Process: 342/2017-T

Date: November 29, 2017

Tax Type: IRC IRS

Source: Original CAAD Decision

Summary

CAAD Arbitral Decision 342/2017-T addresses the complex intersection of IRC (Corporate Income Tax) and IRS (Personal Income Tax) concerning asset variations and shareholder reimbursements. The claimant company challenged additional IRC assessment of €14,640.82 and withholding tax assessment of €33,804.41 arising from a 2014 tax inspection. The dispute originated from shareholder reimbursements totaling €359,097.44, comprising advances on profits (€200,000) and ancillary contributions (€159,097.44) to two shareholders. Due to account settlements between shareholders, the company transferred €290,079.65 to one shareholder and €69,017.78 to the other, rather than the originally resolved equal split. The Portuguese Tax Authority (AT) treated €110,530.93 as taxable income, creating double taxation by considering it both a corporate benefit under IRC and an advance on profits under IRS in the shareholder's sphere. The company argued it recorded no gain since total transfers equaled the shareholder resolution amount, and invoked Civil Code article 767 regarding third-party payment of obligations. The core legal issue concerns whether the AT properly exercised its inspection powers under the principle of legality, and whether it bore the burden of proving that recorded operations did not constitute genuine reimbursements. This decision has significant implications for corporate tax treatment of shareholder transactions, the boundaries of AT's powers to recharacterize operations, and the constitutional prohibition against double taxation of the same economic capacity under Portuguese tax law.

Full Decision

ARBITRAL DECISION

I - REPORT

A - IDENTIFICATION OF THE PARTIES

Claimant: A…, S.A., with registered office located at … Lot…, …-… …, …, bearer of the collective person tax identification number NIPC: …, hereinafter referred to as Claimant or taxable person.

Respondent: Tax and Customs Authority, hereinafter referred to as Respondent or AT.

The Claimant filed a request for the constitution of an Arbitral Tribunal in tax matters and a request for arbitral decision, pursuant to the provisions of article 2(1)(a) and article 10(1)(a), both of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter abbreviated as RJAT).

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD, and in accordance with the provisions of article 11(1)(c) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Tax Authority was notified on 2017-08-01.

The Claimant did not proceed with the appointment of an arbitrator, wherefore, pursuant to the provisions of article 6(1) and article 11(1)(b) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed Rita Guerra Alves as Arbitrator, with the appointment having been accepted by her in accordance with legal provisions.

On 2017-07-14, the parties were duly notified of this appointment, and neither party manifested the intention to refuse the arbitrator's appointment, in accordance with article 11(1)(a) and (b) of the RJAT and articles 6 and 7 of the Deontological Code.

The Singular Arbitral Tribunal was regularly constituted on 2017-08-01, to examine and decide on the subject matter of the present dispute, and the Tax and Customs Authority was automatically notified on 2017-09-17 as shown in the respective minutes.

B – CLAIM

  1. The present Claimant petitions for a declaration of illegality of the tax assessment acts that gave rise to the additional corporate income tax assessment no. 2016…, in the amount of €14,640.82, with payment deadline of 27.02.2017, and to the withholding tax assessment no. 2016… in the amount of €33,804.41, with payment deadline of 23.02.2017;

  2. For the payment of compensatory interest.

C – CAUSE OF ACTION

  1. To substantiate its request for arbitral decision, the Claimant alleged, with a view to obtaining a declaration of illegality of the tax assessment acts, the following:

a. Following the tax inspection procedure initiated with service orders 012016… and 012016…, relating to the years 2013 and 2014, the Claimant was notified of the Tax Inspection Report in which there appear (with reference to the year 2014) arithmetic corrections to the taxable matter of the present Claimant under corporate income tax in the amount of €110,530.93, and corrections to withholding taxes, under personal income tax, in the amount of €30,948.66;

b. The above-described corrections gave rise to the additional corporate income tax assessment no. 2016…, in the amount of €14,640.82, with payment deadline of 27.02.2017, and to the withholding tax assessment no. 2016…, in the amount of €33,804.41, with payment deadline of 23.02.2017;

c. On 8 July 2014, it was unanimously decided by the shareholders of company B…, S.A. to proceed with the reimbursement of part of the advances that had been made by C… and D… in 2010 and 2012 respectively, in the total amount of €200,000.00, with each of the aforementioned shareholders to receive the sum of €100,000.00;

d. Further, the restitution was decided, to the same shareholders, of part of the ancillary contributions subject to the regime of supplementary contributions, in the total amount of €159,097.44, with each shareholder to receive half of the said amount, that is, €79,548.72;

e. Thus, each of the above-mentioned shareholders had the right to receive the total sum of €179,548.72, corresponding to €100,000.00 of advances and €79,548.72 of ancillary contributions;

f. On 8 July 2016, the Claimant transferred to the account of shareholder C…, the amount of €290,079.65 and to shareholder D… the sum of €69,017.78;

g. In this regard, it should be clarified from the outset that the Claimant company did not record (nor could it record) any gain or profit in the context of this operation since, overall, the amount transferred to the two shareholders corresponds exactly to the amount contained in the shareholder resolution;

h. Indeed, in accordance with the shareholder resolution dated 8 July 2014, the Claimant company had to return to the two shareholders the total sum of €359,097.44, with half of this value, that is €179,548.72, going to each of the shareholders;

i. By reason of account settlements between the said shareholders, the Claimant company transferred in favor of one of the shareholders the sum of €69,017.78 and in favor of the other the remainder in the amount of €290,079.65;

j. Whence it results that, overall, the sum transferred to the two shareholders is exactly equal to the value of the shareholder resolution (€359,097.44), which is why it is readily concluded that the Claimant company had no gain in the context of this operation;

k. Thus, another obvious consequence results from the fact that the Tax Administration is framing the same income in a completely different and contradictory manner in the sphere of the Claimant company and in the sphere of the shareholders, resulting in double taxation of such income, first under corporate income tax and then under personal income tax;

l. Indeed, in light of the thesis defended by the AT in its inspection report, the sum of €110,530.93 is considered a benefit in the sphere of the Claimant and, as such, subject to taxation (partly as income and partly as a positive capital variation not excluded from taxation, an understanding with which we disagree for the reasons already exposed) and equally considered a benefit in the sphere of shareholder C… as advance on profits and, as such, subject to taxation;

m. Which translates into an illegal duplication of the taxation of the said sum, since the same amount is considered taxable income in the sphere of the company and also taxable income in the sphere of the shareholder;

n. As is known, the Tax Authority in the exercise of its inspection powers is obliged to act in the use of strictly binding powers and is subject to the principle of legality, with the burden of proof of the existence of all the requirements that determined the corrections to the taxable matter of the Claimant and which were at the basis of the challenges that are the subject of the present request for arbitral decision;

o. The Claimant alleges that at the time of the realization of the respective payments, on the indication of shareholder D… and following a settlement of accounts between the two shareholders, the total amount of €290,079.65 was transferred to the bank account held by C…;

p. Moreover, it argues that it is quite frequent for this type of situations to occur in which, for reasons of practical convenience, the obligation is not satisfied by the debtor itself (in this case shareholder D…) but rather by a third party (in this case the Claimant company), without such having the perverse effect of disqualifying the operation downstream;

q. It argues that this possibility is, moreover, legally provided for in article 767 of the Civil Code, where it is expressly provided for the possibility of the obligation being performed by a third party and not by the initial debtor;

r. The Claimant concludes that, in the case sub judice, the AT had the burden of demonstrating the factuality that led it to disregard the operations carried out and recorded by the Claimant by understanding that they do not constitute real operations of reimbursement of advances and ancillary contributions.

