Summary
Full Decision
Arbitral Decision
The arbitrators Councillor Jorge Manuel Lopes de Sousa (arbitrator-president, designated by the other Arbitrators), Prof. Dr. Rui Duarte Morais and Dr. Maria Manuela do Nascimento Roseiro, designated by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 16-09-2016, hereby agree as follows:
1. Report
A…, NIF…, with registered office at …, …, …, …, … (hereinafter A… or Claimant), pursuant to subsection a) of no. 1 of article 2, in subsection b) of no. 2 of article 6, and in subsection a) of no. 1 and no. 2 of article 10 of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), filed a request for partial annulment of the corporate income tax assessment and compensatory interest no. 2016 … (document no. 2016 …), in the total amount of 1.090.191,05€, which includes tax, municipal surcharge, other accruals and interest (compensatory and default), relating to the tax year 2012.
The Respondent is the TAX AND CUSTOMS AUTHORITY.
The Claimant designated as Arbitrator Prof. Dr. Rui Duarte Morais, pursuant to the provisions of article 6, no. 2, subsection b), of the RJAT.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 14-07-2016.
Pursuant to the provisions in subsection b) of no. 2 of article 6 and no. 3 of the RJAT, and within the timeframe provided in no. 1 of article 13 of the RJAT, the head of the Tax Administration service designated as Arbitrator Dr. Emanuel Augusto Vidal Lima.
The Arbitrators designated by the Parties agreed to designate Councillor Jorge Lopes de Sousa as arbitrator-president, who accepted the designation.
Pursuant to the provisions of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this designation on 31-08-2016.
Thus, in compliance with the provisions of no. 7 article 11 of the RJAT, following the expiration of the timeframe provided in no. 1 of article 13 of the RJAT without either Party raising any objection, the Collective Arbitral Tribunal was constituted on 16-09-2016.
The Tax and Customs Authority submitted a response in which it raised the exception of untimeliness and expiration of the right of action and argued that the request should be ruled inadmissible.
The Claimant responded to the exception and requested the condemnation of the Tax and Customs Authority as a litigant acting in bad faith.
By order of 14-11-2016, the inadmissibility of the exception and the request for condemnation for bad faith litigation were decided.
On 02-12-2016, a hearing was held in which witnesses were examined and it was decided that the proceedings would continue with written submissions.
The Parties submitted their submissions.
The Arbitral Tribunal was regularly constituted.
The parties have legal personality and capacity and are legitimate (articles 4 and 10, no. 2, of the same statute and article 1 of Order no. 112-A/2011, of 22 March) and are properly represented.
There are no obstacles to the examination of the merits of the case.
2. Statement of Facts
2.1. Proven Facts
The following facts are considered proven:
a) The Claimant is the sports association that manages the activity of male professional football of B…;
b) The A… was subject to a tax inspection regarding its activity relating to the year 2012 – which culminated in a final inspection report, contained in document no. 1 attached with the request for arbitral decision, the contents of which are reproduced below, in which it states, among other matters, the following:
II.3.1. Identification and Address
The taxpayer (TP) A…, with tax identification number (NIF) …, is a sports corporation, established by public deed of 1998-06-26.
It resulted from the legal establishment of the senior football team of B…, pursuant to subsection b) of no. 3 of Decree-Law no. 67/97, of 3 April – Legal Regime of Sports Corporations (SAD).
It has registered office and tax address at …, …, …, …, …, …-… …, in the area of the Tax Office of …-….
II.3.2. Activity Exercised
The taxpayer is registered for the exercise of the activity corresponding to the CAE "… - Activities of sports clubs", since 1998-06-26.
The company has as its corporate purpose "participation in the sport of football and professional sports participations, the promotion and organization of sports events and the encouragement and development of activities related to the practice of professionalized sports activity in that sport".
A… is a sports corporation governed by the special legal regime established in Decree-Law no. 67/97, of 3 April, as amended by Law no. 107/97, of 16 September.
Sports corporations are a type of corporation subsidiary regulated by the general rules applicable to corporations, pursuant to the Commercial Companies Code, approved by Decree-Law no. 262/86, of 2 September, as amended by subsequent legislation, and by complementary legislation applicable to corporations, such as the Securities Code, but with some specificities arising from the special requirements of the sports activity that constitutes its main purpose.
III.3.3. Tax Framework
A…, as a legal entity, is subject, by force of the legal framework in force in Portugal, to various taxes, namely Corporate Income Tax (IRC) and Value Added Tax (VAT).
According to article 3 of the IRC Code, it is a resident entity that exercises, as its main activity, an activity of a commercial, industrial or agricultural nature, which makes it a taxpayer subject to tax and not exempt therefrom.
With regard to VAT, it is a taxpayer subject to tax and not exempt, pursuant to article 2 of the VAT Code, within the normal taxation regime with monthly periodicity.
III.3.4. Shareholders
At the beginning of the period under analysis, the capital stock of A…, fully subscribed and paid, in the amount of 5,835,420 EUR, was represented by 1,167,084 ordinary registered shares, with a nominal value of 5 EUR each.
In the tax period of 2012, following capital increases in the amount of 164,580 EUR, fully subscribed by B…, the realized capital reached 6,000,000 EUR.
The shares held by B… are of category A, with general veto rights. The remaining shares are of category S and have normal rights: 10 shares = 1 vote.
(...)
III. DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETICAL CORRECTIONS TO TAXABLE INCOME
III.1. IRC – EXPENSES NOT FISCALLY ACCEPTED
No. 1 of article 17 of the IRC Code establishes that the net result of the period determined based on accounts is one of the components of taxable profit, composed of positive elements (income or gains) and negative elements (expenses or losses).
To define which are these negative elements, no. 1 of article 23 of the IRC Code states, as a general criterion, that expenses or losses are those that, duly proven, are indispensable for the realization of income or gains subject to tax and for the maintenance of the respective source of income.
The fundamental aspect of the fiscal consideration of business expenses is based on the concept of their indispensability inherent in no. 1 of article 23 of the IRC Code.
It is, first and foremost, to ensure that consumption of a good or service occurred within the sphere of the company and then to prove that the consumption of that good or service is appropriate to the charge incurred and to the business purposes, such as the realization of income subject to tax or the maintenance of the source of income.
In these terms, the issue of "indispensability" only arises before expenses or services actually proven.
In cases where the presumption of accounting truthfulness is rebutted, it falls to the taxpayer to prove that the charges recorded correspond unequivocally to services rendered and, if their existence is proven, that they correspond to charges indispensable for obtaining its income.
According to article 74 of the LGT "the burden of proof of the facts constituting the rights of the tax authority or taxpayers falls on whoever invokes them", and it is certain that the taxpayer bears the burden of proving the indispensability of recorded expenses, for purposes of determining taxable income in the context of IRC, and that those expenses actually existed, under penalty of the respective expense not being fiscally deductible.
III.1.1. EXPENSES RELATING TO THE ACQUISITION OF INTERMEDIATION SERVICES IN PLAYER CONTRACTING
The taxpayer considered as expenses charges incurred in the acquisition/renewal of the contractual rights of identified players, with intermediation/representation services provided by player agents/sports entrepreneurs in the conclusion of these transactions.
From the documentary analysis carried out, it was found that the records of amounts in the intangible asset, relating to the provision of intermediation/representation services, are generally supported by "agreements" concluded between A… and the agent/agent company, whereby the TP commits to pay to that party if the player signs/renews a contract with A….
Analyzing the sports employment contracts concluded between A… and each of the players, it is verified that, in most of them, it was expressly stated that the participation of the agent was made in the name and on behalf of the player, having been confirmed by the various entities that signed the contract that the agent acted on behalf of the player.
In other situations, in which the sports employment contract is silent or does not state that the agent represented the player, it was confirmed by other sources, which will be detailed case by case, that the agent acted on behalf of the player and not of A….
