IRC Impairment Losses Dispute: CAAD Arbitral Decision 337/2017-T on Corporate Tax Assessment

ARBITRAL DECISION

The arbitrators Counsel Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Jorge Bacelar Gouveia and Dr. Cristiana Maria Leitão Campos (arbitrator-members), appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 26-07-2017, agree as follows:

1. Report

A… SA (hereinafter A… or Claimant), holder of Tax Identification Number…, with registered office at …, …-… …, filed a request for arbitral pronouncement, pursuant to the provisions of articles 2º, n.º 1, paragraph a), and 10º of Decree-Law n.º 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters - RJAT), seeking the declaration of illegality of the Corporate Income Tax (IRC) assessment relating to the fiscal year 2012, with reference number 2016…, as well as in the account settlement statement n.º 2016… (compensation n.º 2016…), which includes the compensatory interest assessment n.º 2016….

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 23-05-2017.

Pursuant to the provisions of paragraph a) of n.º 2 of article 6º and paragraph b) of n.º 1 of article 11º of the RJAT, as amended by article 228º of Law n.º 66-B/2012, of 31 December, the Deontological Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable timeframe.

On 11-07-2017 the parties were duly notified of this appointment and did not express any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11º n.º 1 paragraphs a) and b) of the RJAT and articles 6º and 7º of the Deontological Code.

Thus, in compliance with the provision of paragraph c) of n.º 1 of article 11º of the RJAT, as amended by article 228º of Law n.º 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 26-07-2017.

The Tax and Customs Authority responded defending that the claim should be dismissed.

On 02-11-2017 the hearing provided for in article 18º of the RJAT was held, in which witnesses were examined and oral arguments were presented.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2º, n.º 1, paragraph a), and 10º, n.º 1, of Decree-Law n.º 10/2011, of 20 January, and is competent.

The parties are duly represented, have legal personality and capacity, are legitimate and are represented (articles 4º and 10º, n.º 2, of the same act and article 1º of Administrative Order n.º 112-A/2011, of 22 March).

The case does not suffer from any defects and there are no exceptions or any obstacle to the consideration of the merits of the case.

2. Facts

2.1. Established Facts

The following facts are considered established:

a) A… develops its activity in the area of production and marketing of fuels, as well as their respective industrial byproducts; the trade and industrial utilization of oilseeds and cereals, as well as their derivatives and byproducts; and the leasing and exploitation of real estate;

b) The current shareholders of A… are the company B… SGPS SA (holder of a shareholding representing 50% of the share capital), C…, S.A. (holder of a shareholding representing 32.33% of the share capital); D…, S.A. (holder of a shareholding representing 16.66% of the share capital) and E…, SA (holder of a shareholding representing 1%), a corporate structure that has remained unchanged since January 2015;

c) Until 2010, A… was held 48.9998% by F…, SA, and 50% by E… (mentioned above), with two additional shareholders holding residual positions in the share capital;

d) Between 2010 and 2012, A… underwent several corporate restructurings in its shareholders' composition, notably the entry of B…— a vehicle established for this purpose by the Recovery Fund managed by G…— into its corporate structure;

e) By dispatch of 24-07-2015, Service Order OI2015… was opened, proceeding with the external inspection action, initially of unilateral scope – IRC, of the Claimant, for fiscal year 2012, which was subsequently amended in scope from partial to general;

f) For purposes of IRC, the Claimant is classified under the general regime for determining taxable profit and, for VAT purposes, under the normal monthly periodicity regime;

g) On 31-12-2012, the Claimant recorded in column 9 of the Provisions Schedule (IRC model 30) the increase in an impairment loss in the amount of €4,506,351.74, corresponding to overdue debts, having already recognized in the previous year the amount of €6,010,783.37;

h) The accounting entry for the increase in this impairment loss is evidenced in account 6511 – Clients Impairment Losses (Annex 7), which shows a debit balance on 31.12.2012 in the amount of €4,506,351.74;

i) The said impairment loss is associated with an overdue debt from the company J…, LLC;

j) The company is subject to statutory audit of accounts, with the responsible statutory auditor being Mr. H…, representing the company I…, LDA, Tax Identification Number…;

k) The Statutory Audit Report for the fiscal year under analysis presented the following reservation: "As disclosed in note 34 to the notes to the financial statements of 31 December 2012, the Company's current assets include an amount due from an entity in the approximate amount of 13.5 million euros (2011: 18 million euros), net of an impairment adjustment. In our opinion, the said amount should have been fully adjusted in prior years, whereby the opening equity and current assets are overvalued by 13.5 million euros and the net result for the fiscal year by 9.9 million euros, after considering the respective tax effect.";

l) The Claimant, between 05-04-2010 and 30-10-2010, sold soybean bagasse to company F… in the amount of €24,150,430.00, without the respective payment having occurred;

m) This fact was recorded on 31-12-2010 in Account 21111 – General Clients … F…: the debit balance, in favor of A…, in the amount of €24,150,430.00;

n) It was also recorded in Account 27832 – Other Creditors …F…: the credit balance, in favor of F…, in the amount of €120,000.00;

o) The difference between these two amounts is the origin of the Claimant's credit against F… in the amount of €24,030,430.00, subsequently assigned to J…;

p) On 15-02-2011, F…, A… and J… entered into a credit assignment agreement under which:

– A… was, at that date, creditor of F… in the amount of €24,030,430.00;

– F… held, at that date, credits against J… in an amount at least equal to the value mentioned above;

• F… proceeds to pay its debt through assignment in payment, with the credit it holds against J…, which declared to take note of the assignment;

– A… accepted the assignment in payment, extinguished F…'s debt and consequently became creditor of J…;

q) Between May and June 2011, the Claimant made supplies of glycerin to the Spanish law company K... in the total value of €12,703.49 (invoices no. 905386 and 906033 attached to the request for arbitral pronouncement as documents no. 7 and 8, whose contents are hereby reproduced);

r) The said invoices were not paid by K..., either on their respective due dates – 25-05-2011 and 03-06-2011 – nor subsequently;

s) A… urged K... to pay the outstanding amount, but failed to obtain the fulfillment of that obligation (correspondence exchanged from 02-11-2011, which is contained in Document n.º 9 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

t) In December of that same year, A… retained the law firm – L…— for collection of K…'s debt, which sent the debtor a letter of demand with a view to satisfaction of that claim and gave a negative opinion regarding the initiation of judicial proceedings because J… had been dissolved (Document n.º 9);

u) The Claimant, having obtained no response from the debtor K..., and after advice from the lawyers retained for this purpose that the judicial route could be successful, on 09.01.2012 A… decided to contract legal services from local lawyers (documents nos. 9 and 10 attached with the request for arbitral pronouncement, whose contents are hereby reproduced);

v) Given the default in the fulfillment of such obligation, in 2011, the Claimant provisioned that amount in the proportion of 25%, and in 2012, increased it by 50% of its value;

w) In 2013, the company K… was subject to a process analogous to the process provided for in Portuguese legislation relating to recovery/insolvency of companies, which was decreed on 22.07.2013 (document n.º 11 attached with the request for arbitral pronouncement, whose content is hereby reproduced);

x) During the said tax inspection, the Tax Inspection Report was prepared, which is contained in the administrative process, whose content is hereby reproduced, in which the following is referred to, among other things:

