CAAD Case 368/2017-T: IRC Payments to Entities in Favorable Tax Regimes – Hong Kong Deductibility

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Carla Castelo Trindade and Elísio Brandão, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Court, hereby agree to the following:

ARBITRAL DECISION (CONSULT FULL VERSION IN PDF)

I – REPORT

On 9 June 2017, A…, S.A., NIPC…, with registered office at …, …, …-… …, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of tax acts embodied in the demonstration of IRC assessment No. 2017…, relating to the tax year 2013, and respective assessment of compensatory interest No. 2017…, as well as the demonstration of account settlement No. 2017…, in the total amount of €205,616.91.

To substantiate its request, the Claimant alleges, in summary:

• Compliance with the burden of proof that rested upon it, thereby excluding the presumption of article 65, no. 1 of the IRC Code with the wording in force at the date of the facts;

• The illegality of the tax act, since the discovery of material truth and taxation in accordance with law requires that the Tax Authority justify the consideration of the evidence as insufficient and indicate which elements it considered to be sufficient to deem the evidence produced adequate;

• The defect of violation of law due to error in the factual and legal presuppositions, since it considers it to be demonstrated that the actual value of the advantages obtained from the contracts it concluded with companies resident in Hong Kong is real and that the charges established constitute fair remuneration for those advantages;

• Violation of law, by failure to observe article 23, no. 1 of the IRC Code, by the fact that the Tax Authority did not consider the expenses with companies with registered office in Hong Kong and with the transfer of credits, indispensable to obtaining the income;

• The non-compliance with the burden of proof that fell upon the Tax Authority by force of article 74, no. 1 LGT;

• The violation of article 77, no. 2 of the LGT by the fact that the Tax Authority's argumentation is obscure, insufficient, incongruous and lacking relevant argumentation and demonstration;

• The illegality of the assessment of compensatory interest.

On 12 June 2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, and therefore, under the provisions of subparagraph a) of no. 2 of article 6 and subparagraph a) of no. 1 of article 11 of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable time limit.

On 03-08-2017, the parties were notified of these designations and did not express any intention to refuse any of them.

In accordance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Court was constituted on 21-08-2017.

On 03-10-2017, the Respondent, duly notified for this purpose, filed its reply defending itself solely by way of objection.

On 21-12-2017, the meeting referred to in article 18 of the RJAT took place, where witnesses presented by the Claimant were examined at the hearing / Under the provisions of subparagraphs c) and e) of art. 16, and no. 2 of art. 29, both of the RJAT, the holding of the meeting referred to in art. 18 of the RJAT was dispensed with.

Having been granted a time period for the submission of written submissions, these were presented by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.

The time limit referred to in article 21, no. 1 of the RJAT was extended by 60 days.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subparagraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate parties 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.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the hearing of the case.

All matters considered, it falls to render

II. DECISION

A. MATTER OF FACT

A.1. Facts established as proved

• The Claimant is, and was in 2013, a public limited company registered in the activity of buying and selling real estate to which corresponds the CAE – 68100, whose business includes the buying and selling of real estate and asset management, embodied either in the activity of sub-leasing or in the activity of furnished local accommodation for tourists.

• In 2013, the Claimant was covered by the general regime of IRC taxation and the exemption regime of article 9 of the CIVA.

• On 10-05-2016, the Claimant was subject to an external inspection procedure, of general scope and covering the tax years 2013 and 2014, through Service Orders nos. OI2016… and OI2016…, which originated from the Inspection Proposal PIP 2016…, carried out within the scope of the 2016 project – Control of the Real Estate Promotion and Brokerage Sector.

• The inspection procedure deadline was extended for three months, with the Claimant being notified of this fact through Official Letter … of 21-10-2016.

• The Claimant was notified on 18-11-2016 of the diligence note on the conclusion of inspection procedures and of the Draft Report on Tax Inspection, in which the following correction was proposed:

• The Claimant was further notified, in accordance with article 60 of the RCPITA and article 60 of the LGT, to exercise, if it so wished, its right to a hearing, which it did, in the terms referred to below, on 06-12-2016.

• On 21-11-2013, the Claimant acquired by public deed from company B… S.A. – in liquidation, 213 real estate properties located in the parish of … (current land registration articles …, … and … of the parish …), for the amount of €18,412,564.93, intended for subsequent resale.

• The amount of €18,412,564.93 relating to the purchase of the real estate was recorded in the Merchandise accounts, as follows: …-Lot …, …-Lot … and …-Lot ….

• The acquisition of the aforementioned real estate was financed by Bank C…, S.A., which was a creditor in the insolvency process of company B… S.A., holding a position that enabled it to make impossible any acquisition of that company's assets.

• As a fundamental condition to the conclusion of the financing contract, Bank C…, S.A. imposed the transfer to the Claimant of credits, in the amount of €5,530,118.00, which it held over the companies "D… S.A.", in the amount of €4,102,520.00 and "E…, S.A.", in the amount of €1,427,598.00.

• On the date of conclusion of the loan contract, a credit transfer contract No. …_2012 in the total amount of €5,530,118.00 was concluded between the Claimant and Bank C…, S.A., which had as its object the credits that Bank C…, S.A. held over the companies, both declared insolvent, "D…S.A." and "E…, S.A", in the amount of €4,102,520.00 and €1,427,598.00, respectively.

