IRC Withholding Tax on Image Rights & Economic Rights of Athletes – CAAD 346/2016-T

ARBITRAL DECISION

The arbitrators Counselor José Manuel Cardoso da Costa, Prof. Doctor Rui Duarte Morais and Prof. Doctor Américo Brás Carlos are in agreement as follows:

I - REPORT

A) Constitution of the Arbitral Tribunal and Proceedings

A…, Tax ID…, with registered office at …- …, P.O. Box …, …, … (hereinafter A… or Claimant), has, in accordance with the law, filed a petition for arbitral pronouncement, with the Tax and Customs Authority as Respondent.

The Claimant, pursuant to Article 6, no. 2, letter b), of the RJAT, appointed Prof. Doctor Rui Duarte Morais as Arbitrator.

The highest official of the Tax Administration appointed Prof. Doctor Américo Brás Carlos as Arbitrator.

The Arbitrators appointed by the Parties agreed to appoint Counselor José Manuel Cardoso da Costa as the presiding arbitrator.

The Collective Arbitral Tribunal was constituted on 28/09/2016.

The Tax and Customs Authority filed a timely response, in which it raised, as an exception, the "untimeliness or expiration of the right of action."

This exception was considered by arbitral order of 22/11/2016, which dismissed it.

The meeting referred to in Article 18 of the RJAT was dispensed with.

On 02/12/2016 a meeting was held at which witnesses were heard.

The Parties submitted written pleadings.

By arbitral order of 03/03/2017, the deadline for issuing the arbitral decision was extended for two months.

B) Petitions for Arbitral Pronouncement

B.1) The main petition is for annulment of assessment no. 2016…, relating to withholding of corporate income tax on income from the financial year 2012, in the total amount of € 169,630.25, of which € 150,000.00 is tax and the remainder is compensatory interest, which originated from corrections made by the Tax Authority.

The Claimant attributes to such assessment the following defects: a) erroneous apprehension of the facts and incorrect subsumption to applicable law; b) violation of Articles 4, more specifically its no. 3, letter d), 94, 87, of the CIRC; c) violation of Articles 13, 17 and 22 of the Double Taxation Conventions concluded between Portugal and Brazil and between Portugal and Morocco; d) illegality of Circular no. 18/2011, of the DGI; e) violation of Articles 35 and 38, no. 1, of the LGT and Article 100 of the CPPT.

B.2) The Claimant requests, in the alternative (should the main petition not succeed), annulment of the assessment of compensatory interest, on the grounds that such interest is only due if the omission or delay in payment of the tax due is accompanied by grounds for censure or fault on the part of the taxpayer in such conduct, and that it acted based upon a plausible interpretation of the law.

B.3) The Claimant further requests, in the event that the main petition is upheld, condemnation of the Tax Authority to pay compensation for the guarantee improperly provided by it.

The main issue to be decided is therefore whether the Claimant had the obligation to effect withholding of corporate income tax and to deliver to the State coffers the aforementioned corporate income tax (B.1).

C) The Rationale for the Disputed Assessment

C1) Regarding Image Rights

The legal rationale for the disputed assessment, concerning image rights, is based essentially on the content of Circular no. 17/2011, of 19 May, of the then DGCI.

The principal arguments invoked by the Tax Authority are as follows:

• When the image rights of a player are held by a non-sports entity that cedes them to a Club/SAD, with which the player will celebrate a professional sports contract, the income obtained by that entity through the cession of those rights is closely related to the rights inherent in the professional sports contract celebrated by the player, because they derive from the player's image in the exercise of their professional activity and only subsist for so long as the professional sports contract lasts.

• There is, thus, an unequivocal connection between the activity carried out by the players and the potential exploitation of their image rights, since the club or SAD only acquires these image rights whilst the players remain in its employ and practice an activity as a sportsperson – the duration of the image rights cession contract follows that of the professional sports contract.

• Therefore, ultimately, what is transferred by that third non-resident entity are the income which derives from the image which these athletes hold whilst players carrying out (or about to carry out) the activity as professional footballers in Portuguese territory.

• Such income is therefore – concludes the Tax Authority - subject to withholding tax, as a final tax, pursuant to no. 4 of Article 87, in conjunction with no. 5 of Article 94, both of the Corporate Income Tax Code.

• The provision in no. 1 of Article 98 of the Corporate Income Tax Code does not apply, given the provision in no. 2 of Article 17 of the DTCs concluded between Portugal and, respectively, Brazil and Morocco.

C2) Regarding Economic Rights

The legal rationale for the disputed assessment, concerning economic rights, is based essentially on the content of Circular no. 18/2011, of 19 May, of the then DGCI.

