IRC Depreciation of Conservation Works on Buildings - CAAD Arbitral Decision 362/2015-T

ARBITRAL DECISION

The arbitrator Dr. André Festas da Silva, appointed by the Ethics Council of the Administrative Arbitration Center (CAAD) to form the Arbitral Tribunal, constituted on 13 August 2015, decides as follows.

I. REPORT

I.1

On 04 June 2015, the taxpayer A..., S.A., NIF..., with head office at..., ..., in accordance with the provisions of paragraph a) of article 2(1) and article 10, both of Decree-Law no. 10/2011 of 20 January, applied for the establishment of an Arbitral Tribunal with the appointment of a sole arbitrator by the Ethics Council of the Administrative Arbitration Center, in accordance with article 6(1) of the aforementioned decree-law.

1. The application for establishment of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and was notified to the Tax and Customs Authority (hereinafter referred to as TA or "Respondent") on 16 June 2015.

2. The Applicant did not proceed to appoint an arbitrator, and therefore, pursuant to article 5(2)(b) and article 6(1) of the RJAT, the undersigned was appointed by the President of the Ethics Council of CAAD to form the present sole Arbitral Tribunal, having accepted according to the legally foreseen terms.

3. The TA submitted its response on 28 September 2015.

4. Taking into account the positions assumed in the pleadings, and given that the issue to be resolved is essentially one of law, with no foreseen utility in hearing the witnesses indicated by the applicant, nor in conducting the meeting provided for in article 18 of the RJAT, by order of 06.11.2015, the hearing of witnesses was dispensed with, as was the conducting of the meeting provided for in article 18 of the RJAT, and it was decided that the case would proceed with written submissions.

5. Neither party submitted legal arguments.

6. The Applicant requests that the Arbitral Tribunal declare the illegality of the assessment of Corporate Income Tax and compensatory interest for 2010 in the amount of €28,676.06 (no. 2015... and compensation no. 2015...).

I.A. The Applicant's Submission

The Applicant bases its request, in summary, in the following terms:

1. The Applicant is a legal person under private law, resident in national territory, registered in the activity of "Wine Production..." corresponding to CAE...: it produces and markets, in particular, the well-known sparkling wine brand, designated as "..."

2. The request for arbitral pronouncement concerns the assessment of Corporate Income Tax and compensatory interest in the amount of €28,676.06 (no. 2015... and compensation no. 2015...).

3. The assessment results from corrections made to the applicant's taxable income, within the scope of an inspection procedure (service order no. OI2014...).

4. In 2010, the applicant carried out a set of conservation and maintenance works on the building and grounds.

5. Such works were recorded by the taxpayer as maintenance and repair expenses of the facilities, being entirely recorded as expenses of the financial year, registered in SNC Account 622613 – FSE – Specialized Services – Conservation and Repair of Buildings.

6. The TA made the following corrections:

7. The TA takes the view that the works carried out should not be treated as a total cost of the financial year, but as capital expenditure, depreciable at a rate of 10% per annum.

8. With only that amount (10%) being deductible from Corporate Income Tax for 2010, in accordance with the table annexed to Regulatory Decree 2/90 – and the remainder of the value of the works should be deductible in the 9 consecutive years, at a rate of 10% per annum.

9. The TA argues that this was not a matter of repairs, but of the acquisition of services associated with tangible fixed assets (Facilities and display room), with the buildings being of a light construction nature; the works would not be repairs, but "requalifications," as capital expenditures intended to expand and remodel the facilities.

10. The TA further alleges that the work neither consumes nor is exhausted in a single financial year; it requires a permit; its use in the activity will last for several years; the value of the works implies that their use will extend for several years, generating future economic benefits; there were other expenses in the display room that the applicant recognized as tangible fixed assets.

11. And the TA concludes: the works would be tangible fixed assets under NCRF 7, because they are used in production and for more than one financial year (generating future economic benefits).

12. This work shown in invoice no. 402, in the amount of €4,798.00, relates to the repair and painting of the support room to the tasting room (in poor condition of preservation) due to the high humidity of the location.

13. The painting was degraded; the plaster fell and had to be replaced, with painting subsequently executed.

14. These repairs served only to restore the value of the walls in question, adding nothing to their value, and much less to the applicant's production process.

15. The works shown in invoices no. 406, no. 387, and no. 470 concern, in this case, arrangements made on the exterior walls of the applicant's building (€50,000.00 + €50,000.00 + €15,200.00).

16. Specifically, in 2010, the plaster on the exterior walls was replaced (in the part in poor condition of preservation) and subsequently painting was carried out.

17. Such repairs served only to restore the value of the walls in question, adding nothing to their value, and much less to the Applicant's production process.

