CAAD 328/2015-T: IRC Corrections on Profit Distribution, Depreciation of Used Assets & Social Utility Costs

DECISION

On the 25th of May 2015, A…, S.A., holder of the unique number of collective person and registration with the Commercial Registration Office…, with headquarters at …, n.º…, in Lisbon, 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 of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), aiming at the declaration of illegality of the act of assessment of IRC and compensatory interest no. 2008 … of the fiscal year 2004, in the amount of 6,012,903.81€, as well as of the act of express dismissal of the hierarchical appeal and of the act of express dismissal of the administrative review that had them as their subject matter.

To substantiate its request, the Applicant alleges, in summary, that the aforementioned tax acts are unlawful, insofar as the corrections made by the Tax and Customs Authority ("AT") are contrary to Law, either because their respective factual and/or legal prerequisites are not met, or because they are based on an erroneous interpretation of the Tax Law, in terms developed further below, in the Legal Reasoning, with regard to the following situations:

i. Disallowance of the tax cost arising from the distribution of results to employees relating to the fiscal year 2002 of B…, S.A. ("B…"), in the amount of 353,771.01€ and of C… — C…, S.A. which today operates under the designation of D…, S.A. ("D…"), in the amount of 44,000.00€;

ii. Disallowance of the tax cost of reinstatements and depreciation relating to assets acquired in used condition of D…, in the amount of 491,296.77€;

iii. Disallowance of part of the costs recognized as respecting realizations of social utility of B…, in the amount of 6,794,007.48€; of D…, in the amount of 1,421,960.30€; and of A…, S.A., now Applicant, in the amount of 6,846.45€;

iv. Disallowance, for tax purposes, of costs considered not indispensable to the activity of B…, in the amount of 582,669.70€ which respect the payment made by that company to E…, S.A.

v. Disallowance, for tax purposes, of undocumented expenses of B…, in the amount of 779,376.19€; and of D…, in the amount of 42,950.01€;

vi. Disallowance of the tax cost of reinstatements and depreciation that resulted from the use of depreciation rates considered higher than those provided for by D…, in the amount of 7,312,195.94€.

On 27-05-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Applicant did not proceed with the appointment of an arbitrator, wherefore, under the provisions of subparagraph a) of no. 2 of article 6 and of subparagraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable time limit.

On 23-07-2015, the parties were notified of these appointments, having manifested no intention to refuse any of them.

In accordance with the provision of subparagraph c) of no. 1 of article 11 of the RJAT, the Collective Arbitral Tribunal was constituted on 07-08-2015.

On 11-09-2015, the Respondent, in accordance with article 569/5 of the Code of Civil Procedure, requested an extension of the time limit to answer, which was granted by ruling of 13-09-2015.

On 21-10-2015, the Respondent filed its response, defending itself solely by way of contestation.

On 05-11-2015, the Applicant filed a request formulating the questions it considered relevant for appraisal by an expert, within the scope of the expert evidence requested in its Initial Request.

On 17-11-2015, the meeting referred to in article 18 of the RJAT took place, where the witnesses presented by the Applicant were heard, at the hearing; the Respondent dispensed with the witnesses it had cited. A ruling was further issued by the Tribunal dismissing the request for expert evidence formulated by the Applicant, and the request for removal of documents formulated by the Respondent.

Having been granted a time limit for the submission of written submissions, these were submitted by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

It was fixed that the pronouncement of the final decision would occur until 07-04-2016, having subsequently this time limit been extended until 07-06-2016.

The Arbitral Tribunal is substantively competent and is regularly constituted, in accordance with articles 2, no. 1, subparagraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Regulation no. 112-A/2011, of 22 March.

The case does not suffer from any nullities.

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

Given all that has been seen, it is incumbent upon us to pronounce

II. DECISION

A. FACTS

A.1. Facts Established

1. The Applicant has been subject to the RETGS (Special Regime for Taxation of Groups of Companies), since the fiscal year 2001, and in the fiscal year 2004, now at issue, had an effective tax perimeter, in which it was the dominant company, which included, in addition to the Applicant, the following 25 companies:

1 F…— SGPS, S.A.;
2 G…, S.A.;
3 H…, S.A.;
4 C…, S.A. which today operates under the designation of D…, S.A.;
5 I…, S.A.;
6 B…, S.A.;
7 J…, S.A.;
8 K…— SGPS, S.A.;
9 L… Unipessoal, Lda.;
10 M…, S.A.;
11 N…, S.A.;
12 O…, S.A.;
13 P…, Lda.;
14 Q…, Lda.;
15 R…, S.A.;
16 S…, Lda.;
17 T…, S.A.;
18 U…, S.A.;
19 V…, S.A.;
20 W…, S.A.;
21 X…, S.A.;
22 Y…, S.A.;
23 Z…, S.A.;
24 AA…, S.A.; and,
25 BB…, S.A.

1. Following Service Order no. OI 2008…, the Applicant was subject to a partial external audit procedure regarding IRC relating to the fiscal year 2004, with the objective of verifying compliance with the tax obligations inherent to the application of the Special Regime for Taxation of Groups of Companies.

2. As a result of the aforementioned audit procedure, the AT made corrections to the taxable income of the group in the amount of 31,859,993.13€ and corrections to the calculation of tax in the amount of 528,584.01€, thus giving rise to additional assessment no. 2008…, of 24-11-2008, in the amount of 17,098,299.06€.

3. The aforementioned IRC and compensatory interest assessment was notified to the Applicant in its capacity as the dominant company of the Group CC… and in accordance with the terms prescribed by the RETGS; following this, the amount of 9,301,341.44€ was determined to be paid additionally as IRC and the amount of 1,292,504.55€ to be paid as compensatory interest.

4. The Applicant submitted an administrative review in which it sustained the annulment of the sustained corrections to the collective taxable income of the group, requesting partial annulment of the contested assessment regarding corrections whose value amounted to 7,117,890.10€.

5. Having analyzed the facts and arguments put forward by the Applicant, then the party seeking review, the request was partially granted by ruling of 30-06-2011, issued by the Director of Tax Inspection Services, who determined partial annulment of the assessment in issue in 622,614.50€.

6. Of the decision, the Applicant was notified on 04-07-2011, through official letter no. -… of 01-07-2011.

7. On 28-07-2011 a hierarchical appeal was filed with the Tax Inspection Services Directorate (distributed under no. …2011…) having as its subject matter the decision of dismissal issued in the administrative review above identified, which was limited to the corrections made by the AT which, although claimed against, were not the subject of annulment by the Director of the Inspection Services or of subsequent acceptance by the Applicant, the amount of the IRC and compensatory interest assessment contested in that phase amounting to 6,313,785.34€.

8. Following the hierarchical appeal, the AT annulled some additional corrections — in certain cases, only partially —, annulments which were reflected in a reduction of the amount determined in the IRC and compensatory interest assessment of 62,665.57€.

9. The Applicant made, on 21 January 2009, a payment of part of the assessment under litigation — in the total amount of 5,175,546.86€.

10. In 2013, the Applicant made a second partial payment of the assessment — in the total amount of 2,136,945.64€, and following this payment and under the Exceptional Regime for Settlement of Tax Debts then in effect, the amount of 296,947.70€ was forgiven as compensatory interest.

11. With reference to the fiscal year 2002, B… and D… decided, in 2003, to grant gratifications to their employees, materialized in the distribution of results.

12. The company B… deducted, in its IRC Form Mod. 22 return relating to the fiscal year 2002, the amount of 15,565,100.00€ as negative equity variations, by reason of balance gratifications granted to employees.