The principal arguments invoked by the Tax Authority are as follows:

• What follows from the terms of the contract concluded between A… and the entities contained in the relevant contracts is that there was a cession of "economic rights" relating to the "registration rights" of the players.

• Pursuant to Law no. 28/98, of 26 June, the rights in question arise from the celebration of a professional sports contract, being nothing more than the rights of registration in a competition by the sports employing entity, duly registered with the entity responsible for the organization and supervision of professional football (in the case of Portugal, the Portuguese Professional Football League).

• The FIFA Regulations Relating to the Status and Transfers of Players, contained in official communication no. …, of 2005-05-19, of the FPF, provides that a player may only be registered if the club submits a valid request to the respective Federation during the registration period, which request must be submitted with a copy of the player's contract (see Articles 6 and 8).

• The existence of sports rights only occurs in the manner described above, and it is not possible for other entities (e.g. companies without the capacity to compete in sports competitions with their own team of players) to claim the possession of sports rights over players.

• No other club/SAD holding the sports rights of the players was identified at the time of their transfer to A….

• Given that there are no sports rights in effect, it cannot be considered that there exist economic rights relating to sports rights, so-called registration rights, held by a third non-sports entity, since these presuppose the existence of a professional sports contract.

• Where the player is "free" for the period that A… intended to contract the player, that is, without an effective professional sports contract in place, when a non-sports non-resident entity appears charging A… – which intends to celebrate a professional sports contract with the player – an amount, these economic rights do not have as their origin sports rights, since there is no professional sports contract generating economic rights.

• As is clarified in Circular no. 18/2011 of the then DGI, under these conditions the economic rights claimed for the celebration of a sports contract are subsumed within the right equivalent to the signing bonus that a player could demand for that purpose.

• Thus, the non-sports entities in question, when invoking the cession of economic rights, demand nothing more than the right to obtain, instead of the player, remuneration for the celebration of the professional sports contract.

• Such income, obtained by non-resident entities, flows unequivocally and indissociably from the celebration of the professional sports contract with A…, celebrated by the players in their capacity as sportspersons, whence derives their use in the service of the resident club / SAD, and therefore are subject to corporate income tax, by force of the provision in letter d) of no. 3 of Article 4 of the Corporate Income Tax Code, and must be subject to withholding tax, as a final tax, pursuant to no. 4 of Article 87, in conjunction with no. 5 of Article 94, both of the Corporate Income Tax Code.

• The provision in no. 1 of Article 98 of the Corporate Income Tax Code does not apply, given the provision in no. 2 of Article 17 of the DTCs concluded between Portugal and, respectively, Brazil and Morocco.

The Tax Authority further understands that, concerning both situations, it does not constitute a condition for income to be considered as arising from the activity of a sportsperson, for the purposes of letter d) of no. 3 of Article 4 of the CIRC, that the income be obtained by the players, or the insertion of this normative provision in the corporate income tax code would make no sense.

In its response and in its pleadings the Tax Authority reaffirms this understanding.

D) Position of the Claimant

The Claimant contends, in summary:

• That remuneration paid to sports agents or similar, when concluding a sports contract with a player, are different from those resulting from the exercise, by the player, of their profession, because the entities that acquire such rights (image and sports rights) "assume the business risk of monetizing those assets, through their exploitation and commercialization, by themselves or through cession to a third party."

• That by ceding their sports rights to specialized companies, the players limited their risk (they receive something, even if they remain unemployed and without remuneration);

• That this business model is common in the football world;

• That it was not alleged and proved that the non-resident companies in question acted in the name and on behalf of the athletes, nor that the remuneration obtained by them was subsequently delivered, in whole or in part, to the players, and that A… had knowledge thereof.

In its pleadings the Claimant reaffirms this understanding.

II - PROCEDURAL MATTERS

The petition for arbitral pronouncement is timely, the parties have legal personality and capacity, are legitimate and are properly represented.

The Arbitral Tribunal is competent to consider the petition for arbitral pronouncement filed by the Claimant.

No other exceptions were raised, apart from the one already decided by arbitral order, which warrant consideration.

There are no nullities that prevent consideration of the merits.