D - RESPONSE OF THE RESPONDENT

  1. The Respondent, duly notified for this purpose, timely submitted its response in which, in abbreviated summary, it alleged the following:

3.1. The Claimant commenced its activity on 17/04/2013.

3.2. The Claimant's purpose is the provision of management, economic, financial and accounting consulting services; provision of consulting services for the creation, development, expansion and modernization of companies; provision of administrative and human resources services, maintenance of quality systems, support tools for operations and business and the purchase, exploitation, promotion, encumbrance and sale of real property;

3.3. Following a merger by incorporation carried out in 2013, the claimant is at the top of group E…, being the holder of all the share capital of company F…, SGPS, SA, NIPC…

3.4. In turn, this company (F… SGPS, SA) is the one that holds direct participation in the remaining companies of the group;

3.5. With respect to the year 2013, the Tax Inspection Services (SIT) verified business combination operations that generated various movements, which are reflected in accounting in equity capital and assets accounts;

3.6. Before referring to the operations in question, we consider it appropriate, as a matter of framing, to highlight some data relating to the company that was to be incorporated in the merger process that took place;

3.7. The company in question was also called B…, SA, NIPC…, having been established in March 2010, currently ceased as of 05/04/2013 for VAT purposes – in accordance with (d) of no. 1 of Article 34 of the VAT Code – and for corporate income tax purposes, on 30/12/2013, by reason of merger;

3.8. The share capital of the company (incorporated) at the date of the merger was €600,000.00;

3.9. During the course of 2013, the company initially called G…, SA was thus established, which incorporated B…, SA;

3.10. The business combination operations referred to above were implemented in 3 distinct phases, namely:

3.11. Phase 1 – Acquisition by company G…, SA of the shareholdings of the above shareholders (except that of H…, SGPS, Sole Proprietorship, Ltd.) in B…, SA;

3.12. It is verified that the shareholders of this company (B…, SA), with the exception of shareholder H…, SGPS, S.A., delivered the shares held by them therein, for the realization of shares subscribed by them in the capital of the new company (G…, SA) – contribution in kind;

3.13. The shares were delivered at their nominal value, which totaled the amount of €430,000.00, in accordance with model 4 declaration delivered on 07/05/2013;

3.14. It is thus verified that the share capital subscribed in the new company (€50,000.00) is less than the valuation of the shares of the original company (€430,000.00), which is why there was a share premium, which was accounted for in account 54.1 of the then-called G…, SA;

3.15. Phase 2 – Merger of entity G…, SA, NIPC… (incorporating company) with B…, SA, NIPC… (incorporated company);

3.16. The merger carried out was based on the merger project dated 15/11/2013, with the registration thereof occurring on 30/12/2013;

3.17. In view of the said operation:

3.18. G… became holder of the entirety of B…'s assets;

3.19. B… ceased to exist;

3.20. The integration of the assets of the incorporated company into the incorporating company was carried out with effect from the date of establishment of the incorporating company,

3.21. 05/04/2013, from which date the operations carried out by the incorporated company were considered, for accounting and tax purposes, as carried out by the incorporating company;

3.22. The merger operation was carried out under the tax neutrality regime provided for in Article 73 and following of the Corporate Income Tax Code;

3.23. The incorporating company adopted the same designation as the incorporated company;

3.24. Following the operation carried out, B…, SA, NIPC…, proceeded on 30/12/2013, to deliver a cessation declaration, by which it ceased its activity for VAT and income tax purposes;

3.25. c) Phase 3 – Acquisition of the shareholding and ancillary contributions from one of the shareholders of the former B…, SA

3.26. This operation resulted, for the incorporating company, in a positive capital variation, subject to taxation, which is why the said operation is described in detail in point III.2.2 of the inspection report attached to the p.a.;

3.27. Positive Capital Variations – Article 21 of the Corporate Income Tax Code, a) Facts verified;

3.28. On 12/08/2013, a purchase and sale contract was executed, which had as its object:

3.29. The sale by company H…, SGPS, Unipersonal, Ltd., NIPC…, to G…, SA, of its shareholding, of approximately 28.33% in B…, SA, NIPC…;

3.30. The sale by taxable person I…, NIF…, of the credits that it held in B…, SA, which totaled €1,651,667.00, corresponding to €1,551,667.00 in supplementary contributions and €100,000.00 in advances;

3.31. The sale by I… to G…, SA, of its 16.63% shareholding in the share capital of J…;

3.32. In accordance with point 3 of the said contract, and as consideration for the transfers agreed and obligations assumed under the contract executed, G…, SA pays to company H…, SGPS, Sole Proprietorship, Ltd. and I… the total sum of €1,200,000.00, in the following terms:

3.33. €170,000.00 to company H… in consideration for the shares held by this company in B…;

3.34. €1,029,999.00 to I… in consideration for the credits (supplementary contributions and advances) held by it in B…;

3.35. €1 paid to I… in consideration for the shares held by it in J…;

3.36. b) Accounting entries made and tax implications

3.37. From the operations carried out, the acquisition of credits stands out, due to the tax implications associated with it, which was accounted for by the company as follows:

3.38. From the accounting entries made, it is concluded that:

3.39. The company paid I… the total amount of €1,029,999.00 for credits held by it in the company, which totaled €1,651,667.00;

3.40. The credits in question were reflected in the accounting records as debits in accounts 53202 – Supplementary Contributions – I… (€1,551,667.00) and 253202 – Advances – I… (€100,000.00);

3.41. Consequently, the operations carried out under the above contract involved the debit of these accounts, canceling the value thereof;

3.42. In return, given the differential verified between the amount actually paid by the company, €1,029,999.00 and the total amount of credits, €1,651,667.00, the following accounts were credited, in addition to account 12 - Demand Deposits:

3.43. Account 7858 – Other income and gains, which constitutes a gain for the company by reason of the fact that it did not pay to the shareholder the credit held by him in the company, in the form of advances;

