Summary
Full Decision
ARBITRAL DECISION
I - REPORT
A..., LDA., hereinafter designated as the "Claimant", with tax identification number ..., and with tax domicile in ..., ..., ...-... Lisbon, filed an application for constitution of a singular Arbitral Tribunal, in accordance with articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter designated as LRTA), in which the Tax and Customs Authority (hereinafter designated as the "Respondent") is summoned, with the objective of obtaining a declaration of illegality of the acts of corporate income tax (CIT) assessment no. 2017..., the act of reversal of CIT assessment no. 2015..., and the acts of assessment of compensatory interest nos. 2017... and 2017..., in the total amount of € 47,056.46, all relating to the tax period of the year 2014.
The application for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 26 January 2018 and automatically notified to the Tax and Customs Authority (TA).
Pursuant to article 6, paragraph 1 and article 11, paragraph 1, letter a) of Decree-Law no. 10/2011, of 20 January, the Deontological Council of the Administrative Arbitration Centre (CAAD) appointed the undersigned as arbitrator, who immediately accepted the appointment. The Parties were notified of the appointment of the arbitrator. The Respondent raised no objection, however, the Claimant, through a motion for recusal filed on 16.03.2018, came to oppose the appointment of the undersigned as arbitrator, alleging that "at the date of the facts of the case, the exercise of 2014, was a civil servant of the Tax and Customs Authority, where exercised the position of Deputy Director of Finance at the Directorate of Finance of Lisbon (...)". The undersigned, in his capacity as appointed arbitrator, submitted a response and in his arguments, in summary, states that "(...) I only ceased to exercise functions in the services of the Tax and Customs Authority on 31 January 2015 (...) and it is absolutely false the argument that I at the date of the facts (2014) exercised the position of Deputy Director of Finance at the Directorate of Finance of Lisbon, given that I did exercise that position but in the period from 10 January 2003 to 31 March 2010".
The motion presented by the Claimant and the response presented by the appointed arbitrator were examined and, through an order dated 27 March 2018, His Excellency the President of the Deontological Council of CAAD decided on the manifest lack of merit of the motion for recusal formulated by A..., LDA., regarding the appointment of the undersigned as arbitrator in the present arbitral proceedings.
In accordance with the provision set out in article 11, paragraph 1, letter c) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the singular Arbitral Tribunal was constituted on 16 April 2018.
On 24 April 2018, His Excellency the Director-General of the Tax and Customs Authority was notified in accordance with the terms and for the purposes provided for in article 17 of the LRTA.
On 28 May 2018, the Respondent presented its response and, in accordance with article 17, paragraph 2 of the LRTA, sent to be attached to the case file the administrative case file. In its response, the Respondent invokes the lack of material jurisdiction of the arbitral tribunal (dilatory exception) and advocates the dispensation of the production of witness evidence.
On 07 June 2018, the Claimant presented a motion stating its opposition to the exception of material jurisdiction raised by the Respondent in its response, on which the Tribunal will pronounce itself below, and the Claimant also, in said motion, highlighted the indispensable character of the witness evidence and the statements of parties requested in the application for constitution of the arbitral tribunal.
On 14 June 2018, considering that in accordance with the principles of the Arbitral Tribunal's autonomy in the conduct of proceedings, expedition, simplification and procedural informality (articles 19, paragraph 2, and 29, paragraph 2, of the LRTA), and taking into account that the exception raised could be addressed in the arbitral decision, and considering the extent of the evidence already produced and the nature of the issues to be decided, the arbitral tribunal issued an order in which it established the following procedural course:
To dispense with the production of witness evidence and statements of parties;
To dispense with the holding of the meeting provided for in article 18 of the LRTA;
To determine that, subject to the judicial vacation period (article 17-A of the LRTA), the proceedings continue with optional written arguments, to be submitted by the Parties in the simultaneous period of 20 days, in accordance with article 120 of the Tax Procedure and Process Code (TPPC) and article 91-A of the Code of Procedure in Administrative Courts (CPAC), applicable by virtue of the provisions of letters a) and c) of article 29, paragraph 1 of the LRTA;
To determine that, within the period defined in the preceding subparagraph, the Parties send to CAAD their respective briefs in editable format (Word);
To fix 15 October 2018 as the deadline for rendering the arbitral decision.
In light of the occurrences that meanwhile occurred in the proceedings, but in particular due to the regulatory developments that took place in the legal provisions governing the disputed matter (reform introduced in the CIT Code by Law no. 2/2014, of 16 January), the tribunal decided to conduct a thorough study of the subject matter of the present arbitral proceedings, wherefore, in accordance with article 21 of the LRTA, orders extending the deadline for rendering the arbitral decision were issued, which are recorded in the history of the arbitral proceedings contained in the CAAD application system.