III - FINDINGS OF FACT

§ 1 - Proven Facts

The following facts are considered proven:

a) The Claimant is the sports company that encompasses the activity of male professional football of B…;

b) A… was subject to a tax inspection relating to the financial year 2012, which culminated in the final inspection report contained in document no. 1 attached to the petition for arbitral pronouncement, which constitutes the rationale for, among others, the assessment now being contested.

c) A… acquired from a company with registered office and effective management in Brazil and without permanent establishment in Portugal the image rights of player C… (C…).

d) It was the player himself (C…) who, in his capacity as legal representative of the ceding company, D…, signed the contract relating to such cession of image rights.

e) A… entered into agreements with various non-sports companies, with registered offices in Brazil and Morocco, without permanent establishment in Portugal, for the acquisition, in exchange for the payment of certain amounts, of the economic rights of various other football players.

f) With the exception of player E… (E…), the contracts referred to in the previous letter covered only percentages, variable depending on the players in question, of their respective economic rights.

g) The following table summarizes the situations in question:

h) Portugal has concluded with Brazil and Morocco Conventions on Double Taxation (DTCs), whose Article 17 reproduces the corresponding provision of the OECD Model.

i) In the professional sports contracts concluded between A… and such players, the same declared themselves to be "free," that is, not bound to any sports entity.

j) The Claimant considered that player C…, at the time that the contract relating to their image rights was concluded, would be, given their professional history (e.g., international player for the main Brazilian national team), one of the most sought after for marketing events, sponsorship maintenance and acquisition, and therefore, in addition to their hiring, acquired their image rights for the period in which they were contracted;

l) The acquisition of image rights was also carried out in order to prevent the player from being able to associate with brands competing with the Claimant's sponsors or refusing to participate in campaigns promoting sponsors' products, which could prejudice the maintenance and acquisition of sponsorships;

m) To suspend various enforcement proceedings, resulting from assessments originated by the inspection action referred to in b), including the one now being contested, the Claimant pledged credits of which it is the holder against P…, SA, as per document 4 attached to the initial petition.

§ 2 - Unproven Facts

The reasons and conditions for acquisition, by the ceding companies referred to in e), of the ownership of image and economic rights, relating to the players in question, were not proved.

§ 3 - Rationale as to the Findings of Fact

The facts established as proven in a) to g) are contained in the inspection report and were not contested.

The facts established as proven in j) and l) result from the testimony of Q… and R…, who, in the understanding of the arbitral tribunal, testified truthfully and in an enlightening manner.

The fact established as proven in m) results from document 4 attached to the initial petition.

IV - Issue for Decision

The central issue to be decided is whether the amounts referred to in letters c) and e) of the proven facts – relating to payments made by it to various non-resident commercial companies in Portugal (and without permanent establishment in our country), due for the acquisition from those entities of image rights and economic rights of various football players, who, at the time of concluding the professional sports contract with the Claimant, declared themselves to be free, that is, not bound to another club or SAD – are subject to taxation (corporate income tax) in Portugal, in which case it would be incumbent upon the Claimant, as tax substitute, to assess and deliver to the State the amounts due.

V - The Law

§ 1 – Regarding the Main Petition

1. At issue is the application of the provision in letter d) of no. 3 of Article 4 of the CIRC. This article deals (as is known) with the "scope of the tax obligation," and in it – after establishing, in no. 2, the rule that entities that do not have their seat or effective management in Portuguese territory are subject to corporate income tax only as to income obtained therein – the following is provided:

3 - For the purposes of the provision in the preceding number, income obtained in Portuguese territory shall be deemed to be that attributable to a permanent establishment situated therein and, as well, that which, not being in those conditions, is indicated as follows:

……..

d) Income derived from the exercise in Portuguese territory of the activity of entertainers or sportspersons.

The other norms invoked by the Tax Authority are merely instrumental with respect to this one, since they establish the manner in which such taxation occurs (total tax substitution, that is, withholding tax with the application of a final tax rate).

The provision in letter d) constitutes an exception to the general rule (contained in the body of no. 3) that business income (of non-residents) may only be taxed by the source State where a permanent establishment of the non-resident exists therein – a rule that is equally adopted in Article 7 of the DTCs concluded between Portugal, on one hand, and Brazil and Morocco (the countries with which the tax situation is equally in contact), on the other.

Thus, given that the remuneration now in question was obtained by commercial companies without seat or permanent establishment in Portugal, their non-taxation in our country would, in principle, follow from the provision in Article 7 of the applicable DTCs, since such income would be qualifiable as company profits.

However, the same DTCs contain, themselves, an exception to the rule of Article 7 – a specific and relevant exception to the matter in question – which is contained in their Article 17 (of identical content), which is as follows:

2 — Notwithstanding the provisions of Articles 7, 14 and 15, income from activities personally exercised by entertainers or sportspersons, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities of entertainers or sportspersons are exercised.

It is, therefore, in light of this specific provision of the pertinent DTCs, and subordinately to it, that, in this case, the exception of Article 4, no. 3, letter d), of the CIRC, must be read and considered.

The question thus comes down to whether the remuneration now in question, obtained by the aforementioned companies, should or should not be qualified as income resulting from activities personally exercised by the football players in question, in that capacity, in Portugal.