• The credit transfer contract between the Claimant and Bank C… S.A. was concluded in the following terms:

• Bank C… is the legitimate holder of the following credits (Item A):

• Credit of €1,427,597.50 over the company "E…S.A.", with tax identification number …;

• Credit of €4,102,520.05 over the company D… S.A., with tax identification number…;

• The aforementioned credits were claimed by Bank C… in the insolvency proceedings of the debtor companies, process …/12… TYLSB in which the company "E… S.A". is the insolvent party, and process …/12… TYLSB in which the company "D… S.A." is insolvent, both at the … Court of Commercial Court of …, and the aforementioned credits were claimed in their entirety (Item B);

• Bank C… sells to A… the two credits of which it is the holder referred to in 1, in the amounts of €1,427,597.50 and €4,102,520.05, over the companies E… S.A". and "D… S.A.", respectively, in the total amount of €5,530,117.55 (first clause)

• The transfer is effected for the overall price equal to the total amount of the credits referred to in the first clause, which A… paid to Bank C… on the present date (second clause)

• Bank C… expressly guarantees to A… the existence and enforceability of the credits subject to transfer, but does not guarantee the solvency of the respective debtors, nor the payment of the transferred credit (third clause)

• It is the responsibility of A… to notify the debtors of the transfer in accordance with the provisions of article 583 of the Civil Code (fourth clause)

• Bank C… will deliver to A…, upon written request, the documents that are in its possession that are necessary to prove ownership of the credits subject to the present transfer (sixth clause)

• The declaration of insolvency of company "D… S.A." dates from 14-06-2012.

• The declaration of insolvency of company "E…, S.A." dates from 17-10-2012.

• With regard to the insolvency process of company "D…, S.A.":

• Bank C… claimed credits in the amount of €5,755,886.30;

• The credit was recognized as common and conditional;

• Bank C… transferred part of the credits it held to the Claimant, in the amount of €4,102,520.05, with qualification made in the process;

• The insolvency plan was approved and homologated, which provides for controlled liquidation of assets;

• At the date of filing of the present arbitration action, no judgment verifying and ranking credits had yet been rendered;

• With regard to the insolvency of "E…, S.A.":

• Bank C… claimed credits in the amount of €6,776,193.06;

• The credit was recognized as common and conditional;

• Bank C… transferred part of the credits it held to the Claimant in the amount of €1,427,597.50;

• A judgment was rendered deeming the Claimant properly qualified in the process;

• The insolvency plan was approved and homologated, in accordance with which in the first two years of its term there was suspension of payment of capital and only interest was due, with payment of the capital debt beginning thereafter;

• A judgment was rendered declaring the verification and ranking of credits annex extinct due to approval and homologation of the plan;

• At the date of filing of the present arbitration action, the process was already closed, but the Claimant had not received any payment under the approved plan;

• Without the acquisition by the Claimant of the credits held over these companies by Bank C…, S.A., the financing would not have been granted and the Claimant would not have acquired the 213 real estate properties for resale.

• In the years 2013 and 2014, amounts of €852,706.65 and €10,158,139.01, respectively, were recognized as expenses in the "Cost of Merchandise Sold and Consumed" item, account 6111.

• The amount of €5,530,117.55, relating to the credit transfer contract, was considered as a purchase expense and, consequently, recorded in the Inventories item, account 3211, through the Miscellaneous Operations document 110.002 and charged to the 213 acquired real estate properties, proportionally to the acquisition value of each real estate property.

• In the course of the inspection procedure, the Claimant was notified to:

• Indicate the reason underlying the conclusion of the contract, that is, indicate the advantages obtained or to be obtained (point 1.1 of the notification)

• Present the notification to debtors D…, S.A. of the existence of the credit transfer (point 1.2 of the notification)

• Justify the credit transfer in inventories and not in accounts receivable (point 1.4 of the notification)

• With respect to point 1.1 of the notification, the Claimant stated the following: "As recorded in Minutes no. 1 of the Board of Directors of 17-09-2013 and in Minutes no. 4 of the General Assembly of 17-09-2013, it was understood that, although the credits were difficult to recover, it was expected that, in a scenario of free sale and exploitation of the Golden Visa market niche, the value of the assets of the real estate to be acquired would be higher than its acquisition value increased by the credits. It was therefore envisioned that the operation would bring good profitability to the company, even accounting for the risks inherent in the recovery of the respective credits. Furthermore, it is a presupposition of the transaction that the Bank would grant financing to the company for the acquisition of all assets. In other words, the Credit Transfer was an imposition of the financial institution (Bank C…), without which the acquisition of the real estate could not take place".

• With respect to point 1.2 of the notification, the company presented the notifications sent by registered mail with acknowledgment of receipt on 13-02.2014 and 10-04-2014, respectively, to the Insolvency Administrator of D… and to the Administration of E… With respect to point 1.4 of the notification, and regarding the justification for the accounting of the credit transfer in inventories, the Claimant stated that the credit transfer was an imposition of Bank C… without which the acquisition of the real estate could not take place, and further stated that it was known from the beginning that they would never be recoverable, and therefore constituted an additional cost of the main business which was the acquisition of the real estate.

• The Claimant notified the debtor companies that they should recognize it as creditor and that it would present the application for qualification of the assignee, as an annex to the insolvency proceedings;

• The Draft Report on Tax Inspection issued by the Tax Authority of … contains the following:

• The Claimant, notified to exercise its right to a hearing, invoked the following:

• In the periods of taxation of 2013 and 2014, the Claimant had several customers of Chinese nationality to whom it sold its real estate under the "Golden Visa" regime.

• Such foreign clients were recruited by companies from their country of origin, arriving in Portugal through them.

• The Claimant contracted the services of the companies "F…" and "G…" with registered office in Hong Kong and the company "H…, Lda.", with registered office in Macau.

• "G…" and "F…" were companies governed by Chinese law, which were engaged, among other things, in providing services to Chinese citizens with a view to their obtaining authorization to reside in countries of the European Union, such as Portugal, Ireland, Cyprus, Malta, Spain, Greece, United Kingdom, Germany and Italy, through investment in real estate.