13. B… increased in Mod. 22 of 2003, the IRC it had failed to collect as a result of the aforementioned deduction, in the amount of 830,783.05€, as well as the corresponding compensatory interest, in the amount of 33,322.37€.

14. During the fiscal year 2004, B… made available to its employees the remainder of the gratifications originating from the results obtained by this company in 2002, having then deducted the corresponding amount (353,771.00€) in field 237, of table 07 of the Income Declaration Mod. 22 of 2004, as a negative equity variation of that fiscal year, that is of 2004.

15. Similarly, the company D… deducted, in its Mod. 22 relating to the fiscal year 2002, the amount of 2,809,400.00€ as negative equity variations, with reference to balance gratifications granted to employees in that fiscal year.

16. D… increased, in Mod. 22 of 2003, the IRC it had failed to collect as a result of the aforementioned deduction, in the amount of 154,777.40€, as well as the corresponding compensatory interest, in the amount of 6,191.10€.

17. During the fiscal year 2004, D… made available to its employees the gratifications originating from the results obtained by this company in 2002, deducting the respective amount (44,000.00€) in field 237, of table 07 of the Income Declaration Mod. 22 of 2004, as a negative equity variation of that fiscal year, that is of 2004.

18. The payments made in 2004 by B… and D… raised only entries in accounts of third parties by counterpart of available funds.

19. In the audit procedure, the AT considered that since the aforementioned amounts had been recorded as negative equity variation in the year/fiscal year 2002, the taxpayer, in accordance with the rules defined in no. 2 of art. 24 of the IRC Code, had allowed the right provided therein to lapse and, therefore, considered that such payments, in 2004, were not subsumable as charges deductible for tax purposes, having proceeded to a correction to the taxable profit of the amount considered as improperly deducted in 2004, in the amount of 353,771.01€, with regard to B…, and in the amount of 44,000.00€, with regard to D….

20. Such corrections were maintained in the context of the administrative review and the hierarchical appeal filed against the additional IRC assessment of the year 2004.

ii.

1. In the context of tax inspection the AT considered that the Applicant recorded in account 662 – Depreciation of Tangible Fixed Assets, the amount of 535,661.22€ referring to depreciation of assets acquired in used condition, which were not accepted as tax costs, because it concluded that the corresponding expected useful lives determined by the Applicant had already ended in years prior to 2004, in accordance with the following table:

[table reference]

1. Of the amount referred to in the preceding point the Applicant contests the amount of 491,296.77€.

The Applicant presented as support for its argument the table relating to the calculation of depreciation and reinstatement (doc. 20 p.i.) of C.... relating to 2003 and 2004:

[table reference]

1. The assets that gave rise to the adjustments at issue here were integrated into the sphere of D… (then designated C…, S.A.) as a result of a merger by incorporation by this company of the companies "DD…, S.A." ("DD…") and "EE…, S.A." ("EE…"), effective as of 1 January 2004, which was carried out according to the neutral taxation regime.

2. Following the aforementioned merger, in 2003, D… recorded in its accounting, in the fiscal year 2004, the fixed assets items from the balance sheet of the incorporated companies at the values they had in the accounting of DD… and EE…, on 31/12/2003.

3. Following this merger (i.e. in the fiscal year 2004), D… changed the depreciation rate of the assets incorporated by merger to 3.125%, corresponding to a useful life period of 32 years, regardless of the year of acquisition and beginning of use of the assets, recording that time period in column 9 – number of years of expected useful life, of the reinstatement tables.

4. Following this change, the computer system that manages the tax schedules of D… automatically entered, without consideration of any other factor, in the field referring to the number of years of expected useful life, the number of years underlying the new rate (i.e., 1/new depreciation rate), as if the new higher depreciation rate had been applied from the moment the assets began to be used in the incorporated companies, which resulted in the depreciation schedule showing a number of years of expected useful life which, in some situations, had already been exceeded in 2004 based on the date when the assets in question began to be depreciated.

5. At no time were depreciations recorded in the accounting records, in the sphere either of DD… and EE… (2.5%), or of D… (3.12% or 3.13%), relating to the assets in question that were lower than those resulting from the application of the minimum rates provided for by law.

6. In the fiscal year 2006, the AT, which had, in a first moment, proposed a correction similar to the correction at issue here, came, following the exercise, by D…, of the right of being heard on the draft tax inspection report, to consider the argument of that entity as correct, annulling the aforementioned correction.

7. In the context of the hierarchical appeal, the AT accepted the deduction as a cost of the reinstatement in the amount of 35,484.12€ made with reference to the asset acquired in 1972, for the amount of 1,135,492.80€, the Applicant having decided, for its part, to accept the correction in the amount of 8,880.33€.

iii.

1. B…, D… and the Applicant deducted, in 2004, for tax purposes, and up to the limit they understood to be legally permitted, the costs incurred by these companies with life insurance contracts, contributions to pension funds and equivalent and complementary Social Security schemes, which guarantee, exclusively, the benefit of retirement, early retirement, retirement supplement, disability or survivorship in favor of their respective employees.

2. Thus, and among other things, B… proceeded with accounting entries in accounts … – Accident Insurance and … – Premiums for pensions of the amounts of 328,758.63€ and 44,625,673.78€, respectively, totaling 44,954,432.41€.

3. In turn, D… proceeded with accounting entries in accounts … – Accident Insurance, … – Health Insurance and … – Premiums for Pensions, of the amounts of 46,640.00€, 77,178.17€ and 8,908,865.70€, respectively totaling 9,032,683.87€.

4. With regard to A…, it proceeded with accounting entries in accounts POC … – Accident Insurance, …- Other Insurance, … – Cmp Pens Reform obr, … – Premiums for pensions and … – CST Acç Soc-Serv Méd, of the amounts of 6,674.78€, 19,545.21€, 42,858.88€ and 776,830.54€, respectively, totaling an amount of 845,909.41€.

5. The AT considered that the aforementioned deductions were excessive because, in its view, the aforementioned companies had not, respecting the limit of no. 2 of article 40 of the IRC Code, since for these purposes it understood that only expenses with personnel that were subject to contributions to Social Security could be taken into account, whereby it concluded that B… would have deducted, excessively and in violation of the said article of the IRC Code, the amount of 6,794,007.48€, D… the amount of 1,421,960.30€ and the Applicant the amount of 6,846.45€.

6. The AT disregarded, with a view to calculating the limit of 15% of "personnel expenses, recorded as remuneration, salaries or wages" referred to in no. 2 of article 40 of the IRC Code, the amounts recorded in the relevant accounting headings that had not been the subject of deductions for Social Security or for any substitute scheme.

7. Following such procedure, the AT determined a new limit amounting to, with regard to the Applicant, 36,715,632.25€ which, compared with the realizations of social utility taken by the taxpayer for its calculation, determined an increase, for purposes of taxable profit of 8,238,800.16€.

8. Considering that the taxpayer had already increased, for purposes of determining taxable profit, the amount of 1,444,792.68€, a correction resulted from the difference amounting to 6,794,007.48€.

9. With regard to D…, the AT proceeded to recalculate the limit referred to in no. 2 of article 40 of the IRC Code, amounting to 7,536,835.09€, considering that such taxpayer should have increased, for purposes of determining taxable result, the amount of 1,495,848.78€, corresponding to charges incurred as realizations of social utility, not deductible for tax purposes.

10. However, considering that the amount of 73,888.48€ had already been increased, for purposes of determining taxable profit, a correction resulted from the difference amounting to 1,421,960.30€.

