CAAD 34/2019-T: IRC Deductibility of Expenses with Tax Haven Territories & Compensatory Interest

ARBITRATION DECISION (consult full version in PDF)

The arbitrators Councillor Jorge Lopes de Sousa (arbitrator-president), Dr. Marcolino Pisão Pedreiro and Dr. Cristina Aragão Seia (arbitrator-members), appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitration Tribunal, constituted on 27-03-2019, agree as follows:

1. Report

A..., LDA., legal entity no. ..., with registered office at ..., ... and ..., ...-... Lisbon (hereinafter "Claimant") submitted, pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), a request for arbitral pronouncement with a view to annulling the decision dismissing the administrative complaint filed against the Corporate Income Tax (IRC) assessment act no. 2017..., issued on 28 August 2017, by the Director-General of the Tax and Customs Authority, with reference to the tax year 2013, which results in tax due in the amount of € 2,249,628.05, the Compensatory Interest assessment acts no. 2017... in the amount of € 253,725.67, to which corresponds the Statement of Account Settlement no. 2017... (Compensation no. 2017...), from which results tax due in the amount of € 2,249,628.05.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitration tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 17-01-2019.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitration tribunal the signatories hereto, who communicated their acceptance of the appointment within the applicable deadline.

On 07-03-2019 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 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitration tribunal was constituted on 27-03-2019.

The Tax and Customs Authority filed a response in which it argued that the request should be adjudged unfounded.

On 27-05-2019 a hearing was held in which witness evidence was produced and it was decided that the proceedings continue with simultaneous submissions.

The Parties filed submissions.

The arbitration tribunal was duly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The parties are duly represented and have legal personality and capacity and have standing (articles 4 and 10, no. 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

2. Facts

2.1. Proven Facts

The following facts are considered proven:

A) The Tax and Customs Authority conducted a tax inspection of the Claimant pursuant to Service Order no. OI2016..., relating to the tax year 2013;

B) In that tax inspection, the Tax Inspection Report was drawn up, which is contained in document no. 5 attached with the request for arbitral pronouncement, the content of which is reproduced, in which the following is stated, among other matters:

II.3.2. Tax Classification

In tax terms, the commencement of activity of company A... occurred on 2012-10-02, and it is classified as:

—» In "real estate mediation activities" (main CAE: 68311), and;

—» In "administration of real estate on behalf of others" (secondary CAE: 68321).

For IRC purposes, the company falls under the general taxation regime, and for VAT purposes, it is subject to the normal monthly taxation regime, as from 2015-01-01.

(...)

II.3.3. Brief Documentary Analysis/Activity Carried Out

The activity carried out by A... consists of real estate mediation, acquiring clients (the real estate owners) and promoting the sale or leasing of the acquired real estate. Sometimes this company also promotes the sale or leasing of real estate acquired by other real estate mediation companies.

A... uses the business name "B..." in the invoices it issues. The business name "B..." is also used by companies C... and D..., which participate in the Share Capital of A....

(...)

The revenues obtained by A... result especially from commissions for intermediation in the sale of real estate owned by its clients or acquired by other real estate mediators. These commissions had a substantial increase as from May 2013.

For each real estate acquired by A..., for sale or leasing, an identification number (hereinafter designated by ID) is assigned, which is mentioned in the invoices issued by this company together with the address of the real estate.

The expenses incurred by A... and of considerable amounts are recorded in the "Supplies and External Services" account, which also had a significant increase as from May 2013.

In accordance with the supporting documents to the accounting records and the clarifications provided, the increase in expenses recorded in the "Supplies and External Services" account is directly associated with the real estate intermediation commissions received by A... and consist of:

• Commissions invoiced by nationals, natural or legal persons, who acquire real estate in the name of A... and promote its sale (sub-accounts: sub-contracts, fees and commissions); and

• Invoices issued by entities not resident in the national territory, essentially based in Hong Kong, relating to the promotion/advertising of real estate, in charge of A..., abroad for the acquisition of buyers wishing to invest in Portugal (sub-accounts of specialized works).

Part of the invoices from A..., mention only "consulting services" or "consulting and management services" or still "real estate consulting services", without any further indication of the services effectively rendered. However, for invoices that are in the conditions referred to, A...:

• Attached an internal document, in which it identifies the real estate (address and ID) and the calculations of commissions to be paid for each real estate intervened by these service providers, or;

• Presented an elaborated table, in which it identifies the real estate (address and ID) with an indication of the commission amount to be paid for each real estate intervened.

These elements presented make it possible to remedy the shortcomings of the requirements mentioned in no. 5 of article 36 of the VAT Code (CIVA).

The internal documents issued by A... relating to the calculation of commissions to be paid for each real estate intervened, with the indication of the address and ID, are also attached to the electronic documents (invoice-receipt) issued by natural persons, resident in the national territory, who provide services to this company. However, the amount calculated by A..., relating to the commissions to be paid, is always higher than the basic value recorded in the electronic documents, due to the fact that this company deducts from the commission value calculated the charges it incurred relating to the supply of goods and services used by these service providers (communications, photocopies, legal services, etc.).

With regard to expenses incurred with the supply of goods and services (communications, photocopies, legal services, etc.) used by national companies providing services, A... invoices them to those companies. The revenue from this invoicing is reflected in the "Service Provision" account, in other services (sub-account: administrative expenses).

With respect to accounting records, it was found that many times the handwritten classification on the supporting documents, relating to expenses incurred by A..., do not correspond to the sub-accounts where those documents were actually recorded.

To conclude, it is stated that in the course of the inspection action (Annex II - sheets 1 to 8, pages 1 to 16):

• On 2016-10-04, notification of the taxpayer, in accordance with articles 29, 37 and 42 of the Complementary Regime of Tax and Customs Inspection Procedure (RCPITA) and article 65 of the IRC Code (CIRC), in the person of E..., in his capacity as manager, to present on 7 November 2016 effective proof that the charges with the companies based in Hong Kong corresponded to actually performed operations and did not have an abnormal character or exaggerated amount;

• On 2017-02-01, notification of the taxpayer, in accordance with article 59 of the General Tax Law (sent by fax and addressed to the lawyer F..., NIF: ..., in his capacity as representative of A...), for on 23 February 2017, clarifications and documents relating to other situations verified in the documentary analysis were presented.

Although clarifications and a large number of documents (photocopies) were presented on the dates and times set by notification (Annex II - sheets 9 to 16, pages 17 to 31 - clarifications), a new version of the clarifications requested by notification of 2017-02-01, dated 2017-04-06, also entered this Finance Directorate (Annex II - sheets 16 to 24, pages 32 to 47).