18. As for the work shown in invoice no. 401, the applicant's garden adjacent to the facilities has an old tank, typical of this region: customers and visitors to the company pass by it.

19. In a purely aesthetic choice, it was decided to restore this tank, to incorporate it into a decorative element of the garden – as a measure to attract and retain customers at the applicant's facilities (and they pass through the display room).

20. Thus, the repairs carried out on the tank aimed to improve the company's image, making its appearance more pleasant to those who visit there.

21. They also resulted (in the fence part) from an obligation imposed by public authorities for legal safety reasons in view of the numerous visits to the Applicant's facilities.

22. With respect to the work shown in invoice no. 411, there was an urgent need to repair the broken roof tiles and prevent rain from entering the facilities (in the amount of €42,500.00).

23. The repairs executed were partial, affecting only a part of the roof that was damaged.

24. Everything amounts to knowing whether these works fall under expenses (with the cost recorded at 100% in the financial year), as the taxpayer argues, or fixed assets, with the cost divided, via depreciation, over 10 years, at an annual rate of 10% per annum (as the TA argues).

25. Works on buildings – and this is what is involved in all cases in this proceeding – may have three qualifications:

a) Works of "conservation and repair" are a total cost of the financial year (article 23(2)(a) of the CIRC).

b) Works of "major repair and improvement" are a tangible fixed asset depreciated over the expected period of use (article 5 of Regulatory Decree 2/90);

c) Works of expansion or new construction on buildings (which follow the regime of new works) are a tangible fixed asset depreciable over the period defined by the Table annexed to Regulatory Decree 25/2009 for new investments (in longer periods than major repairs).

1. With this, the first illegality of the assessment becomes apparent (which contaminates it absolutely): the TA states that the works in question are of expansion or new construction, of the category referred to in paragraph c) of the preceding point – but this is plainly false.

2. These are indeed merely works of conservation and restoration – which encompass works even less profound than major repairs and improvements.

3. There was manifestly no expansion of the buildings (or new construction): no new installation of the tasting room or display room was made; no new building was erected (with its painting and new roof).

4. The works in question do not equally fall within the description of major repairs or improvements – and even if they did, the act would be illegal, due to violation of law and lack of reasoning, because this was not the basis and route of the assessment, the act not being salvageable, as the term and annual value of depreciation is substantially different in one case and the other.

5. The works in question are normal conservation, maintenance, and repair works, treated as a total cost of the financial year, as undertaken by the applicant.

6. Proof is not satisfied with conclusive and synthetic argumentation that does not descend into the real and effective nature of the works, and the value of the works (high) is manifestly insufficient for qualification as major repair (or new building and expansion).

7. The reasoning was limited to mere generic and conclusive allegations, without regard to the type and nature of the works in question: it states that they increase the value of assets, but does not prove it; it refers to their high value, but this fact is not a decisive element; it argues for their durability over time, but conservation and restoration works also last for several years (desirably).

8. If otherwise understood (or if they are qualified as major repairs or as expansions or new construction), the truth is that the tax act is limited to a mere matter of specification of financial years:

a) Allocation, in 2010, of a portion of the cost, via fiscally deductible depreciation (which was done by the tax act)

b) Fiscal acceptance of the remainder of the cost, via depreciation in the following years (9 following years).

1. The applicant, having "accelerated" the fiscal use of the cost – not depreciating in the following financial years: in 2010 it pays less taxes and will pay more in the following years – and, in consolidated terms, the same tax will be paid.

2. It is merely a matter of a specification of the financial year, as in both cases, the amount of tax paid over the long term is exactly equal.

3. As seen, the Applicant acted on the basis of an interpretation (legal) congruent and plausible with tax law, regarding the allocation of all tax expenses to the 2010 financial year: it argues, for reasonable grounds that the works would be a total cost of the financial year.

4. The recording of a tax expense in a financial year different from that to which it pertains is accepted if such incorrection is sustained in an interpretation plausible and congruent with tax law, without evasive intent (good faith of the taxpayer in the face of open readings of the law), as there is no intention to avoid payment of taxes – which will all be paid in subsequent financial years (it is therefore merely a discussion of temporal allocation of tax expenses).

5. The applicant acted as it did, based on logical and congruent interpretations of tax law, not intending to avoid any tax.

6. Now, if the Applicant erred (which is not conceded), the truth is that its conduct must be untouchable – and the tax act annulled – because it was a formal violation of the specification of financial years, without any fraudulent or tax avoidance intent, sustained in logical and plausible interpretations of tax law.