11. Verifying that the Applicant, in the self-assessment of tax relating to the year 2004, presented in field 209, of table 07, relating to "Realizations of Non-Deductible Social Utility" the amount of 251,893.20€, relating to A…, the AT considered that the amount of 69,250.54€ should have been increased, declaring the amount of 321,143.75€, corresponding to the difference between 845,909.41€ and 524,765.66€.

12. In the context of the right of being heard, the Applicant manifested its partial agreement with the classification made by the AT regarding the charges referred to in accounts POC … – Accident Insurance, and …- Premiums for pensions, disagreeing as to the other accounts, …- Other Insurance and … – Cmp Pens Reform Obr.

13. In point 13 of the right of being heard, the Applicant informed that in the account…– Other Insurance, there were recorded charges relating to Work Accident Insurance and Civil Liability Insurance, finding framework in al. d) of no. 1 of art. 23 of the IRC Code, in which the AT considered that it was correct, adjusting the correction accordingly.

14. Similarly, the charges indicated by the Applicant as being capable of individualization relating to charges paid to employees (once they reach the normal age for retirement) or to survivors of employees or pensioners, as applicable, of supplement to the benefits granted by Official Social Security Institutions, respectively, in case of retirement due to old age or death of employees or pensioners, were accepted by the AT, because they fall within al. d) of no. 1 of art. 23 of the IRC Code.

15. Wherefore a correction was made in the amount of 6,846.45€, having been accepted the tax deductibility of the charges recorded in the accounts …Other Insurance and…, Supplements for Retirement and Survivorship Pensions.

16. The corrections which, in their entirety, taking into account the 3 companies, B…, D… and A…, amounted to 8,222,814.23€, were maintained in the context of the administrative review and hierarchical appeal filed against the respective assessment.

iv.

1. Another of the costs that was challenged by the AT for considering it not indispensable to the activity of the Applicant relates to charges incurred with health care provided to retirees and pensioners of E… S.A. [personnel of the FF… of the Municipal Chamber of … ("FF…")].

2. E… was a mutual aid fund, belonged to the Municipal Chamber of … and was the entity that provided health services and pension services to the employees of the FF… of….

3. E…, had its retirees, to whom it paid supplements and assisted in some health aspects, with the Municipal Chamber of … making available every month certain amounts depending on the expenses of E… to pay its retirees and matters in the health area.

4. From the electricity distribution concession contract in low voltage concluded between a… and the Municipal Chamber of…, specifically, from its articles 45 and 47, it results that the responsibility of B… towards the beneficiaries of E… derives from the obligations assumed by this company, namely the contribution to private Social Security schemes and charges with medical services, as a consequence of the incorporation into its sphere, in 1992, of the electricity distribution activity in the Municipality of…, the administrative and commercial services of the FF… having been absorbed in the part relating to that activity.

5. When integrating the electricity distribution activity in the city of … into the A…, the then employees of the FF… became employees of the A… in full right in accordance with the terms prescribed in article 47 of the Concession Contract concluded with the Municipal Chamber of … and ceased to have any relationship with E…, which currently only remains as long as there are pensioners and retirees who were already so when that integration occurred.

6. U… is a company of the Group CC… aimed at providing health care to the workers of the group and its retirees.

7. The cost in question in point 47 above, relates to medical assistance services invoiced by U…, S.A. ("U…") and provided to the retirees and pensioners of E… in 2004, for which B… was responsible.

8. In the judgment of the Supreme Administrative Court, of 30 September 2003, issued in case no.…, it was held that: the "concession contract between the Municipal Chamber of … and A…, which transfers to the latter «the rights and obligations arising from acts or contracts concluded by CM…– FF… relating to the concession distribution» encompasses the transmission of the financial funding contribution obligations of E…, according to its statutes and the rules in effect at the date of the concession, which were previously obligations of the CM… –FF…".

9. In the context of the inspection procedure the AT verified, regarding the supporting documents presented by the taxpayer, as evidence of the accounting entries of cost accounts, selected in the course of the inspection action, that there were external documents issued in the name of third parties, and it was on the basis of these documents that the Applicant intended to justify the cost, wherefore the AT considered that representing the document the formal instrument of support for the accounting entry, if it is issued in the name of another it ceases to justify the cost, reason for which it proceeded to the respective correction.

10. Such correction in the amount of 593,012.59€, in which the contested amount of 582,669.70€ is included, was expressly maintained in the context of the administrative review

11. On 10 April 2013, in the context of the instruction of the hierarchical appeal at issue in the present arbitration, which on that date was pending, the IRC Administration Division of the Directorate of IRC Services requested that "copies of the Invoice from U…, S.A. in the name of E…, in the amount of 582,669.70€ (amount corrected by the Tax Inspection Services as — Expenses with documentary support in the name of third parties) and respective means of payment" be sent to it.

12. In response to this request the Applicant submitted a request in which it attached as doc. no. 2 copy of invoice no. … issued by U… to E…, with the amount of 582,669.70€, dated 31.12.2004, with a quantity identified as "January to December 2004", and not containing any description of the type of service provided, and as doc. no. 3 copy of an accounting entry relating to the payment of such invoice.

13. In light of the elements provided by the then Appellant, now Applicant, the AT refused to accept as a cost the amount of 582,669.70€, on the following basis:

"Now, as referred to in the case, with the amount in question corresponding to amounts paid by A… to satisfy the commitments of the FF…, why is it that an invoice that should justify a cost for A…, issued by a company belonging to its group?

It should be noted that when requested from the Applicant the means of payment corresponding to this situation, we were sent a response through a letter requesting the attachment to the case of: "Evidence of payment made by E… SA (as per document no. 3 attached).

Now, if the document in question is intended to justify a cost, how can it be stated that it is a payment made by E….

With this situation not being duly justified, the correction made by the Tax Inspection Services is shown to be well founded".

1. U… provided medical assistance services to the retirees and pensioners of E… in the fiscal year 2004 and as a result of the services provided issued the corresponding invoice, which was directed to E….

2. The health services provided by U… to the retirees and pensioners of E… reflected in the invoice in question, in the amount of 582,669.70€, were paid by B… to that first company.

v.

1. In the context of the inspection action that led to the tax and compensatory interest assessment here contested, the AT classified as undocumented expenses expenses recorded by B… in the total amount of 1,671,196.52€, and expenses incurred by D… in aggregated amount of 505,187.97€, understanding that the aforementioned expenses are not supported by any external document that demonstrates the truthfulness of the corresponding accounting entries, whereby it considered that these are not deductible for tax purposes, and are also subject to autonomous taxation at the rate of 50%, in accordance with article 81, no. 1, of the IRC Code.

2. During the inspection carried out, the taxpayer was notified to present the external documents supporting the accounting entries.

3. The Taxpayer proceeded to the phased and partial delivery of the requested documents, in the context of the right of being heard and administrative review, and, as of the date of preparation of the Tax Inspection Report, documents justifying the amount of 1,671,196.52€ were still missing.

4. Following the aforementioned inspection action and also in the context of the administrative review submitted, part of these corrections were annulled by the competent services, with the denial of deductibility of expenses in the amount of 867,699.47€ relating to B… and 57,238.25€ relating to D… being maintained.

5. In the context of the hierarchical appeal, the AT maintained in full this correction of undocumented expenses, in the amount of 924,937.72€.

6. Of those expenses, the amount of 752,675.87€ relates to an adjustment made by B… reported to personal accident insurance premiums.

7. In 2004, the Applicant ascertained that, with regard to the personal accident insurance premiums relating to the employees of B… for the fiscal years 2001, 2002 and 2003, lower insurance premium rates were being taken into account than those that had been negotiated by the Group of companies of which the Applicant is the dominant company and were, in fact, being applied by the insurance brokers hired.