On 24 July 2018, the Claimant communicated to His Excellency the President of CAAD the filing of an appeal of the arbitral order of 14 July 2018, in the part in which it decides "to dispense with the production of witness evidence and statements of parties". The Claimant filed the appeal of the arbitral order invoking article 27 of the LRTA, with the consequent application of the subsidiary regime applicable to the appeal procedure, by virtue of the provisions of the Tax Procedure and Process Code (TPPC) and the Code of Civil Procedure (CCP), which in the perspective of the Claimant, by virtue of the provisions of article 29 of the LRTA, are applicable to its appeal filed against the arbitral order. On 04 September 2018, the Claimant informed the arbitral tribunal that it had proceeded with the filing of the appeal in the Central Administrative Court of the South, to which case number 83/18.7BCLSB was assigned.
The arbitral tribunal, mindful of the special appeal regime established in the LRTA, decided not to react immediately to this motion of the Claimant, reserving its pronouncement on the appeal filed for the moment of rendering the arbitral decision, which is why it also did not pronounce itself regarding the successive motions of the Claimant (17.10.2018, 20.12.2018 and 27.02.2018) invoking suspension of the arbitral proceedings, which it will do now, at this moment, which corresponds to the rendering of the arbitral decision.
The LRTA, approved through Decree-Law no. 10/2011, of 20 January, was designed under the legislative authorization granted to the Government through article 124 of Law no. 3-B/2010, of 28 April, and the legislator established the object, sense and scope of the legislative authorization, whereby in the provisions thereof it fixed the scope of the appeal regime to be established in the LRTA, namely it pre-established that the admissibility of appeal in the arbitral proceedings should observe, in particular:
The establishment, as a rule, of the non-appealability of the sentence handed down by the arbitral tribunal, providing for the possibility of appeal to the Constitutional Court only in cases and in the part in which the arbitral sentence refuses to apply any norm on the ground of its unconstitutionality or applies a norm whose unconstitutionality has been raised;
The definition of the regime for annulment of the arbitral sentence on the grounds, in particular, of the failure to specify the factual and legal grounds of the decision, the opposition of the grounds with the decision and the failure to rule on issues that should be examined or the ruling on issues that should not be examined by the arbitral tribunal.
The legislator of the LRTA established the appeal regime in strict observance of the limitations established by the legislative authorization, it being unequivocal that it was the legislator's intention to establish an extremely closed and restrictive regime, only admitting appeal of the final decision of the arbitral proceedings, whether or not it examines the merit of the request for arbitral pronouncement, thus barring any type of appeal of interlocutory acts, even if they pronounce on substantive aspects, or procedural acts. In arbitral proceedings, in accordance with articles 25 and 27 of the LRTA, appeal is only admissible of the arbitral decision, that is to say of the decision that terminates the arbitral proceedings, and in the exact terms established in those provisions, without prejudice to the appellant invoking in the appeal of the final decision any nullity or illegality committed during the course of the arbitral proceedings.
In this measure, the Claimant cannot, invoking the subsidiary application of the provisions of the TPPC and CCP in matters of appeal, attempt to file an appeal of an order of the arbitral tribunal, this being nothing more than a procedural and interlocutory or preparatory act of the arbitral decision. On the other hand, it is important to state that, mindful of the procedural principles established in article 16 of the LRTA, and in accordance with the rules of experience and the free conviction of the arbitrators, the tribunal is free in the assessment of the facts and in the determination of the evidential production procedures. It should also be emphasized that, in the procedural course, the tribunal guaranteed equality of the parties with no violation of the principle of contradiction, as the Parties were given the opportunity to formulate the defense of their legitimate interests, and they proceeded to produce arguments as they deemed pertinent. Thus, in light of the special appeal regime established in the LRTA, the arbitral tribunal considers inadmissible the appeal presented by the Claimant and, consequently, the arbitral proceedings are not suspended, being thus time to render the arbitral decision.
Considering that the deadline for voluntary payment of the assessed tax and compensatory interest was set for 10 November 2017, in light of the provision of article 10, paragraph 1, letter a) of the LRTA, the request for arbitral pronouncement is timely and, in accordance with the provisions of articles 4 and 10, paragraph 2, of the LRTA and article 1 of Order no. 112-A/2011, of 22 March, the Parties enjoy legal capacity and standing and are represented in accordance with the law.
The arbitral proceedings are not affected by nullities, but the Respondent in its response raised the material jurisdiction of the arbitral tribunal, whereby constituting this a dilatory exception, which, in accordance with article 576, paragraph 2, of the Code of Civil Procedure, applicable by virtue of letter e) of article 29, paragraph 1 of the LRTA, precludes the examination of the merits of the request for arbitral pronouncement, it is necessary to examine and assess the merit or otherwise of the exception invoked by the Respondent.