7. And this same argument (absence of fault of the applicant for plausible interpretation and application of tax law) should also determine the annulment of compensatory interest, due to the lack of culpable conduct on the taxpayer's part, even if the annulment of the tax assessment is not carried out (in a hypothesis ventured cautiously and by mere duty of counsel).

I.B. In Its Response, the TA Invoked the Following:

The works carried out on immovable assets, building and surrounding areas, exceed mere ordinary conservation and repair, relating to improvements that improved and valued the property as well as the surrounding parts.

The works in question in the present proceedings, in their essence, do not constitute mere repairs, they are improvements and additions that resulted in requalifications whose effects extend over time, therefore, constituted capital expenditures and as such should be capitalized and not considered as current expenses of the financial year.

The economic benefits of the works here in question will necessarily project over more than one financial year, thereby justifying that the amounts expended be distributed over the expected period of usefulness, through the process of depreciation.

As is commonly known, the replacement of a roof in a dilapidated establishment, with a new roof, is in itself an act of improvement of a building, which increases its value and whose usefulness will extend for more than one financial year.

Just as any tangible asset in good condition is worth more than another that is deteriorated.

It being incumbent upon the tax administration to make the integration of "major repairs or improvements" demonstrating that, in each case, the works carried out contributed to increasing the value or probable duration of the assets on which they were carried out, this was done, as can be seen from the tax inspection report.

Now, what the IT concludes from the examination it undertook of the invoices supporting the expenses incurred by the Applicant and which coincides with what is described in the table presented in point 24 of the p.i., is that the works in question are not qualifiable as mere ordinary maintenance or conservation of the assets to which they relate, because:

a) They resulted in requalifications intended to expand and remodel the facilities;

b) They required obtaining a permit for their implementation; and

c) By their nature, their expected usefulness is not exhausted in a single financial year.

The impact of the improvement or maintenance works carried out resulted in an increase in the value of the assets to which they related, first and foremost because they required the incorporation of new materials, either by replacement of others that were deteriorated, or by addition.

Equally, the replacement of the roof, the restoration of the old tank, and the requalification of the display rooms, are not capable of qualification as works of "improvement" because there was incorporation of new elements that by their character of permanence contributed to increasing the value of the facilities and surrounding areas.

It results from the IT that there were expenses in the display rooms that the Applicant recognized as tangible fixed assets.

The Applicant failed to contest the grounds invoked by the TA to support the corrections made, given on one hand the omission of proof which is extensible to all facts where it alleges to have carried out works annually and, on the other, the necessity of the same, such obligation being incumbent on the Applicant under article 74(1) of the LGT and article 342 of the CC.

The burden of proof of facts constituting rights falls on the one who invokes them.

It is undeniable that the works carried out by the Applicant increased "greatly" the value of the assets in question, since the value of the investment was €168,571.90 which was incorporated into those assets.

The Applicant itself states that it carried out the works with the intention of "improving the company's image to customers," therefore it was an investment with a view to achieving return.

Regarding the relationship between the works and the company's production process, we must take into account that all assets of companies aim at the success of the wine production and sales process.

Therefore, by improving the image of the tasting rooms, the exterior walls of its building, old tanks, etc., the Applicant aimed to improve its image with a view to obtaining greater sales success with tourists/customers visiting its facilities.

As to the notion of major repairs and improvements, it does not exist in any legal provision, however, by combining the CIRC with article 5(5) of Regulatory Decree 2/90, we can conclude that works that involve major repairs and improvements are those that increase the real value or probable duration of the elements to which they relate, carried out on tangible fixed assets.

Now, this is clearly what happened in the present case.

One must see, on the one hand the amount expended and on the other hand "still not relevant" the increase in the value of the Applicant's assets with the works carried out which, with these, intended to achieve more sales "by having a better image to customers/tourists" and increase the value of the assets which, understandably, substantially increase their value.

As clearly results from the inspection report, the works carried out contributed to increasing the real value of the assets and to increasing their probable duration.

Therefore, none of these works can be considered as mere repairs, since by their nature they are not exhausted in the 2010 financial year, but rather extend through subsequent financial years, as was thoroughly demonstrated.

Thus, all works carried out meet the conditions to be considered tangible fixed assets, taking into account what is stated in accounting and financial reporting standard 7.

In this way, the works carried out meet the conditions to be recognized as tangible fixed assets, and the depreciable amount should be allocated to results on a systematic basis during the years that make up the expected period of usefulness.

It is also important to note that the Applicant recognized depreciation relating to renovation/expansion works of the display room, and cannot have different treatment in relation to the same type of expenses, that is, it cannot analyze each invoice individually, since they are directly related to the renovation/expansion contract, and therefore should have had the same accounting treatment on the part of the Applicant.