1. Being in the presence of an exceptional regime (since it departs, as has just been underlined, from that which the source State only has legitimacy to tax business income of non-residents when attributable to a permanent establishment situated in its territory), what then is its precise meaning and scope? That is to say: what is the precise meaning and scope of applicability of Articles 17, no. 2, of the Conventions concluded by Portugal with Morocco and Brazil (which are those that, in this case, legitimate the exception)?

And, very concretely: what is its reflection on the tax situations sub judice?

Such articles correspond textually to those of the Model Double Taxation Convention or (as is usually designated) the OECD Model Convention (hereinafter OECD MC). Thus, they must be decisively taken into account in fixing their meaning and scope, the Comments to that Model Convention, in the relevant part.

It is that, although those Comments cannot or should not be regarded as a form of authentic interpretation of the Model Convention, and of the conventions based on it, they cannot, in any way, fail to constitute (as consensually constitute) an unavoidable element for the interpretation of the norms of those conventions, since they express the understanding, as to the scope of the Model (and thus, necessarily, of the conventional instruments that reproduce it), of the representatives of the countries that participated in its elaboration, including Portugal. Now, our country did not raise any reservations or observations to the content of the Comments in question – that is, it accepted interpreting in the sense there advocated the norms that are subject to them.

Thus:

A) Image Rights

The Commentary 9.5 to Article 17 of the OECD MC is clear in requiring the distinction between remuneration for the use of image rights that constitute a form of remuneration of the activity of the sportsperson, as such, and those that do not. In principle, such remuneration does not fall within the scope of the provision of Article 17, except when there is a close connection between them and the performance of the sportsperson in the source State.

As examples of this strict connection, the Comments refer to cases where a golfer who participates in a certain tournament undertakes, in exchange for additional remuneration, to give interviews promoting such competition or the case of an artist who, also in exchange for remuneration, authorizes their image to be used in posters promoting the spectacle in question.

KLAUS VOGEL – in a work that is a world reference on the subject – maintains (thus) that it is implicit the need to analyze the reason for and the activity that gave rise to the payment.

Applying to the case:

The facts established as proven in j) and l) make it clear that, in the concrete case, the strict connection just referred to does not exist. The acquisition of image rights of player C… was not aimed at promoting A… or competitions in which it participates, but rather the promotion of products and services marketed by sponsors and preventing the potential promotion, by the player, of goods and services of competitors of those sponsors (as if creating an obligation of non-competition, in the broad sense).

Moreover, the amount of the consideration paid by the Claimant did not depend on the concrete use that would be made of the player's image, but rather on the prestige and prominence that the athlete had acquired before performing in Portugal.

Such facts clearly reveal the absence of a direct link – of the strict connection that the Comments require – between the amount paid and the player's performances in Portugal.

The fact that the player (C…) signed the contract relating to the cession of his image rights in representation of the ceding company is of no relevance whatsoever, since, given the rationale for the disputed assessment, what is at issue is whether the income in question should be regarded as arising from the exercise, in Portugal, of the activity of sportsperson (and not the connection between the player and the company to which the payments were made).

That is: even if the circumstance now considered could (or should) lead to the conclusion that the income in question ended up being "personally" obtained by the player, such is irrelevant, since this is not enough to generate the application of Article 17: it was still necessary (as was just underlined) that such income be attributable (and it is not) to the sports activity (exercised in Portugal) as such.

In conclusion, for clearly exceeding the scope of Article 17, no. 2, of the applicable Conventions, the interpretation sustained by the Tax Authority is illegal, by violation of these norms of international law, hierarchically superior to the provisions of the CIRC invoked, especially letter d) of no. 3 of its Article 4 – which must, therefore, be subordinated to them (as was said above) in their application.

As to this part, the assessment must thus be annulled.

B) Economic Rights

According to Commentary 11 to Article 17, no. 2, of the OECD MC, if the income of an artist or sportsperson is received by another person and the source State does not have the legal right to disregard the legal personality of that person, this number permits that income which cannot be taxed in the ownership of the one who carries out the activity may be taxed to the person who received it.

The said Commentary exemplifies the three main situations in which this occurs, the third – potentially applicable in the concrete case – encompassing tax avoidance schemes where the remuneration of the activity of the artist or sportsperson is not paid to the person themselves but to another entity, normally designated star companies, in order to achieve that the income results in being non-taxable [by the source State] neither as professional income of the artist or sportsperson, nor as company profit (due to the absence of permanent establishment).