8. Although the Group CC… had negotiated and was proceeding to the payment of personal accident insurance premiums at a certain amount for the workers of the Group, that was not the amount which, in its respective share, was being recorded by B… regarding the insurance for its workers.

9. Negotiation and payment orders were always made centrally by the Applicant, with the relevant shares then being charged to the companies of the Group.

10. The rate negotiated for work accident insurance of the Group by the Applicant was applied to the insured capital, which was directly related to the payroll of the Group.

11. For the internal determination of how much each company of the Group should bear and pay, the same rate (which was negotiated annually) was applied to the insured capital — payroll — of each of them.

12. Thus, at the time of the initial allocation to B… of the personal accident insurance premiums of its respective employees, the following was recorded:

i. in 2002 the amount of 341,622.96€ instead of the amount of 505,095.87€, actually paid to the insurance broker by the Group CC… with reference to B…'s share;

ii. in 2003 the amount of 344,543.56€ instead of the amount of 516,134.73€, actually paid to the insurance broker by the Group CC… with reference to B…'s share.

1. Thus, in the years 2002 and 2003, the amounts of 163,472.91€ and 171,591.56€, respectively, actually borne by the Group CC… with personal accident insurance for the employees of B… were not recorded in the accounting records of the companies of the Group under any heading.

2. The Applicant only recorded in its accounting and deducted the costs with insurance premiums for its employees, having recharged the remaining amounts to the respective companies; however, that rechargement was not correctly and timely recorded in B…, whereby the respective amount was not fiscally considered either by the Applicant or by B….

3. Having been detected in 2004, the Applicant proceeded to its accounting correction and, consequently, to the tax deduction of those costs, which it valued, including 417,611.40€ reported to the year 2001, in a total of 752,675.87€, for purposes of determining the collective taxable income of B….

4. As for the cost of 26,700.32€ equally considered as undocumented by the AT, it relates to charges relating to the "GG…Fleet" service, allocated to one of the cost centers of B….

5. The Applicant, as the dominant company of the Group, negotiated this service with the respective supplier, in casu the 'GG…', for all companies of the Group, agreeing a value per liter, and at the end of the year, the cost was invoiced to each of those by the Applicant in accordance with their respective fuel consumption.

6. The aforementioned invoicing was done by issuing an invoice (debit note) by the Applicant individually in the name of the various companies that made up its Group, with the invoiced amount calculated by the sum of the value of fuel consumption allocated to cost centers, i.e., to the departments of the said companies.

vi.

1. The AT increased the taxable income of the fiscal year 2004 by the amount of 7,312,195.94€, recorded by D… in the heading "662 — Depreciation of Tangible Fixed Assets", because it considered that this company made excessive reinstatements of tangible fixed assets, which resulted from the application of reinstatement rates higher than the maximum rates allowed, set out in the tables attached to Regulation no. 737/81, of 29 August and to Regulatory Decree no. 2/90, of 12 January, and that when notified, in the context of the inspection procedure, to justify the application of the rates used, it did not submit to the AT elements that legitimized the reinstatements in question.

2. The aforementioned amount relates to depreciations made and adjustments made by the A… under projects developed in partnership with INAG, resulting from the conclusion of protocols with that public institute, representing the Portuguese State.

3. The assets that gave rise to the reinstatements in the amount of 7,307,115.60€, of those 7,312,195.94€, resulted from investments made under various protocols concluded between the A… and the Portuguese State, in the years 1979 to 1985, with the objective of carrying out multi-purpose hydraulic developments (i.e. of purposes not exclusive to electricity production) in the so-called Mondego system — consisting of the infrastructure of the dams of Aguieira, Raiva and Fronhas —, and, as well as preliminary works and infrastructure in ... and interventions relating to the navigability of the Douro.

4. On 3 May 1979, a "Protocol for the Carrying Out of Multi-Purpose Hydraulic Developments" ("framework protocol") was concluded between the Applicant (then HH…) and the Portuguese State, represented by the General Directorate of Hydraulic Resources and Developments ("DGRAH"), which aimed to bring together in a joint initiative the interests of the first — strictly associated with electricity production — and the interests of the State itself, such as flood control, flow regulation, environmental protection, water supply for domestic or industrial use, among others.

5. In accordance with clause no. 2 of the aforementioned "framework protocol", each multi-purpose development would be the subject of a special contract, which should contain the specification of the technical conditions and the economic-financial arrangements of the development, the rules relating to the support and allocation of costs, the definition of the property regime and the standards to which annual operational plans should adhere.

6. From the preamble and from clauses 4 to 6 of the aforementioned protocol concluded with the Portuguese State, the following appears, regarding cost allocation:

a. "Costs shall be allocated in the same proportion as benefits";

b. "Of the total costs of each development, A… shall bear the amount corresponding to the cost of the most favorable alternative that it would have adopted in the event of not associating itself with its execution; the State shall bear the remainder";

c. "The final allocation of costs shall be subject to agreement obtained on the basis of prices in effect at the date of the beginning of electricity production, except for investments already made in which historical prices updated to that date shall be considered";

d. "The allocation of costs relating to each development shall be provisionally fixed by percentage in the respective contract, taking into account budgeted costs and the electrical value of the development estimated based on prices practiced at the date of the contract".

1. The developments covered by the "framework protocol" would be the subject of individual protocols, in the following terms:

i. In June 1984, a "Protocol for the execution of the Douro River Navigable Canal" was concluded between the A… and the DGRAH, which aimed to establish the conditions for A…'s participation in the construction of the navigable canal of the Douro River;

ii. In July 1985, a "Protocol for the Multi-Purpose Development of..." was concluded between the A… and the State, which aimed to establish the rights and obligations of the parties with regard to the multi-purpose development of... during the construction phase and, as well as to define the general principle to be adopted in the allocation of costs for the whole of the developments to be constructed in the cascade of the Guadiana.

1. The special contracts referred to in clause 2 of the "framework protocol" were never executed, whereby the technical conditions and the economic-financial arrangements of each multi-purpose hydraulic development were never specified, as well as the rules relating to the support and allocation of costs, the definition of the property regime, with specification of the components to exclude from the assets of A…, and the standards to which annual operational plans should adhere.

2. Given that the parties involved in the protocols in question did not conclude the special contracts to which the "framework protocol" makes reference, no percentage of provisional allocation of benefits and charges was fixed, just as the ownership of the assets involved was not previously defined.

3. Faced with the legal need to record in its financial statements the investments that were being made and their reinstatement, in the part affected to electricity production, the Applicant defined a provisional allocation percentage, which it fixed at 50%.

4. The investment made — with the exception of the Fronhas development, classified as the provision of services by the A… to INAG rather than a joint development – was being evidenced in the financial statements of the A…, which considered 50% of the same affected to electricity production and the remaining 50% as assets not affected to that purpose

5. Until a settlement protocol was concluded with INAG, only the percentage of the value of the fixed assets considered affected to electricity production (i.e. 50%) was being subject to depreciation, in accordance with the legal depreciation rates in effect.

6. The Portuguese State delivered to the A…, as the projects were being developed, contributions whose net amount amounted to 10,427,334.00€ (of which 8,931,521.10€ are associated with the assets that generated the correction now at issue) and which were recorded in the balance sheet accounting heading designated "Other Debtors and Creditors — State Participation for Multi-Purpose Developments".

7. In 1995 a working group was established that included representatives of the A… and INAG, with the objective of carrying out the appraisal of the charges and contributions of the parties relating to joint investments made in the hydraulic developments of ..., Aguieira/Raiva and Fronhas (made under the "framework protocol"), and in the project relating to the navigability of the Douro.