Regarding the position of the jurisprudence cited in point 93 of the p.i., on formal violations of the principle of specialization of the financial year, it is important to note that this is not a case of an expense from a prior financial year considered in a later financial year, but rather the accounting and tax framework of costs with improvement works of tangible fixed assets to be allocated to results in accordance with the legal rules of depreciation and amortization.

Compensatory interest is equally due, taking into account that the amortization of costs was not carried out in accordance with the due legal terms, which is attributable to the Applicant.

II. SANITATION

The Tribunal is competent and is regularly constituted, in accordance with articles 2(1)(a), 5, and 6 of the RJAT.

The case is the proper one.

The parties have legal standing and judicial capacity.

The parties are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March.

No other preliminary matters exist to be examined, nor vices that would invalidate the proceedings.

It is now necessary to examine the merits of the request.

III. THEMA DECIDENDUM

The issue to be examined is the following:

a) Do the works undertaken fall under the concept of conservation and repair works, under the concept of major repairs and improvements, or under the concept of light-construction buildings (code 2005)?

b) Does the tax act suffer from lack of reasoning?

c) Having the Applicant acted on the basis of logical and congruent interpretations of the law, if it erred, is the violation of specialization of financial years grounds for annulment of the act or for the non-exigency of compensatory interest?

IV. MATTER OF FACT

IV.1. Proven Facts

Before addressing the issues, it is necessary to present the factual matter relevant to their understanding and decision, which, having examined the documentary evidence, the attached tax administrative proceedings, and taking into account the facts alleged, is established as follows:

1. The Applicant is a legal person under private law, resident in national territory, registered in the activity of "Wine Production..." corresponding to CAE...: it produces and markets, in particular, the well-known sparkling wine brand, designated as "..."

2. The request for arbitral pronouncement concerns the assessment of Corporate Income Tax and compensatory interest in the amount of €28,676.06 (no. 2015... and compensation no. 2015...).

3. The assessment results from corrections made to the applicant's taxable income, within the scope of an inspection procedure (service order no. OI2014...).

4. In 2010, the applicant carried out a set of works on the building and grounds.

5. Such works were recorded by the taxpayer as maintenance and repair expenses of the facilities, being entirely recorded as expenses of the financial year, registered in SNC Account 622613 – FSE – Specialized Services – Conservation and Repair of Buildings.

6. The TA made the following corrections:

IV.2. Facts Found Not Proven

There are no facts found not proven, as all facts relevant to the examination of the request were found proven.

IV.3. Reasoning on Matters of Fact

The facts found proven integrate uncontested matter and are documentarily demonstrated in the proceedings.

The facts stated in numbers 1 to 6 are taken as established by agreement of the parties, by examination of the administrative proceedings, and by the documents submitted by the Applicant (docs. 1 and 2 of the application for constitution of the Arbitral Tribunal).

V. APPLICATION OF LAW TO FACTS

Matter of Law

The core of this dispute consists in the qualification of the works carried out by the applicant at its head office. Neither party contests the carrying out of the works, nor their description (cf. proven fact no. 6).

In matters of temporal allocation of expenses, the rule prevails that for the determination of profit, the costs necessary to obtain the profits realized in a financial year must be deducted from the revenues realized in that financial year. Thus, expenses incurred relating to the obtaining of certain revenues should be deducted in the same financial year.

This rule is provided for in article 18 of the CIRC (in force at the time of the facts – 2010):

"1 — Revenues and expenses, as well as other positive or negative components of taxable profit, are allocable to the taxation period in which they are obtained or incurred, independently of their receipt or payment, in accordance with the regime of economic periodization."

Expenses relating to repair and conservation are a total cost of the financial year (article 23(1)(a) of the CIRC).

However, in accordance with article 29(1) of the Corporate Income Tax Code in force at the time of the facts, "Depreciations and amortizations of elements of assets subject to deterioration are accepted as expenses, considering as such tangible fixed assets, intangible assets, and investment properties recorded at historical cost that, in a systematic manner, suffer losses of value resulting from their use or the passage of time."

The process of depreciations and amortizations aims to comply with the principle of periodization (specialization of financial years), balancing revenues and expenses obtained from the use of assets. As FREITAS PEREIRA states, "depreciations and reinstatements are the accounting process of distributing, in a rational and systematic manner, the cost of an asset that depreciates over the different financial years covered by its useful life."[1]

Citing Dr. Helena Pegado Martins, "depreciations (term applicable to tangible fixed assets) and amortizations (term reserved for intangible assets), consist in the allocation of the cost of asset elements over the period of their respective useful life(…)"[2]

In the case of depreciations, they are considered an expense (article 23(1)(g)). However, depreciation is made, as a rule, by the method of constant quotas (article 30(1) of the CIRC).