3.44. Account 599 – Other capital variations, which constitutes a positive capital variation, in the amount of €521,668.00, by reason of the fact that the company paid to the shareholder the amount of €1,029,999.00 for credits held by him, in the form of supplementary contributions (as such recorded in an account of class 5 – Equity Capital), in the total amount of €1,551,667.00;

3.45. In view of the foregoing, it is clearly evidenced that both operations constituted an effective gain for the company;

3.46. Nevertheless, only the operation relating to advances positively influenced the fiscal result obtained in the year, given its accounting in account 7858 – Other income and gains;

3.47. Indeed, the differential of €521,668.00 verified between the amount paid to the shareholder and the credit held by him in the company, in the form of supplementary contributions, although correctly recorded as a positive capital variation, was not considered for purposes of calculating the fiscal result of the year, as should have been;

3.48. Effectively, in accordance with article 21 of the Corporate Income Tax Code, positive capital variations not reflected in the net result of the year contribute to the formation of taxable profit, since the concept of fiscal profit is defined in no. 2 of article 3 of the Corporate Income Tax Code, as the difference between the values of net equity at the end and at the beginning of the tax period, with the corrections established in the Corporate Income Tax Code;

3.49. The situation under analysis resulted in an effective increase in the company's assets, in the amount of €521,668.00, with none of the exceptions to taxation provided for in article 21(1)(a) to (c) of the Corporate Income Tax Code being applicable thereto;

3.50. In the specific case of article 21(1)(a) of the Corporate Income Tax Code, this provision excludes capital contributions from taxation;

3.51. However, in the case under analysis, the operation in question does not constitute a capital contribution to the company, but rather a withdrawal, in cash, for one of the holders;

3.52. Such cash withdrawal constitutes a negative capital variation, which does not contribute to the formation of the company's taxable profit for the year – article 24(c) of the Corporate Income Tax Code – just as the capital contribution by the said partner did not contribute, which occurred while still in the sphere of the incorporated company – exclusion from taxation in accordance with article 21(1)(a) of the Corporate Income Tax Code;

3.53. It happens, however, that the amount returned to the shareholder for the ancillary contributions held by him in the company was less than the amount thereof, and such operation, being a return to a shareholder who is leaving the company, constitutes an effective and definitive capital increase for the company, as such subject to corporate income tax;

3.54. Thus, to the fiscal result declared in the year 2013 is added the amount of €521,668.00 - field 203 of Chart 07 of model 22 declaration;

3.55. Movements verified in account 2681 - Other operations – Current assets, a) Facts verified;

3.56. From the analysis carried out of the movements of account 2681 – Other operations – Current assets, the SIT verified that:

3.57. In July / 2014 was recorded on the debit side the amount of €290,079.65 - accounting document no. … – which constitutes a bank transfer, carried out on 08/07/2014 from the company's bank account no.…, in K…, to a personal bank account of the company's administrator, C…– pages 1 to 3 of Annex 3;

3.58. In the same month was also recorded on the debit side the amount of €69,017.78 - accounting document no. … - which constitutes a bank transfer, carried out on the same date and through the same company account, in K…, to a personal bank account of the company's administrator, D…– pages 1 to 3 of Annex 4;

3.59. The entries made are reflected in accounting as follows:

3.60. The same account (2681) is credited by those amounts, €290,079.65 + €69,017.78, and such entries are supported by accounting document no.…, which corresponds to a unanimous resolution in writing by the shareholders of company B…, SA, dated 08/07/2016;

3.61. In the said document it was resolved:

3.62. The reimbursement of the total amount of €200,000.00 relating to advances made by shareholders C… and D…, with €100,000.00 to be delivered to each;

3.63. The restitution of ancillary contributions subject to the regime of supplementary contributions, made by the same shareholders, in the total amount of €159,097.44, amount to be divided by both, thus being delivered to each shareholder the amount of €79,548.72;

3.64. The said entries were offset, on the debit side, by accounts 25322 – Other participants – Advances and 531 – Supplementary contributions, as detailed in the following table:

3.65. It should be noted that account 25322 – Other participants – Advances presented a credit balance of €200,000.00 (€100,000.00 for C… + €100,000.00 for D…), which had carried forward from 2013, and, following the said operation, came to present a null balance;

3.66. Accounts 53101 – Supplementary Contributions – Dr. C… and 53104 – Supplementary contributions – Dr. D… carried forward from 2013 with a credit balance of €1,551,667.00 in each one of them – page 2 of Annex 6;

3.67. In view of the said movements, account 2681 presents a null balance on 31/12/2014 – page 3 of Annex 6;

3.68. With the debit entry of the amount of €79,548.72, referred to above, as well as another debit in the amount of €25,000.00, the said accounts present a balance of €1,447,118.28 on 31/12/2014;

3.69. C…- The company transferred to this administrator, on 08/07/2016, the amount of €290,079.65.

3.70. - By unanimous resolution, in accordance with the above document, the said shareholder received €100,000.00 of advances and €79,548.72 of ancillary contributions;

3.71. - It is thus verified that the shareholder in question received the amount of €290,079.65, with a substantially lower amount being recorded on the debit side of his account, that is, €179,548.72 (€100,000.00 of advances + €79,548.72 of ancillary contributions);

3.72. Account 2681 with respect to this shareholder, if the accounting entries had discriminated the operations relating thereto, would have shown, in fact, a debit of €110,530.93 (€290,079.65 - €179,548.72);

3.73. Such amount corresponds effectively to a benefit received by that administrator;

3.74. The above-mentioned facts fall within the scope of Article 5 of the Personal Income Tax Code, according to which capital income constitutes (category E of personal income tax) the fruits and other economic advantages;

3.75. Article 5(2)(h) of the same code clarifies that the fruits and economic advantages comprise, among many other income, profits of entities subject to corporate income tax made available to their respective associates or holders, including advances on account of profits;

3.76. In accordance with article 71(1)(c) of the Personal Income Tax Code, such income is taxed as final income, at the (liberatory) rate of 28%;

3.77. Numbers 1 to 3 of Article 98 of the Personal Income Tax Code clarify that the withheld amounts must be delivered to the State by the entity owing them, by the 20th day of the month following that in which they were deducted;

3.78. In view of the facts referred to above, it is concluded that the amount of €110,530.93 withdrawn from the business sphere to the personal sphere of the shareholder, constitutes, in the specific case, an advance on account of profits;

3.79. Consequently, the company should have withheld at the source, as final income, the amount of €30,948.66, corresponding to €110,530.93 * 28%;

3.80. Consequently, the company should have withheld at the source, as final income, the amount of €30,948.66, corresponding to €110,530.93 * 28%;

3.81. D…- On the same date, 08/07/2016, the company transferred to this administrator the amount of €69,017.78;

3.82. By unanimous resolution, in accordance with the above document, the said shareholder received €100,000.00 of advances and €79,548.72 of ancillary contributions;