I. DESCRIPTION OF FACTS AND BASIS OF PURELY ARITHMETIC CORRECTIONS TO TAXABLE INCOME

III.1 For purposes of IRC

III.1.1 Impairment losses not accepted for tax purposes

III.1.1.1 Impairment loss as of 31/12/2012

Based on the analysis of the Provisions Schedule (Model 30 of IRC - Annex 7) for fiscal year 2012, it was verified that A… recorded in column 9 of the said schedule (constitution or increase of the year) the amount of €4,506,351.74, corresponding to overdue debts, having already recognized in the previous year the amount of €6,010,783.37, as can be verified:

The accounting entry for the increase in this impairment loss is evidenced in account 6511 - Clients Impairment Losses (chalk) which shows a debit balance on 31/12/2012 of €4,506,351.74.

From the elements collected during the tax inspection procedure, it was possible to verify that this amount provisioned by A… concerns an overdue credit relating to the company J…, registered under number 349 578, a company incorporated under North American law.

It should be noted that in note 34 of the Report and Accounts for fiscal year 2012 (it is stated that "(…) the credit from the company J…, in the amount of 24,030,430.00 € continues to be unsettled, despite collection efforts made. Thus, for a reason of prudence, the company chose to provision 18.73% of the outstanding balance, for an amount in the fiscal year of €4,500,000.00. In this way, the total amount already provisioned is €10,507,607.50.")

III.1.1.2 Constitution of the debt that gave rise to the impairment loss

With respect to the overdue credit, it is important to clarify its nature and ownership from the date of constitution. In effect, between 05/04/2010 to 30/06/2010, in the context of commercial relations between the two companies, A… made sales to F… in the amount of €24,150,430.00, without the respective payment having occurred.

From the analysis of the extracts of the following accounts on 31/12/2010 it was possible to conclude the following:

• Account 21111 - General Clients … F… (annex 8): there was a debit balance, in favor of A…, in the amount of €24,150,430.00;

• Account 27832 - Other Creditors 8307855 000 F… (annex 8): there was a credit balance, in favor of F…, in the amount of €120,000.00.

In light of the foregoing, according to the accounting records, on 31/12/2010 A… held a credit against F… in the amount of €24,030,430.00.

With respect to this debt, according to information provided via email by the certified accountant of A… (Annex 9):

• "This debt arises from "(…) supply of product (in this case soybean bagasse)";

• the "(…) the total value of the debt that appears in the detail of the balance delivered of client F… refers entirely to commercial transactions for the sale of product produced by A…".

From the elements collected during the tax inspection procedure, it was verified that the credit that A… held against F… in the amount of €24,030,430.00 € was assigned to J…, through the execution of a credit assignment agreement entered into by the three entities. According to the contract, the holder of the debt to A… became J… and not F…, as described in chapter III.1.1.4.

III.1.1.3 Analysis of the relationship between A… and F… at the time of constitution of the debt

According to what was declared by the taxpayer in the 2010 IES in section 10 (OPERATIONS WITH RELATED ENTITIES (domestic territory)) there are between A… and F… significant operations between related entities, as can be verified in the following table (Annex 3):

From the analysis of the table it can be verified that A… invoiced F… during 2010 in the amount of €31,760,992.09, of which €24,030,430.00 remained unpaid (76% of the invoiced amount).

On 03/08/2016, the certified accountant of A… was consulted in a Statement of Declarations regarding the disposal by F… of its shareholding in A… (Annex 10):

i. On what date did F…, S.A., Tax Identification Number…, dispose of its shareholding in A…? - "On 15/01/2010";

ii. What documents prove the disposal of F…'s shareholding in A…? (attach copy) - "The only available documents are in the book of shares (attached copy). Additionally, a request was submitted on 29/06/2010 for deduction of tax losses for the years 2008 and 2009 under nos. 8 and 9 of article 52 of the CIRC, in which, in the initial request, it was stated that the transaction of 50% of A…'s capital would have been carried out by the company F…, S.A. (Tax Identification Number…) in favor of the company B…, S.A. (Tax Identification Number…). Subsequently, in a Notice sent on 16/04/2012 to the same services, the error in the initial request was acknowledged, whereby the disposing entity was the company M…, S.A. and not F…, S.A. as initially stated."

It was also possible to verify that, in the Notice sent on 16/04/2012 to the DSIRC, A… states that: "(…) the transaction that occurred on 30 June 2010 is the first in which there is a change in the holders of the share capital of at least 50% of the Share Capital. In effect, all transactions in A…'s shares that occurred in the preceding months were carried out between companies of the same economic group, whereby the disposal of shares that occurred on 30 June 2010 (disposal of shares by M… to B…- SGPS, S.A (hereinafter B…) is the first in which there is simultaneously a disposal of shares to a company not belonging to the same economic group (…), from a substantive point of view the disposal of shares having been carried out by F…, company that was a shareholder until January 2010, or by M…, company that held the shares on 30 June 2010 did not in the least alter the contours of the acquisition by the Company held by the Recovery Fund to the extent that both companies (F… to M…) were held 100% by the same partner and these corporate changes occurring in 2010 were due to the negotiation process of disposal with different parties and which resulted in that period of 6 months some progress and setbacks in the disposal process and how that the same would take place".

Through analysis of the Book of Registration of Shares of A…, it was verified that during 2010, there were several transactions regarding the shares of A…, as shown in the following tables:

(...)

Based on the information collected, the following facts were ascertained:

• On 15/01/2010, according to the Book of Registration of Shares of A…, F… disposed of 1,227,450,000 shares of A… to N... LLC (company of the group);

• From consultation of the AT computer system through the values declared by F… in MOD. 4 - Purchase and/or Disposal of Securities, it was verified that on 15/01/2010, F… sold 1,227,445,280 shares (there being a difference of 4,720 shares - 1,227,450,000 versus 1,227,445,280 - in relation to the Book of Registration of Shares of A…) to an entity without known Tax Identification Number (Tax Identification Number code 3) for the total amount of €23,000,000.00 (Annex 11)

• On 30/06/2010, N…, LLC sold all the shares of A… to M... Tax Identification Number… (company of the group);

• On 30/06/2010, M…, Tax Identification Number…, disposed of its shareholding in A… to B…. Tax Identification Number….

• From consultation of the AT computer system through the values declared by M… in MOD. 4 - Purchase and/or Disposal of Securities, it was verified that on 30-06-2010 N… sold 1,252,500,000 shares to B… SGPS, Tax Identification Number… for the total amount of €37,461,429.10 (Annex 11)

Thus, as the taxpayer itself alleges in the request presented for application of the provisions of nos. 8 and 9 of article 52º of the CIRC (page 21 of this report), only on 30/06/2010 when M… sold 50% of the shares it held in A… to B…, Tax Identification Number…, did there occur a change in the holders of the share capital of at least 50% of the share capital. All transactions in A…'s shares in the preceding months occurred between companies of the same economic group, which had in common the same shareholder and administrator, Mr. O…, Tax Identification Number….