The Respondent bases the lack of jurisdiction of the arbitral tribunal on the request for condemnation of the TA formulated by the Claimant. In fact, in the final part of its request the Claimant states that the "TA shall be condemned to restitution of the corresponding amounts disbursed by the Claimant, in the amount (partial) of € 42,606.41, plus indemnificatory interest, accrued and to accrue, until full payment, under article 43 of the General Tax Law". It is for the tribunal to decide the questions of fact and law that have been invoked by the Parties, however, it must do so in accordance with its free conviction and the application of the law and the right. In this measure, it is the tribunal's conviction that the restitution of amounts unduly paid, in this case or in any other of this nature, is the corollary of the success of the request regarding the assessment of the legality of the challenged tax acts and not a consequence of an autonomous condemnation directly aimed at that end. Thus, for the tribunal the substance of the Claimant's request comes down to the assessment of the legality of the tax acts of assessment of tax and compensatory interest identified in the request for arbitral pronouncement. In light of the above and, mindful of the provisions of article 2, paragraph 1, letter a) and article 4 of the LRTA, the tribunal declares the exception invoked by the Respondent to be without merit, whereby it is competent to proceed with the assessment of the disputed matter, proceeding next to the assessment of the merits of the Claimant's request.
I - 1 - CAUSE OF ACTION
The cause of action of the request for arbitral pronouncement consists of:
The alteration of the taxable profit in the context of Corporate Income Tax (CIT) relating to the tax period of the year 2014, as a result of the TA, in the course of a tax inspection procedure, having disregarded as a tax-deductible expense the amount of € 205,969.00 paid by the Claimant to company B..., as a result of the services rendered by the latter in the intermediation of the sale of fractions of the property located at ..., no. ..., in Lisbon.
The disregard of this amount led to an additional assessment of CIT for the year 2014, plus the respective compensatory interest.
The Claimant considers that the amount of € 205,969.00 corresponds to the value of the services rendered by B..., which were relevant and contributed to the achievement of income subject to CIT in the year 2014.
I - 2 OF THE RESPONDENT'S RESPONSE
2.1 The Respondent considered that the correction to the taxable profit of the year 2014, in the context of CIT, is legal, insofar as the amount of € 205,969.00, in light of the provisions of article 23 of the CIT Code cannot be considered as a tax-deductible expense, given that the Respondent did not demonstrate any connection between those expenses and the activity carried out by it, but also did not demonstrate the objective intent that led it to resort to that entity and those services, in such a way that it is not possible to establish a causal and justified relationship with the activity of the company, thus putting in question the tax deductibility thereof.
I - 3 ISSUES TO BE DECIDED
The singular arbitral tribunal must decide on:
3.1 Whether or not to consider as an expense the amount of € 205,969.00 paid by the Claimant to B... in the form of service provision, under a service provision agreement, with a view to promoting and marketing the properties subject to commercialization, namely the international promotion sought by the Claimant, especially in the Chinese market.
3.2 Whether or not there exists a causal relationship between the services rendered by B... and the income obtained by the Claimant in the sale of certain fractions of the property located at ..., no. ..., in Lisbon.
3.3 The legality of the assessment of CIT no. 2017..., in the amount of € 42,163.62, the reversal of the assessment of CIT no. 2015..., in the amount of € 1,040.78, and the assessments of compensatory interest nos. 2017... and 2017..., respectively, in the amount of € 86.22 and € 3,765.84), which totals the overall amount of € 47,056.46. This amount was paid by the Claimant on 06.11.2017.
3.4 Partial annulment of the above-mentioned tax acts, insofar as the Claimant accepts part of the correction made by the TA to the taxable profit of the year 2014.
3.5 Condemnation of the Respondent to the payment of indemnificatory interest, under the provisions of article 43 of the General Tax Law (GTL) and article 61 of the TPPC.
II - ON THE MERITS
II -1 - THE FACTS
II - 1 - 1 FACTS ESTABLISHED
The Claimant company (A...) is a subject to Corporate Income Tax (CIT) and a mixed subject for Value Added Tax purposes, having as its main activity CAE 68100, corresponding to the Purchase and Sale of Real Estate, and secondary activity CAE 41100 – Real Estate Development (development of Projects and Buildings).
In its activity the Claimant acquires real estate and proceeds to its rehabilitation and remodeling with a view to its subsequent resale at a profit margin. Therefore, the real estate is recorded in the Claimant's accounting as inventories.
The Claimant, as a rule, complies normally with its tax obligations, both principal and ancillary obligations.
In the context of the crisis that Portugal experienced from the year 2011 onwards, and like all entities classified in the real estate sector, the Claimant's activity in the years prior to 2014 experienced a significant decline in the volume of business transactions.
The property located at ..., no. ..., in Lisbon, acquired by the Claimant was subject to remodeling and placed on the real estate market, with 29 apartments and 2 shops for sale, after obtaining the occupation permit on 06.05.2011. However, as a result of the real estate crisis, the Claimant only managed to sell 6 apartments in the 2nd half of 2011, 4 apartments in the year 2012 and 1 apartment in the year 2013.