3.83. It is thus verified that the differential verified between the amount paid to the shareholder and the entries made in the accounts of advances and supplementary contributions is recorded on the credit side of account 2681;

3.84. Nevertheless, such situation configures in fact a gain and a positive capital variation for the company, in the total amount of €110,530.93;

3.85. A gain in the amount of €30,982.22, corresponding to the differential verified between the amount debited in the advances account (€100,000.00) and the amount paid to the shareholder (€69,017.78);

3.86. A positive capital variation, subject to taxation in accordance with the provisions of article 21 of the Corporate Income Tax Code, in the amount corresponding to the debit verified in account 53104 – Supplementary Contributions – Dr. D…, that is, €79,548.72;

3.87. Indeed, from the accounting entries made, it is clearly stated that the amount paid by the company to the shareholder, €69,017.78, is less than the amount of the advances (€100,000.00) and ancillary contributions (€79,548.72), in accordance with the company's resolution;

3.88. The differential between the amount made available to him, €69,017.78 and the amount of advances and ancillary contributions paid to him (€179,548.72) totals €110,530.93;

3.89. Such amount represents for the company an effective gain, embodied in the fact that it has paid to a shareholder an amount clearly less than what was debited to his Advances account (account 25322) and a positive capital variation, in the case of ancillary contributions (account 53104);

3.90. Such differential corresponds in fact to a benefit for the company;

3.91. It is thus concluded that, in the specific case, the differential between the amount received by shareholder D… and the entries in his advances account and ancillary contributions, which totals €110,530.93, recorded on the credit side of account 2681 – Other operations – Current asset constitutes an effective benefit for the company, being as such subject to taxation;

3.92. Thus, to the fiscal result declared in the year 2014 is added the amount of €110,530.93.

3.93. The Respondent concludes that the company, as the paying entity of advances and supplementary contributions, benefited by paying to a shareholder a value less than unanimously decided and besides, recorded in the accounts of the said partner;

3.94. There is an effective benefit for the shareholder who received an amount greater than unanimously decided, which constitutes profits or an advance on account of profits;

3.95. But we are not dealing with duplication since the €110,530.93 added to the taxable profit of the taxpayer, as a positive capital variation not included by him, has nothing to do with the €110,530.93 basis of the unwithheld tax and now calculated, in the amount of €30,948.66 (€110,530.93 * 28%);

3.96. Indeed, although underlying the same operation (reimbursement to 2 shareholders of advances and supplementary contributions), it is certain that 2 patrimonial facts occurred in the accounting of the respondent, one relating to each shareholder:

3.97. To shareholder D… a value less than what he was entitled to was paid, in the amount of €110,593.30, which necessarily resulted in an enrichment for the company, subject to taxation in corporate income tax in accordance with articles 13, 17, and 21 of the Corporate Income Tax Code;

3.98. To shareholder C… a value greater than what he was entitled to was paid, also in the amount of €110,539.30, which is not ineligible as fiscally deductible expense under corporate income tax, but is subject to taxation under personal income tax, in accordance with articles 5 and 6 of the Personal Income Tax Code, which operates, in accordance with article 71 of the Personal Income Tax Code, by withholding at source as final income, to be effected by the entity owing the income;

3.99. The Respondent concludes by arguing that the arguments invoked by the Claimant in its request for arbitral decision fall away, here expressly and integrally challenged, as well as the documents attached, for not corresponding to the truth or from which the legal effects sought by the Claimant cannot be extracted.

E - FACTUAL FOUNDATION

  1. For the analysis of the questions submitted for examination, it is necessary to describe the relevant factual matter, based on the documentary evidence produced by the parties to the proceedings and the absence of challenge to the administrative tax procedure.

  2. Thus, as a matter of relevant fact, this Tribunal finds as established the following facts:

  3. The Claimant is a joint-stock company whose purpose is the provision of management, economic, financial and accounting consulting services; provision of consulting services for the creation, development, expansion and modernization of companies; provision of administrative and human resources services, maintenance of quality systems, support tools for operations and business and the purchase, exploitation, promotion, encumbrance and sale of real property;

  4. The Claimant, A…, SA, holds all of the capital of company F… SGPS, SA, and this holds direct shareholdings in the remaining companies of group E….

  5. On 8 July 2014, it was unanimously decided by the shareholders of company B…, S.A. to proceed with the reimbursement of part of the advances that had been made by C… and D… in 2010 and 2012 respectively, in the total amount of €200,000.00, with each of the said shareholders to receive the sum of €100,000.00;

  6. Further, the restitution was decided, to the same shareholders, of part of the ancillary contributions subject to the regime of supplementary contributions, in the total amount of €159,097.44, with each shareholder to receive half of the said amount, that is, €79,548.72;

  7. Thus, each of the above-mentioned shareholders had the right to receive the total sum of €179,548.72, corresponding to €100,000.00 of advances and €79,548.72 of ancillary contributions;

  8. On 8 July 2016, the Claimant transferred to the account of shareholder C…, the amount of €290,079.65 and to shareholder D… the sum of €69,017.78;

  9. Indeed, in accordance with the shareholder resolution dated 8 July 2014, the Claimant company had to return to the two shareholders the total sum of €359,097.44, with half of this value, that is €179,548.72, going to each of the shareholders;

  10. The Claimant company transferred in favor of one of the shareholders the sum of €69,017.78 and in favor of the other the remainder in the amount of €290,079.65;

  11. The sum transferred to the two shareholders is exactly equal to the value of the shareholder resolution (€359,097.44);

  12. The entries made are reflected in accounting as follows:

  13. The tax inspection procedure was initiated with service orders 012016… and 012016…, relating to the years 2013 and 2014, and the Claimant was notified of the Tax Inspection Report, where there appear (with reference to the year 2014) corrections under corporate income tax in the amount of €110,530.93, and corrections to withholding taxes under personal income tax, in the amount of €30,948.66;

  14. Which gave rise to the additional corporate income tax assessment no. 2016…, in the amount of €14,640.82 with payment deadline of 27.02.2017 and to the withholding tax assessment no. 2016… in the amount of €33,804.41, with payment deadline of 23.02.2017.

F - FACTS NOT PROVEN

  1. Of the facts with interest for the decision of the case, contained in the challenge, none that do not appear in the factuality described above were proven.

G - QUESTIONS TO BE DECIDED

  1. Given the positions of the parties, adopted in the arguments presented by each, the central question to be resolved, which it is necessary to examine and decide, is the following:

A) Regarding the declaration of illegality of the tax assessment acts that gave rise to the additional corporate income tax assessment no. 2016… in the amount of €14,640.82 with payment deadline of 27.02.2017 and to the withholding tax assessment no. 2016… in the amount of €33,804.41, with payment deadline of 23.02.2017;

B) Regarding the payment of compensatory interest.