In this regard, it was possible to verify a news item taken from the business newspaper on 07/09/2010, the transcript of which we present: (Annex 12)

"Recovery Fund buys 50% of the country's largest biodiesel producer.

Businessman O… now shares A… with the fund held by the Treasury and the five largest Portuguese banks. The Recovery Fund, venture capital held by the Treasury and the five largest Portuguese banks, bought 50% of A…, S.A.'s capital. Businessman O…, who was, until now, the sole shareholder of the company, thus decided to share equitably the ownership and management of Portugal's largest biodiesel producer. "I am a tight capitalist, whereby alone I did not constitute the appropriate shareholder," O… told Negócios, without revealing the value of the transaction. According to him, it was a matter of replacing his previous unsuitable partner, P…, who resold to O… his 59% in A… in January 2007."

Given the relevant role that Mr. O… held and/or holds in A… (served as president of the board of directors until 2014 inclusive) and in the other companies of the group, as has been amply demonstrated, he was notified on 12/08/2016 pursuant to the principle of cooperation to provide clarifications regarding the activity developed by the companies involved in the credit assignment agreement with respect to the years 2010 to 2015 (Annex 13).

In response to the notification made, on 051-09-2016 Mr. O… appeared in this Service and made the following statements which were reduced to a record:

i. What was the activity of F…? - "import and sale on the market of cereals, oilseeds and derivatives. It was an importing trading company";

ii. What was the relationship between F… and A…? - "At a certain moment F… supplied raw material to A… and ensured its commercialization. F… was the 'commercial arm' and A… the 'industrial arm' at the time when I controlled the capital, until June 2010";

iii. Are you aware of the existence of a debt between F… and A… on 31/12/2010 in the amount of €24,030,430? - "No, I only have knowledge of the value reflected in F…'s accounts which apparently does not reflect that value".

iv. He further stated that "I will try to find account extracts and other relevant documentation to demonstrate the financial situation between the two companies at that date. It is not possible that, at that date, there is an amount of this magnitude in debt as the current holders of A… would not allow it.

v. What was the activity of J…? "Its sole activity was to obtain financing abroad because it could not do so under the F… name alone. It ceased to exist when G… entered A…'s capital";

vi. Are you aware of the existence of a credit assignment agreement between F…, A… and J… in 2011? "No, I don't remember, but if I find documentation on this fact, I will bring it. It seems strange to me";

vii. Do you have anything else to declare? "Both F… and J… ceased to have activity from mid-2010 onwards, a date that coincides with G…'s entry into A…'s capital. It resulted from the agreement between the parties that F… and J… could not continue to exist due to conflict of interest."

On this date, he also delivered the analytical statements of accounts on 31/12/2010, 31/1/l2011, 31/12/2012, 31/12/2013, 31/12/2014 and 31/12/2015, undertaking to deliver analytical statements of accounts from third parties (clients, suppliers, other debtors/creditors), current account extract between F… and A…, photocopy of the documents of greatest significance relating to the current account extract, copy of the payment methods used and photocopy of the partnership agreement between F… and A… (to date no additional documents have been attached to the process).

From the analysis of the analytical statement of accounts on 31/12/2010 of F…, delivered by Mr. O…, it was verified that some of the values contained in the analytical statement did not match the values declared in the 2010 IES.

However, it was verified that the values presented in the analytical statement in account 41 - financial investments in the amount of €17,527,451.70 are in accordance with the values declared in the IES in the item Financial Participations - equity equivalence method.

It was also possible to verify that F… in 2010 sold the shareholding it held in the capital of A…, since the balance of account 412 investments in Associates (shareholding in A…) has a zero value.

It was also found that there is no coherence between the values reflected in the accounts of A… and F…, with respect to the balance that should be outstanding to A….

Having A… a credit against F… on 31/12/2010 in the amount of €24,030,430.00, the accounts of suppliers and other creditors of this company should evidence a balance of at least this amount, which is not the case, as confirmed by the copy of the analytical statement attached. Thus, it is concluded that, according to the information reflected in F…'s accounts, there is no evidence of a debt to A… in that amount.

III.1.1.4 Credit assignment agreement entered into on 15/02/2011 (Annex 14)

On 2011/02/15 a credit assignment agreement was entered into between F…, A… and J… governed by the following clauses:

• A… is, on the date of signing the agreement, creditor of F… in the amount of €24,030,430.00 €;

• F… holds, on the date of signing the agreement, credits against J…;

• For full payment of its debt, F… assigns in payment to A… the credits, to which it assigns the value of €24,030,430.00 €;

• J… declares to take note of the assignment of credits given in payment;

• A… declares to accept the present assignment in payment and recognizes F…'s debt as extinguished. As a result of the agreement entered into, A… ceased to hold a credit against F… and came to hold a credit against J….

• With respect to the credit assignment agreement, it should be noted that it referred to an annex (Annex I) which consists of copies of two current account extracts from F…, S.A, which reflected the movements that occurred between this and J… and which served as the basis for the agreement, namely:

• 22813 Advance Suppliers general - Omerc (… J…) whose debit balance is €18,132,162.69. This balance is constituted by several movements, which in the description refers to "maturity date" between 2005 and 2007;

• 22113 General Suppliers - OMercados (… J…), which presented a debit balance of €8,640,885.40 whose description refers to "Credit no. 32" with maturity date 31/12/2003.

III.1.1.5 Diligences carried out by A… with F… to obtain receipt of overdue credits

On 12/10/2016 Dr. Q… (certified accountant of A…) was heard in a Statement of Declarations (Annex 151) regarding the following questions:

i. Identify those responsible for A… who signed the credit assignment agreement entered into on 15/02/2011, between F…-, S.A, hereinafter designated by F…, N/F…, A… and J…, hereinafter designated by J…. "The representatives of A… were Dr. R… and Dr. S…, administrators of A… at the date".

ii. What is the justification for A… having accepted the assignment of credits between F… and J…? "we made diligences with F… to obtain payment of the debt in which in the course of those diligences we were proposed the assignment in payment of the credit against J… noting that with third parties it was perceptible that F… presented uncollectibility problems with other entities such as banks and as such would hardly pay the debt. It doesn't mean that J… presented itself consistently but it was always a way to guarantee at least the collectibility of part of this credit."

iii. What diligences were carried out by A… in order to ensure the "good receipt" of the credits against J…?

iv. Identify/prove the diligences carried out to obtain the credit against J… in compliance with the provisions of article 36º of the CIRC (current article 28-B of the CIRC).

With respect to the questions in points iii and iv (diligences carried out to obtain credit against J…) the certified accountant stated that "Several collection diligences were made, namely by telephone contact and by written contact whenever there was need to formalize them, in which J… presented a payment proposal, which was not fulfilled, and then A… delegated to a specialized company the collection of those same credits, namely T…. This too proved fruitless from a collection point of view once the debtor decided to cease its activity".