All real estate inventory was mortgaged in favor of C..., in the amount of € 3,400,000.00, which had been used to finance the acquisition and remodeling of the property located at ..., no. ..., in Lisbon.
The market crisis and the high financial charges that the Claimant had to bear were a source of great concern, as they put into question its sustainability and viability.
With the introduction of the legal regime of "Golden Visas" or "Golden Visa" the Claimant decided to initiate contacts with company B..., with headquarters in Malta and operational offices in Lisbon, given its international track record in providing marketing services and prospecting of investors from the Chinese market who wished to obtain "Golden Visas".
The Claimant's structure was insufficient and lacked the knowledge and experience for approaching the international market, which is why it chose to resort to specialized services for the promotion of Portuguese real estate to potential foreign investors, namely from Asian countries, with a predominance of China.
To that effect, on 28 November 2013, the Claimant entered into an agreement with the Maltese law company B..., hereinafter designated as B..., a Service Provision Agreement, which was the basis of the services rendered to the Claimant, in relation to which B... invoiced services in the amount of € 205,969.00, and the payment of which was made through bank transfer.
The service provision agreement was reduced to writing and therein were specified the services to be provided by B... as well as the service commission to be charged by the latter in relation to the promotion and marketing services of the property located at ... to potential Chinese investors. The amount to be paid by the Claimant to B... was established at the percentage of 14% of the potential commercialization value.
As a result of the promotion services rendered by B..., a number of potential interested parties visited Portugal in 2014 for the acquisition of fractions of the property at ..., duly identified by the Claimant, and which led to the sale of 6 fractions of the said property to Chinese citizens.
B... promoted the disclosure and commercialization of the property in the international market, namely in China, therefore, in light of the visit to Lisbon of potential foreign investors, the Claimant had to contract real estate mediation services, comprising the visit to the property, the presentation of the Portuguese real estate market, the carrying out of bureaucratic and administrative procedures, as well as the sale process, with entities based in Portugal, insofar as it did not possess internal structure that would allow it to develop the aforementioned activities. In this measure, the Claimant contracted the services of real estate mediators D... and E..., whose activities were restricted to the national market and were complementary to the activities developed by B... with regard to the 6 fractions sold to Chinese investors.
To the national companies the Claimant paid a sales commission in the amount of 4%, which was accounted for as expenses in the SNCA account # 622351 – "Commissions - national market". The commission paid by the Claimant to B... was accounted for as expenses in the SNC account # 6221003 – "Other specialized works".
As a result of the promotion carried out by B... in the Asian market, the Claimant managed to sell real estate to Chinese citizens in the total amount of € 1,966,500, which represented a significant increase in income subject to CIT.
In a purpose of transparency and good faith, prior to payment of the services rendered, the Claimant submitted to the consultation of the Directorate of CIT Services the invoices issued by B... with the purpose of certifying that they were equipped with the legal requirements pertinent to their accounting recognition and consideration of the value of the services rendered as a tax-deductible expense for the purpose of determining taxable profit. The request formulated by the Claimant as well as the clarification provided by the services of the Tax and Customs Authority appear in the present arbitral proceedings and were attached by the Claimant.
In the year 2014, the expenses incurred by the Claimant with the services rendered by B... amounted to € 205,969.00, and the services rendered by the national mediators (D... and E...) totaled the amount of € 76,005.44, all relating to the commercialization of the fractions of the property located at ..., no. ..., in Lisbon.
In the context of its powers of tax inspection, in the year 2017, the tax inspection services of the TA conducted an external tax inspection procedure to the tax period of 2014, of partial scope and with focus on CIT, VAT and withholding taxes.
During the course of the tax inspection procedure the Claimant presented the requested documents, provided the requested clarifications, exercised the right to be heard, as well as recognized and regularized the error regarding the improper deduction of VAT, in the amount of € 47,372.87, having presented the amended return, as well as accepted the correction of the amount improperly accounted for as expenses of a commission paid to F..., in the amount of € 18,204.00, which related to a mediation contract entered into with another entity that was, at the time, the legitimate owner of the autonomous fraction in question.
What the Claimant does not accept is the disregard as a tax-deductible expense of the amount of € 205,969.00 paid to B... and relating to the services rendered by that entity in the promotion and disclosure in the international market (Chinese) of the fractions of the property located at ..., no. ..., which allowed the sale of 6 fractions, the commercialization of which would not have been possible without the collaboration and services rendered by B....