• "G…" was a company that had offices in Hong Kong, Beijing, Chengdu, Guangzhou, Cyprus (I… Cyprus), Italy, Korea, Malta, Portugal, Shenzhen, Shanghai, Spain, Thailand, United States of America, and Vietnam, had about 750 partnerships with companies spread throughout the world, more than 600 employees and a vast portfolio of real estate and investment projects in Portugal, Ireland, Cyprus, Malta, Spain, Greece, United Kingdom, Germany, Italy, St. Kitts and the United States of America.

• The company "G…" was distinguished by the Portuguese-Chinese Chamber of Commerce and Industry for the Business Merit Award.

• "G…" and "F…" were companies that constituted a global platform for promotion of real estate and various investment services.

• The Claimant is not a partner, shareholder or holder of any position in the company "G…", nor does it have any relationship with its shareholders, administrators or representatives.

• In the year 2012, the sales of real estate carried out by the Claimant registered a value of €220.00.

• The Claimant had, through those companies, for the first time, the opportunity to sell its real estate to Chinese citizens.

• In the years 2013 and 2014, the Claimant sold 78 real estate properties for the total amount of €27,034,546.00, with €1,544,500.00 relating to 5 real estate properties sold in the year 2013 and €25,490,046.00 relating to 73 real estate properties sold in the year 2014.

• Of the total number of real estate properties sold, 76 real estate properties were acquired by non-resident citizens of Portugal, from the People's Republic of China, and the remaining two real estate properties were acquired by national companies.

• With the collaboration and services provided by the companies based in Hong Kong, the Claimant sold 4 of the 5 units sold in 2013 valued at €1,534,900, and 51 of the 73 units sold in 2014 valued at €17,237,778.01.

• The contracts concluded between the Claimant and the companies "F…" and "G…" were in force only in the years 2013 and 2014, since from the year 2015 onwards such companies established themselves in national territory, establishing their own real estate companies in Portugal, which then proceeded to exercise the activity of buying and selling real estate directly to Chinese investors.

• When the provision of services between the Claimant and "G…" ended, the Claimant sought, without success, to exploit the Chinese market alone.

• Since the opening of "G…" offices in Portugal, the Claimant has not carried out any sales to Chinese citizens.

• The aforementioned companies governed by Chinese law maintained control of the entire sales process and offered considerable resistance in sharing information and know-how with the Portuguese, to prevent the model from being replicated by national promoters in China.

• In the years under analysis, invoices were issued to the Claimant by the companies "G…" and "F…", both resident in Hong Kong, for services provided related to the sale of real estate.

• The company "F…" issued one invoice in the year 2014, in the amount of €44,160.00, with the remaining invoices issued by the company "G…", in the total amount of €3,695,072.76.

• In the invoices issued by the company "G…", the following descriptions appear:

• The charges debited in the invoices referred to were recognized by the Claimant as expenses in the "Supplies and External Services" item, account 622101 – Marketing, in the year 2013, and account 62253 – Commissions to non-residents in the year 2014.

• The Claimant proceeded to calculate and deliver to the State's coffers VAT, at the rate in force of 23%, relating to the invoices referred to, in the years 2013 and 2014, for the amounts of €52,954.05 and €807,069.48, respectively.

• The VAT calculated was recognized as an expense in accounts 622101-Marketing and 62253-Commissions to non-residents, accounts where the associated invoices were also recorded.

• In the year 2013, the amount debited in the aforementioned invoices corresponds to 15% of the value of the sale of the fraction associated with it.

• In the year 2014, it occurred that:

• in 10 fractions no charge was debited by the aforementioned companies;

• in 62 fractions the amount debited by the company "G…" varies between 19.25% and 22% of the value of the sale of the associated fraction;

• The amount debited by the company "F…" for one fraction corresponds to 12% of the value of the associated sale

• The commission owed by the Claimant to "G…" as consideration for customer recruitment services was initially, in 2013, 15%, rising to 20% in 2014.

• The Claimant sought to resist the increase in the commission charged by "G…" from 15% to 20%.

• During the period in which the Claimant sought to resist the increase in the commission, specifically between December 2013 and February 2014, "G…" did not recruit Chinese clients to acquire real estate held by the Claimant and the Claimant did not sell any real estate.

• The commission was only owed to "G…" in cases where the sale of real estate to clients recruited by it was completed.

• The commissions paid by the Claimant for the services provided by the aforementioned companies based in Hong Kong were accepted by it because it was the first time it had contact with the Chinese market and because the real estate sector had been stagnant for a long time, which led to the opportunity to sell real estate to Chinese clients under the "Golden visa" regime representing a possibility of recovery,

• The commissions paid by the Claimant to the companies based in Hong Kong in the year 2013 – 15% of the sale price – are lower than the commissions paid by the Claimant to the company "H…, Lda.", based in Macau, from which it purchased identical services, paying a commission of 18%, which was not subject to any correction.

• There were no alternatives in the real estate market to the services provided by "G…" in terms of the opportunity to sell the same number of real estate properties at the prices that were practiced.

• The Chinese agencies provided a much more comprehensive service than that provided by real estate agencies in Portugal, in that they:

• promoted and publicized real estate in China;

• established and maintained a network of partnerships with emigration agencies in China;

• promoted client recruitment, handled all documentation required by the Immigration and Border Service (SEF), as well as the authorizations and steps necessary for money transfer, deployed Portuguese technicians to China, specifically jurists to explain the Gold Visa program and prepare promise to sell and purchase contracts, as well as translators, handled and bore the costs of displacement of the potential buyer and their family, accompanied by an interpreter, and monitored the entire process aimed at obtaining authorization to reside in Portugal

• provided post-sale follow-up service for the investor

• convinced the Chinese investor to adhere to this regime and purchase real estate in Portugal.