H - MATTERS OF LAW

  1. Given the positions assumed by the parties in the pleadings presented, the central question to be resolved by this Arbitral Tribunal will be to decide whether the act of assessment under Personal Income Tax and Corporate Income Tax, numbers 2016… and 2016…, which set a total tax to be paid of €45,927.63 (Forty-five thousand nine hundred twenty-seven euros and sixty-three cents), is illegal.

  2. First and foremost, it falls to this tribunal to delimit what matter and questions are subject to examination.

  3. Thus, it is evident from the present proceedings that the Claimant was subject to a tax inspection, with the following service order, no. 012016… and no. 012016…, relating to the years 2013 and 2014, which gave rise to the additional corporate income tax assessment no. 2016…, in the amount of €14,640.82, with payment deadline on 27.02.2017, and to the withholding tax assessment no. 2016…, in the amount of €33,804.41, with payment deadline on 23.02.2017;

  4. From the analysis of the inspection report, it is concluded that there are various corrections to the fiscal result under corporate income tax.

  5. However, the Claimant in its request for arbitral decision regarding the act of assessment under corporate income tax, limited its defense to one of the tax facts of the said service order, which resulted in an increase to taxable profit in the amount of €110,530.93;

  6. Therefore, in relation to the correction made by the AT in the operation involving shareholder I…, no allegation of its illegality was made in the arbitral request by the Claimant, although the AT in its Response has ruled on the same, which is why the Arbitral Tribunal shall not rule on this question;

  7. As for the scope of the withholding tax under personal income tax, the Claimant came to challenge the correction made by the AT, which resulted in the assessment act no. 2016… in the amount of €33,804.41, this here challenged in its entirety;

  8. It is on these questions that the present Tribunal will focus;

  9. Now, in the case at hand, we are dealing with tax facts intrinsically connected, which resulted in assessments under Personal Income Tax and another under Corporate Income Tax, respectively the reimbursement to two shareholders of advances and supplementary contributions, and the alleged advance payment of profits, which resulted in the assessments now challenged;

  10. As for the question raised regarding the cumulation of claims, article 3(1) of the RJAT states: "The cumulation of claims, even if relating to different acts and the joinder of parties are admissible when the merit of the claims depends essentially on the examination of the same factual circumstances and on the interpretation and application of the same principles or rules of law."

  11. In view of the regulatory provision set out above, and from the exposition of the facts, it results that the examination of the assessment acts here challenged under Personal Income Tax and Corporate Income Tax resulted from the examination of common factual circumstances and the interpretation and application of the same principles and rules of law;

  12. Given the position of the parties, briefly, we can state that the operations that gave rise to the assessments now challenged, are embodied in the following elements:

I. The operation which materializes in the non-fulfillment of the Claimant's obligation to shareholder D…, in the amount of €110,593.30 based on the corporate resolution, which resulted in taxation under corporate income tax in the year 2014, number 2016…, and in a tax to be assessed in the sphere of the Claimant of €14,640.82;

II. And the operation that involves shareholder C…, and the bank transfer to his patrimonial sphere of the amount of €110,539.30, based on the corporate resolution, which constitutes a patrimonial fact subject to taxation under personal income tax, applying the liberatory rate of 28% on the amount of €110,539.30, making a tax to be paid of €30,948.66, assessed in the demonstration of withholding tax assessment for personal income tax number 2016…, amount increased by interest at the legal rate of 4%, in the amount of €2,855.75, which makes the total to be paid of €33,804.41;

  1. The Claimant, briefly, alleges that the difference between the values decided in Assembly and the values actually transferred results from account settlements between shareholder D… and shareholder C…, and that overall the sum transferred to the two shareholders is exactly equal to the value of the shareholder resolution (€359,097.44), which is why the Claimant obtained no gain in the context of this operation;

  2. Moreover, it alleges that this account settlement between shareholders is legally admissible in accordance with article 767 of the Civil Code, where it is expressly provided for the possibility of the obligation being performed by a third party and not by the initial debtor;

  3. Given the foregoing, it falls to this tribunal to ascertain whether the assessments in question are illegal;

  4. As to the legal-factual framing of the operations, for purposes of substantiation of this arbitral decision, we shall examine individually each of the two operations of relevance and finally we shall analyze them together:

I – Act that resulted in the taxation under Corporate Income Tax for the year 2014, number 2016…

33.1. We shall begin our approach, (without any value judgment as to its importance in terms of order), to the legal-factual framing of the operation and consequent patrimonial fact that involves shareholder D….

33.2. We consider as matter of fact relevant and proven, for this operation, the following:

33.2.1. By unanimous resolution, shareholder D… was entitled to receive €100,000.00 in advances and €79,548.72 in ancillary contributions;

33.2.2. On 08/07/2014, the Claimant transferred to shareholder D… the amount of €69,017.78;

33.2.3. The Claimant recorded in its accounting and for tax purposes, advances of €100,000.00 and €79,548.72 of ancillary contributions, the operations of which were recorded in accounting as follows:

33.3. It results from the accounting record that shareholder D… received in 2014 the amount of €69,017.78, however from the shareholder resolution of 8 July 2014, the shareholder would have been entitled to receive €179,548.72 (€100,000.00 of advances and €79,548.72 of ancillary contributions);

II – Act that resulted in the assessment of withholding tax for personal income tax number 2016…:

33.4. In the second place, (without any value judgment as to its importance in terms of order), we examine the legal-factual framing of the operation and consequent patrimonial fact that involves shareholder C….

33.5. We consider as matter of fact relevant and proven, for this second operation, the following:

33.5.1.1. By unanimous resolution, shareholder C… was entitled to receive €100,000.00 in advances and €79,548.72 in ancillary contributions;

33.5.1.2. The Respondent transferred to shareholder C…, on 08/07/2014, the amount of €290,079.65;

33.5.1.3. An amount of €179,548.72 was recorded on the debit side of his account;

33.6. It is thus verified that shareholder C… received from the Claimant the amount of €290,079.65, however it results from the shareholder resolution of 8 July 2014, that the shareholder would have been entitled to receive €179,548.72 (€100,000.00 of advances and €79,548.72 of ancillary contributions);

  1. Before the two operations referred to above, and in accordance with the factual matter proven, of relevance for this decision, we list the following:

34.1. On 8 July 2014, by unanimous resolution, it was decided that shareholders C… and D… would each be entitled to receive €100,000.00 of advances and €79,548.72 of ancillary contributions, in a total of €359,097.44;

34.2. Transfer by the Claimant of the total amount of €359,097.44, which corresponds to the sum of advances and ancillary contributions of both shareholders in accordance with the unanimous resolution of 8 July 2014;

  1. It is important to emphasize that according to the principle of free assessment of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings and in accordance with its life experience and knowledge of people (see article 607, no. 5, of the Civil Procedure Code, as amended by Law 41/2013, of 26/6).