The view of Article 17, no. 2, of conventions based on the OECD MC as an anti-abuse norm was, until 1992, dominant, continuing to be sustained by many States and by much of the doctrine. Such appears to be, also, the understanding with which, in the case, the Claimant is satisfied, when it states that it was not alleged and proved that the non-resident companies, to which it made the payments, acted in the name and on behalf of the athletes, nor that the remuneration obtained by them was subsequently delivered, in whole or in part, to the players, nor that A… had knowledge thereof.

However, KLAUS VOGEL, in the work already cited, informs us that, after the 1992 revision of the Comments, it came to be argued that Article 17, no. 2, could also encompass situations where the entity that receives the income is not controlled by the sportsperson (situations where disregard of its legal personality would be possible), such as, for example, cases where the sportsperson is an employee of the entity that receives the remuneration.

But – also warns KLAUS VOGEL – this "comprehensive interpretation has limits, and the expanded right to taxation by the State where the activity is exercised only applies to income directly related to the exercise of the activity (performance-related income)."

Going again to the case:

What immediately stands out is that nothing was proved, as to the reason for – or, perhaps better, the "origin" – of the payments of economic rights by A…, now in question, which permits their subsuming into the hypotheses which, according to the Comments (in either of their readings), are intended in the provision of Article 17, no. 2.

The Tax Authority maintains that they are equivalent to a "bonus" for the celebration of the sports contract (which seems to have implicit the idea that the player will, in some way, benefit from it). This is a conclusion – which, as the rules governing the distribution of the burden of proof dictate, implies the allegation and proof of facts from which the same may be extracted in the concrete case.

The Claimant, for its part, states that these are remuneration charged by sports agents who acquired the "registration rights" of players – through contracts aimed at promoting the career of the same and their economic security during this – which are totally independent from those owed to them (the players).

Now, it is a fact generally known by those who have even minimal knowledge of the reality of professional football (to the point that one can say it is indeed a "notoriously known fact") that, very frequently (perhaps in the majority of cases, at the higher competitive levels), sports contracting in this modality entails the intervention of three entities: the club or sports company and the player, which are to bind themselves through a contract, and the entity that, holding either sports rights or economic rights over the player, relinquishes them in exchange for compensation, thus "freeing" the latter for the celebration of the contract. And it is equally known that this compensation is paid, normally, by the club (sports company) receiving the player.

The Claimant's assertion that this is what happened in the case, beyond corresponding (in light of the data available in the proceedings) with the "appearance of the transaction," has, therefore, in addition, undeniable correspondence with what is a common situation in the sports area in question.

But it must be recognized that the Claimant, in the present proceedings, did not quite come to positively prove that it was thus – that is, to provide positive proof of the correspondence of its assertions (and of the "appearance of the transaction") with the effective reality verified in the specific cases under analysis: more concretely, to provide proof that the ceding companies are really a third entity, with respect to the players, and acquired the respective rights in the manner that come alleged (ut supra, III, § 2).

The fact, however, is that this is irrelevant, since such proof did not the Claimant have to produce. It was, rather, to the Tax Authority that, according to the rules of the distribution of the burden of proof, it fell, as a condition for the existence of the right to taxation, to allege and prove that the reason for – or the "origin" – of the payments now in question (those relating to economic rights) did not correspond to the facial appearance with which they present themselves, and would rather correspond, in the order of facts, to an effective situation that fell within the scope of Article 17, no. 2, of the Conventions (as defined above): but the Tax Authority did not provide such proof.

Given that, as we have already stated, citing KLAUS VOGEL, it is always the reason for and the activity that gave rise to the payment that will determine the eventual inclusion of the situation within Article 17, no. 2 of the Conventions, we are, thus, in the concrete case, faced with a situation of non liquet, which, pursuant to Article 100, no. 1, of the CPPT obliges a decision favorable to the Claimant.

Indeed, it would not have been impossible for the Tax Authority, without such involving a disproportionate activity, to ascertain the factual situation (namely, making use of the mechanisms of exchange of international information provided, in any case, in the applicable conventions), in order to clarify, for example, whether the players in question were partners, managers or, even, employees, of the companies to which such amounts were paid (which would result in the inclusion, in whole or in part, of such remuneration in the provision of Article 17, no. 2 of the applicable DTCs), as well as the reason why the players were "free" at the time of the celebration of professional sports contracts with the Claimant (e.g., whether the previous professional sports contracts, which they had celebrated with other clubs or SADs, had expired or whether it was the companies in question who obtained – against payment – their release) and, still, to ascertain the ownership of the percentages of economic rights of the players not covered by the contracts now in question.

That said, it must, on the other hand, be added a note on the question, raised by the Tax Authority, of the inadmissibility – in light of the national and international norms that regulate the practice of professional football – of the ownership of sports rights by entities that are not football clubs or SADs, with the consequent "invalidity" or "irrelevance" of the ownership, by entities without such status, of alleged "economic rights" over the players.