• The selling prices of the real estate held by the Claimant were fixed in such a way as to include the commissions owed to "G…" for customer recruitment services from Chinese clients.

• The amount of purchases declared by the Claimant in the 2013 tax year, of €24,013,184.48, corresponds to the sum of the acquisition value of the real estate and the values considered as purchase expenses, as shown in the following table:

• In the years 2013 and 2014, amounts of €852,706.65 and €10,158,139.01, respectively, were recognized as expenses in the "Cost of Merchandise Sold and Consumed" item, account 6111, which were determined as follows:

• In the course of the tax inspection, the tax inspection services notified the Claimant, represented by its representative J…, to indicate on 20-07-2016 which services were provided to the Claimant by the companies "G…" and "F…", as well as to present elements that could be considered as proof of the effective performance of the invoiced services, so as to allow the conclusion that the services influenced the sale of real estate and that they are not of exaggerated amounts.

• In response, the Claimant stated the following:

"The companies G… and F… are companies governed by Chinese law which provide services to Chinese citizens with a view to their obtaining authorization to reside in countries of the European Union, such as Portugal. These companies have carried out promotional activities of the Portuguese "Golden Visa" program throughout Chinese territory, through seminars, conferences, television advertisements and other promotional materials, where they highlight the advantages and benefits of investing/living in Portugal and provide detailed information about real estate in Portugal. In addition to this promotional activity, these companies organize all the logistics associated with the displacement of potential investors to Portugal, such as transport from China to Portugal, accommodation in Portugal, visits to real estate and obtaining a tourism visa for entry and stay in Portugal from the Portuguese Embassy and Consulates in China. Already in Portuguese territory, these companies assist clients in practically the entire investment process by arranging translators, lawyers and drivers for them, accompanying and assisting them with the Immigration and Border Service (SEF), the tax authorities and in opening accounts in banks, as well as in the process of searching for, choosing and acquiring real estate in Portugal. These services not only allowed the undersigned the access to these clients, which would otherwise be impossible given the language and cultural differences and the absence of know-how regarding this type of client and market, but were decisive for the sale of real estate of the undersigned. Just to give an idea of the importance of the collaboration of these companies and the influence of the services provided by them for the conclusion of the business conducted, since the undersigned ceased collaborating with these companies (and this happened because these companies began to create their own companies in Portugal that buy real estate and sell directly to Chinese investors) has not made any further sales to citizens from the People's Republic of China. As for the amounts practiced by these companies, it should be recalled that the national real estate sector was stagnant for a long time and that the companies engaged in this sector, such as the undersigned, were in a very difficult situation, so when this Chinese market emerged, the undersigned was not in a position to set the rules and, as it will be understood, wanted to take advantage of that opportunity.

Furthermore, as mentioned, the undersigned would never be able to penetrate this Chinese market without the help of these companies. We note that these companies like to dominate the entire process and offer great resistance to sharing information and know-how with the Portuguese to prevent the model from being replicated by national promoters in China, which naturally makes them even more indispensable. Furthermore, the commission policy practiced by these companies due to the specificity of the Chinese market, the effort employed, the time wasted with each client, the resources used, investments in fairs and seminars, the logistics required, the costs of promotion and marketing, could not be the same as that practiced in the national market, such as for example by "K…", which, in addition to the investment and effort being much less, in most cases only has to take the investor/client from its store to the developer.

In sum, this was the cost imposed by these companies, which knew that they were indispensable to Portuguese developers, and the fact is that these services were decisive for the sales carried out by the undersigned"

• The Claimant made available to the Tax Authority the following elements regarding each of the sold real estate properties:

• copies certified by notary of the purchase and sale contracts, in which they appear as representatives of the Chinese client/buyers, lawyers from Portuguese law firms that provided services to "G…" and "F…", namely: L… and M…;

• copy of the promise to purchase and sell contracts translated by translator (who signs the documents);

• receipts/declaration attesting receipt of the amount of the deposit with banking information of the Chinese client/buyer;

• purchase confirmation forms of the real estate, in Portuguese, in Mandarin and in English (which reveals the intervention of the translator), with all information about the purchase (e.g.: price, IMT, stamp duty, IMI, maintenance value, reserve price, date of contract signature), signed by the Claimant and by the buyers/Chinese.

• emails exchanged between "G…", the Claimant and the lawyers of "G…" and "F…" about the transactions

• The Claimant also made available to the Tax Authority:

• List of employees of "G…" with whom the Claimant exchanged emails, established telephone contacts and who intervened in the sale of real estate to Chinese investors recruited by them

• List of developers/projects that used the services of "G…".

• List of real estate brokers that worked with the Asian market and with international commissions.

• From the Draft Report on Tax Inspection, the following appears:

• Notified to exercise the right to a hearing, the Claimant came, in that venue, to allege the following:

• The Tax Inspection Services issued the Final Report on Tax Inspection, concluding that all corrections projected in the initially proposed terms should be maintained.

• Following the inspection proceedings, the following corrections were determined to the taxable matter in the context of IRC:

• The Claimant was notified of the IRC assessment No. 2017… relating to the 2013 tax year, and respective assessment of compensatory interest No. 2017…, with the amount to be paid determined in the global value of €205,616.91.

A.2. Facts established as not proved

With relevance to the decision, there are no facts that should be considered as not proved.

A.3. Justification of the matter of fact proved and not proved

With respect to the matter of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the matter proved from that not proved (see art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable by virtue of article 29, no. 1, subparagraphs a) and e), of the RJAT).