Thus, it follows from the "agreements" that A… accepts to bear the costs of intermediation/representation made on behalf of the players.
Now, for a charge to constitute an expense, it must necessarily correspond to the consumption of a good/service within the sphere of that entity.
Therefore, since the consumption of the service did not occur on behalf of A…, these charges cannot be considered as tax expenses of the TP, pursuant to no. 1 of article 23 of the IRC Code.
Regarding the Represented Entity
The (new) FIFA Regulations on Player Agents, approved by the FIFA Executive Committee on 2007-10-29 and entering into force on 2008-01-01, establish that the remuneration of the agent shall be paid exclusively by its client.
Note that the Agents Regulation, in no. 8 of its article 19, still with the intent to avoid conflicts of interest, imposes the prohibition of "dual representation" and determines that a player agent may only represent or manage the interests of one of the parties involved in the transaction.
But it is not only FIFA Regulations that impose such provision.
The Legal Regime of Sports Employment Contracts and Sports Formation Contracts (RJCTD), published with Law no. 28/98, of 26 June, provides in no. 2 of article 22 that "the person who exercises the activity of sports entrepreneur may only act in the name and on account of one of the parties to the contractual relationship".
Consequently, pursuant to no. 1 of article 24 of the RJCTD, "they can only be remunerated by the party they represent".
This anomalous situation, of the club/SAD remunerating the player's agent, is something common, about which João Leal Amado has warned: «(...) the ambiguities and indefinitions that frequently surround the activity of entrepreneurs/intermediaries are reflected, not only in the circumstance that they can perform functions for the benefit of either party, but also in the fact, clearly anomalous, of such entrepreneurs, even when they provide their services to the practitioner, sometimes being remunerated by the club (!) or even seeing their remuneration divided (or multiplied) by both parties (...).
The framework of the activity of sports entrepreneurs in the conclusion of contracts for the cession, acquisition and renewal of players' sports rights was clarified with the publication of Circular no. 15/2011 of DGCI.
The fundamental question for the acceptance of the charge within the sphere of A… would be to know which party the agent represented and who considered it indispensable to include it in the transaction.
This question was fully answered by the TP when concluding contracts with each player where, expressly, it was declared by all parties that the agent represented the player.
In other cases, in which the representation in the name of the player was not contractually expressed, it was proven by other documents that the agent/representative actually represented the player.
Regarding the legal-tax framework of this charge, subsection c) of no. 1 of article 45 of the IRC Code provides that "charges that fall on third parties that the company is not legally authorized to bear" are not deductible for the determination of taxable profit.
Since the charges in question correspond to the remuneration of the sports entrepreneur while representative of the player in the transaction, those charges constitute a charge of the player and not of A….
Thus, it could only constitute a charge of A… if it had been legally provided, namely in a contract signed with the player, that it would fall to the TP to bear the charge due with the representation of the player, that is, the cession of the player's debt to A….
In this case, it could not fail to be considered as income to be taxed in the sphere of the player, subject to withholding at source to be carried out by the employer, which, according to the accounting records of the TP, did not occur.
Conclusion
The agents represented the players and not A…, therefore it was the players who imposed their presence in the transaction.
Since the service was not rendered on behalf of A…, it does not correspond to the consumption of a service within the sphere of the TP, therefore it does not constitute a charge proven to be indispensable for the realization of income or for the maintenance of the source of income, pursuant to no. 1 of article 23 of the IRC Code.
On the other hand, since the agent acted on behalf of the player, both Portuguese law and FIFA regulations impose that the agent may only be remunerated by the player, therefore, pursuant to subsection c) of no. 1 of article 45 of the IRC Code, this charge could not be deductible for the determination of taxable profit.
III.1.1.1. Expenses relating to the contracting of "F…"
In the tax period of 2012, A… recorded the following entry, relating to the depreciation of expenses for the acquisition of economic sports rights and the alienation of the same sports rights of player F…:
Of the amount of 53,742.47 EUR, recorded as a debit to account 64.3141, the amount of 6,250.00 EUR corresponds to the depreciation of 25% of ¼ of the expenses in intermediation, in the total amount of 100,000.00 EUR, related to the acquisition of the financial and sports rights of the player.
The amount in question, of 100,000.00 EUR, was recorded as the provision of intermediation services in the acquisition of the player's registration rights, pursuant to the "Agreement" signed on 2008-07-24, between A… and G… Advogados Associados, represented by H….
The document states: «The first party agrees to pay to the second party the sum of 100,000.00 Euros (...), for its intervention in the acquisition of the sports registration rights of athlete F….»
The sports and financial rights of player F… were acquired by A… from I…, pursuant to the "Contract for the Cession of Sports Rights" signed on 2008-07-24. This contract makes no reference to the intervention of any agent.
No. 1 of article 28 of the FIFA Regulations on Player Agents, which entered into force on 2008-01-01, provides that, in any contract in which the agent intervenes on behalf of the club's interests, that agent must be identified as such.
On the date of 2008-07-24, A… concluded with player F… a "Sports Employment Contract".
In clause eleventh it states: «The parties declare that the present contract was concluded without the intervention of player agents.»
As stated in the tax inspection report, which concluded on the tax inspection action authorized by Service Order no. … 2012 …:…
«On the other hand, it was possible to detect references on the internet that Mr. H… acts as an entrepreneur of the player: «F… did a good job at … during the Portuguese championship, and that aroused the interest of other clubs", said H…, the player's entrepreneur, who is heading to Portugal and will accompany the player in his presentation to the new team», (see full news at http://br.esportes.yahoo.com...».
Conducting an internet search, we found many other news items from the same period, in which the name of H… is mentioned as an entrepreneur, agent, representative or "manager" of the player:
i) 2008-…-…, First League news; «H…, representative of the athlete, claims that the loan is negotiable, (...)»;
ii) 2008-…-…, Headline/A Bola: «Survey on F…(...) B… recently conducted a survey with the agent of the athlete, H…. (...)»
iii) 2005-…-…, Paulense Sports news: «F… for four seasons (...) The transfer of the midfielder (...) was established yesterday during a meeting between the president of …, J…, the "manager", K…, and the athlete's representative, H…, who holds 12.5 percent of the rights.»
iv) 2008-…-…, More Football news:«the midfielder F…, 25 years old, was negotiated by his entrepreneur H… with B… for 1 million euros to play for four seasons.»™.
Given the documents described and the express indication that the lawyer H…, representative of G…, Advogados Associados, would have represented the player and not A…, it resulted, from the comparison between the described facts and subsection a) of no. 2 of article 75 of the LGT, the removal of the presumption of accounting truthfulness of the charges recorded as relating to a service rendered on behalf of the TP.
Thus, within the scope of the inspection procedure for the fiscal year 2008, the TP was notified to «prove, in writing, the indispensability of the charges incurred in the amount of €100,000.00, with the contract concluded with G… Advogados Associados, dated 24/07/2008, for the realization of profits or gains subject to tax or for the maintenance of the source of income»
In response to that notification, the TP alleged that «B… in expectation of achieving a high capital gain with the cession of the rights held under athlete F…, entered into a contract with G… Advogados for better achieving its objectives» and that «The negotiations were always conducted from Brazil by this company, which, merely does not appear mentioned in the employment contract of the athlete in question since its action was in the intermediation between B… and I…».
In the course of subsequent inspection procedures, in response to identical notifications, A… maintained the same response. It did not submit any documents/elements that could prove that the "agent" was representing A… and/or that would exclude the involvement of the "agent" with the player.
The "agreement" with the entity G… Advogados Associados, which A… presents, was concluded on the same date it concluded the "Sports Employment Contract" with the player.
Given the same date of conclusion of both contracts, one cannot but conclude that they would not have allowed a temporal margin for negotiation between entities not already bound together.
In this context, the realization of a service to A… and its indispensability are called into question.
