IRC Tax Deductibility of Expenses Without Invoices and Transactions With Favorable Tax Regimes (RETGS) - CAAD 369/2017-T

Arbitration Decision

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. Ricardo Jorge Rodrigues Pereira and Dr. Cristiana Maria Leitão Campos, appointed by the Deontological Council of the Administrative Arbitration Centre to constitute the Arbitral Tribunal, constituted on 21-08-2017, agree as follows:

1. Report

A…, S.A., NIPC…, with headquarters at Avenida …, …, …-… Lisbon, (hereinafter referred to as "A…" or "Claimant"), has, pursuant to Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT), submitted a request for arbitration pronouncement in which the TAX AND CUSTOMS AUTHORITY is requested.

The Claimant requests the annulment of the Corporate Income Tax (IRC) assessment No. 2017…, relating to the taxation period of 2014, and the respective Account Reconciliation Statements identified with No. 2017… and Compensatory and Default Interest Assessment, identified with No. 2017….

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 12-06-2017.

Pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the assignment within the applicable period.

On 03-08-2017 the parties were duly notified of this appointment and did not express any will to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11, paragraph 1, subparagraphs a) and b), of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012, the Arbitral Tribunal was constituted on 21-08-2017.

The Tax and Customs Authority submitted a response in which it defended the lack of merit of the claim.

Furthermore, the Tax and Customs Authority argued that the value of the dispute should be €3,364,557.96, indicated as "amount payable" in the "account reconciliation statement" and not €3,367,870.98, indicated by the Claimant as the value of the dispute and which is indicated as "amount payable" in the assessment.

On 30-11-2017, a hearing was held for the production of testimonial evidence, in which it was decided that the proceedings would continue with written submissions.

The Parties submitted written arguments.

With the written arguments, the Claimant submitted four documents and formulated additional requests for indemnity interest and compensation for undue guarantees.

The Tax and Customs Authority, in its written arguments, opposed the attachment of documents Nos. 1 and 2 together with the Claimant's written arguments, and it was decided to remove them by order of 02-02-2018.

The Arbitral Tribunal was regularly constituted and is competent.

The Parties are duly represented, possess legal personality and capacity and are legitimate (Articles 4 and 10, paragraph 2, of the same legislation and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no exceptions were raised.

2. Factual Matters

The following facts are deemed proven:

• The Claimant commenced business on 29-11-2012 and is registered in the activity of Purchase and Sale of Real Estate, with Economic Activity Code (CAE) 68100, and was classified, in the year 2014, for IRC purposes, under the general taxation system;

• Inspection procedures were carried out on the Claimant, relating to the financial years 2013 and 2014, authorized by Service Orders Nos. OI2016… and OI2016..., respectively;

• Regarding the aforementioned inspection procedures, the Tax Inspection Report was prepared, which appears in document No. 54 attached with the arbitration request, the content of which is hereby deemed reproduced, in which the following is referred to, among other matters:

III - DESCRIPTION OF FACTS AND GROUNDS FOR ARITHMETIC CORRECTIONS

III.1 - Corrections in Corporate Income Tax – Taxable Income

III.1.1 - Non-Deductible Expenses – Cost of Goods Sold (COGS)

On 21/11/2013 company A… acquired by public deed from company B… SA - In liquidation, with NIF…, 213 real estate properties located in the parish of … (current land registry articles …, … and … of the parish …), for the amount of €1,412,564.93 (pages 1 to 28 of Annex), which was recorded in the Goods accounts …-Lot 1.19.01, …-Lot 1.19.02 and …-Lot 1.19.03.

On the same date, a Credit Assignment Contract No. RNE/… __2013 was executed between A… and C… SA, in the following terms (pages 29 to 43 of Annex):

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

a. Credit of €1,427,597.50 against the Real Estate Company D… SA, with NIF…;

b. Credit of €4,102,520.05 against company E… SA, with NIF….

2 - The aforementioned credits were claimed by Bank C… in the insolvency proceedings of the debtor companies, case …/12…TYLSB in which the Real Estate Company D… SA is insolvent and case …/12… TYLSB in which company E… SA is insolvent, both of the … Court of the Commercial Court of Lisbon, and the aforementioned credits were claimed in full (Item B);

3 - 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, against the Real Estate Companies D… SA and E… SA, respectively, in total of €5,530,117.55 (first clause);

4 - The assignment is made at the global price equal to the total value of the credits referred to in the first clause, which A… paid to Bank C… on the present date (second clause);

5 - Bank C… expressly guarantees to A… the existence and enforceability of the credits subject to the assignment, but does not guarantee the solvency of the respective debtors, nor the payment of the assigned credit (third clause);

6 - It shall be incumbent upon A… to notify the debtors of the assignment in the terms and for the purposes provided by Article 583 of the Civil Code (fourth clause);

Article 583 of the Civil Code provides that "the assignment produces effects in relation to the debtor from the moment it is notified to him, even extrajudicially, or from the moment he accepts it."

7 - Bank C… shall deliver to A…, upon written request, the documents which are in its possession which are necessary to prove the credits subject to this assignment (sixth clause).