Thus, the relevant facts for judgment of the case are chosen and delineated in function of their legal relevance, which is established in attention to the various plausible solutions of the legal question(s) (see former article 511, no. 1, of the CPC, corresponding to the current article 596, applicable by virtue of article 29, no. 1, subparagraph e), of the RJAT), including the instrumental facts that resulted from the discussion of the case (article 5, no. 2, subparagraph a) of the CPC).

Thus, taking into account the positions assumed by the parties, in light of article 110, no. 7 of the CPPT, the documentary and testimonial evidence, and the Administrative Procedure file attached to the case record, the facts listed above were considered proved, with relevance to the decision, taking into account that, as stated in the Ac. of the TCA-South of 26-06-2014, handed down in case 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not impugned".

In particular, the facts stated in points 9, 10, 17, 28, 30, 31, 33, 34, 36, 40 to 46, 55 to 57, 59 to 61, took into account the statements given at the meeting referred to in article 18 of the RJAT, which corroborated and supplemented the available documentary evidence, with special relevance being given to the statements of J…, who demonstrated direct knowledge of all the matter contained in the aforementioned points, relating the facts in a coherent and objective manner, to the extent that, in the parts in which they occurred, they were confirmed by the remaining statements, with no reasonable doubt remaining to this Tribunal regarding the verification of the facts in question, as they were taken as proved.

No consideration was given as proved or not proved to allegations made by the parties and presented as facts consisting of strictly conclusive assertions, incapable of proof, and whose truthfulness must be assessed in relation to the specific matter of fact consolidated above.

No consideration was given as not proved to facts alleged by the parties that are incompatible with the facts established as proved.

B. ON THE LAW

In the present arbitration action, two corrections of distinct nature and grounds are at issue, namely:

• correction relating to the credit transfer contract, considered by the Claimant as a purchase expense and, consequently, recorded in the Inventories item, account 3211, through the Miscellaneous Operations document 110.002 and charged to the 213 acquired real estate properties, proportionally to the acquisition value of each real estate property;

• correction and autonomous taxation relating to expenses with payments to the companies "G…" and "F…".

Let us then examine each of them separately.

i.

The first question to be resolved essentially comes down to determining whether an expense incurred in the acquisition of a credit by a taxpayer solely because it was an essential condition for it to be possible to acquire a good for its inventory should, or should not, be considered an expense of that inventory, that is, and in concrete terms, whether the amount of credits acquired by the Claimant could be accounted for as an initial expense of inventories.

The Tax Authority considered, in sum, that there was no basis for the acquisition of the credits to have been considered a purchase cost, taking into account that:

• The Tax Authority notified the debtor companies that they should recognize it as creditor and that it would present the application for qualification of the assignee, as an annex to the insolvency proceedings;

• The insolvency processes were in progress, and in both an insolvency plan was approved.

Further consideration was given in the RIT, in the context of assessment of the right to a hearing, that:

• No proof was presented that there was an imposition by Bank C… for the acquisition of the credits;

• It was not demonstrated that the final outcome of the credits was known at the beginning, that they would never be recoverable, nor is it known at the current date, given that the insolvency plans are ongoing;

• The accounting in the Inventories item is not covered by article 26, no. 2 of the CIRC as worded at the time of accounting.

At the arbitration hearing, the Respondent alleged that it is not true that the acquisition of the credits was an imposition of Bank C… and that, from the beginning, the final outcome of the credits was known, that is, that they would never be recoverable and would not be recoverable.

The Respondent further alleges that the accounting in the inventories item cannot be covered by no. 2 of article 26 of the IRC Code, since "this rule does not apply in the case under analysis, because it refers to costs of loans obtained, which may be included in the cost of acquisition or production in the case of inventories requiring a period of more than one year to reach their condition of sale.".

The Respondent further notes that "if the company comes to receive the credits in whole or in part, given that the accounting does not reflect any accounts receivable (since it was recorded in Inventories), there is no longer any control by the Tax Authority, with the possibility that the amount received is not reflected in the accounting, either the Income or the Cash Flow.".

The Respondent's Reply further states that "the acceptance of impairment losses relating to credits of doubtful collection, as fiscally deductible, depends on such losses being derived from the normal activity of the entity", that is, that "only credits that are originated by sales of goods and provision of services that are specific to the main objectives of the company are admitted, with credits resulting from mere operations of a financial nature being excluded, as is the case under consideration (acquisition of credits of doubtful collection)".

The question to be decided in this regard is split, as was seen, into two levels, first posing itself at the factual level and subsequently at the legal level.

As to the factual level, the Tax Authority considered, as was also seen, that no proof was presented that there was an imposition by Bank C… for the acquisition of the credits and that it was not demonstrated that the final outcome of the credits was known from the beginning, that they would never be recoverable.

With all due respect, that is not what emerges from the case record.

In fact, it is established that Bank C… was a creditor with a dominant position in the insolvency process where the real estate acquired by the Claimant was sold, and therefore was in a position to make the transaction impossible if its conditions were not met.

On the other hand, it is evident that the Claimant had no advantage, nor is there any indication that it had any interest, in the acquisition of the aforementioned credits, except precisely to ensure the acquisition of the real estate, and in the absence of indications to the contrary, the only party interested in the part of the transaction relating to the transfer of credits would be the Bank, in the well-known context of elimination of "toxic" assets from the balance sheet.

Furthermore, it is established that the price agreed upon for the acquisition of the real estate, plus the value of the credit transfer, is within the market price of those assets, as evidenced by the fact that the selling price of those assets accommodated a reasonable profit margin, thus reinforcing the idea that the credit transfer was part of the "price" to be paid by the Claimant to acquire the real estate.

Finally, all the testimonial evidence produced, in terms consistent with the available documentary evidence, was to the effect that the credit transfer was indeed an essential condition for the transaction, imposed by the Bank.