Since the presumption of truthfulness of which the accounting and the agreement presented could enjoy has been rebutted, it would be incumbent on the TP to prove that such charge consisted of operations actually carried out for the benefit of A… and that it was indispensable to the realization of its income, which did not occur.
It is therefore concluded, by the non-acceptance as a tax expense, and it is to be added, for purposes of determining taxable profit, the amount of 6,250.00 EUR.
III.1.1.2. Depreciation expenses in the contracting of L…
In the tax period of 2012, A… recorded as an expense the total amount of 44,375.00 EUR, referring to the depreciation of 16.66% of the expenses related to the contracting of player L…:
The amount recorded of the intangible asset was calculated as follows:
On 2008-12-12 the TP concluded, with the entity M…, Lda., with the NIF/NIPC…, represented by its sole manager N…, an "Agreement" whereby it agrees to pay, to that entity, the sum of 35,000.00 EUR.
On 2009-01-05 the TP concluded, with the football player L…, a sports employment contract, whereby the player agrees to exercise his professional football player activity on behalf of the TP, to be in force from 2009-01-01 to 2014-06-30.
Pursuant to clause thirteenth of this contract, it «was concluded with the intervention of N…, Agent Licensed by the Portuguese Football Federation, with license no.…, on behalf of the Player».
It is therefore concluded that the service provided by M…, Lda., in the person of its sole manager N…, was not provided on behalf of A….
In fact, pursuant to the contract signed by the player, that agent acted "on behalf of the player", therefore that expense of 35,000.00 EUR cannot be accepted as a tax expense of A…, pursuant to no. 1 of article 23 of the IRC Code.
On the other hand, even if it were otherwise, since the agent acted on behalf of the player, both Portuguese law and FIFA regulations impose that the agent may only be remunerated by the player, therefore, pursuant to subsection c) of article 45 of the IRC Code, that charge would not be fiscally deductible for purposes of determining taxable profit.
Thus, it is concluded that the depreciation of that expense cannot be accepted as a tax expense, and it is to be added to table 07 of declaration form 22, for purposes of determining taxable profit.
The following calculates the amount corresponding to depreciation of that amount of 35,000.00 EUR, deducted from the amount of 10,000.00 EUR relating to the contribution of … Sport Club:
(35,000.00 - 10,000.00) X 16.6(6)% = 4,166.67 EUR
III.1.1.3. Expenses relating to the contracting of O…
In the tax period of 2012, A… recorded the following entry, relating to the depreciation of the rights of sports use of player O…:
Of the amount of 57,666.67 EUR, recorded as a debit to account 64.3141, the amount of 7,666.67 EUR corresponds to 1/3 of the amount of an "Agreement" concluded and signed on 2010-06-25, with the entity P…, Ltda., with registered office in Brazil, represented by its administrator Q….
Pursuant to that agreement, A… committed to pay to the second party, the sum of 23,000.00 EUR, «for its intervention in the acquisition of the sports registration rights of athlete O…».
No. 1 of article 28 of the FIFA Regulations on Player Agents, which entered into force on 2008-01-01, provides that, in any contract in which the agent intervenes on behalf of the club's interests, that agent must be identified as such.
On the same date of 2010-06-25, A… concluded another "Agreement", with the entity R…, Ltda., also with registered office in Brazil, for the acquisition of the sports rights and 95% of the economic rights of player O….
Analyzing the document, it is found that it makes no reference to any agent or intermediary.
On the same date of 2010-06-25, A… concluded, with player O…, a sports employment contract, to be in force until 2013-06-30.
Pursuant to clause twelfth, this contract was concluded with the intervention of Q…, agent licensed by the Brazilian Football Federation, on behalf of A….
The "Agreement" with the entity P…, Ltda., which A… presents, was concluded on the same date it concluded the "Agreement" with the entity R…, Ltda., and on the same date in which it concluded the sports employment contract with the player.
Given the same date of conclusion of all contracts, one cannot but conclude that they would not have allowed a temporal margin for negotiation between entities not already bound together.
In this context, the realization of a service to A… and its indispensability are called into question.
Reviewing the information in the news circulating on the internet at the time of the facts, various press articles are found, from which it can be verified that Q…, administrator of P…, Ltda., was already at that time a representative of the player:
a) On 2010-…-…, news published by the newspaper Record «O… could be a player of B… from next season. Record knows that the … advanced for the 25-year-old player, who is represented by Q… and who would arrive at … at no cost». The same news appears in the links "National Football" and "….com".
b) On 2010-…-…: publication on the Record newspaper website, which refers to the agent of the player «Q…, the same entrepreneur of O…». The same news appears on the website "….com".
Given the documents described and the indication that Q… would have represented the player and not A…, it resulted from the comparison between the described facts and subsection a) of no. 2 of article 75 of the LGT, the removal of the presumption of accounting truthfulness of the charges recorded as relating to a service rendered on behalf of the TP.
Having been demonstrated that the agent Q…, administrator of P…, Ltda., represented the player and not A…, it is therefore concluded, by the non-acceptance as a tax expense, and it is to be added, for purposes of determining taxable profit, the amount of 7,666.67 EUR.
III.1.1.4. Depreciation expenses in the contracting of S…
The taxpayer recorded as an expense of the period, the amount of 37,500.00 EUR, referring to the depreciation of 25% of the expenses related to the contracting of player S…:
On 2010-05-21, A… concluded an "Agreement" with T…, Lda., with the NIF…, represented by its director U….
Pursuant to that "Agreement", A… intended «to contract athlete S… for the Seasons 2010/2011, 2011/2012, 2012/2013 and 2013/2014, and for this it resorted to the services provided by the second party.» and «For the services provided by the second party, for its intervention in the acquisition of athlete S…, the first party will have to pay the sum of 150,000.00€ (...)».
Pursuant to "Partnership Contract" signed on 2010-09-13, which appears on the Ministry of Justice portal, the partners of the company T…, Lda., are U… and V….
On the same date, 2010-05-21, A… concluded with player S…, of Nigerian nationality, a "Sports Employment Contract".
Pursuant to clause thirteenth of the same, the «contract was concluded with the intervention of (...)V…, Agent Licensed by Canada CSA, with License no.…, on behalf of the second party».
In the sports employment contract concluded between the player and A… it was confirmed, by the various intervening entities – player, A… and agent - that agent V… acted on behalf of the player and not of A….
In addition to the above, it was found that agent V… is a partner of the company T…, Lda., with which U… appears to be collecting the services described above, therefore the intervention of the company in this process is confused with the representation of the player's agent.
It follows from the "Agreement" combined with the "Sports Employment Contract" that A… accepts to bear the costs of representation/intermediation made on behalf of the player. Now, for a charge to constitute an expense, it must correspond to the consumption of a good/service within the sphere of the entity.
Pursuant to no. 2 of article 22 of Law no. 28/98: «The person who exercises the activity of sports entrepreneur may only act in the name and on account of one of the parties to the contractual relationship.»
The service was not rendered on behalf of A…, therefore it cannot be accepted as a tax expense of A…, pursuant to no. 1 of article 23 of the IRC Code.
On the other hand, even if it were otherwise, since the agent acted on behalf of the player, both Portuguese law and FIFA regulations impose that the agent may only be remunerated by the player, therefore, pursuant to subsection c) of article 45 of the IRC Code, that charge would not be fiscally deductible for purposes of determining taxable profit.
Thus, the depreciation of that expense cannot be accepted as a tax expense, and it is to be added to table 07 of declaration form 22, for purposes of determining taxable profit, the amount of 37,500.00 EUR.
III.1.1.5. Expenses relating to intermediation in the contracting of W…
In the period of 2012, A… recorded the following entry, relating to the depreciation of sports rights and the alienation of the same sports rights of player W…:
Of the amount of 430,000.00 EUR recorded in fixed assets, 380,000 EUR are due to the signature of the "Agreement for the Cession of Financial Rights", signed on 2010-07-01, with X…, with registered office in Brazil, relating to the acquisition of 60% of the financial rights of the player.