A - Accounting for the Credit Assignment Contract

In the years 2013 and 2014, amounts of €852,706.65 and €10,158,139.01, respectively, were recognized as expenses under Cost of Goods Sold and Consumed, account 6111, as shown in Table 4 referring to the Statement of Results and in Table 0519-A of Annex A of the annual declaration, which were determined as follows:

Table A was prepared, which appears on pages 44 to 47 of the Annex, in which the acquired fractions, the purchase value and respective purchase expenses allocated to each fraction are itemized, as well as the calculation of the values in Table 6.

In the aforementioned Table A it is noted that the declared purchases amount for the year 2013 of €24,013,184.48 corresponds to the sum of the value of acquisition of the real estate and the values considered as purchase expenses, thus itemized:

In this way, the amount of €5,530,117.55 relating to the Credit Assignment Contract was considered as Purchase Expenses and consequently was accounted for under the inventories account 3211, through the Internal Operations Document 110.002 as can be verified in this document (pages 48 to 53 of Annex).

From the analysis of document 110.002 and the value of acquisition of the real estate, it is verified that the amount of the Credit Assignment was allocated to the 213 real estate properties acquired, proportionally to the acquisition value of each real estate property, as can be verified through the data of Table A (column 9), in which the 213 real estate properties acquired, the corresponding deed acquisition value, the purchase expenses allocated and the sale date are itemized.

Regarding this matter, during the inspection action company A… was notified to:

• Indicate the underlying reason for the execution of the contract, that is, indicate the advantages obtained or to be obtained by company A… (item 1.1 of the notification);

• Present the notification to debtors E… SA and Real Estate Company D… SA, provided for in the Fourth Clause of the Contract (item 1.2 of the notification);

• Justify the accounting of the Credit Assignment Contract in inventories and not in Accounts Receivable (item 1.4 of the notification).

The notification appears on pages 54 to 59 of the Annex.

Regarding item 1.1, the company stated the following:

"As was 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 (pages 66 to 71 of the Annex), it was understood that, although the credits were difficult to collect, 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 goods to be acquired would be superior to its acquisition value plus the credits.

It was therefore anticipated that the transaction would bring good profitability to the company, even accounting for the risks inherent in the collection of the aforementioned credits. Furthermore, it is a prerequisite of the transaction that the Bank would provide financing to the company for the acquisition of all assets. That is, the Credit Assignment was an imposition of the financial institution (Bank C…), without which the acquisition of the real estate could not be carried out" (page 60 of Annex).

Regarding item 1.2, regarding the provisions of the fourth clause of the Credit Assignment contract, 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 Real Estate D… (pages 72 to 75 of Annex), in which the following appears in four paragraphs:

§1 – A… hereby notifies Your Excellency pursuant to Article 583, No. 1 of the Civil Code, that you have been partially assigned the credit belonging to your creditor Bank C… Portugal;

§2 - The credit was assigned at the global value of €4,102,520.05 and corresponds to the sum of the amounts of capital owed on the date of the declaration of insolvency which were claimed by Bank C… within the proceedings …/12… TYLSB (company E…);

§2 - The credit was assigned at the global value of €1,427,597.50, relating to the amount of capital owed on the date of the declaration of insolvency and which corresponds to part of the amount claimed by Bank C… within the proceedings …/12… TYLSB (Real Estate Company D…);

§3 - The Credit Assignment made hereby has immediate effects, wherefore Your Excellencies should recognize the assignee A…, SA as creditor of the partial amount previously recognized to Bank C… for all legal purposes;

§4 - We further inform you that on this date we will submit a claim for accreditation of the assignee, as an annex to the insolvency proceedings identified above.

Regarding item 1.4, regarding the justification of the accounting of the Credit Assignment in inventories, the company emphasizes that the Credit Assignment was an imposition of Bank C…, without which the acquisition of the real estate could not be carried out, and that from the beginning the final outcome of the credits was known, that they would never be recoverable, and is therefore an additional cost of the main business which was the acquisition of the real estate.

It further states that according to No. 2 of Article 26 of the IRC Code and paragraph 10 of the Accounting and Financial Reporting Standard (NCRF) 18, other expenses directly attributable to them may be included in the cost of acquisition in accordance with the specific applicable accounting standards, and that the cost of inventories must include all costs incurred.

In summary, it states that the acquisition of the real estate could only be realized with the simultaneous acquisition of the two credits assigned, which, not being recoverable, translate into a true additional acquisition cost, as provided for in the applicable accounting and tax standards (pages 60 and 61 of Annex).

B - Assessment

• The paragraphs 3 and 4 of the notifications sent by A… on 13-02-2014 and 10-04-2014 to companies E… SA and Real Estate D… SA, respectively, state that these companies should recognize the assignee A… as creditor of the amounts referred to in paragraph 2 and that it will submit a claim for accreditation of the assignee, as an annex to the insolvency proceedings of the debtor companies;

• From consultation on this date to the CITIUS Portal of the Ministry of Justice, point of access where information about proceedings existing in the Courts can be found, it is noted that:

• In a document prepared on 07/04/2014, relating to Publicity of Resolution in the insolvency proceedings relating to case …/12… TYLSB in which company E… is insolvent, all interested parties are notified that in the aforementioned proceedings, by decision of the Creditors' Assembly, an Insolvency Plan was approved (page 76 of Annex);

• In a document prepared on 03/06/2014 it appears that in the Commercial Court of Lisbon, … Court, a decision was made to close the proceedings …/12… TYLSB in which the Real Estate Company D… is insolvent, having been determined by the finality of the decision approving the Insolvency Plan (page 77 of Annex).