8. From the meetings of the working group, resulted, among other things:

i. The definition of the electrical added value obtained by the A… in each of the joint projects and, by difference, as defined in the "framework protocol", the benefit of the aforementioned projects for INAG; and

ii. The elaboration of a report of conclusions, dated November 1996.

1. The percentages of participation in each of the projects were fixed at:

i. 32% for INAG and 68% for A… in the Mondego System (Aguieira-Raiva/Fronhas);

ii. 52.5% for INAG and 47.5% for A… in the Multi-Purpose Development of....

iii. 23.3% for INAG and 76.7% for A… regarding the Navigability of the Douro.

1. The report prepared by the working group and the conclusions reached there, particularly the percentages resulting from the reassessment of the charges above mentioned, were only validated by INAG and by A… in 2003, at which time the "Protocol between INAG and A… for the settlement of accounts between the A… and the State relating to the multi-purpose developments" was formalized.

2. With the exception of the assets recorded in the A… as investment made in the Hydraulic Development of ... whose ownership was attributed to INAG by effect of the aforementioned protocol, the patrimonial assets relating to joint investments remained, by agreement of the parties, in the sphere of the entities where they were initially recorded.

3. In light of this protocol, D… proceeded, in the fiscal year 2004, to the adjustment of the reinstatements of the fixed assets that had hitherto been considered as assets not affected to electricity production, in the period between their entry into service until 31 December 2003, applying depreciation and reinstatement rates ranging from 31.53% to 38.19%.

4. In view of the doubts raised by the protocol, and the complexity of the operation, which involved numerous fixed assets items, the regularization, both of depreciations and of subsidies, was only possible to complete in 2004, being reported back to 1 January 2004.

5. In that fiscal year, the adjustment of depreciations not previously accounted for, regarding cases in which the percentage of charges allocated to the A… proved to be higher than initially estimated, resulted in the cost of 7,307,115.60€.

6. In that same fiscal year, a benefit of 4,586,315.87€ was recognized, relating to the one-twelfth of the deliveries made to the Applicant by INAG/State within the scope of the joint enterprise, corresponding to the period between the start of operation of the assets and 31 December 2004.

7. Of the amount of 4,586,315.87€, 211,306.48€ relates to the fiscal year 2004 and the remainder, in the amount of 4,375,009.39€, to the value of the subsidy that should have been recognized from the beginning of the operation of the assets until 31 December 2003.

8. In this latter situation, the amount of 4,586,315.86€ was reclassified as subsidy to investment, transferred to accounting heading no.…, designated by "Subsidies to Investment" and recognized as profit in accordance with the provisions of article 22 of the IRC Code ("subsidies or subventions not intended for operation").

9. The tax deductibility of this adjustment of depreciations, in the amount of 7,307,115.60€, was entirely denied by the AT including in the part of the adjustment relating to the assets for which the benefit referred to above was recognized in 2004.

10. The revalued cost of acquisition of the assets generating the adjustment of depreciations in discussion amounts to 18,167,861.46€, with the acquisition value of the assets associated with the INAG process amounting to 15,577,761.51€.

11. The amount of accumulated depreciation of the assets in question amounts to 9,158,536.83€.

12. The total amount of participation associated with the same assets (excluding assets originating from DD… and EE…, which do not present any associated participation), is 8,931,521.10€.

A.2. Facts Established as Not Proven

1. That the fact established as proven under point 14 occurred because B… ended up not being able to make the entire amount available to employees by the end of the fiscal year 2003, due to cash flow unavailability.

2. That the fact established as proven under point 15 occurred because only during the fiscal year 2004 was B… able to make available to its employees the remainder of the gratifications originating from results obtained by this company in 2002.

3. That the fact established as proven under point 17 occurred because D… was not able to make the entire amount available to employees by the end of the fiscal year 2003.

4. That the fact established as proven under point 18 occurred because only during the fiscal year 2004 did D… make available to its employees the gratifications originating from results obtained by this company in 2002.

5. That the fact established as proven under point 60 occurred due to an error.

6. That the fact established as proven in point 67 had occurred in the context of a computer error resulting from a change of computer system in the accounting records of B… (switched to SAP).

7. That the recording referred to in the fact established as proven under point 72 was due to an error.

8. At the time of the initial allocation made to B… of the personal accident insurance premiums of its respective employees, the amount of 117,080.10€ was recorded in 2001 instead of the amount of 534,691.50€, actually paid to the insurance broker by the Group CC… with reference to B…'s share.

9. In 2001, the amount of 417,611.40€ actually borne by the Group CC… with personal accident insurance for the employees of B… was not recorded in the accounting records of the companies of the Group under any heading.

10. That the failure to record referred to in the fact established as proven under point 73 was due to an error.

11. Another of the costs whose deductibility was denied to D… by the AT for being undocumented, in the amount of 1,093.00€, resulted from an order for material that did not materialize, whereby it was annulled through an accounting operation of opposite sign.

A.3. Reasoning for the Established and Not Established Facts

With respect to the facts, the Tribunal is not obliged to pronounce itself on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish the proven facts from those not proven (cf. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, subparagraphs a) and e), of the RJAT).

In this way, the pertinent facts for the judgment of the case are chosen and delimited in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (cf. previous article 511, no. 1, of the CPC, corresponding to current article 596, applicable ex vi article 29, no. 1, subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the case file brought before the court, as well as the testimonial evidence produced, the facts listed above were considered proven, having relevance for the decision.

Statements made by the parties, presented as facts, were not established as proven or not proven, consisting of strictly conclusive affirmations, insusceptible of proof, and whose truthfulness must be assessed in relation to the concrete facts established above.

With regard to the facts established as proven in group ii., the AT contested the facts set out in points 24 to 29, though it is not considered that, in light of the evidence available, assessed in the context of the procedural framework of its production, it is susceptible to persist any reasonable doubt in that regard.

Indeed, with regard to points 24 to 28, the AT contested in arbitration that the assets in question relate to the process of merger by incorporation of the companies "DD…, S.A." and "EE…, S.A.". However, this was never questioned during the inspection procedure and the administrative review phase of the present contention, and it is certain that witness II… confirmed that these were the assets in question, and no evidence was presented suggesting that this was not the case.

Furthermore, the doubts raised by the AT concerning the testimony of this witness are either abstract in nature – such as the circumstance that the same only began working at the A… in 2007 – which do not invalidate the concrete knowledge demonstrated by the witness, including under the questioning exercised by the AT, or are irrelevant to the matter established as proven, such as the circumstance that – at the request of the court – the witness, in the course of her testimony, made statements of an opinative nature, which, obviously, has nothing to do with the facts established as proven and did not contribute to the judgment of proof.

With regard to point 29, only by error is the AT's contestation understandable, in that the fact in question is directly proven by doc. 22 attached by the Applicant, corresponding to the inspection report relating to the year 2006.

The facts to which points 60 and 61 refer were established as proven on the basis of the testimony of the first witness, JJ…, combined with doc. 3 of doc. no. 25 attached to the initial request. Indeed, nothing suggests that the payment of the invoice in question was not made by B…, in contrast to what was stated by the witness in question, corroborated by the document in question. It was also taken into account that the expense in question is an expense to which B… was obliged by virtue of the Concession Contract concluded with the Municipal Chamber of…, which was repeated annually, before and after the fiscal year in question, without notice of having been questioned, and that it is not demonstrated, nor even suggested that the same was, in that year, settled in another way, whereby a judgment of common sense and normalcy points, precisely, to the facts established as proven.

The facts to which points 67 to 75 refer were established as proven essentially on the basis of the testimony of the second witness questioned, KK…, combined with the documents presented by the Applicant under nos. 25 to 29.