The remaining amount of 50,000 EUR is referred to in the "Agreement" concluded, on the same date, between the TP and the entity Y…, Unipessoal, Lda., with the NIF…º
As can be verified, the intangible asset in question was sold to …, Football, SAD, on 2012-08-31.
Of the amount of 23,888.89 EUR, recorded as a debit to account 64.3141, the amount of 2,777.78 EUR corresponds to the depreciation of 1/6 (two months) of the annual percentage of 33.33%, relating to the amount referred to in the "agreement" made with the entity Y…, Unipessoal, Lda., in the amount of 50,000.00 EUR.
Pursuant to the said "Agreement" made with Y…, Unipessoal, Lda., A… intended to contract the player, «and for this it resorted to the services provided by the second party».
By the first clause of the said "Agreement" A… «commits to pay to the second party the sum of 50,000.00 Euros».
On the same date, 2010-07-01, the TP concluded with the player a "Sports Employment Contract".
Pursuant to clause thirteenth, the «contract was concluded with the intervention of Z…, Agent no.…, Licensed by the Brazilian Football Federation, on behalf of the second party», that is, on behalf of the player.
In the sports employment contract concluded between A… and the player it was confirmed, by the various intervening entities, player, W… and agent, that the agent acted on behalf of the player and not of A….
As stated in the inspection report of the action authorized by Service Order no. OI 2012…, pursuant to the terms of the deed denominated "Particular Deed of Proxy", issued by Z…, football player agent, where this party «constitutes and appoints Mr. AA… (...) as its sufficient representative, to whom it grants powers, in an exclusive manner, for the special purpose of representing itself before A… for any matter and negotiation relating to athlete W…, being able to conclude the necessary instruments between the principal and A….», «it was found that the FIFA AGENT established a proxy for Y… in order for this party to represent the FIFA AGENT in the negotiations between the player and A…, with powers to conclude all necessary contracts.»
Thus, A… accepted to bear the costs of intermediation/representation practiced on behalf of the player, effected through the services provided by Y…, in the total amount of 50,000.00 EUR.
Now, a charge to constitute an expense must necessarily correspond to the consumption of a good/service within the sphere of an entity.
In this context, Y… represented the player and not A…, therefore it was the player who imposed its presence in the negotiations.
Therefore, since the service was not rendered on behalf of A…, it does not correspond to the consumption of a service within its sphere, therefore it does not constitute a charge proven to be indispensable for the realization of income subject to tax or for the maintenance of the source of income, pursuant to no. 1 of article 23 of the IRC Code.
On the other hand, since the "agent" acted on behalf of the player, both Portuguese law and FIFA regulations impose that the agent may only be remunerated by the player, therefore, pursuant to subsection c) of no. 1 of article 45 of the IRC Code, this charge could not be deductible for purposes of determining taxable profit.
In conclusion, it is concluded, by the non-acceptance as a tax expense, and it is to be added, for purposes of determining taxable profit, pursuant to no. 1 of article 23 of the IRC Code and subsection c) of no. 1 of article 45 of the IRC Code, the amount of 2,777.78 EUR.
III.1.1.6. Expenses relating to the contracting of player BB…
In the period of 2012, A… recorded the following entry, relating to depreciation of sports rights and termination of the sports employment contract of player BB..:
The amount of 12,500.00 EUR, recorded as a debit to account 64.3141, corresponds to the depreciation 1/3 (four months) of the amount relating to the "agreement" concluded with CC… on 2010-04-12.
The amount of 62,500.00 EUR, recorded as a debit to account 63.8202, corresponds to the remainder (20 months) of the amount relating to the same agreement.
On 2010-04-12, A… (first party) concluded an "Agreement" with CC…, of Spanish nationality, agent licensed by the Royal Spanish Football Federation, with license no.… (second party).
Pursuant to that "Agreement", CC…: «represents the Player and intermediated his transfer to the first party».
As consideration for the signature of the said "Agreement", the TP committed to pay to CC… the sum of 300,000.00 EUR, in two seasons.
As it is stated in the "Agreement" itself, the agent "represents the player", that is, the agent acted on behalf of the player and not of A….
On the same date, 2010-04-12, A… concluded with player BB…, of Spanish nationality, (second party), a "SPORTS EMPLOYMENT CONTRACT"."
Pursuant to clause thirteenth of the same, the «contract was concluded with the intervention of ... CC…, Agent Licensed by the Royal Spanish Football Federation, with License no.…, on behalf of the second party».
Pursuant to no. 2 of article 22 of Law no. 28/98: «The person who exercises the activity of sports entrepreneur may only act in the name and on account of one of the parties to the contractual relationship.»
It follows from the "Agreement" that A… accepts to bear the costs of representation/intermediation made on behalf of the player. Now, for a charge to constitute an expense, it must correspond to the consumption of a good/service within the sphere of the entity.
The service was not rendered on behalf of A…, therefore it cannot be accepted as a tax expense of A…, pursuant to no. 1 of article 23 of the IRC Code.
On the other hand, even if it were otherwise, since the agent acted on behalf of the player, both Portuguese law and FIFA regulations impose that the agent may only be remunerated by the player, therefore, pursuant to subsection c) of article 45 of the IRC Code, that charge would not be fiscally deductible for purposes of determining taxable profit.
Thus, the depreciation of that expense cannot be accepted as a tax expense, and it is to be added to table 07 of declaration form 22, for purposes of determining taxable profit, the amount of (12,500.00 + 62,500.00 =) 78,000.00 EUR.
III.1.1.7. Depreciation expenses in the contracting of player DD…
In the tax period of 2012, the TP A… recorded as an expense the total amount of 63,962.50 EUR, referring to the depreciation of the rights relating to player DD…:
Of the total amount referred to in the preceding paragraph, we highlight the amount of 25,000.00 EUR, corresponding to the depreciation of 25% of the amount of 100,000.00 EUR, which the TP recorded as expenses relating to intermediation in the contracting of the player.
On 2011-06-08, A… signed an "Agreement" with the entity EE…, with registered office in … and NIF…, represented by FIFA agent FF….
Among the recitals of the said "Agreement" it is stated that: «The first party intends to contract player DD…, and for this it resorted to the services provided by the second party.»
Pursuant to the first clause of the "Agreement": «The first party commits to pay to the second party, for the services provided by its intervention in the acquisition of the sports registration rights of athlete DD…, the sum of 100,000.00€ (...)».
On the same date, 2011-06-30, A… concluded with player DD…, with NIF…, a "Sports Employment Contract", for four seasons, beginning on 2011-07-01 and ending on 2015-06-30.
As stated in clause thirteenth of the said contract: «The present contract was concluded with the intervention of FF…, Agent Licensed by the Portuguese Football Federation, with License no.…, on behalf of the second party.»
It is verified that FF…, who represented EE… in the signature of the "Agreement" with A…, appears in the conclusion of the "Sports Employment Contract" as representative of the player.
Pursuant to no. 2 of article 22 of Law no. 28/98: «The person who exercises the activity of sports entrepreneur may only act in the name and on account of one of the parties to the contractual relationship.»
It follows from the "Agreement" that A… accepts to bear the costs of representation/intermediation made on behalf of the Player. Now, for a charge to constitute an expense, it must correspond to the consumption of a good/service within the sphere of the entity.
The service was not rendered on behalf of A…, therefore it cannot be accepted as a tax expense of A…, pursuant to no. 1 of article 23 of the IRC Code.
On the other hand, even if it were otherwise, since the agent acted on behalf of the player, both Portuguese law and FIFA regulations impose that the agent may only be remunerated by the player, therefore, pursuant to subsection c) of no. 1 of article 45 of the IRC Code, that charge would not be fiscally deductible for purposes of determining taxable profit.