III. DESCRIPTION OF FACTS AND BASIS OF MERELY ARITHMETIC CORRECTIONS

Based on the documentary analysis and the clarifications provided, corrections were made, both under Corporate Income Tax (IRC) and under Value Added Tax (VAT).

III.1. Basis of the Corrections

In the following sub-sections the corrections made are itemized and justified.

III.1.1. Transfers of Ownership Rights of Autonomous Fractions of Urban Real Estate

In the "Investment Properties" account (42), the acquisition of three autonomous fractions in buildings one, two and five of the development called "...", (located in ..., in Lisbon), for the total amount of € 270,000.00 (Annex III - sheets 1 to 6, pages 1 to 11) was recorded. The three autonomous fractions correspond to:

• A dwelling located at ... C, at ..., no. ... (fraction ..., registered in the matrix under article ... of the parish of ... — parish code ...);

• Two parking spaces, corresponding to fraction AD, registered in the matrix under article ..., of the parish of ... (parish code ...), and;

• A storage room, corresponding to fraction L, registered in the matrix under article ..., also of the parish of....

In accordance with the public deed of purchase and sale, carried out on 2013-11-11, between "Bank G..., S.A." (NIPC: ...) and A..., this transaction involved the intervention of real estate mediator C..., which participates in the Share Capital of A..., and the ID1... was assigned to the acquisition process of the autonomous fractions (Annexes III - sheets 4 and 7 to 9, page 8 and 13 to 17).

The autonomous fractions acquired by A..., with the intervention of the real estate mediator C..., were sold for the total amount of € 510,000.00, on 2013-11-20, and acquired by citizen H... (NIF: ...), a national of the People's Republic of China, and the ID1... was assigned to the sale process of the autonomous fractions (Annex III - sheets 9 to 14, pages 18 to 28).

The operations relating to transfers of ownership rights of autonomous fractions of urban real estate are exempt from VAT, in accordance with no. 30 of article 9 of the CIVA, which do not confer the right to deduct tax borne in the acquisition of goods or services inherent to these operations. However, taxpayers may benefit from the deduction of VAT borne in the acquisition of goods and services associated with transfers of ownership rights of autonomous fractions of urban real estate, if they waive the exemption from tax, in accordance with the provisions of nos. 5 and 6 of article 12 CIVA, and consequently are obliged to charge tax on these transfers.

Through documentary analysis, it was found that:

• Expenses were recorded by A... with deduction of VAT borne, relating to charges that should have been borne by third parties, and;

• VAT borne by A... was deducted in the acquisition of goods and services inherent to the sale of the autonomous fractions.

A) Acquisition of Autonomous Fractions - Commissions Expenses

As ID1... is the process number assigned to the autonomous fractions of urban real estate acquired by A... and the real estate mediator involved in this transaction is C..., the expenses inherent to commissions relating to this process should have been borne by C....

However, A... recorded as expenses (fees) the amount of € 6,269.82 and deducted VAT of € 1,442.06, based on invoice-receipt no. 44 (electronic document), dated 2013-11-20, issued by I... (NIF: ...), relating to commissions for ID1....

In accordance with the internal document issued by A... attached to the invoice-receipt no. 44, issued by the commission agent I..., the basic value of the commission corresponds to € 6,345.00, while the basic value mentioned in the said invoice-receipt is € 6,269.82 (Annex III - sheets 15 and 16, pages 29 to 31). The difference existing in the basic value of the commission results from the fact that A... deducted from the calculation of the commission to be paid the charges it incurred in the acquisition of goods and services, used by the said service provider, in the total amount of € 75.18.

Given the foregoing:

• The expense incurred by A... in the amount of € 6,345.00 (basic value mentioned in the internal document attached to invoice-receipt no. 44), relating to commissions for ID1..., cannot be accepted for tax purposes, in accordance with no. 1 of article 23 of the CIRC, and;

• The deduction of VAT of € 1,459.35 borne in this commission (mentioned in invoice-receipt no. 44) and in the acquisition of goods and services, used by the commission agent I..., is considered improper, in accordance with no. 1 of article 20 of the CIVA.

B) Supply and Installation of Kitchens

In addition to the accounting record of the acquisition value of the fractions and the amounts paid for Stamp Duty and Municipal Tax on Onerous Transfer of Real Estate (IMT), two amounts of € 16,127.94 and € 9,244.33 were also recorded in the "Investment Properties" account, corresponding to two invoices issued by the company "J..., Lda." (NIPC: ...), relating to the supply and installation of two kitchens, with built-in appliances. Based on these invoices, A... deducted the VAT charged to it by "J..., Lda." (hereinafter referred to as J...), in the total amount of € 5,835.63 (Annex III - sheets 1, 17 and 18, pages 1 and 33 to 36).

In clarifications, the taxpayer stated that by mistake two invoices relating to the installation of kitchens in the same real estate were charged and that (Annex II - sheet 20, page 40):

• The invoice of higher value pertains to the real estate located at ... C, at ..., no. ... (autonomous fraction Q (dwelling) acquired by A..., and;

• The other invoice (of lower amount) refers to real estate also located at ..., at no. A, ..., at ..., to which was assigned the ID... (property of a client of A...).

As invoice no. 303A, of 2013-12-03, issued by company J..., is related to the supply and installation of kitchen with built-in appliances, in the autonomous fraction Q of the urban real estate, acquired by A..., the VAT borne of € 3,709.43 was improperly deducted (combination of the provisions of articles 9 no. 30 and 20 no. 1, both of the CIVA). The amount of € 3,709.43 should have been included in the "Investment Properties" account and considered in the determination of the gain obtained from the sale of the autonomous fractions.

With respect to invoice no. 322A, of 2013-12-20, also issued by company A..., it is stated that the expense incurred in the supply and installation of kitchen in real estate owned by a third party, in the amount of € 9,244.33, cannot be accepted for tax purposes, in accordance with no. 1 of article 23 of the CIRC, and the deduction of VAT borne of € 2,126.20 is considered improper, in accordance with the provisions of no. 1 of article 20 of the CIVA, for the following reasons:

• A..., as a real estate mediator, receives exclusively commissions for the acquisition of clients for the real estate under its care, owned by its clients;

• If the real estate needs "improvements", the expenses related to these "improvements" should be borne by A...'s clients or even by the real estate purchasers (the new owners);

• A... assumed charges with the installation of kitchen in real estate of which it is not the owner, without being reimbursed for those charges.

C) Commissions for the Sale of Autonomous Fractions

As mentioned above, A... assigned to the autonomous fractions of urban real estate of its ownership that it sold the ID....

Through documentary analysis it was found that in the "Supplies and External Services" account (sub-accounts: sub-contracts and fees) expenses inherent to ID... were recorded, relating to commissions paid in the total amount of € 103,157.66 and VAT borne in these commissions was deducted, in the total amount of € 23,726.26 (Annex III - sheets 19 and 20, pages 37 to 40).