The effects of the closure are also contained in this document, being namely:

• All creditors of the insolvency may exercise their rights against the debtor;

• Creditors of the estate may claim from the debtor their rights not satisfied.

C - Conclusion

In accordance with the contents of paragraphs 1 to 4 of the notifications sent by A… to the debtor companies and in accordance with the information contained in the documents extracted from the "CITIUS" Portal, it is concluded that there is no basis for the acquisition of the credits to have been considered as a purchase cost, taking into account that:

• A… notified the debtor companies that they should recognize it as creditor (paragraph 3 of the notifications) and that it will submit a claim for accreditation of the assignee, as an annex to the insolvency proceedings (paragraph 4 of the notifications);

• The insolvency proceedings are ongoing, in both an insolvency plan was approved.

Thus the Balance Sheets of 2013 and 2014 should reflect the credits as a financial asset and not in inventories.

These facts contradict the reasoning of A…, for not recognizing the credit as a financial asset, expressed in the response to items 1.1 and 1.4 of the notification, that from the beginning the final outcome of the credits was known, that they would never be recoverable, or that not being recoverable, they translate into a true additional acquisition cost.

Based on the foregoing, on 31-12-2013, being company A… creditor of the total amount of €5,530,117.55, it improperly registered in inventories the amount of those credits, which should have been recognized as Financial Assets under the heading Other Accounts Receivable.

Since €5,530,117.55 was recorded in Merchandise Purchases, it influenced the value determined for Cost of Goods Sold and Consumed (CGSC), in favor of A…, given its method of determination, in which:

CGSC = Opening Inventories (OI) + Purchases - Closing Inventories (CI)

D - Determination of Amounts Improperly Recognized as Expenses under Cost of Goods Sold and Consumed in the Years 2013 and 2014

The amounts improperly recognized as expenses under Cost of Goods Sold and Consumed in the years 2013 and 2014, account 6111, are determined as follows:

As previously mentioned, the amount of the Credit Assignment of €5,530,117.55 was allocated to the 213 real estate properties acquired, proportionally to the acquisition value of each real estate property, as well as bank expenses of €20,000.00 and notarial expenses of €50,502.00, also divided in the same manner, as can be seen from the data in Table A (columns 8, 9 and 10) which appears on pages 44 to 47 of the Annex.

In column 12 of Table A, the total amount allocated to each fraction appears (acquisition value, bank expenses, Credit Assignment Contract, notarial expenses and furniture).

That Table also shows the sale date of each real estate property, and it can be verified that in the year 2013, 5 real estate properties were sold, identified in rows 1 to 5, and in the year 2014, 73 real estate properties were sold, identified in rows 6 to 78.

Thus, knowing the amount allocated to each real estate property and taking into account the real estate properties sold in each of the financial years, the Cost of Real Estate Sold in each financial year, declared and corrected, is determined in that Table, which are summarized in Table 8.

The corrected value of the Cost of Real Estate Sold is determined by disregarding the values relating to the Credit Assignment Contract, as can be seen in Table 8.

The differentials of €196,374.12 and €2,281,586.41 calculated in the years 2013 and 2014, respectively, between the Cost of Real Estate Sold declared and corrected, determined in Table 8, as can be seen in column 9 of Table A, correspond to the sum of the amounts relating to the Credit Assignment allocated to the fractions sold, which were improperly recognized as expenses under Cost of Goods Sold and Consumed.

Also from the application of the formula for determining the Cost of Goods Sold and Consumed and based on the data in Table A, these amounts are determined in Table 9.

Article 23, No. 1 of the CIRC establishes: "expenses are deemed to be those which are proven to be indispensable for the realization of income subject to tax or for the maintenance of the source of production" in the wording in force in 2013 or "for the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to IRC" in the wording in force in 2014.

The acquisition of Credits, not being expenses but a right to receive a credit, that is, a financial asset, is not deductible for tax purposes, constituting a violation of Article 23, No. 1 of the CIRC.

Thus the amounts of €196,374.12 and €2,281,586.41 recognized as expenses under Cost of Goods Sold in the years 2013 and 2014, respectively, which appear in Tables 8 and 9, shall be added back to Net Result for determination of corrected Taxable Income.

III.1.2 - Non-Deductible Expenses – Supplies and External Services

III.1.2.1 - Commissions to Non-Residents and Marketing Documented with Invoices Issued by Companies Resident in Hong Kong

A - Description of Facts

In the years 2013 and 2014, A… 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 2003 and €25,490,046.00 relating to 73 real estate properties sold in the year 2014.

In Table B of the Annex, pages 78 and 79, the fractions sold, sale value, date and respective marketing and commission charges allocated to each fraction are identified.

The purchasers of 76 real estate properties are non-resident citizens from the People's Republic of China, and regarding 2 real estate properties the purchasers are national companies.

In the years under analysis, invoices were issued to company A… by companies F… Co. Limited and G… Limited, both resident in Hong Kong, referring to services provided relating to the sale of real estate properties.

The invoices are itemized in Table C on page 80 of the Annex, copies of which appear on pages 81 to 145 of the Annex.

Company G…, issued only one invoice in the year 2014, in the amount of €44,160.00, with the remaining invoices issued by company F… Co. Limited in the total of €3,695,072.76.