As to the circumstance of whether or not it was known what would become of the acquired credits, taking into account that these are common and conditional credits and that the debtors had already been declared insolvent, with nothing indicating that they would be paid, and verifying that more than 5 years after the declaration of insolvency nothing has been paid, it is believed that only by Cartesian and methodical doubt could one question whether they will or will not be paid.

This does not prevent any of the conclusions drawn the circumstances raised by the Tax Authority that the Claimant notified the debtor companies that they should recognize it as creditor and that it would present the application for qualification of the assignee as an annex to the insolvency proceedings, as well as the circumstances that the insolvency processes were in progress, and in both an insolvency plan was approved.

Indeed, as regards the first of said circumstances, what is involved are normal procedures of the credit transfer operation, to which the Claimant was contractually bound, with no inference flowing therefrom regarding the possible recoverability of the credits; the same applies, moreover, as regards the second of the circumstances referred to, since, as indicated, what is involved are common and conditional credits, nothing pointing in the direction that they have any practical possibility of recovery.

With the factual data thus established, it then falls to assess the remaining arguments on which the Tax Authority based the correction now at issue.

Taking into account the factuality established, it is believed that the qualification carried out by the Claimant should not be censured.

Indeed, first and foremost, article 11, no. 3 of the LGT imposes that:

"Persisting doubt about the meaning of the applicable tax rules should have regard to the economic substance of the tax facts".

This rule constitutes, as is known, an expression of the principle of prevalence of substance over form, in force in Accounting and accepted in Tax law.

In this regard, §35 of the Conceptual Framework of the SNS mentions that:

"If the information is to faithfully represent the transactions and other events that it is intended to represent, they must be accounted for and presented in accordance with their economic substance and reality and not merely their legal form. The substance of transactions or other events is not always consistent with that shown by their legal form or intended form.".

Also, NCRF 18, relating to "Inventories", states that:

"§9 Inventories must be measured at cost or net realizable value, whichever is the lower.

§10 The cost of inventories must include all purchase costs (...)

§11 The costs of purchase of inventories include the purchase price, import duties and other taxes (which are not subsequently recoverable from tax authorities by the entity) and costs of transport, handling and other costs directly attributable to the acquisition of goods"

On the other hand, NCRF 29, relating to "Financial Assets", mentions that "§10 When a financial asset or financial liability is initially recognized, an entity must measure it at its fair value.", with "Fair value: being the amount for which an asset could be exchanged or a liability settled, between parties in the know and willing to do so, in a transaction in which there is no relationship between them.".

In the case, as was already mentioned, everything indicates that the acquisition of the credits from the insolvent debtors is synallagmatically linked to the acquisition of the 213 real estate properties that the Claimant acquired for its inventory, and therefore, in substance, the cost of acquisition of the latter also incorporated the acquisition price of the former.

Strictly speaking, the Claimant, for the price of €18,412,564.93 + €5,530,118.00, acquired the 213 real estate properties plus the credits of Bank C… over the companies "D…S.A.", in the nominal amount of €4,102,520.00, and "E…, S.A.", in the nominal amount of €1,427,598.00.

Given that it is evident that the fair value of the credits – that is, the amount for which they could be exchanged between parties in the know and willing to do so, in a transaction in which there was no relationship between them – did not correspond, nor does it correspond, to their nominal value, the Claimant chose to consider the entire contractually agreed amount as the price of the credit transfer, as a cost directly attributable to the acquisition of goods, which amounts to having attributed a value of 0 to the credits (financial assets) acquired.

Now, although doubts may be entertained about whether the fair value of such assets will indeed be 0, doubts that are evident in the Claimant's pleadings (when it mentions, for example, that "the possibility of recoverability of such credits remains residual"), the fact is that:

• Nothing indicates that its fair value corresponds to even the minimum of its nominal value, as is implicit in the corrections made by the Tax Authority;

• Under article 100, no. 1 of the CPPT, "Whenever from the evidence produced there is reasoned doubt about the existence and quantification of the tax fact, the challenged act should be annulled."

It is concluded, accordingly, that the correction now at issue is subject to error in the factual presuppositions, and consequent error of law, and should therefore be annulled, with the arbitration petition proceeding in this respect.

This conclusion is not prevented by what the Respondent alleges with respect to no. 2 of article 26 of the IRC Code, since what is at issue, as a result of what has been seen, is the application of no. 1, subparagraph a), of such a rule.

As to the Respondent's objections regarding the putative difficulties of control by the Tax Authority, it should be noted, first of all, that such circumstance is not in itself a tax fact nor such reality as to justify subjection to tax, on the one hand, and that, in any case, such difficulty will only arise if the Claimant does not properly fulfill its accounting and tax obligations, and in that case, the Tax Authority's difficulties will be equivalent to many other cases in which taxpayers do not fulfill those duties, which is why the Law places at its disposal vast and diverse inspection powers, and heavily sanctions non-compliance with said duties.

Furthermore, and here this will be a mischaracterization on the Respondent's part, it is not in any way involved in the present situation, the "acceptance of impairment losses" (or, as stated in the RIT, "derecognition of credits"), but the measurement of the values of acquisition of the real estate and the credits (that is, their recognition) which, substantially, form part of a single transaction, and whose cost of acquisition of the two elements of distinct nature does not correspond, manifestly, to the amounts that, contractually, were attributed to it, and therefore what is involved is the application of the part of NCRF 27 applicable to recognition (§6 et seq.) and, in particular, to initial measurement (§10), not the part relating to impairments (§24 et seq.) or derecognitions (§34 et seq.).

ii.