On this date the taxpayer also delivered copies of documents proving the diligences carried out to obtain the credit against J…, namely exchange of correspondence between A… and J… and a contract for provision of support services to current account management entered into on 21/09/2012 with T….

According to the information collected during the tax inspection procedure regarding the diligences carried out to obtain the credit against J…, the following facts were ascertained in chronological order:

• On 30/12/2010, through Notice no. … from A…, entitled "debt to be settled" and delivered in hand, F… was contacted to proceed with "(…) full payment of the debt in the shortest possible timeframe (…)" in the amount of €24,030,430.00 € (Annex 14);

• In response, on 24/01/2011 F…, through its Notice no.…, delivered in hand to A…, informed that it was not possible to present "(…) a full future of business, within which it would be viable to frame a payment plan (…)" as it was undergoing restructuring having ceased economic activity. F… placed "(…) for the consideration of A…'s administration the effectuation of assignment in payment of the credit in the amount of €24,030,430.00 € against J…" (Annex 14);

• On 07/02/2011, through Notice no. … from A…, delivered in hand to F…, the latter was informed that its proposal for assignment in payment of the debt in the total amount of €24,030,430.00 € was accepted (Annex 14);

• On 15/02/2011, as previously mentioned, a credit assignment agreement was entered into between F…, A… and J…. According to the agreement F… assigns the credits it holds against J… to A… (Annex 14);

• On 09/06/2011, through a letter prepared by A… addressed to J… (document written in English), the latter was informed that it is notified to proceed to payment of the debt as quickly as possible, further stating that if J…. fails to pay A… will resort to legal means in order to obtain collection of the outstanding amount. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 15);

• On 01/07/2011, through entry no. … of 19/07/2011 from A…, J… (document written in English) states it cannot pay the debt to A… immediately, in the amount of €24,030,430.00€, but manifests the will to do so. It further states that it is in a very difficult financial position due to the situation of the world economy and in particular due to the volatility of raw materials markets that has been dramatically affecting the business (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016, having already been delivered to Tax Inspection on a prior date) (Annex 15):

• On 07/12/2011, through a letter prepared by A… addressed to J… (document written in English), the latter was informed that it is notified to proceed to payment of the debt as quickly as possible, or at least the possibility of there being a payment plan in order to obtain coercive collection of the outstanding amount. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 16)

• On 19/12/2011, through a letter whose sender is J… and the recipient is A… (document written in English), the latter was informed that J… received the letter from A… dated 07/12/2011. It proposes payment of €1,000,000 per month, starting in March 2012. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 15)

• On 09/04/2012 through a letter prepared by A… addressed to J… (document written in English), the latter was informed that A… will deliver the credit to a specialized company since J… did not proceed to payment of the amount of €1,000,000 starting in March 2012. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 15)

It follows that, despite the high value of the debt (€24,030,430.00), no records were identified proving that the credit against J… had been claimed judicially or in arbitration by the taxpayer.

It was also possible to verify that the company J… was dissolved on 10/11/2012 (Annex 16).

III.1.1.6 Legal Framework

Article 35º of the CIRC, as worded at the time of the facts, defines the following with respect to impairment losses on debts receivable relating to credits of doubtful collection:

"1- The following impairment losses may be deducted for tax purposes and accounted for in the same tax period or in prior tax periods:

a) Those related to credits resulting from normal activity which, at the end of the tax period, may be considered of doubtful collection and are evidenced as such in the accounts (…);

From the analysis of article 35º of the CIRC, we can conclude that there are cumulative conditions for the acceptance of impairment losses concerning credits of doubtful collection as fiscally deductible, these being:

• That they are derived from the normal activity of the entity;

• That they may be considered of doubtful collection; and

• That they are evidenced in the accounts.

Naturally, credits that are safeguarded by insurance or by any other form of guarantee will not be considered of doubtful collection, because there is no risk of uncollectibility, since the creditor can enforce the respective guarantee. Just as impairment losses will not be accepted as an expense of the period with respect to credits whose debtors are entities that, by their condition, do not present any risk of uncollectibility.

Article 36º, n.º 1 of the CIRC further provides that "(…) credits of doubtful collection are considered those in which the risk of uncollectibility is duly justified, which occurs in the following cases:

a) The debtor has pending insolvency and business recovery proceedings or execution proceedings;

b) The credits have been claimed judicially or in arbitration;

c) The credits are overdue by more than six months from the date of the respective maturity and there are objective evidence of impairment and that diligences have been made for their collection".

In this way, n.º 1 of article 36º of the CIRC defines credits of doubtful collection as "those in which the risk of uncollectibility is duly justified", listing three situations in which the relevant "risk of uncollectibility" is verified. Paragraphs a), b) and c) of n.º 1 of article 36º of the CIRC are applied in the alternative, that is, that type and degree of risk is justified provided that, in the specific case and objectively, one of the cases provided for in any of those three paragraphs is verified.

Thus, for impairment losses to be considered tax deductions, it is important not only that the "risk of uncollectibility" requirement is determined, but also that it be "duly justified".

In the situation at issue, given that none of the situations provided for in paragraphs a) and b) of n.º 1 of article 36º occurs, special relevance is assumed by that stipulated in paragraph c), that is, that there are objective evidence of impairment and that diligences have been made for receipt of the credit.

It is therefore important to dedicate special attention to the analysis of the elements presented by the taxpayer in order to justify compliance with the legal requirements for the acceptance of fiscal deductibility of the impairment loss.

The elements collected during the tax inspection procedure show that F… proposed to A… the delivery of credits it held against J…, as a form of assignment in payment, to remedy the debt in the amount of €24,030,430.00 that it had to A…. This proposal was accepted by A…, which came to hold a credit against J…, on which it recorded in 2012, the increase in an impairment loss for debts receivable, in the amount of €4,506,351.74 €.

While it is acknowledged that it is not up to the Tax Administration to condition the management decisions that guide the activity of companies, it cannot refrain from proceeding with its analysis and validation of compliance with the current legal provisions.

In the case at issue, namely the increase in the impairment loss constituted by A… relating to J…'s debt, the risk of uncollectibility is not considered duly justified, as follows:

• The representatives of A… accepted an assignment of credits from an entity (J…) that was part of the same economic group. The said companies have in common the same shareholder and administrator, with significant commercial and financial operations between the various companies of the GROUP.

• As A… itself alleges in the request presented for application of the provisions of nos. 8 and 9 of article 52º of the CIRC, only on 30/06/2010 (disposal of 50% of A…'s shareholding to the Recovery Fund, managed by G…) did there occur a change in the holders of the share capital of at least 50% of the share capital. All transactions in A…'s shares in the preceding months occurred between companies of the same economic group, having in common the same shareholder and administrator.