In this sense, article 31(1) of the CIRC in force at the time provided that "By the method of constant quotas, the annual quota of depreciation or amortization that can be accepted as an expense of the taxation period is determined by applying the depreciation or amortization rates defined in the regulatory decree that establishes the respective regime to the following values:

a) Acquisition or production cost;

b) Value resulting from revaluation under fiscal legislation;

c) Market value, as of the date of opening of the books, for assets subject to valuation for this purpose, when the acquisition or production cost is not known."

In the case of major repairs and improvements of elements of assets, the depreciation rates are calculated on the basis of the expected period of usefulness (article 31(5) of the CIRC).

The rule in the fiscal regime of depreciations and amortizations is the administrative fixing of the asset's useful life period through the amortization rates defined in the table annexed to Regulatory Decree no. 25/2009 of 14.09, applicable to the case in question as it had revoked Regulatory Decree no. 2/90 of 12.01.

Article 5(1) of Regulatory Decree no. 25/2009 of 14 September provides the following: "By the method of constant quotas, the annual quota of depreciation or amortization that can be accepted as an expense of the taxation period is determined by applying to the values mentioned in article 2(1) the specific depreciation or amortization rates fixed in table i annexed to this regulatory decree, which is an integral part thereof, for the elements of the assets of the corresponding business sectors or, when these have not been fixed, the generic rates mentioned in table ii annexed to this regulatory decree, which is an integral part thereof."

However, in the case of major repairs and improvements, by the requirement of article 5(2)(c), the provisions of article 5(1) do not apply, both of the aforementioned Regulatory Decree, and the depreciation period may be shorter.

The legal concept of major repairs and improvements is set forth in article 5(5)(a) of Regulatory Decree no. 25/2009 of 14 September:

"5 - For the purposes of depreciation or amortization, there are considered:

a) "Major repairs and improvements" those that increase the value or probable duration of the elements to which they relate;"

In the case in question, the TA takes the view that the works carried out and here under examination are not repair and conservation works, nor major repairs, but rather light-construction buildings (code 2005) or, using its expression, renovation/expansion works. These are subject to depreciation, having a longer term than major repairs.

Having reached this point, it is important first to verify whether the works carried out are, or are not, conservation and repair works and therefore classifiable under article 23(1)(a) of the CIRC. In this regard, the doctrine is scarce. However, contributing to clarification of this issue, Dr. Alberto da Silva Barata[3] in his teachings considers that:

"Expenses for conservation-maintenance aim:

a) To maintain tangible assets in normal operating conditions throughout their useful lives, so that they produce goods or provide services in accordance with the plan established at the time of the investment decision:

b) To create conditions so that their useful lives may be extended or, alternatively, so that, upon replacing them or simply disposing of them, the best possible market value is obtained."

It is important to emphasize that the element of temporal comparison essential for us to determine whether we are, or are not, dealing with conservation works is the state of the asset at the beginning of the investment and at the moment the work is carried out.

The intention is not to reconstruct the value of the initial asset, but merely to maintain it. Having this element as the decisive parameter, from the description of the works presented, we note that the works carried out on the buildings are integral parts of the buildings themselves.

As for invoices 387, 470 (both relating to exterior painting of the facilities) and no. 401 (roof repair), it appears to us that this expense does not fall under the concept of light-construction buildings or within the terminology of the RI of expansion/renovation. With these works, nothing was built, expanded, or remodeled, in the sense that there exists a new construction or any additional or innovative element that did not exist before. The taxpayer with these works intends merely to maintain the state of the property, adding nothing. The painting and repair of the roof tiles do not increase the value of the asset. The degradation of the painting and the roof devalue the property. Its maintenance merely prevents it from losing value, maintaining it. The painting of the building and the repair of the roof do not affect the increase in its durability, contributing only to the maintenance of its initial durability.

The high value of the painting and roof repair is not a legal criterion that permits qualifying this expense as being, or not, a building/renovation/expansion. The high value may result from the size of the building and not from the depth of the repairs.

Therefore, these expenses should not be subject to depreciation, being admissible their entire deduction in the 2010 financial year.

In the same sense, we can verify the judgment rendered on 19/01/1999, case no. 00612/98 of the TCAS, which admitted that the costs of roof repair, among other others, could be allocated as a cost of the financial year:

"In accordance with the regime resulting from articles 1 and 5, in particular paragraphs c) and d) of its (2) and paragraphs a) and b) of its (5), all of Regulatory Decree no. 2/90 of 12/1, for purposes of Corporate Income Tax, the works carried out on a building not owned by the plaintiff, which resulted in repair of the roof, gutters, and replacement of sewer pipes and other plumbing in bathrooms and the kitchen, and not in the "ex novo" construction of such facilities, are allocable as a cost of the financial year, given that they did not have the effect and purpose of increasing the useful life period of the asset, in which case they would be subject to reintegration."