  2. Furthermore, we note that the following elements are not contained in the proceedings, either because they do not exist or have not been attached, respectively the following:

36.1. Judicial challenge, with final judgment, of a declaration of nullity or annulment of the minutes that constitutes the resolution of the shareholders taken unanimously on 8 July 2014, signed by all shareholders, or that there is a pending judicial action of challenge;

36.2. The judicial or extrajudicial exercise of the rights of shareholders against the Claimant, with a view to being compensated for the amounts listed in the unanimous resolution of 8 July 2014;

36.3. Proof that shareholder D… requests or authorizes the Claimant to transfer the amount of €110,539.30 to shareholder C…, under the alleged article 767 of the Civil Code;

36.4. Documentary proof supporting the credit of €110,539.30 of shareholder D… with shareholder C….

36.5. Judicial challenge of the minutes approving the Accounts of the Claimant;

  1. Given the elements referred to above, and for purposes of substantiation of this arbitral decision, it falls to us to analyze the questions brought by the parties, in light of the legislation in force at the date of the facts;

  2. First, it is necessary to analyze the legality and implications of the declarations and shareholder resolution of the Claimant of 8 July 2014, as well as to analyze the suitability and truthfulness of its accounting elements;

  3. Regarding the legality and implications of the shareholder resolution of the Claimant of 8 July 2014, the following is stated in the Commercial Companies Code:

39.1. The resolutions of shareholders are made in accordance with articles 53 and following of the Commercial Companies Code;

39.2. Article 59(1) of the Commercial Companies Code states that "Voidability may be argued by the supervisory body or by any shareholder who did not vote in the manner that was passed and who has not subsequently approved the resolution, expressly or tacitly."

39.3. The period for filing the action for annulment by the supervisory body or by any shareholder is 30 days, as provided in article 59(2) of the Commercial Companies Code;

39.4. And in accordance with article 59(2) of the Commercial Companies Code in harmony with article 75 of the General Tax Law, it is presumed that the resolution taken in minutes is true and suitable;

  1. Indeed, regarding the declarations of the Claimant, it is presumed that the presumption listed in the basic principle enshrined in article 75 of the General Tax Law was not rebutted, which states:

"The declarations of taxpayers presented in accordance with the law are presumed true and made in good faith, as well as the data and determinations entered in their accounting or records, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends. (As amended by Law no. 80-C/2013 of 31 December)".

  1. Additionally, in accordance with articles 74(1) of the General Tax Law and 342(1) of the Civil Code, the burden of proof of the facts invoked falls on whoever invokes them, as results from article 74(1) of the General Tax Law, which states "the burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers falls on whoever invokes them.", in keeping with article 342(1) of the Civil Code, "It is incumbent upon he who invokes a right to prove the constitutive facts of the right alleged." (Our emphasis)

  2. In accordance with the legislative exposition referred to above, the burden of proof falls on whoever invokes the facts, in the present case it was incumbent on the AT to prove that the declarations of the Claimant taken in assembly are not suitable and do not correspond to the truth;

  3. With particular relevance, the alleged declaration of the Claimant, regarding the transfer to shareholder C… of the value of €110,539.30 under article 767 of the Civil Code, of the value attributed in assembly to shareholder D….

  4. The AT argues that the claimant did not transfer this value based on this legal option provided for in article 767 of the Civil Code;

  5. In these terms, it falls to this Tribunal to frame the legal regime and the legal requirements necessary to demonstrate the operations in question;

  6. First, as to account settlement between shareholders, legally the same is admissible under article 767 of the Civil Code, which we transcribe: "1. The obligation may be performed either by the debtor or by a third party, whether or not interested in the fulfillment of the obligation.

  7. The creditor may not, however, be compelled to receive from a third party the obligation, when it has been expressly agreed that it is to be performed by the debtor, or when the substitution prejudices him."

  8. It results from the legal provision the possibility of the obligation being performed by a third party and not by the initial debtor;

  9. As ALMEIDA COSTA states, "In the concept of third party falls any person who at the date of performance does not occupy the position of debtor. It is necessary that the third party performs the obligation knowing that it is another's debt. If someone fulfills a debt in the mistaken belief that he is the debtor, the legal regime applicable is that of article 477." (Almeida Costa, Obligations, 3rd Ed. Page 720).

  10. In the same sense, ABÍLIO NETO in his annotation to article 767: "4- Note that if a third party wants to perform the obligation in place of the debtor, the law not only authorizes him to do so, but imposes on the creditor the duty to receive it (…)";

  11. Indeed, the question of the possibility of the obligation being performed by a third party and not by the initial debtor is a question that falls within the civil law sphere, since it concerns its parties, and in such manner any alleged conflict should be resolved in the appropriate forum;

  12. Indeed from the applicable legal regime, for the performance of the obligation no written form is required (article 767 of the Civil Code), it being sufficient, for what is relevant here, a simple declaration in the pleadings of the request for constitution of arbitral tribunal, which will bind the Claimant (article 46 of the Civil Procedure Code);

  13. As results from the provision of article 46 of the Civil Procedure Code: "The affirmations and express confessions of facts, made by the representative in the pleadings, bind the party, unless they are rectified or withdrawn while the opposing party has not specifically accepted them.";

  14. A declaration which was likewise produced by the Claimant, in the exercise of its right to be heard in the context of the initiatory action;

  15. Thus, the declaration of the Claimant, embodied in the request by shareholder D… to transfer his right to receive the monetary value relating to advances and ancillary contributions to a third party, as a mechanism of "account settlement", is legally admissible;

  16. As such, in this first situation, there is no act that constitutes a positive capital variation, since the same was effected under article 767 of the Civil Code;

  17. Thus, moving to the analysis in greater detail of the assessments, taking into account the chronology of events, it falls to decide on the legality of each of the assessments;

I - As to the Positive Capital Variation - assessment number 2016… of Corporate Income Tax

  1. In the present assessment, we find that there is an incongruity, in the case of shareholder C…, the Respondent considered that the non-receipt by shareholder D… constitutes a benefit (positive capital variation) for the Claimant;

  2. However, considering that hypothetically the shareholder did not receive the full amount of the resolution, this non-receipt does not mean that this non-receipt constitutes a benefit for the Claimant, as hypothetically there may still exist an obligation towards the shareholder;

  3. As to the positive capital variation in the sphere of the Claimant, we must analyze two aspects, first, the declarations of the taxable person, as already mentioned, are presumed true, second, if the declarations are presumed true, there are two interpretations we can make about the bank transfers carried out by the Claimant;

  4. The first interpretation, already described above, was carried out under the provisions of article 767 of the Civil Code at the request and with the authorization of shareholder D….