During the inspection action, Contracts executed with these entities and Amendments to the Contracts were presented, copies of which appear on pages 146 to 163 of the Annex.

The description of services contained in the invoices issued by company F… Co. Limited was transcribed to Table 10, in which the translation to Portuguese also appears.

The charges debited in the invoices were recognized as expenses under Supplies and External Services, account 522101-Marketing in the year 2013 and account 62253-Commissions to Non-Residents in the year 2014, as shown in the notes (a) and (b) of Table C.

It is noted that according to the localization rules defined in subparagraph a) of No. 6 of Article 6 of the VAT Code, the provision of services made to a taxable person referred to in No. 5 of Article 2 of the VAT Code are taxable in national territory, wherefore A… (proceeded to charge and remit to the State Treasury the corresponding VAT at the rate in force of 23% regarding those invoices, for the amounts of €52,954.05 and €807,069.48, respectively in the years 2013 and 2014.

Given that in the financial years 2013 and 2014 A… was exempt from VAT by virtue of the provisions of No. 30 of Article 9 of the VAT Code, the right to deduction of the tax is not granted, as established by Article 20 of the same Code.

Since the VAT charged is not deductible, it is deductible for tax purposes under IRC, wherefore it was recognized as expenses in accounts 622101-Marketing and 62253-Commissions to Non-Residents, accounts where the invoices associated were recorded.

With the information contained in the invoices in question, namely the name of the purchaser, it was possible to associate each invoice to the fraction(s) to which it relates, wherefore in column 8 of Table C the fraction to which each invoice relates is indicated.

Based on the data in Table C (commission value and associated fraction), the amount of the commission debited regarding each fraction sold was indicated in column 7 of Table B relating to the itemization of fractions sold, determining in column 8 of the same Table the percentage of the charge regarding the sale value, which is in accordance with the conditions contained in the executed contracts.

It is thus verified that:

• In the year 2013, the amount debited as marketing corresponds to 15% of the sale value of the associated fraction;

• In the year 2014:

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

• In 62 fractions the amount debited by company F… Co. Limited varies between 19.25% and 22% of the sale value of the associated fraction;

• The amount debited by company G… Limited regarding one fraction corresponds to 12% of the associated sale value

B - Evidence Referred to in the IRC Code in No. 1 of Article 65 (applicable to the year 2013) and in No. 1 subparagraph r) of Article 23-A (applicable to the year 2014)

Article 65, No. 1 of the CIRC (applicable to the year 2013) and Article 23-A, No. 1, subparagraph r) (applicable to the year 2014) establish that amounts paid or due, to any title, to natural or legal persons resident outside Portuguese territory and therein subject to a clearly more favorable tax regime are not deductible for purposes of determining taxable profit, save if the taxpayer can prove that such charges correspond to effectively realized operations and do not have an abnormal character or an exaggerated amount.

A legal person is deemed to be subject to a clearly more favorable tax regime when its territory of residence is listed in the approval ordinance by the Minister of Finance (No. 2 of Article 65 applicable in 2013 and No. 1 subparagraph r) of Article 23-A of the CIRC, applicable in 2014).

In the specific case of Hong Kong, it appears in Ordinance 150/2004, amended by Ordinance No. 292/2011, applicable in the financial years under analysis.

Article 65, No. 4 of the CIRC (applicable to the year 2013) establishes that "the evidence referred to in No. 1 must take place after notification of the taxpayer, effected with a minimum prior notice of 30 days," and Article 23-A, No. 8 (applicable to the year 2014) establishes that "the Tax and Customs Authority notifies the taxpayer for production of the evidence referred to in subparagraph r) of No. 1, and for this purpose, a period not less than 30 days shall be set."

For collection of the evidence referred to in the CIRC in Article 65, No. 1 (applicable to the year 2013) and in Article 23-A, No. 1, subparagraph r) (applicable to the year 2014) for purposes of accepting the tax deductibility of the charges debited by the companies resident in Hong Kong, itemized in Table C in the amount of €3,739,232.76 (€230,235.00 + €3,508,997.76), in compliance with No. 4 of Article 65 and No. 8 of Article 23-A mentioned above, A… represented by its H…, referred to in II.3.1, was notified on 20-06-2016 for on 20-07-2016:

• Indicate which services were provided to A… by companies F… Co. Limited and G… Limited and present documents/elements that could be considered as evidence of the effective realization of the services invoiced, so as to permit concluding that the services influenced the sale of the real estate and that they are not of exaggerated amounts (item 2.1 of the notification), pages 55 and 56 of Annex.