Thus, the depreciation of that expense cannot be accepted as a tax expense, and it is to be added to table 07 of declaration form 22, for purposes of determining taxable profit, the amount of 25,000.00 EUR.
III.1.2. PROPOSED CORRECTIONS RELATING TO CAPITAL GAINS DETERMINED
In the period of 2012, the taxpayer determined and recorded capital gains, according to the statement form 31 that it submitted.
This statement shows the determination of capital gains resulting from the alienation of players GG…, W… and F….
III.1.2.1. Expenses relating to the contracting of GG…
In the period of 2012, A… recorded the following entry, relating to the alienation of player GG… to HH…Ltda., of …:
The amount of 83,500.00 EUR, recorded as a debit to account 78.714, corresponds to 50% of the alleged expenses in the contracting/intermediation, which are described below:
On 2011-06-30, A… signed an "Agreement" with EE…, NIF…; II…, with registered office in …, Brazil, represented by JJ…; and KK…, with registered office in…, Brazil, represented by LL… (second parties).
The document in question states: «The first party intends to contract player GG…, and for this it resorted to the services provided by the second parties jointly, namely, for purposes of intermediation and assistance in that contracting».
On the same date, 2011-06-30, A… concluded with player GG…, of Brazilian nationality, a "Sports Employment Contract", for two seasons, beginning on 2011-07-01 and ending on 2013-06-30.
As stated in clause twelfth of the said contract: «The parties declare that the present contract was concluded without the intervention of player agents.»
No. 1 of article 28 of the FIFA Regulations on Player Agents, which entered into force on 2008-01-01, provides that, in any contract in which the agent intervenes on behalf of the club's interests, that agent must be identified as such.
The "Agreement" with the entities EE…, II… and KK…, Ltda., which A… presents, was concluded on the same date it concluded the "Sports Employment Contract" with the player.
Given the same date of conclusion of all contracts, it is found that this would not have allowed a temporal margin for negotiation between entities not already bound together.
From the internet, we retrieved a news item published on the EE… website, where you can read: «The 23-year-old central represented by EE… signed a 4-year contract with the multimillionaire Russian club. / GG…'s career had a meteoric rise in the last year, largely because of EE… which recognized his great value during his passage through …, where he played in the modest State Championship of …, having immediately in the past season 2011/2012 placed the player in Europe to play for B… (...)».
From various sources of information, accessible on the internet, namely on the "More Football" website, it is proven that the name FF… is mentioned as the player's agent: «B… guaranteed two reinforcements this Tuesday for the next season: the goalkeeper MM… and the midfielder GG…, ascertained Maisfutebol. The two players are represented by FF…. (...) FF… is partner and manager of EE…, Lda.
On the "TransferMarket" website on the internet, the data of player GG… appears, including among them his entrepreneur II… who, together with EE…, constitute the second parties mentioned in the "Agreement" referred to above.
It is verified, therefore, that those second parties of the said "Agreement" had a business connection with the player and not with A….
A… accepts to bear the costs of representation/intermediation made on behalf of the player. Now, for a charge to constitute an expense, it must correspond to the consumption of a good/service within the sphere of the entity.
The service provided by the representatives/agents of the player was not rendered on behalf of A…, therefore it cannot be accepted as a tax expense of A…, pursuant to no. 1 of article 23 of the IRC Code.
Since the agent acted on behalf of the player, both Portuguese law and FIFA regulations impose that the agent may only be remunerated by the player, therefore, pursuant to subsection c) of article 45 of the IRC Code, that charge would not be fiscally deductible for purposes of determining taxable profit.
That amount of 83,500.00 EUR is affecting the amount of capital gains determined by the TP, with no correction coefficient having been applied in that determination, as it is not applicable.
It is therefore concluded, by the non-acceptance as a tax expense, and it is to be added, for purposes of determining taxable profit, the amount of 83,500.00 EUR, recorded as a debit to account….
III.1.2.2. Capital gains determined in the alienation of W…
In the period of 2012, A… recorded the following entry, relating to the alienation of sports rights of player W…:
As described in point III.1.1.5 of this report, to whose reasoning we refer, of the amount of 430,000.00 EUR recorded in fixed assets the amount of 50,000 EUR corresponds to an "Agreement" concluded on 2010-07-01, between the TP and the entity Y…, Unipessoal, Lda., with the NIF/NIPC….
Of the amount of 119,444.45 EUR, recorded as a debit to account 78.714, the amount of 13,888.89 EUR corresponds to 10/36 (months still not depreciated) of the amount of 50,000.00 EUR, relating to the said "Agreement".
Given that that amount of 13,888.89 EUR is affecting the amount of capital gains determined by the TP and that in that determination the coefficient of 1.04 was applied to the acquisition value, pursuant to article 47 of the IRC Code, that amount should be corrected to (13,888.89 x 1.04 =) 14,444.44 EUR.
As reasoned in point III.1.1.5, the expenses incurred relating to the said "Agreement" are not accepted as a tax expense, therefore it is proposed to correct the taxable profit declared by the TP, and it is to be added to table 07 of declaration form 22, the amount of 14,444.44 EUR.
III.1.2.3. Capital gains determined in the alienation of F…
In the tax period of 2012, A… recorded the following entry, relating to the alienation of sports rights of player F…:
As described in point III.1.1.1 of this report, to whose reasoning we refer, in the amount of 107,484.94 EUR recorded as a debit to account 78.714, the amount of 12,500.00 EUR corresponds to 50% of ¼ of the expenses in intermediation, in the total amount of 100,000.00 EUR, related to the acquisition of the financial and sports rights of the player.
The amount in question, of 100,000.00 EUR, was recorded as the provision of intermediation services in the acquisition of the player's registration rights, pursuant to the "Agreement" signed on 2008-07-24, between A… and G…, Advogados Associados.
Given that that amount of 12,500.00 EUR is affecting the amount of capital gains determined by the TP and that in that determination the coefficient of 1.04 was applied to the acquisition value, pursuant to article 47 of the IRC Code, that amount should be corrected to (12,500.00 x 1.04=) 13,000.00 EUR.
As reasoned in point III.1.1.1, the expenses incurred relating to the said "Agreement" are not accepted as a tax expense, therefore it is proposed to correct the taxable profit declared by the TP, and it is to be added to table 07 of declaration form 22, the amount of 13,000.00 EUR.
III.1.3. EXPENSES RELATING TO THE ACQUISITION OF IMAGE RIGHTS OF PLAYERS
In the period of 2012, A… considered as expenses the charges allegedly incurred with the acquisition of image rights of some players.
Legislation
No. 1 of article 10 of Law no. 28/98, of 26 June, which established a new legal regime for the work of the sports practitioner and the sports formation contract, provides that; «Every professional sports practitioner has the right to use his public image linked to the practice of sports and to oppose others using it unlawfully for commercial exploitation or for other economic purposes».
However, in no. 2 of the same article «the right to use the image of the collective of practitioners is reserved, which may be the subject of regulation under collective employment contracts".
In turn, the Collective Employment Contract (CCT) concluded between the Professional Football League and the Union of Professional Football Players establishes that:
a) «The right to use and exploit the image of the player is the right of the player in the purely individual sphere, being able to cede that right to the club in whose service he is during the term of the respective contract», (no. 2 of article 38 of the CCT);
b) «The right to use the image of the collective of players from the same team is reserved for the respective club or sports corporation», (no. 3 of article 38 of the CCT);
c) «The commercial exploitation of the image of football players as a professional collective shall be the responsibility of the SJPF (Union of Professional Football Players)», (no. 4 of article 38 of the CCT).
Circular no. 17/2011, of 2011-05-19, of DGCI, clarified that: «The right of image of a player, as a member of a team, is implicitly transmitted to the Club/SAD with which he concluded a sports employment contract, as provided in article 10 of Law no. 28/98, of 26 June, with the Club/SAD coming to hold and be able to exploit the right of image of the player integrated in the team.»