As the transfers of ownership rights of autonomous fractions of urban real estate are exempt from VAT, in accordance with no. 30 of article 9 of the CIVA, the tax deductions in the total amount of € 23,726.26 are considered improper, in accordance with the provisions of no. 1 of article 20 of the same provision. The said amount should have been considered as an expense of the period, in accordance with paragraph f) of no. 1 of article 23 of the CIRC (wording applicable at the date).

The invoice issued by the company "K..., Unipessoal, Lda." (currently referred to as "L... Lda.") mentions in the description the promotion of the apartment on the 6th floor of ... (...), which does not correspond to the apartment sold by A..., located at ... of ....However, the taxpayer, in the presentation of documents requested of it by notification, indicated that invoice no. 31/2013, issued by "K..., Lda.", corresponded to expenses incurred with its own real estate, that is, with ID1... (Annex III - sheet 21, pages 41 and 42).

Given that the apartment on the ... floor of ... (...), identified by ID..., generated to A... a revenue in commissions of € 16,250.00 (net value), corresponding to invoice no. 1300/000439 of 2013-10-17, issued to "G..., SA." (Annex III - sheet 22, page 43), it was considered that the amount invoiced by "K..., Lda." of € 76,500.00 (net value) could not correspond to the said ID, but to ID....

III.1.2. Acquisitions for Real Estate Owned by Third Parties

In the accounting of A... expenses relating to the acquisition of various furniture and the supply of construction materials were recorded, in which VAT was deducted based on the invoices relating to these acquisitions.

Based on the clarifications provided by the taxpayer, it was found that part of these acquisitions was intended for real estate owned by A...'s clients (Annex II - sheets 4 and 20, pages 7, 8 and 40 and Annex III - sheet 23, pages 45 and 46).

As mentioned above, A... only receives commissions for the sale of the real estate under its care, as a real estate mediator, with no records of revenues associated with the acquisition of furniture or construction materials for the real estate owned by its clients.

Given the foregoing, the expenses incurred in the acquisition of furniture and construction materials for real estate owned by A...'s clients, in the total amount of € 25,178.12, cannot be accepted for tax purposes, in accordance with no. 1 of article 23 of the CIRC, and the deduction of VAT borne of € 5,790.97 is considered improper, in accordance with the provisions of no. 1 of article 20 of the CIVA (Annex III - sheets 24 to 29, pages 47 to 57).

As for invoices nos. V001/201303385 and V001/201303632, issued by company M..., Lda., the taxpayer indicated them as relating to works carried out in its store at ... (the registered office location). However, these invoices state that the discharge of materials was carried out in ... (Annex III - sheets 23, 26 and 27, pages 46, 52 and 54).

III.1.3. Registration of Invoices Issued by Non-Residents

As mentioned above, in the "Supplies and External Services" account (in several sub-accounts of specialized works) invoices issued by non-residents in the national territory, especially by companies located in Hong Kong, were recorded. In accordance with the clarifications provided by the taxpayer, this invoicing relates to the promotion/advertising of real estate, in charge of A..., abroad for the acquisition of buyers wishing to invest in Portugal.

The expenses inherent to this invoicing amounted to 3,213,295.16 (Annex III - sheets 30 to 94, pages 59 to 188).

The payments of the invoices issued by company "N..." (hereinafter referred to as N...) were made by national bank transfers to an account held by company "O..., R. L." (NIPC: ...), at "P... (NIB: ...) (Annex III - sheets 58 to 79, pages 115 to 158), while the payments of the invoices issued by companies "Q... LTD.", "R... and "S..." (hereinafter referred to, respectively, as Q..., R... and S...) were made by international bank transfers to accounts held by these companies.

As for non-resident service providers in the national territory, the following must be taken into account:

• The self-assessment of VAT, in accordance with paragraph a) no. 6 of article 5 of the CIVA, which was not performed by the taxpayer. However, considering that A... carries out active taxable operations and is conferred the right to deduct self-assessed tax, we are faced with a void operation, that is, without any influence on the tax determined by the taxpayer in the periodic VAT declarations it submitted to the Tax and Customs Authority (AT);

• The provisions of article 65 of the CIRC, regarding the deductibility of expenses for the determination of taxable profit, in the case of entities based in Hong Kong that are subject to a clearly more favorable taxation regime, in accordance with Ordinance 292/2011 of 8 November (applicable to the tax year 2013);

• The payment of services (advertising or commissions) to non-resident entities, considered revenues obtained in the national territory, in accordance with no. 6 of paragraph c) of no. 3 of article 4 of the CIRC, subject to taxation by withholding at source as a final tax at the rate of 25%, in accordance with paragraph g) of no. 1 and nos. 3 and 4 of article 94 of the same legal instrument.

With respect to the taxation in the national territory of revenues paid to non-resident entities, article 98 of the CIRC establishes that there is no obligation to effect withholding at source, whenever, by virtue of a convention intended to eliminate double taxation, the competence to tax revenues earned by the non-resident entity is not attributed to the source state of the revenue or is only limited. This condition is dependent on the submission of a form (model 21-RFI) or in the specific case of Hong Kong, the same must accompany the tax residence certificate issued by the competent authorities of that territory (no. 2 of article 98 of the CIRC and Dispatch no. 22600/2009 of 14/10).

The documents presented by the taxpayer to prove the exemption from withholding at source of revenues paid to non-residents consisted of:

In the original of the form (model 21-RFI), for the Swedish company S..., certified by T..., on 2013-11-01, complying with the requirements for exemption from withholding of tax, provided for in article 98 of the CIRC;

In simple photocopies of tax residence certificates, issued in the name of companies Q... and R... based in Hong Kong (Annex III - sheet 95, pages 189 and 190). Subsequently, simple photocopies of certifications made by lawyer U... (NIF: ...), on 2017-03-31, based on verification of the originals exhibited to this lawyer in 2013 (Annex III - sheets 96 to 99, pages 191 to 197), were sent to this Finance Directorate, it not being possible to determine whether the documents that were certified at the request of A... corresponded to the tax residence certificates of the companies located in Hong Kong, as mentioned below.

As stated previously, on 2016-10-04, notification of the taxpayer was carried out, in accordance with articles 29, 37 and 42 of the Complementary Regime of Tax and Customs Inspection Procedure (RCPITA) and article 65 CIRC, in the person of E..., in his capacity as manager, to present on 7 November 2016 effective proof that the charges with the companies based in Hong Kong corresponded to actually performed operations and did not have an abnormal character or exaggerated amount (Annex II - sheets 1 and 2). The following was also requested:

• Justification for the payments of the invoices issued by N..., located in Hong Kong, having been made to an entity distinct and located in the national territory;

• The presentation of documents proving the charges incurred with the Swedish company S... (SE...).