This tribunal does not depart from the judicial decision cited, admitting that invoices no. 387, no. 470, and no. 411 be entirely allocated to the 2010 financial year and not subject to depreciation. This solution is dictated by the nature and substance of the operations in question.

It is now necessary to analyze the remaining invoices:

a) No. 402 – supply and laying of brick masonry within the warehouse next to the tasting room, execution of primer coat, plaster coat, and render on walls, preparation and execution of wall painting within the warehouse next to the tasting room, execution and painting of flooring;

b) No. 406 – execution of render on exterior walls;

c) No. 401 – supply and installation of curbing to support fencing next to the tank, supply and installation of fencing and galvanized piping, execution of a box for bottom discharge of tank waters.

The works mentioned add elements to the construction, in particular with regard to the laying of masonry, render, fencing, and the supply of galvanized piping and execution of a box for bottom discharge of tank waters.

Furthermore, the works increase the value of the asset because they add elements that did not exist and contributed to increasing its respective value.

These works are not limited to conserving the property but rather introduce new elements, increase its value and its durability.

Not being considered works of maintenance and conservation, they could be subject to depreciation if they are subject to deterioration and are considered tangible fixed assets.

For them to be subject to depreciation, it is necessary that they be susceptible to deterioration and be a tangible fixed asset. The characterization as an asset has fiscal impact, as the acquisition cost may be considered in one period or through the mechanism of depreciation.

The buildings where the works were carried out are part of the applicant's fixed assets.

In accordance with §49(a) of notice no. 15652/2009 of 07 September on the conceptual framework of the accounting standardization system:

"An asset is a resource controlled by the entity as a result of past events and from which it is expected that future economic benefits will flow to the entity;"

Section 87 of the same notice provides the following:

"An asset is recognized in the balance sheet when it is probable that future economic benefits will flow to the entity and the asset has a cost or a value that can be reliably measured."

The works carried out will have an impact on the future economic benefits of the applicant, which is moreover recognized indirectly by the applicant itself when it alleges that the works are necessary to offer customers better conditions and in order to improve the applicant's image (points 35 and 35 of the p.i.).

Thus, in the case in question, the works carried out integrate the concept of an asset. "Tangible fixed assets are assets with physical substance held for use in the production or supply of goods or services, for rental to third parties, or for administrative purposes, and are expected to be held for more than one period (for example, a machine, the company's head office building)"[4]

The SNC, approved by Decree-Law no. 158/2009 of 13 July, provides the following account:

"43 Tangible Fixed Assets

432 Buildings and other structures"

Based on the foregoing, this is a tangible fixed asset. In addition, its physical use and the passage of time cause deterioration.

We conclude that the works shown in the invoices may be considered expenses subject to depreciation.

Nevertheless, we must still distinguish major repairs from light-construction buildings. This distinction is important because depending on it, the depreciation rate is different. The depreciation of major repairs has a shorter depreciation period (Cf. article 5(2) of Regulatory Decree no. 25/2009 of 14.09) compared to light-construction buildings.

The inspection report qualifies these works as being light-construction buildings and places them in code 2005 of Regulatory Decree no. 25/2009 of 14.09.

The inspection report, to justify its qualification as light-construction buildings, asserts the following:

a) We are not in the presence of repairs but rather in the acquisition of services associated with tangible fixed assets (facilities and display room);

b) They constitute light-construction buildings, underlying a building permit (permit .../06) for renovation and expansion of the building/facilities;

c) The taxpayer recognized as a tangible asset the amount of €370,939.14, adopting a different criterion for the invoices in question;

d) The goods invoiced are not exhausted or consumed in one financial year;

e) Their use will extend through subsequent financial years;

f) By the characteristics of the services and the amount invoiced, it is verified that their use is not limited to or exhausted in the year under analysis.

Nevertheless, in contradiction, the same report argues that the works under analysis increase the real value of the asset and contribute to increasing its duration (page 11). Now, these are the characteristics of major repairs and not of light-construction buildings (article 5(5)(a) of Regulatory Decree 25/2009 of 14.09).

Although the respondent, in response to the arbitral request, alleges that the works fall under the concept of major repairs (article 5(5)(a) of Regulatory Decree no. 25/2009) (cf. articles 36, 47, and 48 of the response), in the inspection report, the works are qualified as light-construction buildings (article 5(1) of Regulatory Decree no. 25/2009).