It is true that, according also to Portuguese law (Law no. 28/98), invoked by the Tax Authority, the professional sports contract may only be celebrated between practitioners and clubs or SADs, which only this contract generates "sports rights" and that only it is a prerequisite or condition, according to sports federation regulations, for the registration of a practitioner by a club; and it may well be true that sports organization seeks to discourage other types of contracts involving sports practitioners (notably, football players). Simply, it is also true that these other contracts – source of the so-called economic rights, here in question and in which the counterparty to the practitioner is an entity different from a club or SAD (e.g., a fund) – are current practice, and it cannot even be said that state law (in any case, Portuguese state law) prohibits them: they will be contracts that are simply beyond (or alongside) the sports contract and the regime of Law no. 28/98, celebrated, at the end of the day, in the exercise of the general contractual autonomy of persons – which (apart from express legal prohibitions) only has as its limit the illegality or the impossibility of the subject matter of the transaction.

That is sufficient to conclude, without more, that the question raised by the Tax Authority, and now considered, in no way, obviously, can be relevant in the present context. Moreover, the same would happen if, contrary to what is being said, one were faced with contracts that should be deemed "illicit" – and that, given, ultimately, the provision in Article 10 of the LGT.

In conclusion: just as occurred with the Tax Authority's interpretation regarding the payment of image rights, the interpretation made by it with respect to the payment of economic rights now in question must also be considered illegal, and for similar reasons: that is, for clearly exceeding the scope and the purpose of Article 17, no. 2, of the applicable DTCs. In this part as well, therefore, the corporate income tax assessment sub judice must be annulled.

It remains to add, finally (given already the provision in Article 8, no. 3, of the Civil Code), that the understanding now upheld follows in the line of existing jurisprudence on the subject (arbitral, since no other exists), namely the decisions issued in cases CAAD no. 108/2015-T and 501/2014, whose rationale, although proceeding from a somewhat different analysis, in essence, is subscribed.

§ 2 – Regarding the Subsidiary Petition

Having found illegal, and about to be annulled, the tax assessment disputed, the consideration of the Claimant's subsidiary petition regarding the illegality, at least, of the assessment of compensatory interest is rendered moot – since the annulment of this other assessment is already a direct consequence of the annulment of the tax assessment to which it refers.

§ 3 – Regarding Compensation for Improper Provision of Guarantee

The Claimant formulates a petition for compensation for improper provision of guarantee.

Article 171 of the CPPT establishes that "compensation in case of banking guarantee or equivalent improperly provided shall be requested in the proceedings in which the legality of the enforceable debt is disputed" and that "compensation must be requested in the complaint, objection or appeal or if its grounds are subsequent within 30 days following its occurrence."

The petition for constitution of the arbitral tribunal and for arbitral pronouncement has as a corollary the fact that it will be in the arbitral proceedings that the "legality of the enforceable debt" will be discussed, and therefore, as follows from the express wording of that no. 1 of the aforementioned Article 171 of the CPPT, it is also the arbitral proceedings that are appropriate to consider the petition for compensation for improper guarantee.

In the case at hand, the errors underlying the disputed assessments are attributable to the Tax and Customs Authority, since they were of its own initiative and the Claimant in no way contributed to these errors being committed.

For this reason, the Claimant has, in the abstract, a right to compensation for the guarantee provided, pursuant to Article 52 of the LGT.

However, the guarantee provided relates to various enforcement proceedings, not only that arising from the assessment which is the subject of the present proceedings. Neither were any concrete prejudices resulting from the guarantee (pledge of credits) provided alleged.

Given that there are no elements that permit determination of the amount of compensation, this petition must be considered autonomously.

VI - DECISION

a) The corporate income tax assessment no. 2016…, from which resulted a total amount of corporate income tax to be paid of € 169,630.25 (including compensatory interest), is annulled in its entirety, on the grounds that it is illegal.

b) The petition for compensation for improper provision of guarantee is not considered, which must be filed autonomously.

VII - Value of the Case

Having regard to the provision in Article 306, no. 2, of the CPC, Article 97-A, no. 1, of the CPPT and Article 3, no. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 169,630.25.

VIII - COSTS

The costs of the proceedings are the responsibility of the Claimant, pursuant to no. 2 of Article 5 of the Regulation on Costs in Tax Arbitration Proceedings.

Let notice be given.

Lisbon, 6 April 2017

The Presiding Arbitrator

José Manuel Cardoso da Costa

Arbitrator Member

Rui Duarte Morais

Arbitrator Member

Américo Brás Carlos, who votes in dissent, as per the statement which follows.