Regarding the invoices issued by N..., located in Hong Kong, the taxpayer clarified that the payments of these invoices were made to the NIB indicated by this company, and presented a photocopy of a statement issued in the name of company D..., in which the NIB and the law firm O... R.L. (Annex II - sheet 9, page 17 and Annex III - sheet 58, page 106), in its capacity as recipient of the payments of the invoices issued by N... to A....

With respect to the clarifications and documents presented by the taxpayer, in response to the notification, the same are insufficient to prove the effective performance of the services invoiced by the Hong Kong companies and by the Swedish company, as mentioned below.

A) Accounting Errors

Among the accounting records and the supporting documents, the following situations were verified:

— Invoice no. 20130712-0015 of 2013-07-12, issued by Q..., in the amount of € 94,224.29, was recorded in the accounting of A... for the amount of € 94,229.29 (Annex III - sheets 30 and 36, pages 59 and 71);

— In invoice no. SNH12011 of 2013-09-04, issued by the company "V... (Hong Kong)", for the amount of 25,000 dollars and recorded in the accounting for 25,000 Euros, there is no indication of the name of the client of the said company. In accordance with the clarifications provided by the manager of A..., this invoice was sent to the accounting office, merely as an example, in order to verify if it "...would be in accordance with the rules..." and by mistake entered the accounting records of the company (Annex II - sheet 9, page 17 and Annex III - sheets 30 and 93, pages 60 and 185).

These are accounting errors that gave rise to expenses in the total amount of € 25,005.00, which should be disregarded for tax purposes, in accordance with no. 1 of article 23 of the CIRC.

B) Invoices Issued by Hong Kong Companies

Taking into account the accounting errors detected, the invoicing issued by companies located in Hong Kong to A... amounted to € 3,150,490.16.

In accordance with the description of these invoices, we are faced with "marketing and consulting services in China" or "marketing and advertising services in China".

Considering the provisions of article 65 of the CIRC (applicable to the tax year 2013), we have:

• Article 65 Payments to non-resident entities subject to a privileged tax regime

1 — The amounts paid or due, on any account, to natural or legal persons resident outside the Portuguese territory and there subject to a clearly more favorable tax regime, are not deductible for the purpose of determining taxable profit, unless the taxpayer can prove that such charges correspond to actually performed operations and do not have an abnormal character or exaggerated amount.

2 — It is considered that a natural or legal person is subject to a clearly more favorable tax regime when the territory of residence of the same appears on the list approved by ordinance of the Minister of Finance or when it is not there taxed on income tax identical or analogous to personal income tax (IRS) or corporate income tax (IRC), or when, with respect to the amounts paid or due mentioned in the preceding number, the amount of tax paid is equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory.

3 — For the purposes of the preceding number, taxpayers must possess and, when requested by the Directorate-General for Tax, provide evidence of the tax paid by the non-resident entity and the calculations made for the determination of the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence of the same does not appear on the list approved by ordinance of the Minister of Finance.

4 — The proof referred to in no. 1 must take place after notification of the taxpayer, carried out with a minimum of 30 days' notice.

5 - The provisions of the preceding numbers are also applicable to amounts paid or due indirectly, on any account, to the same natural or legal persons, when the taxpayer has or should have knowledge of the destination of such amounts, such knowledge being presumed when there are special relations within the meaning of no. 4 of article 63 between:

a) The taxpayer and the natural or legal persons resident outside the Portuguese territory and there subject to a clearly more favorable tax regime; or

b) The taxpayer and the agent, trustee or intermediary who proceeds to payment to the natural or legal persons referred to in the preceding paragraph."

This rule is clearly intended to combat evasive operations, by means of payments in favor of non-resident entities established in privileged tax jurisdictions, so that revenues generated and located in Portugal are not transferred to places with more favorable tax regimes, with reduced or non-existent taxation and traditionally averse to collaboration in information for tax purposes. However, with respect to the non-deductibility of the expenses incurred, a safeguard clause was introduced that operates through proof by the taxpayer, incumbent on the same to demonstrate the cumulative fulfillment of two conditions:

• The expenses correspond to actually performed operations; and

• They did not have an abnormal character or exaggerated amount.

This is a dual proof, incumbent on the taxpayer to demonstrate that:

• The expenses materialized in actual acts, not merely the formal existence of contracts, invoices and bank transfers being sufficient,

• The expenses are not abnormal or excessive, that is, that they constitute just remuneration for the services, and may, in particular, be comparable with expenses relating to analogous services.

When it comes to entities not resident in Portugal and located in privileged tax jurisdictions, such as Hong Kong, it is not sufficient to "dress up" accounting operations with formal documents (contracts, invoices, bank transfers), there must be actual evidence of the performance of the services by the service providers.

With proof of the effective realization of the expenses (in response to the notification of 2016-10-04), the taxpayer limited itself to presenting the following elements;

-> A summary description relating to the services invoiced by the companies located in Hong Kong (N..., Q... and R...), which consisted of the search for clients abroad who wanted to invest in Portugal through the acquisition of real estate, advertising A... at fairs and events (Annex II - sheet 9, page 17), without evidencing the conduct of any advertising campaign or equivalent by the cited companies;

-> The contracts/agreements concluded between A... and the companies N... Q... and R..., all written in English and within the same mold, that is, with the same clauses, whose contracted services are the same. The differences existing in these contracts/agreements result from the percentages of remuneration to be attributed for the services rendered, depending on the value of sale of the real estate (16% for N..., 17% for Q... and 1% for R...) (Annex III - sheets 100 to 104, pages 199 to 207);

-> Tables drawn up with the indication of the address and ID of the real estate sold with the participation of A..., as a real estate mediator, and intervened by the companies located in Hong Kong (Annex III - sheets 105 and 106, pages 209 to 211);

-> Photocopies of the invoices issued by companies N..., Q... and R..., handwritten with the identification numbers assigned by A..., that is, the ID (Annex III - sheets 107 to 130, pages 213 to 259);

-> Photocopies of the invoices issued by A... to its clients, with the indication of the ID mentioned in the description of the invoices, which are also handwritten with the word "Chinese", suggesting that the real estate, in charge of this company, were acquired by citizens nationals of the People's Republic of China" (Annex III - sheets 131 and 132, pages 261 to 263, by way of example). The ID numbers mentioned in the invoices issued by A... correspond to the ID numbers handwritten in the photocopies of the invoices issued by the companies based in Hong Kong;

— Photocopies of real estate mediation contracts.