• According to the statement made by Mr. O… on 05/09/2016 when he was asked what the activity of J… was, he replied that "its sole activity was to obtain financing abroad because it could not do so under the F… name alone". He further stated that "both F… and J… ceased to have activity from mid-2010, a date that coincides with G…'s entry into A…'s capital. It resulted from the agreement between the parties that F… and J… could not continue due to the existence of a conflict of interests." (our emphasis)

• The Auditor of F… in the Statutory Audit Report issued in 2010 places a reservation in the accounts: "With the disposal of the financial shareholding it held in A…, and the disposal of the trading business and all its inherent rights to A…, effective from 1 July 2010, with F… assuming an obligation not to compete for a period of 5 years, F…'s perspective becomes, as disclosed in the Management Report, the integral settlement of its liabilities, with priority for bank liabilities. Being further stated that this process will also be through the continuation of policy of disposal of shareholdings. However, the financial statements were not prepared from the perspective of discontinuance of operations" which coincides with what was stated by Mr. O… in the paragraph above. (our emphasis)

• In the years 2009 to 2011 F… was held 100% by J….

• J… does not have pending insolvency and business recovery proceedings or execution proceedings.

• J…'s credits have not been claimed judicially or in arbitration. It is not reasonable to admit that the representatives of A… accepted an assignment of credits of such a large debt from an entity that was completely unknown to them and that they had not carried out any analysis of its financial/patrimonial situation in order to safeguard/guarantee good collection of the credit. The absence of this prior evaluation, which any judgment advises, if not even requires, in the protection of the legitimate interests of shareholders, allows us to deduce that it could only be justified because there indeed was complete knowledge of all the participants in this agreement, derived from the links existing between all.

• According to the statements made by the certified accountant on 12/10/2016 regarding the question asked about the justification for A… having accepted the assignment of credits between F… and J…, the same states that "(…) with third parties it was perceptible that F… presented uncollectibility problems with other entities such as banks and as such would hardly pay the debt. It doesn't mean that J… presented itself consistently but it was always a way to guarantee at least the collectibility of part of this credit."

• With respect to proof of the diligences carried out by A… to promote receipt of the debt, we verify that these are limited to copies of notices/documents exchanged between the participants, some delivered in hand, others by mail without proof of delivery.

• A… also presented a contract for provision of support services to current account management entered into on 21/09/2012 with T…. According to the analysis of that agreement, it is a generic agreement, with A… having delivered no document issued by this company to prove any eventual diligences carried out for receipt of the credit against J….

Thus, in light of the foregoing throughout this report, we consider that with respect to the credit held by A… against J…, the legal requirements for acceptance of fiscal deductibility of the impairment loss were not met, because the respective risk of uncollectibility is not considered proven, nor are the diligences carried out for its receipt, specifically:

• it is not a credit in relation to which the debtor has pending special business recovery proceedings and protection of creditors or execution, bankruptcy or insolvency proceedings. Although there is information that the company J… was dissolved on 10/11/2012, nothing proves that this occurred for reasons of insolvency. Indeed, it is emphasized that according to the elements collected, such occurrence was due to management decisions within the business that involved the disposal of part of A…'s share capital, and as a result of which that company would be prevented from conducting the activity, thus being deprived of its corporate purpose;

• although the credit is overdue by more than six months from the date of the respective maturity, it was not claimed judicially by A…;

• the relationships established between the various companies that entered into the credit assignment agreement (A…, F… and J…), namely those arising from common representatives/shareholders, as well as the agreements entered into between the parties regarding the "obligations" arising from the disposal of parts of capital, reveal that there was a profound knowledge of the financial/patrimonial situation of each company, which allows the risk of uncollectibility to be disregarded;

• the diligences carried out for receipt of the credit were not proven;

whereby it is concluded that the impairment loss in the amount of €4,506,351.74 €, accounted for in account 6511 - Clients Impairment Losses, is not fiscally deductible, in light of the legal provisions provided for in articles 23º n.º 1, 35º and 36º of the CIRC.

(...)

III.2. Summary of Proposed Corrections

In light of the analysis carried out, the proposed corrections are summarized in the values shown in the following table:

(...)

IX. RIGHT TO BE HEARD

(...)

Let us then proceed to examine the arguments used by the taxpayer:

The absence of any shareholding in A… held by F… and J… on the date of constitution of the debt that gave rise to the impairment loss by A….

In the 31st and 32nd points of its submission the taxpayer states that J… on the date of constitution of the debt that gave rise to the impairment loss recorded by A… did not hold, nor had ever held any shareholding in A…, whereby the conditions described in n.º 3 of article 36º of the CIRC were not met for the credit to be considered of doubtful collection.

On this statement it is important to clarify the following from the outset:

i. Contrary to what the taxpayer states, the SIT never framed the correction made to J…'s impairment loss in n.º 3 of article 36º since in the case at issue, in effect, at the time of constitution of the impairment loss this situation does not apply;

ii. With respect to the fact that both entities belong to an economic group, we cannot agree with the allegations made by the taxpayer, since this is assumed by one of A…'s administrators (Mr. O…), and reproduced in documents provided by the company, as already emphasized in point III.1.1.3 and which we refrain from repeating.

The impairment loss of J… is not fiscally deductible in light of the provisions provided for in articles 23 n.º 1, 35º and 36º n.º 1 paragraph c) of the CIRC since with respect to J…'s debt the said risk of uncollectibility is not considered duly justified, as was amply referred to in the draft report, and which is once again demonstrated:

a. The representatives of A… accepted an assignment of credits to J…, an entity that was part of the same economic group, since the said companies have in common the same shareholder and administrator, Mr. O…;

b. In the request submitted by A… on 16/04/2012 to the DSIRC the same states that only on 30/06/2010 (disposal of 50% of A…'s shareholding to the Recovery Fund, managed by G… Capital) did there occur a change in the holders of the share capital of at least 50% of the share capital. In this way all transactions in A…'s shares months prior occurred between companies of the same economic group, having in common the same shareholder and administrator, Mr. O…. It is the taxpayer itself that declares in the request referred to above that all transactions in A…'s shares that occurred in the months prior to 30/06/2010 "were carried out between companies of the same economic group".

c. According to the statements made by Mr. O… on 05/09/2016 the same replied that J… had as its "sole activity the obtaining of financing abroad because it could not do so under the name of F… alone".

He further stated that both F… and J… ceased to have activity from mid-2010, a date that coincides with the entry of G… into A…'s capital;

d. J… does not have pending insolvency and business recovery proceedings or execution proceedings;

e. J…'s credits have not been claimed judicially or in arbitration;

f. It does not seem reasonable to us that the representatives of A… accepted an assignment of credits of a debt of €24,030,430.00 from an entity that was unknown to them. The absence of a prior analysis to J…'s patrimonial/financial situation in order to safeguard good collection of the credit could only be justified because there indeed existed complete knowledge of all the participants in this agreement, derived from the links existing between all.

From the proofs of diligences carried out with J… to attempt to recover the outstanding amount in the amount of €24,030,430.00

Regarding the diligences carried out the taxpayer states that "during the period in which the inspection action by the SIT took place, it presented a set of proofs of the diligences carried out with J… to attempt to recover the outstanding amount of €24,030,430.00".