As a result of the tax inspection procedure, the TA identified VAT owing in the amount of € 47,372.87, to the regularization of which the Claimant proceeded, as well as identified the accounting of an expense (amount paid to F...) that cannot be attributed to the Claimant, the correction of which the latter does not contest, accepting to proceed with the payment of the CIT owed. The TA disregarded as a tax-deductible expense the amount paid by the Claimant to B... in the amount of € 205,969.00, and this correction the Claimant does not accept because it corresponds to services rendered by B... which were decisive for the sale of 6 fractions of the aforementioned property to Chinese investors.
In light of the corrections made by the TA in the course of the tax inspection procedure, the fiscal result had an increase in the amount of € 176,800.13, having changed from € 2,486.41 to the amount of € 179,286.54, an amount which determined the reversal of the assessment and the assessments of CIT and compensatory interest of the year 2014, above identified and which constitute the subject matter of the request for pronouncement of the present arbitral proceedings, the Claimant not having challenged the CIT relating to the value of the commission paid to F... and improperly accounted for by the claimant as a tax-deductible expense. In this measure, the subject matter of the request for arbitral pronouncement is restricted to the disregard of the amount paid by the Claimant in the amount of € 205,969.00 and subsequent assessments of CIT and interest. It should be noted that the VAT improperly deducted by the Claimant was regularized in favor of the State and therefore should be considered as a tax cost.
The Claimant alleges lack of substantiation and waiver of the right to be heard regarding the assessment of compensatory interest. It should be noted that the assessment of compensatory interest is the corollary of the delay in the assessment of tax and the TA having proceeded to make corrections to the taxable profit of the year 2014, which determined the additional assessment of CIT, it is necessary, in accordance with the law (article 35 of the GTL and article 102 of the CIT Code), to assess compensatory interest, which are assessed together with the tax and are included in the principal debt (no. 8 of article 35 of the GTL), so its enforceability stems from the substantiation of the tax assessment acts and its evidence or demonstration is carried out in the demonstrative note of the tax assessment (no. 9 of article 35 of the GTL), therefore, equally, there is no waiver of formality in the context of the right to be heard relating to the assessment of compensatory interest.
The Claimant disagrees with the disregard as a tax-deductible expense of the amount of € 205,969.00 paid to B..., insofar as the services rendered by the latter are real and effective and contributed directly to the commercialization of the property at ..., no. ..., in Lisbon, having resulted in the actual sale of 6 autonomous fractions to Chinese clients.
The services rendered by B... correspond to the objectives that were fixed in the "Service Provision Agreement" entered into between the Claimant and B..., and have the respective documentary support in the said agreement and in the invoices issued by the service provider, and the same determined an increase of more than 30% in the average commercialization prices of the real estate, whereby such activity contributed directly to the formation of income subject to CIT.
The intervention of B... and of the national mediators (D... and E...) is, in the Claimant's perspective, justified, insofar as the scope of action is absolutely disparate, given that B...'s action was aimed at the promotion and marketing of the fractions of the property in the international market and the action of the national mediators was limited to the national market and to the complement in national territory of the activity developed by B... in the Chinese market, having been essential to receive the persons, follow up and carry out the activities with a view to the sale of the fractions to Chinese clients.
The tax inspection procedure to the tax period of the year 2014 was authorized by service order no. OI2016..., and was of partial scope.
In the course of this tax inspection procedure and having identified entries in the Claimant's accounting, of the year 2014, in the item "Specialized works" amounts whose supporting documents did not clearly identify the nature of the services acquired, the tax inspection services proceeded to notify the Claimant to identify, in relation to the invoices issued by B..., the nature of the services rendered by that entity and to relate those expenses with the income obtained and subject to CIT.
The tax inspection services considered that no justification for the effectiveness of the services rendered and indicated in the invoices issued by B... was presented, nor was any connection established that would allow concluding that those service provisions relate to the promotion, advertising or marketing of any of the real estate commercialized by the Claimant.
The Tax inspection services considered that in relation to all fractions sold to foreign citizens, the Claimant resorted to two national real estate mediators, having been left to demonstrate the effectiveness and adequacy of the services rendered by B..., and also noted that it cannot be overlooked the possibility that the amount invoiced by B... is inflated compared to what an intervention for purposes of real estate intermediation would justify for the commercialization of the fractions of the property in question.
In light of the reasons contained in the report of the tax inspection procedure, which forms an integral part of the documentary evidence put forward in the present arbitral proceedings, and which were adequately reproduced in the Respondent's response, the TA concluded that "(...) the expenses relating to entity B... are fiscally disregarded in the exercise of 2014, with the amount of € 205,969.00 being added to box 07 field 752 of model 22. Given the foregoing, the fiscal result for the year 2014 is changed from € 2,486.41 to the amount of € 179,286.54, determined as follows:
– disregard of expenses not accepted in accordance with article 23, in the amounts of € 205,969.00 (a) and € 18,204.00 (b) [this correction identified in b) was not disputed by the Claimant].