The witness in question, making it clear that he did not have personal involvement in the facts in question, demonstrated solid knowledge of the procedures of the Applicant for accounting matters in question, and their evolution in the historical context, framing and giving a reasonable and comprehensible sense to the documentation presented by the Applicant.

The facts established as proven in points 77 to 79 rest on the testimony of the third witness, combined with doc. 30 attached by the Applicant. The witness in question revealed direct knowledge of the procedures of the Applicant relating to the matter in question, recognizing them in the document referred to.

The facts established as proven in points 87, 88, 92 and 93 result from the testimony of the fifth and sixth witnesses presented by the Applicant, LL… and MM…, assessed in light of the criteria already explained above, and in the testimony of the latter were also grounded the facts established as proven in points 89 to 91, and 98 to 100. The first, director of works and engineering, and the second, advisor to the Board of Administration, revealed proximate and detailed knowledge of the facts in question, in such a way as to leave no reasonable doubt as to their verification.

The facts established as proven in points 94 to 97, although contested by the AT in its submissions, result from documents 35 to 40 attached with the Initial Request, which integrate documentation directly related to the case in question, combined with the testimony of witness LL…, who framed and explained them. This same occurs with the facts established as proven in points 101 to 103, having by reference, in that case, document no. 43 attached with the Initial Request, and in points 105 to 107, having by reference documents no. 41 to 43.

The facts established as not proven in points 1 to 4 are due to the absence of sufficient proof in that regard.

Similarly, the fact established as not proven in point 5 is due to insufficient proof in that regard. Indeed, although witness JJ… suggested that invoicing to the CM, rather than to B…, occurred due to an error, the fact that such statements are unaccompanied by any complementary evidence to corroborate them does not allow this Tribunal to establish as proven, beyond any reasonable doubt, the fact in question.

The facts established as not proven in points 6 to 10 likewise result from the absence of sufficient proof in that regard. Specifically, with regard to the facts not established as proven in points 6, 7 and 10, witness KK… testified to the effect that it "must" have been the computer system that failed in the adjustments that needed to be made, a doubt which this Tribunal cannot overcome.

With regard to the facts established as not proven in points 8 and 9, as the AT correctly notes in its submissions, in docs. 26 to 29, there is no document referring to the year 2001, whereby the values relating to that year cannot, on the basis of the remaining available elements, be considered.

The fact established as not proven under point 11 results from insufficient proof in that regard.

B. LEGAL REASONING

In the present case, a series of distinct and unrelated questions are placed for resolution by this arbitral tribunal, namely:

i. Distribution to employees of results from prior fiscal years;

ii. Reinstatements and depreciation relating to assets acquired in used condition;

iii. Realizations of social utility;

iv. Costs not indispensable to activity;

v. Undocumented expenses;

vi. Reinstatements and depreciation that resulted from the use of depreciation rates higher than those provided for;

vii. Compensatory interest;

viii. Indemnificatory interest.

Let us then examine each of them separately.

i.

a. Position of the AT

Regarding the first question that is now to be resolved, the AT understands that, by virtue of the provision of no. 2 of article 24 of the IRC Code, in the version applicable at the time, "negative equity variations relating to gratifications and other remuneration for work of members of corporate bodies and employees of the company, by way of participation in results, contribute to the formation of the taxable profit of the fiscal year to which the result to which they relate pertains, provided that the respective amounts are paid or made available to the beneficiaries by the end of the following fiscal year.", and that, in accordance with no. 5 of the same article, "In the event that the requirement set out in no. 2 is not met, to the value of IRC assessed for the following fiscal year there is added the IRC that ceased to be assessed as a result of the deduction of gratifications that were not paid or made available to the interested parties within the indicated time limit, increased by the corresponding compensatory interest.".

Thus, the AT concludes, gratifications from the application of results were considered as negative equity variations, which deducted themselves from accounting results for purposes of determining taxable income, provided that the requirement set out in no. 5 was met, that is, they were paid or made available to beneficiaries, members of corporate bodies and employees, by the end of the following fiscal year, while gratifications attributed to employees of the company, by way of participation in results, contribute to the formation of taxable profit of the fiscal year to which the result to which they relate pertains, provided that the respective amounts are paid or made available to the beneficiaries by the end of the following fiscal year.

The AT further emphasizes that charges with remuneration, by virtue of the principle of period allocation, set out in no. 1 of art. 18 of the IRC Code, are attributable to the fiscal year to which such charge pertains, independently of the moment of its payment, that is, "are costs of the period in which the work was performed".

The AT also contends that, with regard to the so-called "balance gratifications", the legislator was more cautious, because it conditioned the deduction of the corresponding negative equity variations from the taxable profit of the fiscal year of which they constitute application, to the effectuation of the respective payment or making available by the end of the following fiscal year, which, in the case, would be 2003, whereby the deduction of the negative equity variation caused by the attribution of balance gratifications cannot occur in the fiscal year of payment or making available (2004), only being able to take effect in the fiscal year during which the services to be gratified were rendered.

Understanding the AT that this invocation of the principle of period allocation does not reflect any ex post facto reasoning, since the aforementioned principle is inherent in no. 2 of article 24 of the IRC Code, as it follows from the same that negative equity variations relating to gratifications and other remuneration for work of members of corporate bodies and employees of the company, by way of participation in results, contribute to the formation of taxable profit of the fiscal year to which the result to which they relate pertains, provided that the respective amounts are paid or made available to the beneficiaries by the end of the following fiscal year, and in the opinion of the AT, the legislator was peremptory in limiting in time the fiscal years that contribute to the application of the provision of no. 2 of article 24, it is not therefore a matter of any new reasoning but rather of a mere argument based on the reasoning always defended by the Respondent.

For the AT, since in the case, both B… and D… proceeded with the entry of the same negative equity variation, relating to gratifications to employees by way of participation in results decided to be attributed in the year 2003 for results obtained in the year 2002, in the years 2002 and 2004, and recorded such gratifications, that is, both the amount paid in 2003, in accordance with no. 2 of article 24 of the IRC Code, and the amount remaining of gratification, paid in 2004, precisely in the same manner, that is, as negative equity variation in field 237, of table 07 of mod. 22, in the aforementioned years of 2002 and 2004, such conduct clearly disrespects the provision of no. 2 of article 24 of the IRC Code.

From the AT's point of view, to assess the deductibility of gratifications attributed to employees of B… and D… in 2004 with reference to profits of 2002, one should not resort to art. 23 of the IRC Code, in whose subparagraph d) of no. 1 only are charges with remuneration recorded in the personnel cost account subsumable, whereas balance gratifications, being negative equity variations, do not pass through income accounts as they constitute an application of the profits of the fiscal year.

Also from the AT's point of view, the gratifications attributed to employees of B… and D… are regulated not in article 23 but in article 24 of the IRC Code which expressly refers to "gratifications and other remuneration for work of members of corporate bodies and employees of the company, by way of participation in results", it not being legitimate an interpretation, such as that made by the Applicant, which as soon as considers them as gratifications to include them in article 24, but then ends up saying that they are remuneration and that they fall under article 23 of the IRC Code, as personnel costs indispensable for the maintenance of the productive source, an interpretation which the AT considers does not fit either in the letter or in the spirit of the legislator, since if the latter wanted to consider such gratifications as costs, in accordance with article 23, it would not only have included them in an enumeration such as the one then set out in no. 1 of such article, but also would not have elaborated a norm with the content of article 24.