In the context of the right to be heard regarding this point the taxpayer attaches the following diligences:

• Correspondence sent to J… on 09 June 2011, 07 December 2011 and 09 April 2012 (corresponding to Document no. 4 of the right to be heard). The said documents had already been delivered in the inspection procedure as can be verified in chapter III.1.1.5 of this report;

• Contract for provision of support services to current account management entered into on 21/09/2012 with T… (corresponding to Document no. 5 of the right to be heard). This agreement had also been delivered during the inspection procedure;

• Email sent by T… to Dr. R… (administrator of A…), dated 30/11/2016, stating that "the cases are eliminated from our application after 2 years for a legal matter, besides this fact we have no record in our application of J…'s case, because the company was no longer in activity and we did not register it." (corresponding to Document no. 6 of the right to be heard);

• Email sent by the law firm to Dr. R… (administrator of A…, dated 22/11/2016, stating that "we provided in 2012 a verbal opinion regarding the viability of resorting to legal means for purposes of coercive collection of J…'s debt to A…, S.A." (…) "at the time, we were provided information from T…" (…) "that J… had been administratively dissolved." (…) "For that reason, we gave a negative opinion to resorting to legal means for the purposes at issue (…)".

As a result of the examination of the diligences presented by A… in order to promote receipt of the debt to J…, we verify that these are limited to correspondence exchanged between the participants, some delivered in hand, others by mail without proof of delivery. The agreement entered into on 21/09/2012 with T…, as already referred to in this report, is a generic agreement, with A… having delivered only in the right to be heard context, an email sent by T… to one of A…'s administrators, on 30/11/2016, informing that it has no record in its database regarding F…. Thus, we consider that A… continues to be unable to objectively prove the diligences carried out to obtain the debt.

Regarding the email sent on 22/11/2016 by the law firm, it is incumbent on us to state that the fact that the company J… was administratively dissolved does not mean that it was declared insolvent. Thus, the debt of J… is not a credit in relation to which the debtor has pending special business recovery and creditor protection proceedings, or execution, bankruptcy or insolvency proceedings. We further call attention to the fact that, as already stated above, according to the elements collected, such occurrence was due to management decisions within the business that involved the sale of part of A…'s share capital, and consequently that company would be prevented from conducting the activity, thus being deprived of its corporate purpose.

As previously stated, A… did not safeguard the consequences arising from the acceptance of the credit against J… and also did not make efforts with American justice contesting the administrative dissolution given that it at least had a liability.

From the foregoing of the elements collected in the course of the inspection procedure and in the context of the right to be heard, the taxpayer failed to demonstrate that objective evidence of impairment and that diligences were made for receipt of the credit existed.

y) Following the inspection the Tax and Customs Authority made tax corrections to taxable income relating to the tax period 2012 in a total amount of €4,036,286.55 (generated by the correction to the tax result of the period from a tax loss in the value of €470,065.19 to a taxable profit of €4,506,351.74), as well as the correction of the amount due as autonomous taxation in favor of the taxpayer of €15,077.96;

z) These corrections were the basis for the IRC assessment relating to fiscal year 2012, n.º 2016…, dated 22-12-2016, in which the amount due was determined to be €883,180.84, amount that includes €109,018.96 as compensatory interest – assessment n.º 2016…;

aa) On 22-05-2017, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present case.

2.2. Facts Not Established

There are no facts relevant to the decision of the case regarding the defects imputed to the assessments under discussion that have not been established.

2.3. Reasoning for Fixing the Facts

The established facts are based on the documents attached by the Claimant with the request for arbitral pronouncement and on the administrative process, with no controversy regarding them.

3. Law

3.1. Essential Issue That Is the Subject Matter of the Case

In fiscal year 2012 the Claimant recorded the increase in an impairment loss for debts receivable, in the amount of €4,506,351.74, with respect to an overdue credit from the company J….

The Tax and Customs Authority considered that this impairment loss is not fiscally deductible in light of the provisions of articles 23 n.º 1, 35º and 36º n.º 1, paragraph c) of the CIRC, on the ground that the risk of uncollectibility is not justified, for the following reasons, in summary (which it summarizes in the final part of the Tax Inspection Report):

a. The representatives of A… accepted an assignment of credits to J…, an entity that was part of the same economic group, since the said companies have in common the same shareholder and administrator, Mr. O…;

b. In the request submitted by A… on 16/04/2012 to the DSIRC the same states that only on 30/06/2010 (disposal of 50% of A…'s shareholding to the Recovery Fund, managed by G…) did there occur a change in the holders of the share capital of at least 50% of the share capital. In this way all transactions in A…'s shares months prior occurred between companies of the same economic group, having in common the same shareholder and administrator, Mr. O…. It is the taxpayer itself that declares in the request referred to above that all transactions in A…'s shares that occurred in the months prior to 30/06/2010 "were carried out between companies of the same economic group".

c. According to the statements made by Mr. O… on 05/09/2016 the same replied that J… had as its "sole activity the obtaining of financing abroad because it could not do so under the name of F… alone". He further stated that both F… and J… ceased to have activity from mid-2010, a date that coincides with the entry of G… into A…'s capital;

d. J… does not have pending insolvency and business recovery proceedings or execution proceedings;

e. J…'s credits have not been claimed judicially or in arbitration;

f. It does not seem reasonable that the representatives of A… accepted an assignment of credits of a debt of €24,030,430.00 from an entity that was unknown to them. The absence of a prior analysis to J…'s patrimonial/financial situation in order to safeguard good collection of the credit could only be justified because there indeed existed complete knowledge of all the participants in this agreement, derived from the links existing between all.

Articles 23º, n.º 1, 35º and 36º of the CIRC, as worded in 2012, establish the following, insofar as relevant here:

Article 23º

Expenses

1 – Expenses are those which are demonstrably indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source, including in particular:

(...)

h) Adjustments in inventories, impairment losses and provisions;

(...)

Article 35º

Fiscally Deductible Impairment Losses

1 – The following impairment losses accounted for in the same tax period or in prior tax periods may be deducted for tax purposes:

a) Those related to credits resulting from normal activity which, at the end of the tax period, may be considered of doubtful collection and are evidenced as such in the accounts;

(...)

Article 36º

Impairment Losses on Credits

1 – For purposes of determining the impairment losses provided for in paragraph a) of n.º 1 of the preceding article, credits of doubtful collection are considered those in which the risk of uncollectibility is duly justified, which occurs in the following cases:

a) The debtor has pending insolvency and business recovery proceedings or execution proceedings;

b) The credits have been claimed judicially or in arbitration;

c) The credits are overdue by more than six months from the date of the respective maturity and there are objective evidence of impairment and that diligences have been made for their collection.