Reasoning must be presented at the time of preparation of the act and not at a later date. Moreover, when presented in response to the claim, it prevents the taxpayer from defending itself against them. Subsequent reasoning is not admissible and constitutes a denial of access to the law (article 20(1) of the CRP).

Deficient reasoning cannot be effected subsequently, but rather its implementation is required in the act itself that is challenged, so that its recipient can understand it and defend itself against each of the segments that are unfavorable to it, for which it is essential that it be made aware of the factuality underlying the act performed.

Reasoning must be clear, sufficient, and congruent, and cannot contain obscure or ambiguous elements, which means the obligation to set forth the reasons of fact and law[5].

In addition to this, subsequent reasoning is not admissible, which as a rule is likely to collide with the stability of particular interests (Cf. Vieira de Andrade, op. cit., p.299; Judgment of the Administrative Court of Appeal of 07.10.1999, in "Anthology of Judgments of the Supreme Administrative Court and of the Administrative Court of Appeal", Year III, no. 1, p.247 et seq.), so in principle it should not be accepted that only now, in judicial proceedings, the taxpayer comes to be aware of the omitted grounds.

As taught by Prof. Joaquim Freitas de Rocha, reasoning must be done in a manner: "(…)(IV) Current, being (totally) carried out at the moment of communication of the decision and not subsequently;" In Lessons of Tax Procedure and Process, Coimbra Editora, 3rd Ed., p. 114

In this sense, Cf.:

Judgment of the Administrative Court of Appeal of 25.06.2010, case no. 00232/01:

"As we have said on various occasions, only the statement of reasons that the TA expressed when the act was performed can serve as reasoning, being entirely irrelevant the statement of reasons that is not contemporaneous with the act, the so-called subsequent reasoning. For in the field of substantive legality proceedings, which is that of the judicial challenge provided for in tax proceedings, the court can only form its judgment on the validity of the act in light of the reasoning that is contextually part of the act itself, being totally irrelevant for this purpose any grounds other than those that were opportunely expressed."

Judgment of the Supreme Administrative Court of 06-01-2005, case no. 00439/04

"III - Knowledge of the law by those administered does not relieve the Administration of the duty to reason its decisions, nor is subsequent reasoning of administrative acts admissible, that is, reasoning that comes to be effected after the act is performed."

Judgment of the Administrative Court of Appeal of 10-02-2012, case no. 01221/07.0BEBRG

"– Deficient reasoning cannot, therefore, be effected subsequently, but rather its implementation is required in the act itself that is challenged, so that its recipient can understand it and defend itself against each of the segments of the act that are unfavorable to it, for which it is essential that it be made aware of the factuality underlying the act performed."

Judgment of the Supreme Administrative Court of 24-04-2002, 048184

Furthermore, as decided in the Judgment of the Full Court of 10/11/1998, Appeal no. 32702, in that type of reasoning (subsequent), if it only includes the reasoning invoked in the response of the appealed authority in the contentious appeal, this is devoid of value either as a complement to the reasoning of the act or as capable of destroying or contradicting the latter.

Not being admissible subsequent reasoning as it violates article 268(3) of the CRP and article 77 of the LGT, let us attend to the grounds invoked in the inspection report.

Even if the taxpayer has requested a building permit, which was not demonstrated, its analysis was required to determine whether the works in question are connected with that permit and possibly with the construction of light-construction buildings. Without such analysis nothing can be drawn from that fact.

Moreover, the existence of a building permit is not a necessary condition to qualify the works under analysis as being light-construction buildings because it is not known whether they are related. Nor is it known whether these works are related to the renovation contract of the entire building because nothing is stated about this fact in the inspection report, nor was the supposed contract attached.

The fact that the taxpayer has recognized certain expenses as forming part of its tangible assets does not mean that all other expenses should merit the same qualification. It was required that the expenses be analyzed concretely.

As to the value of the invoices, it does not reveal the characteristics of the works, not permitting us to qualify them. The value depends on the dimensions and not necessarily on the characteristics that permit qualifying the works as light-construction buildings.

Analyzing the substance of the works, we are left without knowing the reason for their classification as light-construction buildings and not major repairs. The works were performed on existing buildings, with nothing new being constructed.

It is not enough to allege that the works are intended to expand the facilities; it is incumbent on the respondent to demonstrate this.