It is concluded that the image rights relating to the player as an element of the collective/team are inevitably and inseparably transmitted with the conclusion of the sports employment contract.
Otherwise, any club/SAD would always have to contractualize the acquisition of the image rights of all players, for purposes of exploitation, for example, of a television broadcast or the static advertising it operates in stadiums.
With regard to the right of image of that player as an integral part of the collective of the same team, this was ensured by A…, since it had concluded with the player a sports employment contract, as follows from no. 2 of article 10 of Law no. 28/98, combined with no. 3 of article 3 of the CCT.
As for the individual image right of the player, the same circular states that «The available image right, which the player can cede by contract to a club/SAD or to a non-sports entity, resident or non-resident, in national territory, shall be his individual image right.»
And; «The Club/SAD resident in Portuguese territory that acquires from another entity the image rights of a player with whom it will conclude a sports employment contract must be able to demonstrate the minimum adequacy between its exploitation and the expenses incurred, in order for these to be considered as expenses pursuant to article 23 of the IRC Code.»
From the analysis of the documents supporting the accounting entries, closing trial balance of the period and the "Report and Annual Accounts" of the 2011 period, no income was found arising from the exploitation of the individual image rights of the players in question.
Also from the analysis of annual account reports and annual declarations submitted, relating to subsequent years, there is no record, in subsequent periods, of any income arising from the exploitation of the individual image rights of the players in question.
The taxpayer failed to demonstrate that it carried out its commercial exploitation, nor presented any invoice/debit note to charge the player's participation in any event, thus not resulting in any income that could be realized as a patrimonial increase of A….
If A… exploited the individual image rights of any player, in advertising campaigns, photography sessions, among others, in which this player participated, it would be able to objectively distinguish the income obtained from these operations from other income, as it would be necessary to issue invoicing for these activities, being able to clearly estimate the income obtained related to the expenses incurred.
Ownership of Rights
In the assumptions of the contracts concluded as the cession of the exploitation rights of the image of a professional football player, it is stated that the alienator is holder of the image, voice and use rights of the name of the professional football player and that, by that contract, the company cedes to A… the rights of commercial exploitation, jointly or individually, of the public image of the professional football player of B….
However, what is the origin of this right in the sphere of the alleged alienating entity?
It is found that the companies that cede the rights of use of image in question here are represented by the players themselves (see signatures of contracts, by the second party), which reveals, undoubtedly, a close relationship (if not strict) with the players themselves.
Note also that the payment plan follows the contract concluded between A… and the players, as follows from: «In case of expiry or termination of the sports employment contract maintained between the First Party and the Third Party, payments that have not been paid in the meantime shall cease to be eligible within the scope of this contract».
Given this, nothing guarantees that under the appearance of use of the image right does not hide a different reality, consisting of the payment of amounts on another basis, such as the remuneration of the professional service of the players, as A… pays amounts on rights regarding which it registered no income, and does not possess or set up adequate business structure for its exploitation.
Conclusion
No. 1 of article 10 of Law no. 28/98, provides that every professional sports practitioner has the right to use his public image linked to the practice of sports and to oppose others using it unlawfully for commercial exploitation or for other economic purposes.
However, the right to use the image of the collective of participants is reserved, which belongs to the clubs/SAD, that is, the right to use the image of the players, inserted in the team, is associated with the exercise of the labor relationship established and, by the conclusion of the employment contract, passes to the sphere of the clubs/SAD.
The player maintains the right to use and exploit his image in the purely individual sphere, being able to cede that right to the club in whose service he is during the term of the respective contract.
Pursuant to point 7 of circular no. 17/2011, of the Office of the Director-General of the General Tax Authority (current AT): «The Club/SAD resident in Portuguese territory that acquires from another entity the image rights of a player with whom it will conclude a sports employment contract must be able to demonstrate the minimum adequacy between its exploitation and the expenses incurred, in order for these to be considered as expenses pursuant to article 23 of the IRC Code.»
In acquiring from players F… and NN… their image rights in the purely individual sphere, it would be incumbent on the taxpayer to prove the indispensability of concluding a contract for the acquisition of these rights from the players, which did not occur, as the economic rationale underlying a transaction in which A… did not proceed to its commercial exploitation in order to maximize the respective income was not proven, nor does it demonstrate having made efforts for its exploitation.
III.1.3.1. Image rights of "F…"
In the period of 2012, A… considered as an expense of the period, recorded as a debit to the expense account "…- FSE, specialized services", as a counterpart to the suppliers account "…-…, investment suppliers, national market", 60 the amount of 210,000.00 EUR, relating to the acquisition of image rights of player F...:
On 2011-03-18, A… signed an "Amendment and Renewal of Sports Employment Contract", with the professional football player F…, also known as "F…".
On 2011-06-21, A… concluded with the entity OO…, Ltda., with registered office in…, Brazil, a "Contract for the Cession of Image Exploitation Rights of a Professional Football Player".
By the second party, the company OO…, Ltda., the player F… himself signed the contract:
By the third clause of that contract that entity cedes to A… the rights of commercial exploitation, jointly or individually, of the "public image" of the player.
The fifth clause of the contract defines «As consideration for the provision of services identified in the preceding third clause, the First Party commits to pay to the Second the total sum of 1,055,000.00 € (...)», distributed over four seasons.
However, from the analysis carried out of the accounts, no income associated with the exploitation of those rights was detected.
Already in previous inspection actions, a similar situation was verified, although with an image rights cession contract where the cedant was another entity, "PP…, Ltda.", also represented by the player himself.
With regard to the right of image of that player as an integral part of the collective of the same team, this was ensured by A…, since it had concluded with the player a sports employment contract, as follows from no. 2 of article 10 of Law no. 28/98, of 26 June, combined with no. 3 of article 3 of the CCT.
The taxpayer failed to demonstrate that it carried out its commercial exploitation, nor presented any invoice/debit note to charge the player's participation in any event, thus not resulting in any income that could be realized as a patrimonial increase of A….
From this, it does not follow that there was any commercial exploitation of the player's image, which would justify the expenses assumed.
It is to be emphasized that if A… exploited the individual image rights of any player in advertising campaigns, photography sessions, among others, in which this player participated, it would be able to objectively distinguish the income obtained from these operations from other income, as it would be necessary to issue invoicing for these activities, being able to clearly estimate the income obtained related to the expenses incurred.
A… does not present any business structure prepared for the exploitation of a business with these characteristics.
As recorded in previous inspection actions, A… pointed to the advertising campaign "…", to demonstrate the exploitation of these rights. However, it was possible to identify other players involved in the campaign "…" but for the majority of them no conclusion of any agreement, autonomous to the sports employment contract, of acquisition of image rights relating to the players was detected.
From the analysis of the documents supporting the accounting entries and the closing trial balance of the period of 2012, no income was found arising from the exploitation of the individual image rights of the player in question.
The taxpayer did not present any documents proving the actual exploitation of the acquired individual image rights, and it is to be emphasized that it cannot be affirmed that there is full exploitation of the acquired rights by having carried out some calendars on which the player appears, in his capacity as an element of the team, nor through actions where this player will have appeared in campaigns in schools, as from these situations no income results for A… that would justify the maintenance of this charge.
In clause second, point 2, of the contract concluded as "Contract for the Cession of Image Exploitation Rights of a Professional Football Player" it is stated that: «The Second Party is the exclusive holder of the image, voice and use rights of the name of the Third Party as a professional football player».
In the third clause, point 1: «By the present contract the Second Party cedes to the First, who accepts, the rights of commercial exploitation, jointly or individually, of the public image of the Third Party as a professional football player of B…»,
However, what is the origin of this right in the sphere of the second party, that is, in the entity OO…, Ltda.?
It is found that the company that cedes the right of use of image in question here is represented by the player himself, as seen in the signature of the contract, by the player in representation of the second party, which reveals a close relationship, if not strict, between the "cedant" entity of the image rights and the player himself.