DISSENTING OPINION

I voted against the decision contained in the award for the following reasons:

1. The provisions of double taxation avoidance conventions (DTAC) concluded by States that adopted, without reservations, the wording contained in the OECD Model Convention for the Taxation of Income and on Capital (OECD MC) must be interpreted in light of the "Comments" to the articles of this Model.

2. It is relevant in the concrete case that the wording of no. 2 of Article 17 of the DTACs concluded between Portugal and Brazil and between Portugal and Morocco is identical to that of the OECD MC.

3. When income is formally attributed to a person different from the sportsperson, the Comments to no. 2 of Article 17 of the OECD MC are of decisive importance to fix the scope and meaning in which the expression "income from activities personally exercised by (…) sportspersons, in that capacity, attributed to another person" must apply.

4. For the understanding of what constitutes "income from activities personally exercised by (…) sportspersons, in that capacity," the Comments to no. 1 of the same Article 17 are also decisive, since no. 2 of the same provision is a particular development – income attributed to a person different from the sportsperson – of that normative.

5. As regards the cession of image rights of player C…, it follows from the contract concluded between A… and D…, Ltda, that this ceded to the former "the rights of commercial exploitation jointly or individually of the public image of the player" (see page 36 of the RIT).

6. For its part, nos. 1 and 2 of Article 10 of Law no. 28/98, of 26 June (Legal Regime of Work of the Sports Practitioner and of the Sports Formation Contract), establishes the dichotomy between the individual exploitation of the player's image and the exploitation of the use of the image of the collective of practitioners.

7. A similar dichotomy can also be found between nos. 2 and 3 of Article 38 of the Collective Labour Agreement concluded between the Portuguese Professional Football League and the Union of Professional Football Players. No. 2 of that article provides: "The right to the use and exploitation of the player's image is the responsibility of the player personally in a merely individual capacity, and the player may cede this right to the club in whose service the player is employed during the term of the respective contract." On the other hand, no. 3 of the same article reads: "The right to image of the collective of players of the same team is reserved to the respective club or sports company."

8. There is thus a part of the player's image right that is not automatically ceded to the club or sports company by virtue of the professional sports contract. This portion of the image right may be exploited individually by the player or by another to whom the player has ceded it. And it was these "rights of individual exploitation of the image" that A… acquired (see point 8 of the pleadings of the claimant).

9. It is now necessary to know whether the income resulting from the cession of this portion of the player's image right have a close relationship with the personal activity exercised as a sportsperson, such that they are subsumed in Article 17 of the DTACs.

10. The distinction between a use of the sportsperson's image right closely linked to sports activity – covered by Article 17 of the OECD MC – and the use of that same right without that close link – not covered by Article 17 of the OECD MC – is also impressively present in the Comments to the OECD MC.

11. As to the most consistent criterion for elucidating what this "close relationship" consists of, see point no. 9 of the said Comments: "This close relationship generally exists when one cannot reasonably consider that the income would have been obtained if these activities had not been exercised."

12. And, in the case under analysis, it is not clear how, reasonably, A… would acquire the image rights of the player if it were not for the player to exercise their activity as a sportsperson. It would certainly not do so if the player were not to exercise or no longer exercised their sports activity.

13. For which reason, I depart from the Award, considering that the provision in no. 2 of Article 17 of the DTAC with Brazil is applicable to the image rights sub judice, which, together with the provision in letter d) of no. 3 of Article 4 of the CIRC, results in the consequent taxation of the respective income in Portugal.

14. As regards the so-called Economic Rights, A… reiterates (point 12 of the pleadings) that it acquired the economic rights (it calls them registration rights) of players without employment bonds to a club, from commercial companies specialized, non-sports, and non-resident in Portugal, which assumed the risk of monetizing those assets (the players).

15. I understand that the payments made by A… to the said companies have a close relationship with the activity of each of the sportspersons in that capacity.

16. Payments for the acquisition of "economic rights" only occur because it is already agreed that the player will celebrate a professional sports contract with A…. It can be said that the acquisition of such rights is, with the signing of the professional sports contract, the internal requirement that A… must fulfill so that formally those athletes are its players.

17. It is evident to me that, similarly to the test done above to ascertain the existence of a "close relationship" of income resulting from image rights with the activity exercised personally by sportspersons, in that capacity, also in the case of the acquisition of the so-called "economic rights," A… would not have made those payments to the non-resident entities if the respective players were not about to exercise their sports activity in the club.

18. Moreover, the framework of payments made to a "company promoting artists or sportspersons" – a model to which, without effort, those said non-resident companies will be subsumed, which while the players are unemployed pay them remuneration and assume the risk of monetizing those assets (sic) until a new club is found – is one of the cases which the Comments to the OECD MC uses as an example of income subsumed in no. 2 of Article 17, regardless of the location of the State.