In response it was stated the following:

"Companies F… Co. Limited and G… Limited are companies governed by Chinese law that engage in the provision of services to Chinese citizens aimed at obtaining, by them, the authorization of residence in countries of the European Union, as is the case of Portugal. These companies have developed activities to promote the Portuguese "Golden Visa" program throughout Chinese territory (e.g., Beijing, Shanghai, as can be seen from the origin of the various clients that were recruited and introduced by these companies to [the Claimant] for acquisition of its real estate - cfr. doc. No. 72, through seminars, conferences, television advertisements and other promotional materials, where they highlighted the advantages and benefits of investing/living in Portugal and provided detailed information about real estate in Portugal. In addition to this promotional activity, these companies organize all the logistics associated with the travel of potential investors to Portugal, such as transportation from China to Portugal, accommodation in Portugal, visits to the real estate and obtaining a tourism visa for entry and stay in Portugal from the Embassy and consulates Portuguese in China. Already in Portuguese territory, these companies assisted the clients in practically the entire investment process, arranging translators, lawyers and drivers for them, accompanying them and assisting them with the SEF, the Finance authorities and in opening accounts in banks, as well as in the process of searching, selecting and acquiring real estate in Portugal. These services not only allowed [the Claimant] access to these clients, which would otherwise be impossible, given the linguistic and cultural differences and the absence of know-how regarding this type of clients and market, but were decisive for the sale of [the Claimant]'s real estate (we attach copies of the invoices issued by these companies, reservation forms and receipts of payment of the contract deposit, as doc. No. 72. Just to get 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 transactions carried out, since [the Claimant] stopped 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) [the Claimant] has not made any more sales to citizens from the People's Republic of China. As for the amounts charged by these companies, it should be recalled that the national real estate sector was stagnant for quite some time and that companies dedicated to this sector, as is the case with [the Claimant], were in a very difficult situation, so that when this Chinese market emerged [the Claimant] was not in a position to set the rules and as will be understood, wanted to take advantage of this opportunity. Furthermore, as has been said, [the Claimant] 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 makes them, naturally, 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 necessary logistics, the costs with promotion and marketing, could not be the same as that practiced in the national market, for example by "I…," which, in addition to the investment and effort being much less, most of the time only has to take the investor/client from its store to the promoter.

In sum, this was the cost imposed by these companies, who knew they were indispensable to Portuguese promoters, and the fact is that these services were decisive for the sales made by [the Claimant]" (pages 61 to 63 of Annex).

Document No. 7 referred to by the taxpayer contains copies of the invoices in question and associated with each invoice are:

• A document called "Property Purchase Confirmation Form," which contains data regarding the purchaser, the seller and the fraction, namely the name of the purchaser and seller, reservation amount and respective date, date of the promise of sale contract, identification of the fraction and address and respective characteristics, sale value and method of payment, IMT and Stamp Duty amount.

On pages 90 and 91 of the Annex appears the form relating to invoice No. 162, by way of example;

• In some cases proof of payment of the reservation amount.

By way of example the document appearing on page 89 of the Annex is attached;

• In most cases, copy of the purchaser's passport.

C - ASSESSMENT

Pursuant to the aforementioned articles of the CIRC, it is incumbent upon the taxpayer to prove that the charges, paid or due to natural or legal persons resident outside Portuguese territory and therein subject to a clearly more favorable tax regime, correspond to effectively realized operations and do not have an abnormal character or an exaggerated amount, conditions necessary for such charges to be deductible for purposes of determining taxable profit.

As mentioned above, the taxpayer was notified to indicate which services were provided to A… by companies F… Co. Limited and G… Limited and to present documents/elements that could be considered as evidence of the effective realization of the services invoiced, so as to permit concluding that the services influenced the sale of the real estate.

In response, it stated that those companies are governed by Chinese law that engage in the provision of services to Chinese citizens aimed at obtaining, by them, the authorization of residence in countries of the European Union, as is the case of Portugal, and have developed activities to promote the Portuguese "Golden Visa" program throughout Chinese territory.

Regarding the services provided to A…, it stated that:

• They recruited clients of Chinese origin for the acquisition of its real estate, through seminars, conferences, television advertisements and other promotional materials, where they highlighted the advantages and benefits of investing/living in Portugal;

• They provided detailed information about real estate in Portugal;

• They organized all the logistics associated with the travel of potential investors to Portugal, such as transportation from China to Portugal, accommodation in Portugal, visits to the real estate and obtaining a tourism visa for entry to Portugal from the Embassy and consulates Portuguese in China; and

• In Portuguese territory, those companies assisted the clients in the entire investment process, arranging translators, lawyers and drivers for them, accompanying them and assisting them with the SEF, the Finance authorities and in opening accounts in banks, as well as in the process of searching, selecting and acquiring real estate in Portugal;

Regarding documentary proof of the effective realization of the services provided, it presented:

• The invoices in question;

• A form containing data about the purchaser, the seller and the fraction (referred to by the taxpayer as a Reservation Form);

• Proof of payment of the reservation regarding some real estate properties;

• Copy of the passport of most of the purchasers.

The documentary evidence presented does not clearly demonstrate the realization of any of the services that A… stated were provided by the companies in question, whose description appears in the invoices, transcribed to Table 10, to which reference is made.

On the other hand, no evidence was presented of the intervention of the cited companies:

– In the recruitment of clients through the holding of seminars, conferences, television advertisements or use of other promotional materials;

• In the travel of purchasers to Portugal;

• In air transportation from China to Portugal;

• In accommodation in Portugal;

• In obtaining tourism visas for entry to Portugal from the Embassy and Portuguese consulates and it was not demonstrated that these Visas exist.

• In the provision of translator, lawyer and driver services in Portuguese territory;

• In the realization of the other services described in the invoices in question.

Based on the foregoing, it is concluded that there is no evidence of the effective realization of the services billed and no evidence that they influenced the sale of the real estate.