Based on the documents presented by A..., the amounts invoiced by this company to its clients were compared with the values invoiced by the companies located in Hong Kong to A... (Annex III - sheet 133, pages 265 and 266). From this analysis it was found that:

• The invoicing of the companies based in Hong Kong represents, on average, about 71.37% of the commissions invoiced by A... to its clients (for the same real estate, according to the indication of the taxpayer), and this percentage can vary between 4.23% and 85.52%;

• There are invoices issued by more than one of the companies based in Hong Kong, for the same real estate, according to the ID handwritten in the photocopies of the invoices issued by companies N..., Q... and R..., with no justification being presented by the taxpayer for this situation.

Considering the clarifications and documents presented by the taxpayer, and their respective analysis, it is concluded that no concrete evidence was presented that the services invoiced by companies N..., Q... and R..., located in Hong Kong, were effectively performed, nor that the payments made by A... to the said companies corresponded to just remuneration for the services.

Given the foregoing, the amount of € 3,150,490.16 recorded in the accounting as an expense ("Supplies and External Services" - Specialized Works), arising from invoices issued by companies N..., Q... and R..., cannot be accepted for tax purposes, and is subject to independent taxation at the rate of 35%, in accordance with the provisions of nos. 1 and 8 of article 88 of the CIRC, and the amount of tax corresponding to this taxation is € 1,102,671.56 (€ 3,150,490.16 X 35%).

C) Revenues Paid to Entities Resident in Hong Kong

D) Invoice Issued by Swedish Company

A... recorded in the accounting, as an expense, the amount of € 37,800.00, based on invoice no. 13037, dated 2013-12-11, issued by the Swedish company S... and with the description of "Service fee" (Annex III - sheet 94, page 187).

Taking into account the clarifications provided by the taxpayer, the Swedish company S... invoiced commissions for its intervention in the sale of real estate under A...'s care (Annex II - sheet 9, page 17).

In accordance with the AT database, company S... is registered in the VAT register (VIÉS), since 2013-02-01, for the activity of wholesale trade in clothing and footwear (Annex III - sheet 134, page 267).

As proof of the performance of the service by S..., the taxpayer presented (Annex III - sheets 135 and 136, pages 269 to 272):

• The photocopy of the invoice issued by this company, handwritten with the numbers of the processes ID... and ID...;

• The photocopy of invoice no. 008/2014 of 2014-01-20, issued by company N... (located in Hong Kong), handwritten with the same numbers of the processes (IO) that are handwritten in the photocopy of the invoice issued by S...;

• Photocopies of two invoices issued by A... to its client, "W..., S.A." (NIPC: ...), relating to the commissions received from the sale of the real estate identified by ID... and ID... (invoices nos. 1300/000540 and 1400/000023, issued on 2013-12-12 and 2014-01-13, respectively).

Given the foregoing, no justification was presented by the taxpayer for the need to resort to two companies, resident in different places (Sweden and Hong Kong), one to invoice commissions ("service fee") and another to invoice "marketing and advertising services in China", for the sale of the same real estate, under A...'s care, in which the Swedish company itself declared to carry on a commercial activity linked to the clothing and footwear sector (VIÉS).

Taking into account the provisions of no. 1 of article 23 of the CIRC, the amount of € 37,800.00 invoiced by the Swedish company S... and considered by the taxpayer as an expense of the period, cannot be accepted for tax purposes, because it was not demonstrated that this expense has a relationship with the obtaining of revenues, taking into account the geographical location of the companies indicated as service providers and the activity carried out by the Swedish company.

III.1.4. Registration of Invoice Issued by Ceased Company

In March 2013, the amount of € 14,388.36 was recorded in the "Supplies and External Services" account (sub-account: 622503 referred to as "commissions paid to other agencies"), based on invoice no. 122-02 of 2012-03-26, issued by the company "X..., Lda." (NIPC: ...) to A..., and VAT of € 3,309.32, mentioned in the said invoice, was deducted (Annex III - sheet 137, page 273).

With respect to the accounting record of this invoice and its respective payment, the following is stated:

— In accordance with the AT database, the company "X..., Lda.", issuer of invoice no. 122-02 of 2012-03-26, has been ceased since 2011-07-01, for VAT and IRC purposes;

— The date of issue of the invoice is prior to the commencement of activity of A..., which occurred on 2012-10-02;

— Taking into account the accounting records of A..., associated with the payment of the total invoice amount of € 17,697.68 (€ 14,388.36 + € 3,309.32), there are only several bank transfers in the total of € 16,897.17, to bank accounts of three persons, Y..., Z... and AA... (Annex III - sheets 137 to 139, pages 273 to 277).

In clarifications, the taxpayer states that (Annex II - sheet 22, page 44):

• The Share Capital of the company "X..., Lda." was held by three agents who collaborated with A... (Z..., Y... and AA...), to whom commissions were paid for the service evidenced in invoice no. 122-22, and effectively rendered;

• The payment in question was made to the accounts (NIB) that were indicated by those responsible for the company, and;

• It never suspected the integrity of the said company, being unaware that it had already ceased operations.

On 2017-04-06, the taxpayer sent to this Finance Directorate photocopies of three real estate procurement contracts, concluded with company D... and with each of the gentlemen identified below (Annex III - sheets 140 to 144, pages 279 to 287):

• BB..., with NIF: ...;

• AA..., with NIF: ..., and;

• Z..., with NIF: ....

Besides the fact that the three contracts were concluded with company D... and the same were signed by natural persons in the capacity of real estate procurement agents, no contract was presented concluded between A... and the company "X..., Lda.", and none of the gentlemen mentioned above held management functions in this company, in accordance with the AT database.

Despite the taxpayer considering that the invoice issued by the company "X..., Lda.", proves the services rendered, it is not possible to determine the performance of the same, taking into account the way the invoice payments were processed, in which A... itself should have required each of the beneficiaries to issue the corresponding invoices for the amounts they received.

Based on the foregoing, the invoice issued by the company "X..., Lda.", gave rise to:

• The recording of an expense that does not ensure it is necessary to obtain revenues, in the amount of € 14,388.36, which cannot be accepted for tax purposes in accordance with no. 1 of article 23 of the CIRC;

• VAT deducted in the total amount of € 3,309.32, considered improper in accordance with the provisions of no. 1 of article 20 of the CIVA.

III.1.5. Representation Expenses

In various sub-accounts of the "Supplies and External Services" account (travel and accommodation, commissions and advertising) expenses were recorded which, due to their characteristics or due to the absence of other justifying elements, should have been considered as representation expenses, which are subject to independent taxation at the rate of 10%, in accordance with the provisions of no. 7 of article 88 of the CIRC. It should be noted that in some of these expenses, VAT mentioned in the supporting documents was deducted, contrary to the provisions of paragraphs d) and e) of no. 1 of article 21 of the CIVA.