  5. On this interpretation, it is concluded:

61.1. Article 767 of the Civil Code permits the transfer directly to a third party, and as already stated above, the Claimant has the right to do so, and a simple declaration in the pleadings of the request for arbitral decision is sufficient for the Claimant to bind itself to such declaration;

61.2. By unanimous resolution of the Assembly, it was determined that shareholder D… has the right to €100,000.00 in advances and €79,548.72 in ancillary contributions, this amount is his, and he may do as he wishes with this amount, including, he may have requested the Claimant to proceed directly to transfer it to the sphere of a third party, a right that is permitted to him under article 767 of the Civil Code;

61.3. Repeating again that this account settlement between shareholders is legally admissible under article 767 of the Civil Code, where it is expressly provided for the possibility of the obligation being performed by a third party and not by the initial debtor;

61.4. In these terms, it is legally admissible for the Claimant to effect the transfer of this amount directly to shareholder C…, without the same having fiscal or accounting implications in the sphere of the Claimant;

61.5. However, it may have implications and legal and tax consequences in the personal sphere of the shareholders, but these are distinct taxable subjects, with personality and legal capacity distinct from the Company and the Claimant, and these consequences are of no concern to the Claimant, and may be analyzed in the appropriate forum, which is not the present one;

  1. The second interpretation would be based on the fact that the Claimant did not transfer the remaining amount decided in the unanimous resolution of 8 July 2014 to shareholder D…, whereby that amount would be owed to this shareholder;

  2. On this interpretation, it is concluded:

63.1. The positive capital variation could occur in the event of application of the legal figure of "forgiveness" of the debt by shareholder D… to the Claimant, otherwise, there will be an obligation towards the shareholder;

63.2. Moreover, it may be said that if the Claimant has not yet transferred the remaining amount decided, then this amount is still owed to the shareholder, and being a debt of the Claimant to the shareholder, in that case the tax fact ("forgiveness") that constitutes a benefit and positive variation of the Claimant has not yet occurred;

  1. It can thus be concluded that in both interpretations, if applied, there is no positive variation of the Claimant, as such the positive capital variation under assessment number 2016… of Corporate Income Tax is defective;

II - As to the question of the Advance on Profits - assessment number 2016… of Personal Income Tax

  1. In contrast, in the case of shareholder C…, who received the additional amount, the AT considered that this amount falls within the advance on profits relating to income obtained in 2014, and considers the bank transfer as the moment generating the taxable act, in accordance with article 5(2)(h) of the Personal Income Tax Code and taxed as final income at the (liberatory) rate of 28% in accordance with article 71(1)(c) of the Personal Income Tax Code;

  2. Now, article 5(2)(h) of the Personal Income Tax Code states that: capital income constitutes the fruits and other economic advantages, the profits and reserves made available to the associates or holders and advances on account of profits;

  3. It is presumed in no. 4 of article 6 of the Personal Income Tax Code, the following: "The entries in favor of such party, in any current accounts of shareholders, recorded in commercial or civil companies in commercial form, when they do not result from loans, the provision of work or the exercise of corporate positions, are presumed to be made on account of profits or advance of profits."

  4. However, in the case now under examination, there are no entries in favor of the same party in any current accounts of shareholders, and indeed there is no corporate resolution that assigns the anticipated profit to shareholder C… in the year 2014;

  5. And it is our understanding, already described above, that it is legally admissible for the Claimant to effect the transfer of this amount directly to shareholder C…, without the same having fiscal or accounting implications in the sphere of the Claimant. The account settlement between shareholders is legally admissible under article 767 of the Civil Code, where it is expressly provided for the possibility of the obligation being performed by a third party and not by the initial debtor;

  6. Thus, it is concluded on this question that the making available to shareholder D… of the amount of €110,539.30 under article 767 of the Civil Code, does not constitute income of Category E (Capital Income), there being no corporate resolution that assigns the anticipated profit to shareholder C… in the year 2014, nor are there entries in favor of the same in any current accounts of shareholders and as such the presumption provided for in no. 4 of article 6 is rebutted, the same being set aside in accordance with the powers of this Tribunal provided for in the RJAT, whereby the request for illegality of the assessment, petitioned by the Claimant, is granted;

III - Conclusion

  1. Given what was listed above, there results the non-existence of a positive capital variation, subject to taxation in accordance with the provisions of articles 17 and 21 of the Corporate Income Tax Code, since the total amount decided by the shareholders, unanimously, of €359,097.44 was transferred;

  2. Moreover, the total sum transferred to the two shareholders is exactly equal to the value of the shareholder resolution (€359,097.44), which is why the Claimant had no gain in the context of this operation;

  3. Thus, this Tribunal concludes with a declaration of illegality of the assessments sub judice, as they are defective due to a violation of the norms listed, due to error regarding the legal presuppositions, which justifies the declaration of its illegality and annulment (article 135 of the Administrative Procedure Code);

  4. Given the foregoing, the assessment under Corporate Income Tax and Personal Income Tax, in the part covered by the annulment, which is hereby decreed, result from errors of fact and law attributable exclusively to the tax administration, to the extent that the Claimant fulfilled its duty of declaration;

  5. Given the foregoing, this Tribunal grants the petition of the Claimant.

J - COMPENSATORY INTEREST

  1. The Claimant further petitions for the payment of compensatory interest;

  2. Given the foregoing, the assessment of Personal Income Tax and Corporate Income Tax, in the part covered by the annulment, result from errors of fact and law attributable exclusively to the tax administration, to the extent that the Claimant fulfilled its duty of declaration;

  3. In fact, it was demonstrated that the Claimant paid the tax challenged in an amount superior to that which is due. Thus, and by virtue of the provisions of articles 61 of the Tax Procedure Code and 43 of the General Tax Law, the Claimant has the right to compensatory interest owed, such interest to be accounted from the date of payment of the unduly paid (annulled) tax until the date of issuance of the respective credit note, the deadline for payment of which is counted from the date the period for voluntary execution of this decision begins (article 61, nos. 2 to 5, of the Tax Procedure Code), all at the rate calculated in accordance with the provisions of no. 4 of article 43 of the General Tax Law;

  4. In light of all the foregoing and the invoked legal norms, the petition of the Claimant is granted.

H - DECISION

In light of all the foregoing, this Arbitral Tribunal decides:

a. To uphold the petition for a declaration of illegality of the tax assessment acts under Personal Income Tax and Corporate Income Tax, numbers 2016… and 2016…, which set a total tax to be paid of €45,927.63 (Forty-five thousand nine hundred twenty-seven euros and sixty-three cents);

b. To condemn the Respondent to reimburse to the Claimant this amount improperly assessed and paid, plus the payment of compensatory interest already accrued relating to the period between the date of payment of the tax until its reimbursement, as well as in the payment of compensatory interest to accrue from the date of notification of this decision until actual and complete payment, all in accordance with nos. 2 to 5 of article 61 of the Tax Procedure Code, at the legal rate calculated in accordance with the provisions of no. 4 of article 43 of the General Tax Law until complete reimbursement;