Many doubts persist regarding the qualification of the laying of masonry, the execution of render, and the placing of curbing to support fencing as light-construction buildings. In this regard, we could even approach the concept of "major repairs and improvements" expressed by the learned jurisprudence of the Supreme Administrative Court in the Judgment of 02/02/2005, case 917/04: "works of dismantling, renovations, demolitions, masonry, flooring coverings, concrete, excavations for foundations, ceilings, carpentry, glass, shutters, excavations and fills, electrical piping, wall and ceiling coverings, facades, etc., that is, works necessary for the exercise of banking activity, which are integrated, thus, in the buildings themselves and that contribute clearly not only to increasing the real value of each of the bank branches, but also contribute to a probable increase in the duration of those buildings, becoming their integral part and constituting a whole."[6]

The substance of the works now under analysis does not point to their qualification as light-construction buildings.

Nevertheless, it was incumbent on the TA to reason the qualification effected. It was necessary for the respondent to indicate the reasons that led it to qualify the works as light-construction buildings. If the TA did not include those facts in the reasoned statement it expressed when correcting the declared taxable amount, that act cannot be considered sufficiently reasoned, for neither the company recipient became aware of the reasons that determined the TA to practice it, which deprives it of the opportunity for informed choice between conforming to it or challenging it, nor is the Court enabled to review the legality of that act[7].

It was required of the respondent to go beyond the reasoning invoked as support for the correction for this to be considered reasoned.

Thus, agreeing with the applicant, it appears to us that, with respect to the consideration of invoices no. 401, 402, and no. 406, the tax act suffers from lack of reasoning, violating article 77(1) of the LGT and article 268(3) of the CRP.

Accordingly, the correction effected must be annulled due to lack of reasoning.

Regarding the other vices invoked, in the alternative, by the Applicant, the examination of such issues is hindered by the declaration of illegality of the additional assessment act in question.

As Mário Aroso de Almeida and Carlos Cadilha[8] note in annotation to article 95 of the CPTA (applicable by reference from article 2(c) of the CPPT and article 29(1)(a) and (c) of the RJAT): "If the court ruled as meritorious the main claim, the jurisdictional power over an alternative or subsidiarily formulated claim is barred; and, in the same terms, if the pronouncement adopted regarding an issue consumes or leaves prejudiced other aspects of the case that correlate with it."

In these terms, given the interpretation recommended, the examination and assessment of the other vices attributed to the additional assessment act is prejudiced.

VI. DECISION

Based on all that has been stated above, it is decided:

a) To judge entirely meritorious the request for arbitral pronouncement on the illegality of the additional assessment act for Corporate Income Tax and compensatory interest for 2010, in the amount of €28,676.06 (no. 2015... and compensation no. 2015...);

b) To partially annul that assessment, in the part corresponding to invoices no. 387, no. 401, no. 402, no. 406, no. 411, and no. 470, which should be admitted as expenses to be deducted in their entirety (article 23(1)(a) of the CIRC – version of 2010) in the 2010 financial year.

The value of the proceeding is fixed at €28,676.06, in accordance with article 97-A(1)(a) of the CPPT, applicable pursuant to article 29(1)(a) of the RJAT and article 3(2) of the Regulations on Costs in Tax Arbitration Proceedings.

The arbitration fee is fixed at €1,530.00, in accordance with Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid entirely by the Respondent, since the request was entirely granted, in accordance with articles 12(2) and 22(4) of the RJAT, and article 4(4) of the aforementioned Regulation.

Let notice be given.

Lisbon, 18 January 2016

The Arbitrator

André Festas da Silva

Text prepared by computer, in accordance with article 131(5) of the Code of Civil Procedure, applicable by force of article 29(1)(e) of the RJAT.

[1] In The Periodization of Taxable Profit, Science and Technical Taxation, no. 349, 1988, p. 157.

[2] In Lessons of Taxation, Coordinated by João Ricardo Catarino and Vasco Branco Guimarães, Vol. I, 2015, 4th Edition, p. 307

[3] In Fisco Magazine, no. 24, October 1990, Fiscal and Accounting Aspects of Expenses and Conservation of Tangible Fixed Assets, p. 12.

[4] In Lessons of Taxation, Coordinated by João Ricardo Catarino and Vasco Branco Guimarães, Vol. I, 2015, 4th Edition, Helena Martins, P. 307, note 22

[5] Cf. Vieira de Andrade, "The Duty to Reason Administrative Acts", Almedina, 2003, p.232 et seq.

[6] In the same sense Cf. Judgment of the Supreme Administrative Court of 06/07/2005, case no. 0323/05, Judgment of the Supreme Administrative Court of 17/05/2006, case no. 0123/06, and Judgment of the Administrative Court of Appeal of 04/11/2003, case no. 07134/02.

[7] In this sense Cf. Judgment of the Supreme Administrative Court of 16.11.2011, case no. 0513/2011.

[8] In Commentary to the Code of Procedure in Administrative Courts, Almedina, 2005, p. 483