With respect to the correction and autonomous taxation relating to expenses with payments to the companies "G…" and "F…", the Tax Authority considered, in sum, that the Claimant did not demonstrate, as was its responsibility, the effectiveness of the operations nor the reasonableness of the value corresponding to the expenses it accounted for, considering, in brief summary, that:

• the evidence gathered does not allow, specifically, by reference to the descriptive text of the invoices in question, identification of the specific service provision identified therein;

• there is equally no evidence that specifically allows assessment of the actual value of the advantages gained from entering into the contract with the two entities based in Hong Kong;

• the Claimant, with respect to the operation in question, has no evidence to demonstrate the normal character of the same, given the existence of 10 real estate properties sold in which no charge was debited by the companies located in Hong Kong, and whose selling prices are presented as elevated compared to the values of sales during that period, as well as the fact that there are contracts entered into with two companies that practice percentages significantly lower than those practiced by the company G…, between 8% and 12%, one of them being based in Hong Kong.

What is at issue is the application of articles 65 of the CIRC, as amended by Law No. 64-B/2011, of 30 December (in force in 2013) and 88, no. 8 of the same Code, which establish the following, to the extent relevant to the case:

"Article 65

Payments to non-resident entities subject to a privileged tax regime

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

2 – A natural or legal person is considered to be subject to a clearly more favorable tax regime when the territory of residence thereof is on the list approved by ordinance of the Minister of Finance or when it is not taxed therein with income tax identical or analogous to the PIT or the CIT, or when, with regard to the amounts paid or owed mentioned in the previous number, the amount of tax paid is equal to or less than 60% of the tax that would be due if said entity were considered resident in Portuguese territory.

3 – For the purposes of the preceding number, taxpayers must possess and, when requested by the General Tax Authority, provide the supporting elements of the tax paid by the non-resident entity and the calculations made to determine the tax that would be due if the entity were resident in Portuguese territory, in cases in which the territory of residence thereof is not on the list approved by ordinance of the Minister of Finance.

4 – The proof referred to in no. 1 must take place after notification of the taxpayer, made with a minimum advance notice of 30 days."

"Article 88

Autonomous taxation rates

(...)

8 - Expenses corresponding to amounts paid or owed, on any account, to natural or legal persons resident outside Portuguese territory and subject to a clearly more favorable tax regime, as defined in accordance with the Code, are subject to the regime of no. 1 or no. 2, as applicable, with applicable rates, respectively, 35% or 55%, unless the taxpayer can prove that they correspond to operations effectively carried out and do not have an abnormal or exaggerated character. (...)

14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers that present a tax loss in the period to which any of the tax facts referred to in the above numbers related to the exercise of a commercial, industrial or agricultural activity not exempt from IRC relate."

The Hong Kong territory was included, in 2013, in the "list of countries, territories and regions with privileged tax regimes, clearly more favorable", which appears in Ordinance No. 292/2011, of 8 November, which amended Ordinance No. 150/2004, of 13 February.

As referred to, what is at issue in the case sub iudice is the evidence, imposed by both of the above-cited rules, regarding the effectiveness of the operations and whether the operations have a normal character or not exaggerated.

a.

With respect to the first of the points referred to, no doubt whatsoever is justified regarding the occurrence of the operations in question.

Indeed, as emerges from the matter proved, the Claimant had sales of only €200.00 in the year 2012 and moved to a value of €1,544,500.00 relating to 5 real estate properties sold in the year 2013, with 4 of those 5 units, valued at €1,534,900, sold to Chinese clients residing in China.

Furthermore, commercial documentation and correspondence exchanged between the Claimant and the Hong Kong companies relating to those activities were attached, and the evidence was to that effect at the hearing, from those who had direct contact in Portugal with those activities.

Furthermore, the effective payment of the amounts invoiced and accounted for as expenses is not called into question, and it is established that the Claimant calculated and delivered VAT to the State on those amounts.

Finally, as stated in arbitration proceeding 198/2017T, which dealt with a situation analogous to that of the present case:

"Moreover, the fact, which is not disputed, that the Claimant sold a large quantity of real estate to Chinese citizens is indirect but convincing evidence that there was efficient recruitment activity, for without this it is unclear how they could have known that the Claimant had real estate for sale. On the other hand, the fact that the remuneration of B… was only paid precisely if it resulted in the completion of sales ensures that there were no payments that did not have underlying recruitment activity.

Therefore, it is not justified that it is not considered proved that the expenses incurred by the Claimant with payments to B… correspond to operations effectively carried out.

In this context, it appears manifestly unjustified to require, for proof of the effectiveness of the activity developed by B…, the "identification of human resources involved, hours applied and hourly rates per consultant", the "evidence of meetings, surveys"; "knowing whether those who executed it have professional experience", because, in addition to being information that normally will not be accessible to those who contract with a foreign company for recruitment services, there will be little concern for the purchaser when it comes to payments that are made only based on results.

It must be said even that the requirement for "identification of human resources involved" and the determination of their professional experience in an activity with the dimension described is beyond the limits of reasonableness, for, in its literal sense, will encompass the identification of all those who provided the airplane transport services, restaurant and hotel services, taxi drivers, etc."

Thus, it is to be considered proved that the payments correspond to operations effectively carried out.

As to the Respondent's considerations, based on the descriptive text of the invoices in question, which refer, in the period under consideration, to "Marketing" services, beyond having been duly explained by the testimonial evidence produced, it should be noted only that it is now accepted that "For the purposes of IRC, the document proving and justifying costs for the purposes of articles 23, no. 1, and 42, no. 1, subparagraph g), of the CIRC, does not need to assume the essential formalities required for invoices for VAT purposes, since the requirement of documentary evidence does not confuse or exhaust itself in the requirement of an invoice, with only a written document, in principle external and with mention of the fundamental characteristics of the operation, being sufficient, since, unlike what happens with VAT, for the purposes of IRC, the justification of the cost embodies a probative formality and, therefore, replaceable by any other kind of evidence."[2].