- VAT (expense fiscally accepted in CIT) in the amount of € 47,372.87 (c)
Therefore (a) + (b) – (c) = 205,969.00 + € 18,204.00 - € 47,372.87 = € 176,800.13
Corrected result = € 2,486.41 + € 176,800.13 = € 179,286.54".
The tax inspection considered that the supporting documentation for the services rendered by B... does not contain the essential elements that would allow clearly identifying the nature of the services and does not make it feasible to assess the relationship of those services with the activity of the Claimant, putting in question, both the legitimacy and the consistency of those expenses to guarantee income subject to CIT.
The Respondent argues that the Claimant did not demonstrate any connection between the expenses relating to the invoices issued by B... and the activity carried out by it, and also did not demonstrate the intent and objective that led it to resort to that entity and those services, in such a way that it is not possible to establish a causal and justified relationship with the productive activity of the company, putting in question the tax deductibility of the amount in question.
II-1-2 FACTS NOT ESTABLISHED AND SUBSTANTIATION OF THE FIXING OF THE FACTUAL MATTER
There are no essential facts relevant to the assessment of the merits of the case, which have not been established.
II - 2 - MATTERS OF LAW
In order to decide on the issues to be decided, it is necessary to list and examine the applicable law.
2.1 The taxable profit of subjects to CIT with organized accounting is determined in accordance with the provisions of articles 3, 17 and following of the CIT Code, with the corrections that in accordance with the law are necessary, and its taxation is based fundamentally on its actual income. Article 23 of the CIT Code, in the wording introduced by Law no. 2/2014, of 16 January, and with legal effect from 01 January of the year 2014, provides that for the determination of taxable profit, all expenses and losses incurred or borne by the subject for obtaining or guaranteeing income subject to CIT are deductible. On the other hand, the provision of letter a) of paragraph 2 of article 23 of the CIT Code establishes that expenses and losses relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general production, conservation and repair expenses, are considered to be included in paragraph 1 of that article.
2.2 Notwithstanding the TA continuing to argue for the indispensability of costs and the direct connection of the expense with income for its consideration in the formation of taxable profit, it is important to emphasize that with reference to all expenses and losses incurred by the subject for obtaining or guaranteeing income subject to CIT, the legislator abandoned the concept of indispensability, which was part of the previous wording of paragraph 1 of article 23 of the CIT Code, and which case law and doctrine had already been interpreting in a broad sense, moving away from the requirement of a necessary causal link between expenses and income.
2.3 It should first be noted that the new wording of article 23 of the CIT Code, introduced by Law no. 2/2014, aims to implement a greater degree of certainty in the concrete application of deductibility criteria, whereby the legislator chose to establish as a general principle that expenses related to the activity of the subject and incurred or borne by it are deductible, based on the idea that the connection with the business activity is sufficient, regardless of the actual contribution to the income subject to tax, an assertion drawn from the final report of the Commission for the Reform of Corporate Income Tax, dated 30 June 2013.
2.4 In this line of reasoning, in the judgment of the Supreme Administrative Court (SAC, handed down in case no. 0372/16, dated 15.11.2017, although the facts in question related to the year 2009, it was emphasized that "[i]n the understanding that case law and doctrine have been adopting regarding indispensability as a requirement for a cost to be deductible in the determination of the taxable matter for purposes of CIT (see article 23 of the CIT Code in the wording prior to 2009), the finalistic view is completely removed, according to which a cause-effect relationship, of the type conditio sine qua non, between costs and profits would be required. In the same understanding, a cost will be accepted fiscally provided that, in a judgment made at the time it was incurred, it is suitable to the productive structure of the company and to the obtaining of profits, and the TA can only disregard as fiscal costs those that do not fall within the scope of the activity of the taxpayer and were incurred, not in the interest of the latter, but for the pursuit of other objectives".
2.5 To this end, emphasis should be given to the position of Professor Rui Morais, referred to on pages 86 and 87 of his Notes on CIT, Coimbra 2007, in which he states that "the invocation of the rule of cost indispensability can never be used to substitute the judgment of convenience and opportunity of the charges assumed, as they resulted from the decision of the governing bodies, by another judgment, also of a business nature made by the tax administration or by the courts". He reinforces this idea by saying that "the question of whether a cost should or should not be deemed indispensable should be resolved on the basis of the objective intent of the transaction, that is, the business purpose test. We believe it is reasonably clear the scope of the norm: to refuse tax participation in some of the charges borne by the subject (...). If the assumption of the charge was preceded by a genuine business motivation (...) the cost is indispensable. When it should be concluded that the charge was determined by other motivations (personal interest of shareholders, managers, creditors, other companies in the same group, business partners, etc.) then such cost should not be deemed indispensable".