2 – The accumulated annual amount of the impairment loss of credits referred to in paragraph c) of the previous number cannot exceed the following percentages of overdue credits:

a) 25% for credits overdue more than 6 months and up to 12 months;

b) 50% for credits overdue more than 12 months and up to 18 months;

c) 75% for credits overdue more than 18 months and up to 24 months;

d) 100% for credits overdue more than 24 months.

3 – The following are not considered of doubtful collection:

a) Credits against the State, Autonomous Regions and local authorities or those in which these entities have provided a guarantee;

b) Credits covered by insurance, with the exception of the amount corresponding to the percentage of mandatory deductible, or by any type of real security;

c) Credits against natural or legal persons holding more than 10% of the company's capital or members of its governance bodies, except in the cases provided for in paragraphs a) and b) of n.º 1;

d) Credits against companies in which more than 10% of capital is held, except in the cases provided for in paragraphs a) and b) of n.º 1.

The Tax and Customs Authority acknowledges in the Tax Inspection Report, when examining the right to be heard, that the taxpayer states "that J… on the date of constitution of the debt that gave rise to the impairment loss recorded by A… did not hold, nor had ever held any shareholding in A…, whereby the conditions described in n.º 3 of article 36º of the CIRC were not met for the credit to be considered of doubtful collection".

Therefore, the non-acceptance of the fiscal relevance of the impairment loss is based solely on n.º 1 of article 36º.

Of these situations listed in n.º 1 of article 36º in which the risk of uncollectibility is considered duly justified, only the one provided for in paragraph c) is in issue, as it is undisputed that the debtor did not have pending insolvency and business recovery proceedings or execution proceedings and the credits had not been claimed judicially or in arbitration.

Furthermore, with respect to the framing of the situation in this paragraph c), it is not questioned that the credits for which impairment loss was recognized were overdue by more than six months from the date of the respective maturity, whereby the only matter in dispute is whether "there are objective evidence of impairment and that diligences have been made for their collection".

This is, moreover, what the Tax and Customs Authority explicitly states in the tax inspection report, when it says:

In the situation at issue, given that none of the situations provided for in paragraphs a) and b) of n.º 1 of article 36º occurs, special relevance is assumed by that stipulated in paragraph c), that is, that there are objective evidence of impairment and that diligences have been made for receipt of the credit.

With respect to proof of uncollectibility of the credit and diligences for its collection, the Tax and Customs Authority further states in the Tax Inspection Report that:

– the relationships established between the various companies that entered into the credit assignment agreement (A…, F… and J…), namely those arising from common representatives/shareholders, as well as the agreements entered into between the parties regarding the "obligations" arising from the disposal of parts of capital, reveal that there was a profound knowledge of the financial/patrimonial situation of each company, which allows the risk of uncollectibility to be disregarded;

– the diligences carried out for receipt of the credit were not proven;

And the Tax and Customs Authority concludes in the Tax Inspection Report that "A… did not safeguard the consequences arising from the acceptance of the credit against J… and also did not make efforts with American justice contesting the administrative dissolution given that it at least had a liability. From the foregoing of the elements collected in the course of the inspection procedure and in the context of the right to be heard, the taxpayer failed to demonstrate that objective evidence of impairment and that diligences were made for receipt of the credit existed".

It is in light of this reasoning that the lawfulness or unlawfulness of the correction in question must be assessed, since the tax arbitration process, as an alternative means to judicial review proceedings (n.º 2 of article 124º of Law n.º 3-B/2010, of 28 April), is, like the latter, a contentious proceeding of mere legality, in which the aim is to eliminate the effects produced by unlawful acts, annulling them or declaring their nullity or non-existence [articles 2º of the RJAT and 99º and 124º of the CPPT, applicable by force of the provisions of article 29º, n.º 1, paragraph a), of that law].

In a contentious proceeding of this type, acts must be assessed as they were performed, and the tribunal cannot, in the presence of the invocation of an illegal ground as support for the administrative decision, assess whether its action could have been based on other grounds. ( [1] )

3.1. Impairment Loss Relating to the Credit from Company K…

The impairment loss raised by the Claimant and corrected by the Tax and Customs Authority is in the amount of €4,506,351.74, an amount relating to credits overdue by more than six months and whose value breaks down into the credit held against the company J… in the amount of €4,500,000.00 and also the credit against the company K…, this in the amount of €6,351.74.

With respect to this latter credit, the Tax and Customs Authority makes no reference in the Tax Inspection Report as grounds for the non-fiscal relevance of the impairment loss.

On the other hand, from the proof produced it results that the Claimant made diligences to collect the credit, which is recognized by the Tax and Customs Authority in the present case, in stating that "the Claimant proved the diligences in order to obtain from client K… payment of the outstanding amount in fiscal year 2012, whereby the provisioned amount should be accepted in the proportion of 50% of the debt (€12,703.49 x 50% = €6,351.74)" (article 86º of the Reply).

There is thus agreement between the Parties as to the verification of the requirements demanded by article 36º, n.º 1, of the CIRC for the fiscal relevance of the impairment loss relating to the credit held against K…, for the amount of €6,351.74, whereby the claim for arbitral pronouncement is well-founded, in that part, and the assessment should be annulled insofar as it is based on that correction.

3.2. Impairment Loss Relating to the Credit Held Against J…

As referred to, only the issue of whether objective evidence of impairment and diligences carried out for receipt of the credits existed is in dispute.

3.2.1. Question of the Existence of Objective Evidence of Impairment

The Tax and Customs Authority argues, in article 77º of its Reply, that "in accepting the credits assigned by F… to extinguish its own debt, without safeguarding/guaranteeing good collection of the same, given the "absence of a prior evaluation, which any judgment advises, if not even requires, in the protection of the legitimate interests of shareholders" (cf., Tax Inspection Report, page 34), the Claimant assumed the premise that J… had financial capacity to meet its commitments or, then, that decision was influenced by the "links existing between all"."

The possible influence of the "links existing between all" in the acceptance of the credit assignment by the Claimant is irrelevant for this purpose, as already mentioned, since the Tax and Customs Authority itself acknowledged that there is no situation of the type provided for in n.º 3 of article 36º of the CIRC involving relationships between companies that would preclude the fiscal relevance of impairment losses.

Thus, one can only see in that proximity between the companies that entered into the credit assignment agreement that came to be considered of doubtful collection an indication that the Claimant was well aware of J…'s situation, whereby, in accepting the assignment, it was acknowledging that it was not of doubtful collection.

However, the credit assignment agreement was entered into on 15-02-2011, and recognition of the impairment loss on the ground of uncollectibility was made on 31-12-2012, more than one year and ten months later, whereby acceptance of the assignment cannot be considered proof that the credit was not of doubtful collection on the date and in which the impairment loss was recognized.

Indeed, contradicting the meaning of that acceptance of the assignment as an indication of collectibility of the credit, the Tax and Customs Authority itself states in article 70º of its Reply that "J… already revealed problems in the settlement of its debts", which is in keeping with what the certified accountant of A… (Dr. Q…) said during the inspection procedure: "we made diligences with F… to obtain payment of the debt in which in the course of those diligences we were proposed the assignment in payment of the credit against J… noting that with third parties it was perceptible that F… presented uncollectibility problems with other entities such as banks and as such would hardly pay the debt. It doesn't mean that J… presented itself consistently but it was always a way to guarantee at least the collectibility of part of this credit".