The expenses incurred by A... based on the invoices evidenced in this table, refer to the following situations:

• Expenses incurred and not reimbursed, relating to accommodation for service providers (commission agents) (Annex II - sheets 4, 8 and 21, pages 8, 15 and 41 and Annex III – sheets 145 to 147, pages 289 to 293);

— Expenses incurred with dinners of considerable amounts, whose documents are handwritten with the following phrases "team dinner" or "store dinner" (Annex III - sheets 147 and 148, pages 294 to 296);

— Charges relating to travel and trips, without the invoices identifying the beneficiary(ies) (Annex III - sheets 149 to 151, pages 297 to 301). The taxpayer associates these expenses with the real estate mediation activity (acquisition of clients and promotion of real estate to potential buyers), and without presenting documents that confirm the identity of the "travelers", claims that the trips were carried out by the partners of A..., F..., E..., FF... and CC... (Annex II - sheets 21 and 22, pages 41 to 43). As to the "summary" indication/identification of A...'s partners, it is stated that:

• This company has as partners the companies C... and D..., which carry out the same activity as A.... The management functions in A... are exercised by F... and E...;

• C... has exclusively as partner-manager Mr. F..., the sole holder of the Share Capital of this company. The trips indicated as carried out by this gentleman could have been performed on behalf of either of the companies, C... or A...;

• D... has as partner-managers, FF... and E.... The trips indicated as carried out by these gentlemen (always together in the capacity of travelers) could have been carried out on behalf of the said company;

• Regarding Mr. CC..., it is unknown to which companies he may have a share.

• In the advertising sub-account, invoice no. 142 of 2013-12-13, issued by the company "DD..., Lda.", was recorded with the description "Firewalking Event", and VAT mentioned in the said invoice was deducted (Annex III - sheet 151, page 302). In clarifications, the taxpayer associates this "event of walking on hot coals" as a training activity and personal development, in which part of its agents (the commission agents) participated, without making a statement about reimbursement of the charges it incurred in this "event/entertainment", by the participants (Annex II - sheet 23, page 46);

• In the commissions sub-account, invoice no. 1300/000001 of 2013-09-24, issued by the company "EE..., Lda.", was recorded with the description of "Promotional Action", and VAT mentioned in the said invoice was deducted (Annex III - sheet 152, page 303). Considering the activity carried out by this company, of retail trade in supermarkets, and the clarifications of the taxpayer, it is presumed that the said company supplied to A... food goods, beverages and personnel for the celebration/commemoration of certain dates or events. The clarifications of the taxpayer state that (Annex II - sheet 23, pages 45 and 46):

• A... held several "promotional actions", in order to promote and publicize the activity it carries out, which involved the acquisition of goods from the company "EE..., Lda.", which carried out a supermarket activity;

• Upon learning of the pre-liquidation of the business of the company "EE..., Lda.", it acquired almost all of the stock (without the presentation of a document that identifies the quantities and goods that were acquired, which should have been included in the respective invoice) that the supermarket had before closure, and also contracted the services of its employees to provide support in the "promotional actions";

• The promotional actions, among others, covered the opening of several B... stores, the celebration of Children's Day (for the benefit of the homeless) and the celebration of Women's Day.

Based on the foregoing:

• The VAT deducted based on the invoices issued by the companies "DD..., Lda. and "EE... Lda." (identified in the above table), in the total amount of € 23,759.00, is considered improper in accordance with paragraphs d) and e) of no. 1 of article 21 of the CIVA;

• The amount of € 23,759.00, relating to the improperly deducted VAT, is considered an expense of the period, in accordance with paragraph f) of no. 1 of article 23 of the CIRC;

• The amount determined as representation expenses of € 146,239.07 (including VAT of € 23,759.00) is subject to independent taxation at the rate of 10% (article 88, no. 7, of the CIRC), and the amount of tax inherent to these expenses is € 14,623.91.

III.2. Calculation of Total Corrections

Given the situations described in the above sub-sections of this Chapter, technical corrections were made, for IRC and VAT purposes, which take the amounts indicated below.

For IRC purposes

(...)

IX. RIGHT TO BE HEARD - BASIS

In compliance with the provisions of articles 60 of the General Tax Law and 60 of the Complementary Regime of Tax and Customs Inspection Procedure, the taxpayer was notified, through its representative, of the Draft Tax Inspection Report by our letter no. ..., dated 2017-07-03, in order to enable the exercise of the prior right to be heard, and a period of 15 days was granted to exercise this right.

On 2017-07-21, the Right to be Heard of the taxpayer A... was received by this Finance Directorate (entry no. 2017... Annex IV - sheets 1 to 14, pages 1 to 28), in which the grounds presented, relating to the corrections proposed, are based:

• Essentially on transcriptions of phrases/paragraphs from the Draft Tax Inspection Report to highlight the fact that the Tax Inspection Services (SIT) made corrections in IRC and VAT, without taking into account the documents and clarifications presented by A... during the inspection procedure, "...which led to wrong conclusions that cannot be maintained insofar as they are flagrantly illegal", and,

• In a more "detailed" description of the expenses incurred by A... based on invoices issued by companies based in Hong Kong, associating this invoicing with commissions necessary for the sale of real estate owned by A... itself.

Regarding the illegality of the proposed corrections, it is understood from the reading of the Right to be Heard, that the application of the tax rules inherent to these corrections have no relevance in light of the clarifications/explanations and documents provided by the taxpayer, during the inspection action and "ignored or disregarded" by the SIT (items 2 to 123 of the Right to be Heard).

Transcription of Phrases/Paragraphs from the Draft Tax Inspection Report

With respect to the transcription of phrases/paragraphs from the Draft Tax Inspection Report, introduced in the Right to be Heard, it is stated that the same do not reflect all the facts evidenced in the said draft, giving rise to interpretations different from those that are underlying the proposed corrections (items 4 to 59 of the Right to be Heard).

As it is exclusively a description of facts that are duly substantiated in the Draft Tax Inspection Report, there is no need to reference them again, under penalty of repetition.

Invoices Issued by Companies Located in Hong Kong

In the accounting of the taxpayer were recorded:

• Expenses from invoices issued by companies Q..., R... and N..., based in Hong Kong, in the amount of € 3,150,490.16,

• Cross-border transfers of amounts to the Hong Kong territory, to bank accounts held by companies Q..., R..., as payment of the invoices issued by these companies, and;

• National bank transfers to an account held by company "O..., R. L.", as payment of the invoices issued by N....