The value of the proceedings is set at €45,927.63 (Forty-five thousand nine hundred twenty-seven euros and sixty-three cents), corresponding to the amount of the assessment, taking into account the economic value of the proceedings assessed by the amount of the tax assessments challenged, and in accordance therewith the costs are fixed, in the respective amount of €2,142.00 (two thousand one hundred forty-two euros), to be borne by the Respondent, in accordance with article 12(2) of the Tax Arbitration Regime, article 4 of the Rules of the Civil Procedure Code for Tax Matters, and Table I attached thereto – no. 10 of article 35, and nos. 1, 4 and 5 of article 43 of the General Tax Law, articles 5(1)(a) of the Rules of the Civil Procedure Code for Tax Matters, 97-A(1)(a) of the Tax Procedure Code and 559 of the Civil Procedure Code).

Notify.

Lisbon, 29 November 2017.

The Arbitrator

Rita Guerra Alves

Frequently Asked Questions

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What are the IRC and IRS tax implications of asset variations (variações patrimoniais) and advance on profits (adiantamento de lucros) under Portuguese tax law?
Under Portuguese tax law, asset variations (variações patrimoniais) are generally taxable under IRC (Corporate Income Tax) pursuant to Article 21 of the IRC Code, unless specifically excluded. Positive asset variations increase taxable income, while negative variations may be deductible. Advances on profits (adiantamento de lucros) distributed to shareholders are treated as deemed income distributions subject to withholding tax under IRS at rates applicable to capital income (generally 28%). When a company reimburses legitimate advances or ancillary contributions previously made by shareholders, these operations should not generate taxable income as they merely restore the shareholders' capital position. However, the Tax Authority may recharacterize transactions if it determines that payments exceed documented advances or if the operations lack economic substance, potentially triggering IRC taxation at the company level and IRS withholding obligations. The principle against double taxation requires that the same economic value should not be taxed simultaneously in both the company's and shareholder's spheres.
Can a taxpayer challenge additional IRC assessments and withholding tax (retenções na fonte) corrections arising from a tax inspection through CAAD arbitration?
Yes, taxpayers can challenge additional IRC assessments and withholding tax corrections through CAAD (Centro de Arbitragem Administrativa) arbitration under Article 2(1)(a) and Article 10(1)(a) of Decree-Law 10/2011 (RJAT - Legal Framework for Arbitration in Tax Matters). This applies to disputes arising from tax inspection procedures that result in additional assessments or corrections to declared taxable income. The arbitral procedure provides an alternative to judicial courts for resolving tax disputes, offering faster resolution (typically 6 months) and specialized expertise. Taxpayers must file the arbitration request within 90 days following the deadline for voluntary payment of the challenged assessment. Both IRC assessments and IRS withholding tax assessments (retenções na fonte) fall within CAAD's jurisdiction. The arbitration request must identify the contested acts, specify the grounds of illegality, and may include claims for compensatory interest. CAAD arbitration has become increasingly popular due to its efficiency compared to traditional administrative and judicial review procedures.
How does the Portuguese Tax Authority (AT) classify arithmetic corrections to taxable income in IRC relating to undisclosed asset variations?
The Portuguese Tax Authority classifies arithmetic corrections to taxable income relating to undisclosed asset variations as adjustments under IRC Code provisions governing determination of taxable profit. When the AT identifies positive asset variations not reported in the tax return, it typically categorizes them as either: (1) unreported income under Article 20 of the IRC Code; (2) positive asset variations under Article 21 that are not excluded from taxation; or (3) hidden profit distributions under Article 88 that trigger withholding tax obligations. The AT's inspection reports must specify the legal basis for each correction and distinguish between income from ordinary activities and capital variations. In cases involving shareholder transactions, the AT often scrutinizes whether payments characterized as capital reimbursements actually constitute disguised profit distributions. The burden of proof regarding the existence of requirements justifying corrections rests with the Tax Authority, which must demonstrate through the inspection file that the taxpayer's accounting and documentation do not support the claimed treatment. Taxpayers can contest both the legal classification and factual basis of such corrections through administrative or arbitral proceedings.
What is the legal procedure for constituting a CAAD arbitral tribunal under Decree-Law 10/2011 (RJAT) to dispute tax assessments?
The legal procedure for constituting a CAAD arbitral tribunal under Decree-Law 10/2011 (RJAT) involves several steps: (1) The taxpayer files a request for arbitration within 90 days after the voluntary payment deadline of the contested tax assessment, paying the required fee; (2) The CAAD President examines the request and, if accepted, notifies the Tax Authority within 5 days; (3) The claimant may appoint an arbitrator within 5 days of notification; if not, the Deontological Council appoints one under Article 6(1) and Article 11(1)(b) of the RJAT; (4) The appointed arbitrator must accept the appointment and verify independence; (5) Parties have 5 days to refuse the arbitrator for valid legal reasons under Articles 6 and 7 of the Deontological Code; (6) The tribunal is formally constituted upon arbitrator acceptance and parties' non-refusal; (7) The Tax Authority is automatically notified to submit its response within 30 days; (8) The tribunal must render its decision within 6 months from constitution, extendable once for up to 3 months. The procedure follows principles of contradictory proceedings, equality of arms, and procedural efficiency, with hearings held only when necessary for evidence evaluation.
Are compensatory interest (juros compensatórios) payable on additional IRC and IRS assessments resulting from tax inspection corrections in Portugal?
Yes, compensatory interest (juros compensatórios) is payable on additional IRC and IRS assessments resulting from tax inspection corrections in Portugal. Under Article 35 of the General Tax Law (LGT) and Article 102 of the IRC Code, compensatory interest accrues from the date the tax should have been paid (typically the original filing deadline) until actual payment or enforcement. The rate is established annually by ministerial order. Importantly, if the taxpayer successfully challenges the assessment through arbitration or judicial review, the Tax Authority must pay compensatory interest on any amounts unduly collected, calculated from the payment date until reimbursement, pursuant to Article 43 of the LGT and Article 61 of the CPPT (Tax Procedure Code). This reciprocal mechanism ensures temporal compensation for both parties. In arbitral proceedings before CAAD, taxpayers routinely include claims for elimination of compensatory interest charged by the AT or, alternatively, for payment of compensatory interest by the AT if amounts were already paid. The arbitral tribunal has jurisdiction to rule on compensatory interest claims as an accessory to the principal dispute regarding the assessment's legality.