2.6 In the judgment of the Central Administrative Court of the South (CACS), handed down in case no. 74/01.7BTLRS, dated 14.02.2019, case law is established establishing that "[t]he requirement of indispensability of a cost has been jurisprudentially interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis from an economic-business perspective, in the perception of a relationship of economic causality between the assumption of a charge and its realization in the interest of the company, mindful of the corporate objective of the commercial entity in question, being barred to the Tax Administration actions that put into question the principle of freedom of management and autonomy of the will of the subject. Nevertheless, if the Tax Administration has reasonable grounds to doubt the insertion in the corporate interest of a certain expense, the burden of proof lies with the taxpayer that such operation falls within its corporate scope. As for the framework under the aforementioned article 23 of the CIT Code, three jurisprudential contributions should be mentioned regarding the application of such normative: a) It is the understanding of case law that the Tax Administration cannot assess the indispensability of costs in light of criteria relating to the opportunity and merit of the expense of a subjectivist nature. A cost is indispensable when it relates to the activity of the company, and costs foreign to the activity of the company will only be those in which it is not possible to discern any causal nexus with the profits or gains (or with the income, in the current expression of the code - see article 23, no. 1, of the CIT Code), explained in terms of normality, necessity, congruence and economic rationality; b) An indispensable cost does not have to be a cost that directly implies the obtaining of profits. There are various costs that only mediately fulfill that function and that for this reason are not considered indispensable, in accordance with article 23 of the CIT Code; c) The question of the burden of proof of the indispensability of the cost bypasses the presumption of veracity of correctly organized accounting (see article 75, no. 1, of the GTL), for, the veracity (existence and amount) of the accounted expense is not questioned but its relevance, in light of the law, for tax purposes, in this case, its qualification as a deductible cost, under the cited article 23 of the CIT Code".
2.7 In turn, on page 215, in "The Limits of Tax Planning", Coimbra 2006, Professor Saldanha Sanches notes that "knowing whether a certain cost corresponds or not to the most effective defense of the interests of the company is a question that cannot be resolved by attributing a power of State intervention (...) so as to make a judgment of merit on a certain business management option, just as it cannot validate the qualification of the expense as a cost by subjecting it to the condition of verification a posteriori of the actual generation of profits".
2.8 In this line of thinking, it must be concluded that the fiscal relevance of an expense depends solely on its connection with the activity of the company, regardless of the merit of the business management option that was followed in the assumption of that charge, with only expenses that were determined by other motivations to be ruled out.
2.9 Now, the expenses borne by the Claimant for the services rendered by B... were determined with the objective of increasing business activity, namely by the increase in the number of fractions commercialized compared to previous years, which has unquestionably been achieved, in addition to there having been an increase in the value of commercialization and sale of fractions compared to what occurred in previous years.
2.10 It is absolutely irrelevant for assessing the indispensability of the expense, in the perspective that it contributed to the formation of income subject to CIT, the affirmation or the considering that the expenses may be inflated, insofar as, as stated in the judgment of the SAC, handed down in case no. 01432/17, dated 04.04.2018, "the TA cannot scrutinize the goodness and opportunity of the economic decisions of the company's management, under penalty of interfering with the freedom and autonomy of management of the company".
2.11 The expenses borne by the Claimant are based on a service provision agreement and are duly documented by invoices, whereby nothing allows concluding that they do not correspond to actual services, being evident from the outset that the services occurred in the international market, namely in the Chinese market, which is why several interested persons came to Portugal for the acquisition of fractions of the property located at ..., no. ..., in Lisbon, diligences that led to the actual sale of six fractions of the said property.
2.12 It is thus unquestionable that there is a causal nexus between the services rendered by B... and the business activity developed by the Claimant, whereby, in accordance with article 23 of the CIT Code, those expenses borne by the Claimant, in the amount of € 205,969.00, meet the legal requirements to be considered as fiscal expenses, whereby, in this measure, the Claimant's request must be considered successful and, consequently, the assessment of CIT relating to the year 2014 must be annulled, in the corresponding part.
2.13 As for the annulment of the assessments of compensatory interest, it should be emphasized that this type of interest constitutes compensation for the tax creditor, with a view to compensating it for the delay in the assessment and delivery to the State coffers of the tax that is, in accordance with the law, due. Responsibility for the payment of compensatory interest depends on the existence of a situation in which there is tax to be assessed resulting from acts, omissions or inaccuracies that lead to a delay in the structuring of an assessment, in this case, the self-assessment of CIT made by the subject relating to the tax period of the year 2014. The delay in assessment or delivery of tax when attributable to the subject presupposes culpable conduct, even if negligently, which is why compensatory interest can be configured as having the nature of a legal penalty clause, taking the form of an aggravation "ex lege" to the tax owed, being included in the assessment thereof and collected together with it, having the same payment deadlines and collection regime.