Note also that the image rights cession contract follows the contract concluded between A… and the player: «The present contract (...) shall be valid during the period in which the Third Party maintains in force the sports employment contract with the First Party, expiring automatically when, regardless of the reason, the said contract expires (...).»
Given this, nothing guarantees that under the appearance of use of the image right does not hide a different reality, consisting of the payment of amounts on another basis, such as the remuneration of the professional service of the player, as A… pays amounts on rights regarding which it registered no income, and does not possess or set up adequate business structure for its exploitation.
In conclusion, as the indispensability of A… bearing the expenses in question was not proven, for the obtaining of income subject to taxes or for the maintenance of the source of income, in accordance with no. 1 of article 23 of the IRC Code, the expenses in the amount of 210,000.00 EUR are not fiscally accepted.
III.1.3.2. Image rights of NN…
In the period of 2012, A… considered as an expense of the period the amount of 200,000.00 EUR, relating to the alleged acquisition, from the entity QQ…, Lda., with NIF…, of the image rights of Player NN…:
In addition to the sports employment contract between the TP and player NN…, another contract was concluded with QQ…, Lda., relating to the acquisition of the player's image rights, for the amount of 600,000.00 EUR, being 200,000.00 EUR for each of the seasons 2010/2011, 2011/2012 and 2012/2013 and provided that the sports employment contract with the player remained valid:
The partners of the company QQ…, Lda., are the player himself, with 50% of the capital stock, and his spouse, with the remaining 50% of the capital stock.
However, from the analysis carried out of the accounts, no income associated with the exploitation of those rights was detected.
From the comparison between the described facts and the applicable legislation, pursuant to subsection a) of no. 2 of article 75 of the LGT, the removal of the presumption of good faith of which the recorded expenses are corresponded to charges proven to be indispensable for the realization of the profits of A….
As, with regard to the right of image of that player as an integral part of the collective of the same team, this was ensured by A…, since it had concluded with the player a sports employment contract, as follows from no 2 of article 10 of Law no. 28/98, of 26 June, combined with no. 3 of article 3 of the CCT.
The taxpayer failed to demonstrate that it carried out its commercial exploitation, nor presented any invoice/debit note to charge the player's participation in any event, thus not resulting in any income that could be realized as a patrimonial increase of A….
From this, it does not follow that there was any commercial exploitation of the player's image, which would justify the expenses assumed.
It is to be emphasized that, if A… exploited the player's image rights in advertising campaigns, photography sessions, among others, in which this player participated, it would be able to objectively distinguish the income obtained from these operations from other income, as it would be necessary to issue invoicing for these activities, being able to clearly estimate the income obtained related to the expenses incurred.
A… does not present any business structure prepared for the exploitation of a business with these characteristics.
As recorded in previous inspection actions, A… pointed to the advertising campaign "…", to demonstrate the exploitation of these rights. However, it was possible to identify other players involved in the campaign "…", being that for the majority of them no conclusion of any agreement autonomous to the sports employment contract, of acquisition of image rights relating to the players, was detected.
From the analysis of the documents supporting the accounting entries and the closing trial balance of the period of 2012, no income was found arising from the exploitation of the individual image rights of the player in question.
The taxpayer did not present any documents proving the actual exploitation of the acquired individual image rights, and it is to be emphasized that it cannot be affirmed that there is full exploitation of the acquired rights by having carried out some calendars on which the player appears, in his capacity as an element of the team, nor through actions where this player will have appeared in campaigns in schools, as from these situations no income results for A… that would justify the maintenance of this charge.
In the second clause, § 2, of the contract concluded as "Contract for the Cession of Image Exploitation Rights of a Professional Football Player" it is stated that: «The Second Party is the exclusive holder of the image, voice and use rights of the name of the Third Party as a professional football player»,
In the third clause, § 1: «By the present contract the Second Party cedes to the First the right of commercial exploitation, jointly or individually, of the public image of the Third Party as a professional football player of B…, (,..)».
However, what is the origin of this right in the sphere of the second party, that is, in the entity QQ…, Lda.?
It is found that the company that cedes the right of use of image in question here is represented by the player himself, as seen in the signature of the contract, by the player in representation of the second party, which indicates a close relationship, if not strict, between the "cedant" entity of the image rights and the player himself.
Note also that the image rights cession contract follows the contract concluded between A… and the player: «The present contract (...) shall be valid during the period in which the Third Party maintains in force the sports employment contract with the First Party, expiring automatically when, regardless of the reason, the said contract expires (...).»
Given this, nothing guarantees that under the appearance of use of the image right does not hide a different reality, consisting of the payment of amounts on another basis, such as the remuneration of the professional service of the player, as A… pays amounts on rights regarding which it registered no income, and does not possess or set up adequate business structure for its exploitation.
In conclusion, as the indispensability of A… bearing the expenses in question was not proven, for the obtaining of income subject to taxes or for the maintenance of the source of income, in accordance with no. 1 of article 23 of the IRC Code, the expenses in the amount of 200,000.00 EUR are not fiscally accepted.
(...)
III.4. INTEREST ON TRANSACTIONS WITH RELATED ENTITIES
In the accounting of the TP there is an SNC account "…- Shareholders/partners, other active transactions, A…" which, at the close of the tax period of 2012, showed a debit balance of 5,364,239.55 EUR.
Considering that in previous inspection actions it was found that there were special relationships between the two entities, an analysis of this situation with greater depth was included in this external inspection action.
In point III.1.1.3 of the tax inspection report, prepared within the scope of the inspection action authorized by Service Order no. OI 2012…, of the Large Taxpayers Unit, an extract of which is attached and becomes part of this report, the evolution of the balance of that accounting account is described, until the period of 2010/2011.
From the analysis of the entries made in the account… in question, and which appear in the attached account statement extract, it is verified that, beyond the transactions supported by the "Protocol" concluded with B…, charged and credited, other transactions are recorded here between the TP and B….
From these records, it is noteworthy, in particular, various amounts relating to debts of B… to entities also owing to the TP, in relation to which, by tripartite agreement, a meeting of accounts was carried out within the sphere of the TP, settling these debts of B… to third parties, with B… consequently becoming a debtor to the TP, through the entry in the loans account….
In the accounting entries of A… there are also records of bank movements in favor of B…, without corresponding to any sale of goods or provision of services.
From the foregoing, the operations mentioned above, whether as regards the amounts of the protocol, which the TP did not end up receiving, or for the other operations carried out, mentioned above, constitute actual loans between these two entities, as was assumed by the TP in its accounting.
However, as is proved by the analysis of the accounting of the TP and by the information provided by its representatives, the two entities involved did not agree nor practice any remuneration for the said loans.
III.4.1. The Subordination of Linked Operations to the Arm's Length Principle
The arm's length principle, as a guarantee of fiscal neutrality, is established in the national legal system, by the rules inscribed in article 63 of the IRC Code.
It defines that in commercial transactions, including transactions or series of transactions in goods, rights or services, as well as in financial transactions, carried out between an IRC taxpayer and any other entity, subject or not to IRC, with which it is in a situation of special relationships, terms or conditions must be contracted, accepted and practiced substantially identical to those that would normally be contracted, accepted and practiced between independent entities in comparable operations.
In accordance with subsection a) of no. 4 of article 63 of the IRC Code, there are special relationships between two entities in situations where one has the power to exercise, directly or indirectly, a significant influence on the management decisions of the other.
This is considered to be verified, namely, between an entity and the holders of its capital that hold, directly or indirectly, a participation of not less than 10% of the capital or voting rights.
According to information gathered, it is verified that, as of the close of the period, B… was holder of a 36% participation in the capital stock of the TP and that the president and members of the boards of administration of both entities are the same persons.