The AT argues that, even if article 23 of the IRC Code were to be applied, by virtue of the application of the principle of period allocation, which rests, in the first place, on a criterion of economic competence, the deduction of the negative equity variation caused by the attribution of balance gratifications cannot occur in the fiscal year of payment or making available (2004), only being able to take effect in the fiscal year during which the services to be gratified were rendered, since to this article 18 of the IRC Code obliges, which at the time of the facts established that "Profits and costs, as well as other positive or negative components of taxable profit, are attributable to the fiscal year to which they pertain, in accordance with the principle of period allocation.", whence it concludes that the determination of taxable profit links itself to a notion of profits and costs, and not of receipts and expenses, whereby profits and costs are attributed to the fiscal year that, not effectively supported in it, nonetheless pertain to operations that in that year are carried out, whereby, taking into account that the cost/negative equity variation was incurred and recorded in 2002, by virtue of the principle of period allocation, could only be attributed to that year/fiscal year of 2002.

Already with regard to a possible verification of double economic taxation of distributions of profits, by way of gratifications of employees, generated by the conjunction of the non-deduction of the corresponding negative equity variations in the sphere of the company, with its taxation in Personal Income Tax in the sphere of the employee, the AT understands that, although its occurrence was not desired by the legislator, as is shown by the provision of no. 2 of art. 14 of the IRC Code, in cases in which it can occur by impossibility of application of this normative provision, the legislator, unlike what is provided for profits distributed to shareholders, did not create any measure aimed at its elimination or mitigation.

Finally, the AT contends that its interpretation of the aforementioned articles does not violate the constitutional principle of taxation based on actual profit, since, if the legislator chose, in articles 23 and 24, the conditions for the acceptance of costs, one must consider that those that do not meet such requirements must be entirely borne by the company that opted to incur them despite them not being necessary, there being no legal or constitutional support that imposes that the generality of taxpayers must bear the part of the loss that results to the State from the acceptance of such costs, whereby it appears perfectly adequate and proportionate, taking into account the interests in conflict, of the State in the collection of public revenue aimed at satisfying collective needs and of the taxpayer in reducing its taxable profit, the limitation of legal acceptance of costs to the year in which they were incurred.

b. Position of the Applicant

The Applicant contends that the provision of article 24, no. 2, of the IRC Code allowed that gratifications attributed to employees, by way of participation in results, be considered as negative equity variations, provided that the respective payment was made by the end of the following fiscal year to which the result pertained, whereby companies could, through the consideration of a negative equity variation, deduct amounts relating to gratifications that they had decided to grant to their employees, in the fiscal year in which the results to which these gratifications pertained had been determined, notwithstanding the payment only coming to be made in the following fiscal year.

The Applicant also notes that the aforementioned legal provision incorporated, at the same time, an anti-abuse norm aimed at preventing the deliberation of the distribution of results to employees and the recognition of that distribution of tax relevance for purposes of determining taxable profit, without the result being in fact distributed, aimed at preventing a cost that had not effectively been incurred from being accepted as a tax cost, this being the reason why no. 5 of article 24 of the IRC Code established that, in the event that payment during the following year of the amounts deducted as gratifications in the prior year did not take place, the taxpayer should add the IRC that failed to be assessed as a result of the deduction made, increased by the corresponding compensatory interest.

For the Applicant, the aforementioned norm did not render impossible the consideration, for tax purposes, of amounts that subsequently came to be actually paid to employees, when — as happened in the case of the present litigation — the initially made deduction, for tax purposes, as a negative equity variation, was regularized, the Applicant understanding that the sole sanction that the Tax Law expressly establishes for the delay in payment of decided balance gratifications (and tax-deducted in the year of origin) is the restoration of the tax owed and the consequent assessment of compensatory interest.

The Applicant also notes that the ratio legis of the scheme in question results from the validity of a model of partial dependence of tax result on accounting result, in accordance with which corrections are applied to accounting result, and in the case of negative equity variations not reflected in the net result of the taxation period, deductible for tax purposes, we are faced with "tax costs that are not accounting costs", and that the deduction of such negative equity variations allows the anticipation of the tax consideration of a cost that does not yet find reflection in the accounting results of the company, which is why the tax legislator felt the need to place some limits on the aforementioned deductibility, whereby the aforementioned limit, according to the Applicant, has relevance only as a guarantee that that tax anticipation consideration comes to be reflected in the actual payment to employees of the gratifications in question.

The Applicant also draws attention to the fact that, in the case at hand, there is no artificial or abusive deduction of an expense not incurred in question.

The Applicant further considers that in the situation at issue there is no application of the aforementioned article 24, no. 2, of the IRC Code, since in 2002, the companies considered for the formation of their respective taxable profit, as negative equity variations not reflected in the net result of the fiscal year, the amounts that, after the closing and approval of the accounts of that fiscal year, which takes place already in 2003, they decided to distribute to their employees, and that, to the extent that, by 31 December 2003, such companies had not completed the entire distribution of results as they had decided to do, they added in 2003, in the respective IRC Declarations, Models 22, and precisely in accordance with no. 5 of article 24 of the IRC Code, the tax they had failed to assess and pay because they had taken into account in 2002, for the formation of taxable profit, amounts that were not, in fact, delivered to employees, having moreover paid the respective compensatory interest, whereby, in May 2004, upon submission of the Model 22 of 2003, the application of article 24 of the IRC Code would have been exhausted.

Hence, the Applicant continues, in the fiscal year 2004, B… and D… recorded and executed payment to their employees, as gratifications, of the amounts of, respectively, 353,771.01€ and 44,000.00€ — and included those amounts in field 237 of table 7 of the corresponding Model 22 and not in field 203 relating to negative equity variations, whereby the fixing of the tax scheme to which such payments must be subjected is not dependent on the application of article 24 of the IRC Code, turning instead to the provision of article 23 of the same normative code which establishes the general rules of deductibility of costs for tax purposes. Thus, the Applicant understands that, given that in that fiscal year of 2004 the relevant companies made payments in favor of their employees, in accordance with subparagraph d) of no. 1 of article 23 of the IRC Code, these are fully deductible, since there is no question of the remunerative nature or the execution of such payments to employees and, as such, the respective tax framework cannot be dissimilar from that applicable to the remaining remunerative payments made in 2004 by B… and D… to their employees.

The Applicant further states that if, in the sphere of the respective employees, under Personal Income Tax, such results are taxed, in light of the denial of deduction, by the employing company, of the costs with the attribution of gratifications to its employees, there occurs a situation of double taxation of income, which does not accord with the system of complementarity between the IRC and Personal Income Tax, especially the symmetry that is observed in this matter: tax-deductible cost on one side (company), taxable income on the other (employee).

The Applicant opposes the AT's argument to the effect that, even if article 24 of the IRC Code is not applicable, the costs in issue cannot be deductible in accordance with article 18 of the same Code. The Applicant understands that this is an innovative argument and that it had never been used by the AT in any phase of the inspection procedure, administrative review and even hierarchical appeal, and that the AT cannot base its acts ex post facto, and its acts must be assessed in judicial or arbitral proceedings with the content and meaning given to them at the time of their issue.

The Applicant further adds that the argument relating to the principle of period allocation, precisely the one that is enshrined in the aforementioned article 18 of the IRC Code, would in any case be inapplicable because the costs in question were in fact incurred in 2004 — since only in that year were the relevant payments carried out in favor of the employees, and only in that year was the right to receive them consolidated as remuneration of that precise year, and in 2003 the application of article 24 of the IRC Code was definitively closed, that is, the possibility of deduction of negative equity variation ceased to be in issue and consideration passed to the deduction of administrative cost related to remuneration paid to employees subject to the provision of subparagraph d) of no. 1 of article 23 of the IRC Code, further underscoring that the principle of period allocation is not an absolute principle, and that in cases where the AT had no prejudice from the deduction of a certain cost in another year than the one to which the cost pertains and that deduction did not result from voluntary or intentional omissions, aimed at operating transfers of results between fiscal years — precisely as occurs in the situation sub judice —, the tax relevance of the relevant cost should be admitted as determined by the principles of proportionality, justice and good faith, citing in this sense the judgment of the Central Administrative Court of the South, of 28 March 2007, issued in case no. 01551/06.