2.14 Compensatory interest are assessed together with the tax and are included in the principal debt (nos. 8 and 9 of article 35 of the GTL), and in the assessment of compensatory interest the values of the tax debt and interest must be discriminated, explaining clearly the respective calculation and distinguishing it from other due performances. This requirement for demonstration of the calculation of compensatory interest is part of the general duty of express and accessible substantiation of tax acts, imposed by no. 3 of article 268 of the Constitution of the Portuguese Republic and nos. 1 and 2 of article 77 of the GTL.
2.15 Upon reviewing the demonstrative notes of the assessment of the tax and compensatory interest above identified, it is verified that these legal requirements were observed by the services of the TA, whereby there is no lack of substantiation of the assessment of compensatory interest, nor was there any violation of the principle of participation as, in the course of the tax inspection procedure, the Claimant was notified in accordance with article 60 of the GTL and article 60 of the Supplementary Regime for Tax and Customs Inspection Procedures (SRTCIP) and, in accordance with the law, there was no place for any other notification of the Claimant with a view to the exercise of the right to be heard connected with the assessment of compensatory interest.
2.16 Given that the Claimant improperly entered in its accounting an expense in the amount of € 18,204.00, action which implied delay in the delivery of tax to the State coffers, compensatory interest connected with the tax due and relating to the correction made by the TA relating to that amount are shown to be due, whereby, in this part, the Claimant's request cannot be considered successful in its entirety, but only and in the part relating to compensatory interest connected with the assessment of CIT relating to the value of expenses relating to the services rendered by B....
2.17 Accordingly, in accordance with article 100 of the GTL, the TA must proceed with the immediate and full restitution of the situation that would have existed if the illegalities that justify, in accordance with the tribunal's decision, the success of the request for arbitral pronouncement had not been committed.
II - 3 - OF INDEMNIFICATORY INTEREST.
3.1 Indemnificatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error attributable to the services which results in payment of the tax debt in an amount higher than legally due (no. 1 of article 43 of the GTL). In accordance with no. 5 of article 24 of the LRTA the right to payment of indemnificatory interest may be recognized in the arbitral proceedings.
3.2 The payment of indemnificatory interest presupposes that the tax subject to the assessments placed in question has been paid, which is confirmed in relation to the assessment of CIT and compensatory interest of the year 2014, the payment of which was made by the Claimant on 06 November 2017.
3.3 In this measure, having regard to the success of the Claimant's request in relation to expenses in the amount of € 205,969.00, relating to the invoices that cover the services rendered by B..., and the partial success regarding compensatory interest, insofar as in relation to CIT resulting from the correction to taxable profit in the amount of € 18,204.00, in accordance with the provisions of article 35 of the GTL and article 102 of the CIT Code, compensatory interest connected with the tax relating to this latter correction are shown to be due, indemnificatory interest must be paid in accordance with article 43 of the GTL and article 61 of the TPPC, in relation to the amount of CIT and compensatory interest that are actually shown to be undue, the assessment of indemnificatory interest to cover the time period that elapsed between the undue payment and the date of issue of the respective credit note.
III - DECISION
In the terms and with the grounds set out above, and having the Tribunal formed its conviction on the basis of the facts evidenced in the documentary evidence presented by the Parties and in the reasons adduced, as well as in the doctrine and case law cited in all documents of the arbitral proceedings, the Arbitral Tribunal decides:
To judge the request for arbitral pronouncement successful in relation to the assessment of CIT, of the year 2014, resulting from the disregard as a tax-deductible expense of the amount of € 205,969.00, relating to the services rendered by B..., with the consequent and corresponding annulment of the assessment of CIT;
To judge the assessment of the respective compensatory interest successful, partially and in the part that are connected with the assessment of CIT annulled in accordance with the preceding subparagraph;
That, as a result of the annulment of the assessments of CIT and compensatory interest, the TA must proceed with the restitution to the Claimant of the amounts of tax and interest unduly paid;
To judge successful the request for condemnation of the Tax and Customs Authority to the payment of indemnificatory interest, in accordance with article 43 of the GTL and article 61 of the TPPC, in relation to the amounts of CIT and compensatory interest that are shown to be unduly paid.
IV - 1 VALUE OF THE CASE
The value of the case is set at € 42,606.41 (Forty-two thousand six hundred and six euros and forty-one cents), in accordance with the provisions of articles 3, no. 2 of the Regulation of Fees in Tax Arbitration Proceedings (RFTA), article 97-A, no. 1, letter a) of the TPPC and article 306 of the Code of Civil Procedure (CCP).
IV - 2 COSTS
The costs are set at € 2,142.00 (two thousand one hundred and forty-two euros) under article 22, no. 4 of the LRTA and Table I attached to the RFTA, at the charge of the Respondent, in accordance with the provisions of articles 12, no. 2 of the LRTA and 4, no. 4 of the RFTA.
Notify accordingly.
Lisbon, 15 April 2019
The Arbitrator
Jesuíno Alcântara Martins
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