As to the non-existence of evidence that would allow assessment of the actual value of the advantages gained from entering into the contract with the two entities based in Hong Kong, it is believed that the same is evident, both from the evolution of the Claimant's business volume before, during and after the existence of the commercial relationship with those companies (essentially with G…), both from the weight of the clientele residing in China during the term of that same relationship, and from the evolution of the price of the fractions transacted by the Claimant, of which the invoicing thereof gives account.

b.

With respect to the normal character and non-exaggerated nature of the operations in question, it is also believed that sufficient evidence of this nature has been produced.

Indeed, whether having regard to the scale of the operation of recruiting, transporting and accompanying clients for real estate valued in hundreds of thousands of euros, from China to Portugal, overcoming the geographically and culturally notoriously existing gap, or considering the publicly known state of the real estate sector in Portugal in the years 2012 and thereafter, or considering the appreciation of real estate that occurred, and which the documentation collected by the Tax Authority itself denotes, the order of values of the commissions that the Claimant paid will be understood.

Furthermore, in the case at issue, relating to the year 2013, the commissions in question amounted to 15%, and it is proved that the Claimant paid a commission of 18% to a company based in Macau, with the corresponding expense being accepted by the Tax Authority.

Therefore, there are no doubts whatsoever that the amounts in question correspond, in their context, to normal operations and do not have an exaggerated character.

Restoring what was stated in the aforementioned arbitral judgment handed down in proceeding 198/2017T:

"In order to decide whether or not there is exaggeration, one cannot take as terms of comparison the percentages of commissions that the Tax and Customs Authority says are usually charged by real estate companies, between 3% and 5%, since that carried out by B… is not limited to what is normally carried out in real estate mediation, which does not involve expenses of the order of those proved to be borne by B… (payment of trips, accommodation, meals, transport, interpreters, etc.).

On the other hand, the assessment of the requirement of non-exaggeration should be made taking into account the situation of the taxpayer, seeking to determine whether the payment should be considered excessive, from its perspective, in the context in which it has to decide to pay for the services.

From this perspective, the payment will be exaggerated when it is demonstrated that the taxpayer could obtain what the same service would cost at a lower price

It follows from the evidence produced that the Claimant intended to sell the real estate as quickly as possible, since it was foreseen that the process of construction and sale of the real estate would be completed by 2010, five years after the beginning of the construction process, and still had not managed to sell them by 2013 and 2014, due to the situation of economic and financial crisis affecting Portugal.

The evidence produced is also to the effect that the Claimant could not obtain customer recruitment at payments of lower commissions, either from B…, which would not accept them, nor from other service providers for recruitment, since none of them provided it with clients who would pay the selling prices that the Claimant intended to obtain for itself.

In these circumstances, the payment cannot be considered exaggerated, as it is justified by the need to obtain recruitment services and there being no alternative at a lower price.

The reasonableness of the payments made to B… is further reinforced by the fact that the Claimant is not affected by the payments it made to it, since it only paid it when the sale of real estate was completed and what it paid to B… added to the selling price that the Claimant itself set and intended to obtain for itself.

By the foregoing, it is concluded that the Claimant proved that the payments made to B… were not abnormal nor exaggerated."

As stated in the quoted judgment, it is believed that the assessment of the normal character and non-exaggerated nature of the operations should be made with reference to the specific case, taking into account the specific situation in which such operations were carried out, and one cannot formulate "tables" or a priori formulas that mechanically exclude operations from the scope of reasonableness, or refer them to the level of exaggeration.

In the case, the commissions in question arise in the scenario of acute economic crisis, in which the market was practically at a standstill, and in which the services remunerated by those commissions provide significant added value to the product sold.

On the other hand, with the service paid only based on results, there is increased risk for the service provider, which must support – notoriously – substantial costs to bring clients "from the other side of the world", and additional security for the purchaser of the services, which only constitutes the obligation to pay, having secured the return arising from the completion of its sales, and it should be noted further that the activity in question allowed accommodation of the additional cost, assuring a profit margin for the seller.

Finally, in the case there is detected neither is substantiated by the Tax Authority any concrete indication of fraud or tax evasion.

Thus, and in light of the foregoing, it is believed that, in the part now at issue, the tax act subject to the present arbitration action is subject to error in the factual presuppositions, and consequent error of law, and should therefore be annulled, and the arbitration petition also proceeds in this respect.

The assessment of compensatory interest has as its presupposition the assessment of tax whose annulment determines the consequent annulment thereof.

In view of the complete success of the arbitration petition, based on the grounds exposed, the examination of the remaining questions placed by the Claimant is rendered moot.

C. DECISION

Therefore, this Arbitral Tribunal hereby decides to judge the arbitration petition filed to be entirely upheld and, in consequence:

• Annul the IRC assessment No. 2017…, relating to the 2013 tax year, and respective assessment of compensatory interest No. 2017…, as well as the demonstration of account settlement No. 2017…, in the total amount of €205,616.91;

• Condemn the Respondent in the costs of the proceedings, in the amount determined below.

D. Value of the Proceedings

The value of the proceedings is fixed at €205,616.91, in accordance with article 97-A, no. 1, subparagraph a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €4,284.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the petition was entirely upheld, in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.

Notify accordingly.

Lisbon, 12 April 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Carla Castelo Trindade)

The Arbitrator Member

(Elísio Brandão)

[1] Available at www.dgsi.pt, as is the remaining jurisprudence cited without mention of source.

[2] Ac. of the SAT of 05-07-2012, handed down in proceeding 0658/11, available at www.dgsi.pt.