Therefore, it is concluded that between the TP (A…) and B… there are special relationships, in accordance with subsection a) of no. 4 of article 63 of the IRC Code, to the extent that B… holds 36% of the capital stock of A…, to which is added the fact that the persons composing the administrations of both entities are the same.
Thus, the financing operations carried out by the TP to B…, described above, constitute linked transactions, pursuant to subsections b) and d) of no. 3 of article 1 of Order 1446-C/2001, of the Ministry of Finance, combined with subsection a) of no. 4 of article 63 of the IRC Code, which are subordinated to the arm's length principle established in no. 1 of article 63 of the IRC Code.
Thus, terms and conditions identical to those that would be contractualized, accepted and practiced by independent entities in comparable operations should have been contracted and accepted.
The said financing operations, carried out by the TP (A…) to B…, were not remunerated in the sphere of the first.
Now, had the financing operations been carried out between independent entities, these would not have been willing to assume the charges relating to the maintenance of a constant and with a growing trend debtor balance without any type of remuneration, namely interest, of that balance.
In the case under analysis, A…, for the financing of its current activity, also needs to resort to financing, as the flows generated by it and the composition of its capital stock do not allow it to hold sufficient monetary means to finance its activity.
A situation aggravated by the fact that the TP is financing the activity of B… by allowing it to permit that the significant amounts in debt continue to increase.
In fact, as is normal, for financings obtained A… pays the remuneration, namely interest, considered adequate to its relationship with the independent financing entity.
What is reasonable, between independent entities, is that whoever lends demands to be remunerated and whoever obtains the loan accepts to remunerate it, which did not happen in the loan operations granted by the TP (A…) to B….
From this it is concluded that A… should have agreed with B… terms that it would establish with any non-linked entity.
By allowing B… to maintain a high and growing balance, in debt, without there being any established payment plan or any barrier to the maintenance of operations between both, the TP (A…) is clearly operating in a situation of exception, motivated by the special relationships existing between them, violating the arm's length principle, provided in no. 1 of article 63 of the IRC Code.
III.4.2. The Violation of the Arm's Length Principle
In accordance with the above described, the debt of B… to the TP (A…) results, in part, from those defined as commercial relationships between both, under the "Protocol", charged and credited, but also from other amounts ceded by the latter, namely, from deposits of amounts in accounts of B… and from the payment of debts of that entity.
As for the amounts ceded, it is clear that these are loans. The taxpayer recorded them as such, viewing a temporary cession, with the aim of remedying the treasury difficulties of B….
As for the commercial relationships, it is to be noted that these amounts charged result from 20% of the quotas charged to the shareholders, an amount corresponding to the reduction of ticket prices that A… applies, in home games, to the shareholders of B….
It so happens that B… does not deliver to A… the remainder, from the meeting of accounts of rights and obligations resulting from the protocol, concluding that the entries always have an underlying account meeting.
There is no contract indicating the form of payment and its timeframe, which is concretized in the growing evolution of the balance of the account SNC….
Therefore, in accordance with the elements reported, it is verified that A…, by allowing B… high balances, maintaining commercial relationships without any alteration, even when the balance went, between 1998 and 2012, from being creditor of 412,841.64 EUR, to a debtor balance of 5,364,239.55 EUR, is, unequivocally, financing the activity of the club.
B… has determined positive net results consistently, in the fiscal years/periods of 2000 to 2012, and holds 36% of the capital of A…, having an economic image that would allow it to have the capacity to resort to credit on the market, if it were interested in doing so.
Also, no investment of significant magnitude is envisioned that would have originated substantial financial needs, in a way to minimally justify the maintenance of that high balance.
The fact that the actions of management of the administration of A…, in the conduct of the destinies of the company, can be considered legitimate in the face of Commercial Law, does not imply that the Tax Administration accepts them without the production of consequences of a tax scope.
In Portuguese jurisprudence it has been argued that, in relationships between entities of the same group, the expenses/income associated should be analyzed in an individualized perspective of each entity, to the detriment of a group perspective.
Thus, the financing service here in question, without the agreement of conditions that would be established between independent entities, does not comply with the arm's length principle established in no. 1 of article 63 of the IRC Code.
III.4.3. Determination of Arm's Length Price
«The transfer pricing regime has as its paradigm the arm's length principle, around which broad international consensus has been established because it is understood that its adoption allows not only to establish parity in the tax treatment between companies integrated in international groups and independent companies but also to neutralize certain practices of tax avoidance and ensure the consequent protection of the internal tax base.»
In accordance with no. 2 of article 63 of the IRC Code, the TP should adopt, for the determination of the terms and conditions that would normally be agreed, the method capable of ensuring the best degree of comparability between the operations in question and others, which are identical to them, in normal market situation.
In the same sense, it is stipulated in no. 1 of article 4 of Order no. 1446-C/2001, that the most appropriate method to each operation should be adopted, for the determination of the conditions that would normally be agreed.
In accordance with no. 2 of the said article 4, the most appropriate method is considered to be that which is capable of giving the closest estimate of the terms and conditions that would normally be practiced.93
In no. 3 of article 63 of the IRC Code some methods are identified that can be used in the determination of transfer price, namely the comparable uncontrolled price method.94
III.4.4. The Comparable Uncontrolled Price Method (CUPM)
It compares the price paid for goods, rights or services transferred, in a linked transaction, with the price paid for goods, rights or services transferred in a comparable transaction between non-linked entities.
It is a transaction-based method that, in accordance with no. 1 of article 6 of Order no. 1446-C/2001, requires a high degree of comparability between transactions at the level of the object and other terms and conditions of the operation, as well as the functional analysis of the entities involved.
Provided it is possible to identify comparable transactions in open market, the comparable uncontrolled price method constitutes the most direct and reliable means of applying the arm's length principle, and should be given preference over the others.
This method should be used, namely, when:
a) The taxpayer or an entity belonging to the same group conducts a transaction of the same nature that has as its object a similar service, in quantity or analogous value and under substantially identical conditions, with an independent entity in the same market or in a similar market (internal comparables);
b) An independent entity conducts a transaction of the same nature that has as its object a similar service, in quantity or analogous value and under substantially identical conditions, in the same market or similar (external comparables).
In the case under review, the application of this method is made viable by the possibility of comparing the remuneration obtained by the TP A…, in the financings granted to B…, (null remuneration), with the cost of financing supported by A…, when obtaining funds, of amounts and for periods similar to those granted to the club.
Given the foregoing, taking into account the comparable information available, the CUPM reveals itself to be the most appropriate, in accordance with the provided in no. 2 of article 4 of the Order, therefore it will be used for the search of conditions that would be practiced between independent entities in operations similar to those analyzed here.
III.4.5. Analysis of Comparables
As mentioned in the preceding paragraphs, the CUPM can be used by comparing the conditions that occurred in a linked transaction with the conditions practiced in a transaction carried out with an independent entity.
In accordance with no. 3 of article 4 of the Order, two transactions can be comparable if they are substantially identical.
In order to conclude whether the linked financial transactions and the financial transactions conducted between non-related entities are comparable, the following comparability factors should be considered:
a) Nature of transactions;
b) Currency used in transactions;
c) Credit rating of the borrowing entity;
d) Repayment period;
e) Existence of guarantee.
In accordance with the comparability factors discriminated above, internal comparables can be used to conclude about arm's length conditions.
In the controversial situation, it is intended to analyze the comparability between the price to be practiced by the TP A… in the financing transaction to B…, (without associated remuneration), with the financing cost supported by A… when obtaining funds.
This intention is corroborated by § 7.34 of the 1995 OECD report, pursuant to which: «(...) it is possible that the market value of intragroup services is not higher than the expenses incurred by the service provider. This case can occur when, for example, the service does not correspond to a normal or recurring activity of the provider, but is provided occasionally to group members (...) as a courtesy.»
That is, an independent entity would not be willing to practice a "pricing" (price or return) in an active financing transaction that would not guarantee it, at least, the recovery [... truncated due to length ...]
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