Regarding proof that the billed charges do not have an abnormal character or an exaggerated amount, in response to the notification, it stated:

• Given that the national real estate sector was stagnant for quite some time, the company was in a difficult situation and that when the Chinese market emerged it was not in a position to set the rules;

• That the commission policy practiced by those 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 necessary logistics, the costs with promotion and marketing, could not be the same as that practiced in the national market;

• That the cost was imposed by these companies, who knew they were indispensable to Portuguese promoters and that these services were decisive for the sales made by the company.

A… stated that the commission policy of those companies, could not be the same as that practiced in the national market, wherefore it admits that the charges billed are of an amount superior to that which would be practiced in the national market.

As determined in column 8 of Table B, the charges debited by company F… Co. Limited vary between 19.25% and 22% of the sale value of the real estate properties.

The non-existence of proof of the effective realization of the services billed by the companies in question, demonstrated above, has as a consequence the impossibility of A… proving that those charges are not in exaggerated amounts, limiting itself to stating that it was not in a position to set the rules, that given the resources used, the necessary logistics, the costs with promotion and marketing, the commission policy could not be the same as that practiced in the national market, and that those costs were imposed by the companies in question.

D - CONCLUSION

Pursuant to the provisions of the aforementioned articles of the CIRC, Article 65, No. 1, applicable in 2013 and No. 1, subparagraph r) of Article 23-A, applicable to the financial year 2014, it is incumbent upon the taxpayer cumulatively to fulfill two conditions:

• That the charges debited by entities resident outside Portuguese territory and therein subject to a more favorable tax regime correspond to effectively realized operations;

• That those charges do not have an abnormal character or an exaggerated amount.

A… did not prove the effective realization of the services billed nor did it prove that the charges are not of an exaggerated amount.

Based on the foregoing, not having A… presented the evidence referred to in the IRC Code, Article 65, No. 1 in 2013 and in Article 23-A, No. 1, r) in 2014, the charges in question recognized as expenses are not deductible for purposes of determining the taxable profit of the years 2013 and 2014 in the amounts of €230,235.00 and €3,508,997.76, respectively, thus itemized by issuing entity:

III.1.2.2 - Commissions to Non-Residents Without Documentary Support

On 31-12-2014 it was accounted for and recognized as expenses under account 62251-Commissions National Market, the internal document of Miscellaneous Operations 60/120.184 in the amount of €955,700.78, which includes VAT in the amount of €178,708.28, with the description "Commissions F… 2014" (pages 164 to 168 of Annex).

That account had as a counterpart account 272219 - Other Creditors for accruals of expenses, whose extract appears on pages 169 to 170 of the Annex.

Having that expense as documentary support an internal document, the company was notified to present the documents that support that entry (item 3 of the Notification, page 57 of Annex).

In response the company stated the following:

• In the financial year 2014, a set of real estate properties was sold with intermediation by the respective promoters and until the date of closure of the accounts for the financial year 2014, the invoices for the intermediation commissions from company F… Co. Limited had not been received;

• In accordance with the economic accrual regime and according to Article 18, No. 1 of the CIRC, the values of the missing commissions relating to sales already made were estimated and recognized as expenses;

• Given the non-deductibility of VAT in this activity sector, the value of the corresponding VAT was also estimated and recognized as expenses that would be due upon accounting for the corresponding invoices (pages 63 and 64 of Annex)

Regarding the arguments presented, the following is stated:

• Account 2722 - Accruals of Expenses is credited as a counterpart to the debit to be made to the expense accounts to be recognized in the period to which they relate, in cases where the respective supporting documentation is issued in the following period(s).

In the case in question there is no supporting documentation for that accrual of expenses, the amount was estimated, given that until the date of closure of the accounts for the financial year 2014, the invoices for the intermediation commissions from company F… Co. Limited had not been received.

Not having presented the invoices in question, in response to the notification, it is considered that the expense recognized under account 62251-Commissions, in the amount of €776,992.50, is not documentarily proven, wherefore it is not deductible for tax purposes pursuant to subparagraph c) of No. 1 of Article 23-A of the CIRC, which establishes that expenses whose documentation does not comply with the provisions of Nos. 3 and 4 of Article 23 are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the taxation period.

Nos. 3 and 4 of Article 23 of the CIRC establish that:

3 - Deductible expenses pursuant to the preceding numbers must be documentarily proven, regardless of the nature or support of the documents used for such purpose.

4 - In the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, the supporting document referred to in the preceding number must contain, at a minimum, the following elements:

a) Name or legal designation of the goods supplier or service provider and of the purchaser or recipient;

b) Tax identification numbers of the goods supplier or service provider and of the purchaser or recipient, always when these are entities with residence or permanent establishment in national territory;

c) Quantity and usual designation of the goods acquired or of the services provided;

d) Value of the consideration, namely the price;

e) Date on which the goods were acquired or on which the services were rendered.

Regarding the value of the estimated VAT, as stated by A…, given the non-deductibility of VAT, the value of the estimated VAT was recognized as expenses in the amount of €178,708.28 corresponding to the estimated commissions in the amount of €776,992.50.

Taking into account that in the financial years 2013 and 2014 A… was exempt from VAT by virtue of the provisions of Article 9 of the VAT Code:

• The right to deduction of the tax is not granted, as established by Article 20 of the same Code;

• It is not required to file the periodic declaration pursuant to Article 41;

• The VAT due pursuant to subparagraph a) of No. 6 of Article 6 of the VAT Code is remitted to the State through the Model P2 Payment Form within the period established in No. 3 of Article 27 of the VAT Code.