By application of the provisions of no. 1 of article 65 of the CIRC, the amount of € 3,150,490.16, was not accepted for the determination of taxable profit, and was subject to independent taxation at the rate of 35%, in accordance with the provisions of nos. 1 and 6 of article 88 of the CIRC, and the amount of tax, resulting from this taxation, is € 1,102,671.56 (see paragraph B) of subsection 1.3 Chapter III, of the Draft Tax Inspection Report).

Regarding this situation, the taxpayer, in the Right to be Heard, presents only a more "detailed" description (items 60 to 119):

• Evidencing as "procurement commissions" the services invoiced by the companies located in Hong Kong;

• Considering that the evidence elements incumbent on the taxpayer, that the expenses incurred corresponded to actually performed operations and did not have an abnormal character or exaggerated amount (safeguard clauses mentioned in no. 1 of article 65 of the CIRC), are duly proven, and,

• Highlighting the contracts concluded with the companies located in Hong Kong as crucial evidence documents.

The taxpayer's allegations, relating to this description, are summarized as follows:

— The invoices issued by the companies based in Hong Kong respect commissions for the procurement of clients for the real estate of which A... was the owner;

— The commissions were only paid if clients were procured, that is, if they purchased the real estate of which A... was the owner;

-> The contracts concluded (highlighted several times as crucial evidence documents) with the procuring entities do not establish an obligation of means in the disclosure of real estate or in marketing actions, but rather of results (the sale of the real estate);

• The services included in the commissions were effectively performed by the procurement companies and were consubstantiated in:

• The prospecting of clients in the Chinese market;

• The presentation of the Golden Visa program;

• The organization of trips and stays in Portugal for visits to the real estate.

• The accompaniment of visits to the real estate with translators for the Chinese clients and car rental for that purpose.

-> The commissions paid are higher than the values practiced by the national real estate mediation companies, due to the fact that these companies based outside the community area incur higher expenses related, namely, to trips to Portugal, stays in hotels and personalized accompaniment of potential clients.

-> A... was forced to accept conditions that it would not accept if the demand in the national market, relating to the real estate sector, had not had a marked contraction. The resort to companies located in Hong Kong, to procure clients in the People's Republic of China, allowed the conclusion of contracts for the purchase and sale of real estate;

-> The wrong conclusion by the SIT, in accordance with what was demonstrated through the presentation of the contracts concluded that establish an obligation of results (procurement of clients in the People's Republic of China and consequent conclusion of contracts), in the demonstration of the commissions paid, means of payment and purchase and sale deeds.

On these allegations, the following is stated:

-> The activity carried out by A... consists of real estate mediation, therefore, the real estate is not/were not its property, and doubt arises as to whether the more "detailed" description on the invoicing issued by the Hong Kong companies, considered in the Right to be Heard as "commissions", is actually directed to A...;

-> The description of the invoices issued by the companies located in Hong Kong does not evidence that we are faced with "commissions", and the clarifications of the taxpayer, in the course of the inspection action and in response to the notification of 2016-10-04, go in another direction, that is, in the association of these invoices to the advertising of A... at fairs and events with the objective of seeking buyers abroad for the real estate it had under its care;

-> Contrary to what is mentioned in the Right to be Heard (item 91), there was no "demonstration of commissions" paid, and the public deeds of purchase and sale of the real estate intervened by A..., as a real estate mediator, were not presented, which could, at least, confirm the acquisition of real estate by residents in the Hong Kong Special Administrative Region, taking into account the diversity of services included in the so-called "commissions" of "almost exclusive" connection with potential buyers of the real estate.

When it comes to entities not resident in Portugal and located in privileged tax jurisdictions, such as Hong Kong, it is not sufficient to present as effective evidence of the performance of the services the formal documents (contracts, invoices, bank transfers), there must be other elements/documents that can unequivocally attest to the performance of the same.

Considering all the services included in the so-called "commissions", not even evidence was presented attesting to the connection of A... to the companies issuing invoices.

Given the foregoing, the Tax Inspection Services understand that the clarifications/explanations and documents presented by the taxpayer in the course of the inspection action, as well as the arguments presented in the Right to be Heard, were not sufficient and adequate to prove, in accordance with no. 1 of article 65 of the CIRC, that is, do not provide unequivocal proof that these expenses corresponded to actually performed operations.

Conclusion

The clarifications/explanations and documents presented by the taxpayer, in the course of the inspection action, were not ignored or disregarded, as is verified by reading the Draft Tax Inspection Report and its respective annexes, the same were duly analyzed, resulting from this analysis the corrections proposed.

C) Following the inspection, the Tax and Customs Authority issued the IRC assessment no. 2017..., relating to the tax year 2013, the Compensatory Interest assessment acts nos. 2017... in the amount of € 253,725.67, to which corresponds the Statement of Account Settlement no. 2017... (Compensation no. 2017...), from which results tax due in the amount of € 2,249,628.05; (documents nos. 2 to 4 attached with the request for arbitral pronouncement, the content of which is reproduced);

D) The Claimant filed an administrative complaint against the aforementioned assessments, which was dismissed by decision of 13-07-2018, with the grounds set forth in document no. 1 attached with the request for arbitral pronouncement, the content of which is reproduced, in which the following is stated, among other matters:

VI - OVERALL ANALYSIS AND OPINION

As already mentioned, in the context of inspection actions for the years 2013 and 2014, corrections were made to the taxable matter, based on "Non-deductible Expenses" and VAT considered as an expense, and tax was determined based on expenses subject to independent taxation, as detailed below:

Having analyzed the situation and the arguments now presented by the claimant, we find that broadly speaking, they are identical to those previously set out in the right to be heard in the context of the inspection procedure.

The claimant states that in the assessment acts notified, the grounds that determined their issuance are not explicitly stated and that they were issued with breach of the rules and principles, due to violation of the duty to provide grounds, and should be annulled accordingly.

Let us see,

Acts carried out by the Tax Authority capable of affecting the rights and legitimate interests of taxpayers must always be reasoned, in accordance with the requirements of article 77 of the General Tax Law.

"The duty to provide grounds is thus intended to permit the recipient of the act to know its cognitive and evaluative itinerary, enabling them to know which reasons led the Administration to its practice and the reason why it decided in this direction and not another. (...) an act is properly reasoned whenever the administrated party, placed in the position of the normal recipient - the bonus pater familias mentioned in article 487 of the Civil Code - is properly informed of the reasons that motivated it".

Now, on 25-08-2017, the claimant was notified through official letter no. ..., dated 23-09-2017 (cf. sheets 94 to 97 in annex) through its representative, of the Tax Inspection Report, relating to Service Order OI2016.... This notification mentions "(...) shortly, the AT services will proceed to notify the respective assessment, which will contain the means of defense, as well as the payment deadline, if applicable (...)".

