - Investment subsidies: operations with subsidy payments

Operation … – Promotion of Forest Competitiveness – Action Improvement of Stand Productivity

Operation … – Promotion of Forest Competitiveness – Action Improvement of Stand Productivity

Operation … – Promotion of Forest Competitiveness – Action Improvement of Stand Productivity.

n) The Claimant's accounting presented, on 31/12/2011, in "Account 59.3 – Other Changes in equity – Subsidies and Donations", a credit balance of 128,375.97 €.

o) In that balance was included the amount of 54,910.53 €, reflected in sub-account 59.3.01 – Subsidy Project no. 2002….

p) The Claimant's accounting presented, on 31/12/2012, in the same "Account 59.3 – Other Changes in equity – Subsidies and Donations", a credit balance of 224,016.96 €.

q) The investment subsidies obtained by the Claimant in 2012 amounted to a total value of 90,706.99 €, divided among the following projects:

• Operation no.…: 86,404.99 €

• Operation no.…: 632.39 €

• Operation no.…: 3,669.61 €

r) The Claimant recognized, in 2012, in "Account 78.8.3 – Allocation of investment subsidies", the amount of 44,803.35 € when the value of subsidies to be taxed should be only 18,141.40.

s) The Claimant entered into, on 20/12/2010, a financing contract with B… in the amount of 500,000.00 €, for a period of 84 months, which was credited to the B… account…, having pledged the following guarantees:

• Mortgage in favor of B… Portugal over the autonomous fraction located at Av. …, no.…, Block…, …, fraction "AL", in Lisbon, property of F…;

• Pledge of Notes B… Yield … 4th version bonds, in the amount of 150,000.00 €;

• Promissory note subscribed by the Claimant.

t) On 29/12/2010, the Claimant subscribed a purchase operation, through stock market order no.…, on the Luxembourg market, of "Notes B… …" Bonds, in the value of 150,000.00 €, debited to the B… … account.

u) On 26-01-2011, a transfer was made from the same bank account in the amount of 464,000.00 €.

v) Besides an agricultural tractor, the Claimant had dedicated to its activity a motor vehicle with registration plate …-… -…, whose registration plate was associated with a Green Lane identifier.

w) The Claimant made various payments through the two bank accounts reflected in the 2011 analytical balance sheet, to beneficiaries without any identification or, to others, with mere indication of the first two names, which were not made with any business justification.

9.2. Justification of Matters of Fact:

The matters of fact given as proven took into account the positions assumed by the parties in their motions and was based on the critical examination of the documentary evidence, as well as the administrative file attached to the case.

9.3. There are no other facts with relevance to the examination of the merits of the case that have not been proven.

III.2. Matters of Law

Various defects are imputed to the tax acts which will be examined in observance of the provisions of Article 124th of the CPPT.

A – ON THE NULLITY OF NOTIFICATION AND THE LIMITATION OF THE RIGHT TO ASSESS RELATING TO 2011

The Claimant seeks to have declared the nullity of the notification of the 2011 assessment for having failed to observe the provisions of Article 38th of the CPPT.

In fact, it argues that, given that this is an assessment resulting from an inspection action conducted with the prior hearing procedure, its notification would necessarily have to be made by registered letter, by requirement of no. 3 of that provision. Moreover, the Tax Authority would be prohibited from resorting to another form of notification, namely personal, since, according to no. 5 of the same article, notifications shall only be "personal in the cases provided by law or when the entity proceeding thereto considers it necessary".

Now, according to the Claimant, personal notification could not have occurred, firstly because it does not result from the notification order the reasons for its implementation.

However, the Claimant is not correct, since the Tax Authority's option for personal notification of the assessment act is provided for by law and results from its discretionary powers.

As stated in the Supreme Administrative Court Judgment of 21-09-2011, in Case 0305/11 "The additional Personal Income Tax assessment must be notified to the taxpayer, by registered letter with receipt acknowledgement … but the entity directing the procedure can order that personal notification be carried out when it deems it necessary. The choice of personal notification by the competent entity of the tax administration, to convey to the recipient the content of the tax act, constitutes a manifestation of the exercise of a discretionary power that must weigh the effectiveness in fulfilling the intended objective and there is no lack of notification when such choice is made without the indication of the specific or concrete need to be achieved" (underlined).

In the case at hand, the Tax Authority opted for the implementation of notification of the assessment act through personal notification, having observed the formalities provided for in the Code of Civil Procedure, and it is certain that, beyond the claimant's summary rejection of this form of notification, the Claimant invoked no omission of formality regarding its perfection.

Having observed the legal formalities, the notification of the Personal Income Tax assessment for 2011 occurred on the date on which the note referred to in no. 3 of Article 240th of the Code of Civil Procedure was posted, that is, on 30 December 2015 (see Supreme Administrative Court Judgment of 31-01-2012, in Case 0674/11).

The limitation period for the right to assess had not yet elapsed on that date.

B – OMISSION OF LEGAL FORMALITIES – FORMAL ASPECTS OF THE REPORT AND ITS JUSTIFICATION

Without need for extensive considerations, it will be said that no formal defects that the Claimant seeks to extract from the inspection report are discernible.

This is because, as the Claimant recognizes, the report states the reasons why the inspection procedure was opened (despite the Claimant possibly not agreeing with them) and all formalities were observed with a view to extending the period for its conclusion.

This notwithstanding the recognition that such extension proved unnecessary, with the assumption that the inspection action was concluded within the legal initial period, making the extension order a "inconsequential and unnecessary act".

No defect that could taint the inspection report is discernible from this.