The estimated VAT, under appraisal, to date does not appear in any Model P2 Payment Form, wherefore it was not remitted to the State, as confirmed by A… when stating that the estimated VAT becomes due upon accounting for the missing invoices.

Given the non-deductibility of VAT, the VAT due, pursuant to subparagraph a) of No. 6 of Article 6 of the VAT Code could be recognized as an expense, but only at the moment it becomes due, that is, at the moment of accounting for the invoices in question and the consequent payment to the State.

Thus, similar to the estimated value of the commissions, it is considered that the corresponding estimated VAT in the amount of €178,708.28, recognized as an expense under account 62251-Commissions, is not documentarily proven, wherefore it is not deductible for tax purposes pursuant to subparagraph c) of No. 1 of Article 23-A of the CIRC.

Based on the grounds described above, both the estimated value of the commissions of €776,992.50 and the value of the corresponding estimated VAT of €178,708.28, in total of €955,700.78, recognized as expenses in account 62251 - Commissions, are considered not documentarily proven, wherefore they are not deductible for tax purposes pursuant to subparagraph c) of No. 1 of Article 23-A of the CIRC.

III.2 - Corrections in Corporate Income Tax – Autonomous Taxation

According to Nos. 1 and 8 of Article 88 of the CIRC, applicable to the years 2013 and 2014, amounts paid or due to legal persons resident outside Portuguese territory and therein subject to a clearly more favorable tax regime are taxed autonomously at the rate of 35%, save if the taxpayer can prove that they correspond to effectively realized operations and do not have an abnormal character or an exaggerated amount.

Pursuant to No. 14 of the same article, the rate of 35% is increased by 10% for taxpayers that present a tax loss in the taxation period to which any of the tax facts referred to in the preceding numbers pertain.

As described in Chapter III.1.2.1, the taxpayer did not present proof that the charges billed by companies F… Co. Limited and G… Limited correspond to effectively realized operations and do not have an abnormal character or an exaggerated amount, wherefore those expenses are subject to autonomous taxation in the years 2013 and 2014, pursuant to the provisions of Nos. 1 and 8 of Article 88 of the IRC Code.

Regarding the year 2013, given that it presents a tax loss, pursuant to Article 88, No. 14, the autonomous taxation rate is 45% (35% + 10%).

From the application of the rates of 45% in the year 2013 and 35% in the year 2014, the autonomous taxation values are €103,605.75 in 2013 and €1,228,149.22 in 2014, determined in Table 12:

III.3 - Summary of Corrections and Determination of Corrected Taxable Income

• The corrections in Corporate Income Tax to Taxable Income are €426,609.12 in 2013 and €6,746,284.95 in 2014, the tax shortfall resulting from Autonomous Taxation is €103,605.75 in 2013 and €1,228,149.22 in 2014, as summarized in Table 13.

• Taking into account the corrections contained in Table 13, the Corrected Taxable Profit for the year 2013 is €331,009.81 and for the year 2014 is €10,438,424.94, determined in Table 14.

IX - RIGHT TO HEARING – GROUNDS

Pursuant to Article 60 of the General Tax Law and Article 60 of the Regulation on Administrative Procedure in Tax Matters, company A…, was notified to exercise within 15 days the right to hearing regarding the Draft Report, through Office… of 18-11-2016.

The Right to Hearing was exercised in writing, a document that was filed with the Lisbon Tax Authority on 06-12-2016 (Entry 2016E…), which appears on pages 200 to 223 of the Annex, which has 30 attached documents.

The Right to Hearing was exercised in the following terms:

1- ACCOUNTING FOR THE CREDIT ASSIGNMENT CONTRACT

Regarding the corrections in the amounts of €196,374.12 (year 2013) and €2,281,586.41 (year 2014) described and grounded in Chapter III.1.1, to which reference is made, the taxpayer disagrees with the grounds of the Tax Authority, having alleged and presented the following:

1 - From the beginning it was known the final outcome of the credits, that they would never be recoverable, and not being recoverable they translate into a true additional acquisition cost (Item 5);

2 - The execution of the Credit Assignment Contract was due to the imposition by Bank C…, the financial institution financing the operation of purchase of 213 real estate properties (Item 9);

3 - Such imposition resulted from the manifest belief that such credits would be uncollectible, reason why it took them as an integral and inseparable part of the transaction, having been accepted by the administration of A… given that it was expected that the cost overrun of the real estate would not make unprofitable the profitability of the aforementioned purchase operation (Items 10 and 11);

4 - It is an additional purchase cost, despite being in the form of a credit assignment, its substance is that of a cost overrun (Item 12);

5 - The substance over form is a principle of accounting standards and operations should be accounted for according to their substance regardless of form (Item 13);

6 - Being the determination of taxable profit made on the basis of the net result determined in accordance with accounting normalization, the principle of substance over form is accepted by the tax standards, cfr. Article 17, No. 3 of the CIRC, which establishes that accounting must be organized in accordance with accounting normalization so as to permit the determination of taxable profit (Item 14);

7 - The accounting for the aforementioned cost overrun is framed within Article 26, No. 2 of the CIRC, according to which other expenses directly attributable to it may be included in the cost of acquisition in accordance with the applicable specific accounting normalization (Item 15);