Following this, the respective IRC assessments no. 2017... dated 30-08-2017 (cf. sheets 90 to 93 in annex) appear, in which it is mentioned "(...) IRC assessment relating to the period to which the revenues are attributable, in accordance with the explanatory note attached to the grounds already sent (...)".

It was thus concluded that, given what is set out in the Inspection Report, the claimant is not correct in what concerns the arguments expended in defense of the lack of grounds in the assessment act.

Analyzing the administrative complaint presented by A... and the report of the SIT, we can verify that broadly speaking, the allegations presented in the administrative complaint are the same as those presented during inspection, B which were based essentially on:

A- Expenses not accepted for tax purposes in accordance with no. 1 of article 23 of the CIRC

The expenses with commissions relating to acquisition of autonomous fractions can only be accepted for tax purposes if the claimant is the real estate mediator and the respective invoice has been issued in its name, which did not occur.

Invoice no. 322A issued by J..., relating to supply and installation of kitchen, as well as invoices relating to acquisition of furniture and construction materials for real estate owned by A...'s clients cannot be accepted for tax purposes by the latter because it is not the owner of the real estate.

Invoice no. SNH12011 issued by company "V..." was recorded in the claimant's accounting by mistake, so its amount should be disregarded for tax purposes.

The amount invoiced by the Swedish company S... and considered as an expense of the period by A... cannot be accepted for tax purposes because the relationship of this expense with the obtaining of revenues was not demonstrated, taking into account the geographical location of the companies indicated as service providers and the activity carried out by the Swedish company.

The invoice issued by the Company "X... Lda. was issued after it had ceased and before the commencement of activity of the claimant, so the recording of an expense that does not ensure it is necessary to obtain revenues, cannot be accepted for tax purposes.

B- Invoices issued by Hong Kong companies – article 65 of the CIRC. The inspection report states, in summary, and as per transcription.

"As for non-resident service providers in the national territory, the following must be taken into account (...) the provisions of article 65 of the CIRC regarding the deductibility of costs for the determination of taxable profit in the case of entities based in Hong Kong that are subject to a clearly more favorable taxation regime in accordance with Ordinance 292/2011 of 8 November (applicable to the tax year 2013)" (cf. sheet 16/36 of the IR and 65 - verso - of the case)

Taking into account the accounting errors detected, the invoicing issued by companies located in Hong Kong to A... amounted to € 3,150,490.16, as can be seen in the following table:

In accordance with the description of the invoices we are faced with "marketing and consulting services in China" or "marketing and advertising services in China", so we must take into account the provisions of article 65 of the CIRC, where a safeguard clause was introduced that operates through proof by the taxpayer, incumbent on the same to demonstrate the cumulative fulfillment of two conditions:

• The expenses correspond to actually performed operations;

• The expenses do not have an abnormal character and an exaggerated amount.

As proof of actual realization of the expenses, the taxpayer presented some elements in the context of tax inspection, which the inspection team analyzed and concluded that "considering the clarifications and documents presented by the taxpayer, and their respective analysis, it is concluded that no concrete evidence was presented that the services invoiced by companies N..., Q... and R..., located in Hong Kong, were effectively performed, nor that the payments made by A... to the said companies corresponded to just remuneration for the services".

In this seat, the claimant brings no additional evidence document to the proceedings.

Now, in the situation now under analysis, the reversal of the burden of proof operates, which will be incumbent on the taxpayer to produce, who, in the first place, must demonstrate that the expenses materialized in actual acts, not merely the formal existence of contracts, invoices and bank transfers being sufficient, and, in the second place, that those expenses are not abnormal or excessive, which can be achieved through comparison with comparable market situations in a context of full competition.

Now, from the analysis of the claimant's arguments and documentary analysis, it continues to lack substantial proof, as is mentioned in the inspection report, and the following is not proven:

• That any action, advertising campaign or equivalent, concrete and effective, was carried out by the service-providing companies aimed at the sale of fractions, or the promotion of various; enterprises in the Chinese market, in order to promote the obtaining of investors, which would allow the acquisition of the enterprises and subsequent management;

• Any type of proof that the service was actually rendered, through the presentation, namely, of market prospecting studies, investment advantages, marketing campaigns, since no evidence of the same was presented on paper, recordings, video, computer, digital or any other medium;

• And even if the physical evidence of the work performed were exhibited, it would still be necessary to demonstrate the adequacy of each of them to the requirements of article 23 of the IRC Code;

• Regarding the amount of commissions charged by companies N..., Q... and R..., the claimant did not present proof of analogous services in the market.

On this matter, of an abnormal character or exaggerated amount of the operations, part of the judgment rendered on 19/02/2015 in case 08126/14 10 Central Administrative Court of the South (TCAS) is transcribed, which judged a case of payment to non-resident entities subject to a privileged tax regime, highlighting the importance of demonstrating the evidence:

"(...) as for the proof of the non-existence of the abnormal or exaggerated character of the expenses, this must pass through the demonstration that the contract, whose truthfulness was proven, is presented as balanced. For that purpose, the taxpayer must demonstrate what the real importance of the advantages gained by the contract in question is, such as proving that the established charges constitute just remuneration for those advantages, notably, by comparison with the costs of analogous services in the market (...)."

In the context of administrative complaint, the claimant contests the corrections which, it is speculated, will have been at the origin of the IRC and IC assessment acts to the extent that those corrections suffer from error regarding the assumptions, both of fact and of law, which should determine their annulment", merely reiterating that the expenses in question are supported by invoices duly registered in its accounting, without bringing to the proceedings new facts/documents capable of altering the corrections proposed by the SIT.

In this sense, it appears to us that the corrections made by the Tax Inspection Services are correct.

In fact, as the taxpayer is invested with the status of claimant, the burden of proof of the facts constituting the rights it alleges falls to it in accordance with no. 1 of article 74 of the General Tax Law "the burden of proof of the facts constituting the rights of the tax administration or taxpayers falls on whoever invokes them", which is not the case here.

Consequently, facts should only be considered proven when determined with absolute certainty, reason for which the failure to present proof or its insufficient presentation cannot fail to influence the merit of the claim.

COMPENSATORY INTEREST

The Judgment of the Central Administrative Court South, Case: 06670/13, of 17-10-2013, establishes that "(...) Liability for payment of compensatory interest depends on the existence of a situation in which there is a tax debt (which serves as the basis for calculating interest), with the following prerequisites met:

a) Acts or omissions that lead to a delay in the structuring of an assessment; or

b) Non-payment of tax that should be paid in advance (without prior notification of the taxpayer by the tax authority), or

c) Non-payment of tax that was withheld or should have been withheld and delivered to the tax authority', or

d) Excessive reimbursement;