19. For which reason, also as regards the payments for acquisition of the said economic rights, I consider that the provisions of Articles 17, no. 2 of the DTACs with Brazil and with Morocco are met, as well as the provision of Article 4, no. 3, letter d), of the CIRC, with the consequent taxation of those amounts in Portugal.

For the reasons above explained, I understand that the tax act sub judice should have been upheld; and for this reason I draw up this dissenting opinion.

Lisbon, 6 April 2017

Américo Brás Carlos

[1] Approved, respectively, by Resolution of the Assembly of the Republic no. 69-A/98, of 11 December 1998 and by Resolution of the Assembly of the Republic no. 33/2001, of 1 March 2001.

[2] We used the most recent version (2014) of such Comments. Although it must be understood that conventions must be interpreted in light of the Comments in effect at the date of their conclusion, the fact is that the solutions advocated with respect to Article 17, no. 2, are, in essence, the same since 1992.

[3] We reproduce in full this Comment:

9.5 It is frequent for entertainers and sportspersons to derive, directly or indirectly(e.g. through a payment made to the star-company of the entertainer or sportsperson), a substantial part of their income in the form of payments for the use of, or the right to use, their "image rights", e.g. the use of their name, signature or personal image. Where such uses of the entertainer's or sportsperson's image rights are not closely connected with the entertainer's or sportsperson's performance in a given State, the relevant payments would generally not be covered by Article 17 (see paragraph 9 above). There are cases, however, where payments made to an entertainer or sportsperson who is a resident of a Contracting State, or to another person, for the use of, or right to use, that entertainer's or sportsperson's image rights constitute in substance remuneration for activities of the entertainer or sportsperson that are covered by Article 17 and that take place in the other Contracting State. In such cases, the provisions of paragraph 1 or, depending on the circumstances, will be applicable.

[4] Klaus Vogel, On Double Taxation Conventions, Kluwer Law International, 2015, I- Overview and Main Features, no. 16.

[5] We reproduce such Comment:

1. Paragraph 1 of the Article deals with income derived by individual entertainers and sportspersons from their personal activities. Paragraph 2 deals with situations where income from their activities accrues to other persons. If the income of an entertainer or sportsperson accrues to another person, and the State of source does not have the statutory right to look through the person receiving the income to tax it as income of the performer, paragraph 2 provides that the portion of the income which cannot be taxed in the hands of the performer may be taxed in the hands of the person receiving the remuneration. If the person receiving the income carries on business activities, tax may be applied by the source country even if the income is not attributable to a permanent establishment there. But it will not always be so. There are three main situations of this kind:

a) The first is the management company which receives income for the appearance of e.g. a group of sportspersons (which is not itself constituted as a legal entity).

b) The second is the team, troupe, orchestra, etc. which is constituted as a legal entity. Income for performances may be paid to the entity. Individual members of the team, orchestra, etc. will be liable to tax under paragraph 1, in the State in which they perform their activities as entertainers or sportspersons, on any remuneration (or income accruing for their benefit) derived from the performance of these activities (see, however, paragraph 14.1 below). The profit element accruing from a performance to the legal entity would be liable to tax under paragraph 2.

c) The third situation involves certain tax avoidance devices in cases where remuneration for the performance of an entertainer or sportsperson is not paid to the entertainer or sportsperson himself but to another person, e.g. a so-called star-company, in such a way that the income is taxed in the State where the activity is performed neither as personal service income to the entertainer or sportsperson nor as profits of the enterprise, in the absence of a permanent establishment. Some countries "look through" such arrangements under their domestic law and deem the income to be derived by the entertainer or sportsperson; where this is so, paragraph 1 enables them to tax income resulting from activities in their territory. Other countries cannot do this. Where a performance takes place in such a country, paragraph 2 permits it to impose a tax on the profits diverted from the income of the entertainer or sportsperson to the enterprise. It may be, however, that the domestic laws of some States do not enable them to apply such a provision. Such States are free to agree to other solutions or to leave paragraph 2 out of their bilateral conventions.

[6] A figure that should, as a rule, be considered inapplicable in tax law, by force of the typicality of the rules of incidence.

[7] Op. cit., Commentary 125 to Article 17, no. 2.

[8] "9.5 (…) When this use of the right to image of the artist or sportsperson is not closely linked to the performance of the artist or sportsperson in a given State, the corresponding payments will generally not be covered by Article 17."

[9] "11.1 – (…) this paragraph permits that State to impose taxes on income derived by a company promoting artists or sportspersons."