B – CORRECTIONS TO TAXABLE INCOME

B.1 – INVESTMENT SUBSIDIES NOT TAXED 2011

The Claimant was classified under the organized accounting regime until 31-12-2011 (making an incorrect interpretation in this regard of Article 28th of the CIRS).

Article 36th-A of the CIRS shall thus apply, when it provides that "ceasing the determination of taxable income based on accounting in the course of the period established in Article 22nd of the Corporate Income Tax Code, the part of subsidies not yet taxed will be attributed, for taxation purposes, to the last year of application of that regime", it being therefore due the correction made in this matter.

B.2 – INVESTMENT SUBSIDIES NOT TAXED 2012

The Claimant being already included in the simplified regime – it is reiterated that it was classified under the organized accounting regime until 31-12-2011 – the provisions of no. 7 of Article 31st of the CIRS shall apply, regarding subsidies, which imposes, for the purpose of determining taxable income, that subsidies must be considered in equal fractions, during five years, with the first being that of receipt, it being therefore correct the correction made by the Tax Authority.

In either case, it will not be within this proceeding to determine whether there will be duplication of collection due to the fact that the Claimant was subsequently taxed, regarding the same subsidies, for having included them in the income declarations of subsequent years. It will be incumbent upon it, if such is the case, to use the procedural means at its disposal regarding the taxation that, in those years, it understands to exist such situation.

B.3 – EXPENSES NOT ACCEPTED FISCALLY

Given that it is not for the Tax Authority to determine the criteria for cost indispensability – which are governed by exclusive management criteria – it is understood that:

B.3.1. – EXPENSES WITH HUNTING CONCESSION

There are no reasons not to accept as a cost the expenses incurred with hunting concession, insofar as the Claimant can potentially resume such activity which may be momentarily suspended due to management choices.

The maintenance of this potential and latent exploitation, with profit interest, is thus manifestly justified, being consequently inevitable for the Claimant to incur the costs that are inherent to it.

Principle which the Respondent itself assumes when it cites: "indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumed in a profit profile … only costs that have no causal and justified relationship with the company's productive activity will not be indispensable".

It thus appears that the correction made by the Tax Authority is improper.

B.3.2. – EXPENSES WITH INTEREST

Given the doubts, substantiated and well-founded, raised by the Tax Authority regarding the destination of the contracted loan, it would be incumbent on the Claimant to demonstrate the indispensability of the cost.

In fact, given the facts evidenced by the Tax Authority, it would be incumbent on the Claimant, by reversal of the burden of proof, to demonstrate the indispensability of that same cost (cf. Supreme Administrative Court Judgment of 29-30-2006 – Case 1236/05 and, more recently, Administrative Court of Appeal of the South Judgment of 16-10-2014 - Case 6754/13).

Failing to do so, the correction shall thus be upheld.

B.3.3. – TOLL EXPENSES

Within the same reasoning, resulting in evident contradictions in the use of the so-called … and also the failure to observe correct documentation, the Tax Authority's correction is to be upheld.

B.3.4. – DIESEL AND MEAL EXPENSES

The justification provided by the Tax Authority for the non-acceptance of these costs is minimally not supported (moreover, of little significance).

Hence the merit of the claim in this matter.

B.4 – AUTONOMOUS TAXATION

Article 63rd-C of the General Tax Law effectively requires that "Corporate Income Tax taxpayers, as well as Personal Income Tax taxpayers who have or should have organized accounting, are obliged to have at least one bank account through which must be, exclusively, moved the payments and receipts relating to the business activity developed".

It is not questioned in the inspection report that the receipts and payments made by the Claimant violated that provision by failing to use the bank account dedicated to its activity. What is questioned is the existence of payments through such an account, without indication of the respective beneficiaries.

From the violation of the provisions of Article 63rd-C of the General Tax Law, beyond being able to constitute the infraction provided for in Article 129th of the Tax Violations Regulation, no direct consequences in the tax sphere of the violator are evident.

Furthermore, being an individual entrepreneur, the withdrawals made by it from such bank accounts do not generate gains susceptible of being taxable, and it is certain that such payments were not considered by the Claimant as costs of its activity.

Hence the lack of consistent justification invoked to the effect that such expenses should be considered as undocumented is not to operate the autonomous taxation sought and the application, in the case, of the special relationships regime provided for in Article 63rd of the Corporate Income Tax Code.

IV. DECISION

In these terms, this Arbitral Tribunal decides:

a) To judge well-founded the request for illegality of the assessment acts to the extent that the Tax Authority did not accept the costs incurred with the hunting concession [See supra B.3.1], with diesel and meal expenses [B.3.4] and autonomous taxation [B.4];

b) To declare, consequently, the illegality of the deductions processed by the Tax Authority and Personal Income Tax assessment acts nos. 2016… (year 2011) and 2016 … (year 2012) and demonstrations of settlement of accounts and compensatory interest to the extent that such acts resulted from the disregard of such costs and expenses;

c) To judge without merit the remainder of the claim;

d) To condemn both parties to pay the costs of the proceedings, in the proportion of 80% by the Claimant and 20% by the Respondent.

V. VALUE OF THE CASE

The value of the case is fixed at 125,345.06 €, in accordance with Article 97th-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of Article 29th of the Legal Regime for Tax Arbitration and of no. 2 of Article 3rd of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The value of the arbitration fee is fixed at 3,060.00 €, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, under Articles 12th, no. 2, and 22nd, no. 4, both of the Legal Regime for Tax Arbitration, and Article 4th, no. 4, of the cited Regulation.

Let it be notified.

Lisbon, 15 May 2017.

The Presiding Arbitrator

(José Poças Falcão)

The Arbitrator Member

(António Alberto Franco)

The Arbitrator Member

(Nuno de Oliveira Garcia)