And, as the Tax and Customs Authority itself emphasizes in article 72º of its Reply, "The credits against J… were so associated with an elevated risk of uncollectibility, when assumed by the Claimant, given their antiquity, that the statutory auditor itself, in the 2012 Statutory Audit Report, stated that the impairment adjustment should have been made 100% in 2011".

And the Tax and Customs Authority even concludes that "the Claimant revealed imprudence in accepting the credits against J…, as it did not carry out a prior evaluation of the eventual risks of uncollectibility, a decision that is only understandable because the entities involved belonged to the same economic group".

Thus, in light of the proof produced, it is to be concluded that the credit acquired by the Claimant which J… was debtor for could be considered of doubtful collection at the end of fiscal year 2012, doubts that are corroborated by the facts that J… already on 01-07-2011 had informed the Claimant that it was in a very difficult economic situation and was dissolved on 10-11-2012, without knowledge of any assets.

Therefore, it is to be considered proven that there was objective evidence of impairment of the Claimant's credit against J… on 31-12-2012.

3.2.2. Question of Objective Evidence of Diligences Carried Out for Receipt of the Credit

It thus remains to ascertain whether there is objective evidence of diligences carried out for receipt of the credit, as required by the final part of paragraph c) of n.º 1 of article 36º of the CIRC.

The Tax Inspection Report itself lists a set of diligences carried out by the Claimant with a view to obtaining collection of the credit against J…:

• On 09/06/2011, through a letter prepared by A… addressed to J… (document written in English), the latter was informed that it is notified to proceed to payment of the debt as quickly as possible, further stating that if J… fails to pay A… will resort to legal means in order to obtain collection of the outstanding amount. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 15);

• On 01/07/2011, through entry no. … of 19/07/2011 from A…, J… (document written in English) states it cannot pay the debt to A… immediately in the amount of €24,030,430.00€, but manifests the will to do so. It further states that it is in a very difficult financial position due to the situation of the world economy and in particular due to the volatility of raw materials markets that has been dramatically affecting the business (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016, having already been delivered to Tax Inspection on a prior date) (Annex 15):

• On 07/12/2011, through a letter prepared by A… addressed to J… (document written in English), the latter was informed that it is notified to proceed to payment of the debt as quickly as possible, or at least the possibility of there being a payment plan in order to obtain coercive collection of the outstanding amount. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 16)

• On 19/12/2011, through a letter whose sender is J… and the recipient is A… (document written in English), the latter was informed that J… received the letter from A… dated 07/12/2011. It proposes payment of €1,000,000 per month, starting in March 2012. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 15)

• On 09/04/2012 through a letter prepared by A… addressed to J… (document written in English), the latter was informed that A… will deliver the credit to a specialized company since J… did not proceed to payment of the amount of €1,000,000 starting in March 2012. (document delivered to Tax Inspection forming an integral part of the statement of declarations of 12/10/2016) (Annex 15)

In addition, as also referred to in the Tax Inspection Report, the Claimant, on 21-09-2012, entered into a contract for provision of support services to current account management with T…, a company specialized in credit collection, as stated to the Tax Inspection by the Claimant's certified accountant: "Several collection diligences were made, namely by telephone contact and by written contact whenever there was need to formalize them, in which J… presented a payment proposal, which was not fulfilled, and then A… delegated to a specialized company the collection of those same credits, namely T…. This too proved fruitless from a collection point of view once the debtor decided to cease its activity".

As the Claimant rightly states, given that there are no other credits of doubtful collection indicated in the Provisions Schedule other than those of J… (€4,500,000.00) and K… (€6,351.74), it must be concluded that the contracting of that collection company was intended for the collection of these credits.

Furthermore, legal advice was sought from the Law Firm L… with a view to determining the viability of resorting to the judicial route with a view to coercive collection of the debt, with the opinion being negative on account of J… having been dissolved (Annex 18 to the Tax Inspection Report attached as Document n.º 3, with the request for arbitral pronouncement).

In these circumstances, it is manifest that it has been proven that the Claimant carried out diligences with a view to collection of the credit, including the contracting of a company specialized in collections, which cannot but be considered as an appropriate and not merely symbolic diligence.

It is the performance of diligences appropriate to the collection of the credit, and nothing more, that is required in the final part of paragraph c) of n.º 1 of article 36º of the CIRC, as a requirement for the fiscal relevance of impairment losses.

Specifically, it is not grounds for dismissing that fiscal relevance, in the face of that paragraph c), the fact, emphasized by the Tax and Customs Authority, that "despite the high value of the debt (€24,030,430.00), no records were identified proving that the credit against J… had been claimed judicially or in arbitration by the taxpayer".

If such judicial or arbitration claim had occurred, one would be dealing with a situation that could be framed in paragraph b) of n.º 1 of article 36º. Therefore, judicial or arbitration claim of the debt is not included among the diligences for receipt referred to in paragraph c).

Based on the foregoing, it is concluded that objective evidence has been produced of diligences having been carried out for collection of the credit in question.

4. Decision

In these terms, this Arbitral Tribunal agrees to:

Declare well-founded the request for arbitral pronouncement and declare unlawful the Corporate Income Tax assessment with reference number 2016…, as well as in the account settlement statement n.º 2016… (compensation n.º 2016…), which includes the compensatory interest assessment n.º 2016….

5. Value of the Case

In accordance with the provisions of article 306º, n.º 2, of the CPC and 97º-A, n.º 1, paragraph a), of the CPPT and 3º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €883,180.84.

6. Costs

Under article 22º, n.º 4, of the RJAT, the amount of costs is fixed at €12,546.00 in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 30-11-2017

The Arbitrators

(Jorge Lopes de Sousa)

(Jorge Bacelar Gouveia)

(Cristiana Maria Leitão Campos)

[1] Essentially in this sense, reference may be made to, among many, the following decisions of the Supreme Administrative Court, regarding parallel situations in administrative review proceedings:

• of 10-11-98, of the Full Court, given in review n.º 32702, published in Appendix to the Official Journal of 12-04-2001, page 1207;

• of 19/06/2002, case n.º 47787, published in Appendix to the Official Journal of 10-2-2004, page 4289;

• of 09/10/2002, case n.º 600/02;

• of 12/03/2003, case n.º 1661/02.

In the same sense, reference may be made to:

 - MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479, in which he states that it is "irrelevant that the Administration comes, already pending the administrative review, to invoke as determinative reasons other reasons, not set forth in the act", and volume II, 9th edition, page 1329, in which he writes that "it cannot (…) the authority appealed against, in the reply to the appeal, justify the practice of the appealed act by reasons different from those which appear in its express reasoning".

  - MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where he writes that "the objectively existing reasons but which are not expressly adduced as grounds of the act cannot be taken into account in assessing its legality".