Finally, the Applicant invokes that the deduction of losses and costs is based on the requirement that tax on income should bear on the real economic strength of the taxpayer, such strength functioning as the presupposition and limit of taxation, which derives from the principle of taxation based on actual income provided for in article 104, no. 2, of the Constitution of the Portuguese Republic, whereby taking into account that, regarding gratifications actually paid to employees of B… and D… in the fiscal year 2004, article 24, no. 2, of the IRC Code has no relevance or application, and that article 23 of the same Code not only does not limit but expressly provides for the respective deductibility, then the understanding in the contrary sense contends with the aforementioned constitutional principle, whereby, from the Applicant's point of view, the interpretation that the AT makes of the norms set out in no. 2 of article 24 of the IRC Code and no. 1 of article 23 of the same code, to the effect of not permitting the deduction of gratifications paid in 2004 by the companies B… and D… to their employees, is unconstitutional due to violation of the provision of no. 2 of article 104 of the Constitution.

c. Appraisal

The situation that is presented here for decision is of simple factual configuration, verifying itself, in essence, that the Applicant and a subsidiary thereof, in the year 2003, decided to attribute to their employees, by way of gratification for the results of 2002, certain amounts which it recorded as negative equity variation of the latter year. Subsequently, not having, during the year 2003, paid in full the amounts they had decided to attribute to their employees, the taxpayers in question applied the provision, at the time, of no. 5 of article 24 of the IRC Code, and assessed the IRC that had failed to be assessed, as a result of the deduction from taxable profit of the amounts not paid, and also proceeded to the payment of the respective legal interest. Finally, having ended up paying to their employees the amounts owing, in the year 2004, they recorded them in that year, as negative equity variations, contributing negatively to the formation of taxable profit.

The AT, understanding that this was done in violation of the provision of article 24 of the IRC Code, proceeded to the correction now at issue, disallowing the amounts in question, and assessing the corresponding IRC.

With all due respect, it is understood that the AT has no reason here.

Indeed, the provision of article 24 of the IRC Code, at the time, was entirely respected by the Applicant and its subsidiary who followed the procedures determined therein. Hence, there is no violation, on the part of that entity, in any way, of the norm in question.

Actually, by the procedure prescribed by that norm having been followed, the gratifications in question ceased to have the nature of participation in results, to become simple gratifications – not prohibited by general law or by tax law. Indeed, by having been annulled in the fiscal year 2003, the gratifications paid in the fiscal year 2004, such gratifications ceased to have the nature of participation in 2002 results, in that the results of this year were restored by the correction made in 2003. It should be noted, moreover, that the IRC assessed and paid in obedience to the then provision of no. 5 of article 24 of the IRC Code, is not IRC of the fiscal year in which such operation takes place, but of the fiscal year in which the results for account of which the attribution of gratifications had been deliberated occurred, which is evidenced, from the outset, by the obligation to assess interest.

In this way, for account of the results of 2002 of the Applicant and its subsidiary, only the amounts actually paid in 2003 were distributed, since the amounts that were not, by virtue of the operation then prescribed by no. 5 of article 24 of the IRC Code, ceased to affect the results of 2002 and, consequently, to be attributed for account of the same.

On the other hand, the taxpayers are not prohibited from, for reasons of business management that are their own, granting gratifications to those whom, within the scope of their respective management decisions, they consider appropriate, provided that they meet the generic requirements of article 23 of the IRC Code.

Now, in the case, and from the outset, these were not questioned by the AT, nor does their non-verification form part of the grounds of the tax act being reviewed. On the other hand, it is evident and notorious that, in a case such as the present one, the attribution of gratifications to employees has a motivational purpose and, as such, is a business purpose.

It is not finally an obstacle to what has just been stated, the principle of period allocation, embodied in article 18 of the IRC Code, and regardless of whether it is, or is not, raised in article 24 of the same Code.

Indeed, nothing in the case file allows one to state that in the legal sphere of the Applicant and its subsidiary was born an obligation of payment to its employees in the year 2002. Since, in the absence of elements to the contrary, the deliberation of gratification for account of the results of 2002, will be nothing more than a promise of donation. Now, regarding this, citing the Judgment of the Supreme Court of Justice of 21-11-2006, issued in case 06A3608:

"It has been discussed in doctrine the admissibility of the contract-promise of donation. For some authors, this would not be an admissible business because, on one hand it would call into question the requirement of spontaneity, which is considered should preside over the donation and, on the other hand, the business being admissible, it would be worth as donation (cf. art. 954.°c)), consequently not being a true contract-promise, apart from the fact that the promise of donation could call into question the prohibition of donation of future assets (art. 942).

The Doctrine has been to the effect that it is possible and valid the promise of donation – cf. Eridano de Abreu, "Of donation of rights in personam" in Dir 84 (1952), pp. 217-235 (226 et seq.), Vaz Serra "Annotation Ac. STJ 18/5/1976" in RLJ 110 (1977), pp. 207-208 and 211-214, and BMJ 76; Antunes Varell, "Annotation Ac. 16/7/1981", in RLJ 116 (1983), pp. 30-32 and 57-64 (61 et seq,) Of Obligations in General Vol I 4th Edition p. 275 and Pires de Lima/Antunes Varela Civil Code Annotated in annotation to art. 940.°, n.° 9, p. 240. Also pronounces, though with hesitation, in affirmative sense, Ana Prata «The contract-promise and its civil regime», Coimbra, Almedina, 1995, pp. 305 et seq. (315)

In the Jurisprudence can be confronted the Judgments published in BMJ 361/ 515 and

J.R., Year 13, p. 537 and C.J., Year XX, tome 5, p. 131.(among others)

For the validity of the donation contract promise pronounced themselves the Judgments of 410/01 of the 6th Section in which the Counselor Afonso de Melo was the Rapporteur; and 407/01 of the 1st Section in which the Counselor Pinto Monteiro was the Rapporteur; BMJ 309/283, this commented by Antunes Varela in RLJ year 116 page 61 and following where it is stated:

«That, being an attribution solvendi causa "the contract promised does not represent a second donation, but cannot fail to be considered a gratuitous disposition (or attribution) made by the disposer in favor of the beneficiary, since it is made without any reciprocal or counter-service on the part of this". But, "the fact that the contract promised (…) does not constitute in itself a donation (due to lack of the spirit of liberality, proper to the disposition donandi causa), does not prevent it from integrating a donation, since its cause (the underlying legal relationship) is in the contract-promise marked by that spirit of liberality''.

We can thus conclude that the promise of donation is valid.

But one thing is the validity of the donation and another is knowing if the same is susceptible to specific performance, as determines Article 830 of the Civil Code.

Indeed, in the sense of non-specific performance of the valid promise of donation is unanimous the Doctrine and the Jurisprudence, arguing that «its nature justifies that the parties conserve the possibility of withdrawing from the contract until the conclusion of this, though incurring in responsibility for the breach of the contract promise» — M. J. Almeida Costa, Law of Obligations, p. 279; see also what was written in RLJ, year 118, p. 24 et seq. In the same sense, Antunes Varela, Of Obligations in General, p. 286. One can thus also conclude—

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