8 - The accounting normalization on this matter states that the cost of inventories must include all purchase costs and other costs incurred to place inventories in its location and in its present condition (cfr. § 10 of NCRF 18) (Item 16);

9 - To pretend that these credits should be accounted for as a financial asset is to distort the accounting principle of specialization of exercises contained in Article 18 of the CIRC which establishes that income and expenses are recognized when generated (Items 18 and 19)

10 - If the debtor entities could come to liquidate fully or partially the credits in question, the Tax Authority would never be defrauded since the amounts received, in the year in which they would be, could always be accounted for as extraordinary gains and as such taxed (Item 22);

11 - In light of the above it considers it evident that the accounting was correct, wherefore the corrections proposed by the Tax Authority are undue (Item 24).

12 - As documentary support it attaches documents related to the insolvency proceedings of the debtor companies E… (NIF…) and Real Estate D… (NIF…), proceedings …/12… TYLSB and …/12… TYSLB, respectively, of which the following stand out (Items 7 and 8):

Case No. …/12… TYLSB of Company E…

• Notification of the Insolvency Declaration sentence dated 14-06-2012 (Doc. 1);

• Claim of Credits by Bank C… (Doc. 1);

• Document evidencing that the credit was recognized as common and conditional prepared by (Doc. 2):

• Notification of Approval of Insolvency Plan dated 07-04-2014 (Doc. 5);

• Document evidencing delivery to Court of Claim for Accreditation of Assignee by A… in its capacity as assignee of the credit dated 14-02-2014 and subsequent sentence of 25-05-2015 that judged company A… duly accredited in the proceedings (Docs. 3 and 4);

• Document retrieved from the CITIUS Portal prepared on 23-06-2016 on the status of case …/12… TYLSB, in which it appears that the proceedings are in Liquidation phase (Doc. 6);

Case No. …/12… TYLSB of Company Real Estate D…

• Notification of the Insolvency Declaration sentence dated 17-10-2012 (Doc. 7);

• Claim of Credits by Bank C… (Doc. 7);

• Document evidencing that the credit was recognized as common and conditional prepared by (Doc. 8);

• Notification to Bank C… of Approval of Insolvency Plan on 27-01-2014 (Doc. 11);

• Document evidencing delivery to Court of Claim for Accreditation of Assignee by A… in its capacity as assignee of the credit dated 21-04-2014 (Doc. 9);

• Order of 22-05-2014 declaring closure of the insolvency proceedings …/12… TYLSB due to approval of Insolvency Plan (Docs. 10 and 13).

The facts described above were also alleged in the course of the inspection procedure in response to notification made to provide clarifications on this matter, as appears on pages 12 and 13, and as documentary support Minutes No. 1 of the Board of Directors and Minutes No. 4 of the General Assembly both dated 17-09-2013 were presented (pages 66 to 71 of Annex).

In the Minutes the following is summarized:

• A… intends to acquire real estate belonging to the insolvent estate of company B…, SA;

• The realization and financing of the operation of purchase of the real estate in question presupposes that, together, the company acquires the credits that Bank C… holds against companies E… and Real Estate D…, also in insolvency proceedings.

Notwithstanding these credits being difficult to collect, it is estimated that the market value of the real estate to be acquired is superior to its acquisition value plus the credits to be acquired, in a scenario of free sale and given the possibility of exploitation of the market niche associated with the Golden Visa, it is anticipated that this operation will bring good profitability to the company, even accounting for the risks inherent in the collection of the aforementioned credits;

• It is a prerequisite of the transaction that Bank C… grant financing to the company for acquisition of the real estate;

• It was unanimously decided to approve the operation of purchase of the real estate as it proved to be a good business opportunity and in that sense to be in the interest of the company.

ASSESSMENT

The grounds invoked by A… for the Acquisition of Credits from Bank C… to be considered an additional purchase cost are:

• The acquisition of the credits was an imposition by Bank C…;

• From the beginning it was known the final outcome of the credits, that they would never be recoverable, and not being recoverable they translate into a true additional acquisition cost;

• The accounting under inventories results from compliance with Articles 17, No. 3, 26, No. 2 of the CIRC and paragraph 10 of NCRF 18 relating to inventories;

Regarding the imposition by Bank C… and regarding the statement that from the beginning it was known the final outcome of the credits, that they would never be recoverable.

The elements presented by A… on this matter were:

• The Minutes of the Board of Directors and General Assembly appearing on pages 66 to 71 of Annex dated 17-09-2013;

• The Credit Assignment Contract dated 21-11-2013;

• The documents identified above relating to the insolvency proceedings of the debtor companies E… and Real Estate D…, proceedings …/12… TYLSB and ../12… TYSLB, respectively.

The content of the Minutes described in the preceding page does not reveal that there was any imposition by Bank C… for acquisition of the credits.

On the other hand, it contradicts the statement that from the beginning it was known the final outcome of the credits, that they would never be recoverable, since they admit the collection of the credits, although they consider it difficult and they admit the existence of risks inherent in collection.

It is further noted that in the third clause of the Credit Assignment Contract (pages 29 to 33 of Annex) it appears that "BANK C… expressly guarantees to A… the existence and enforceability of the credits subject to the assignment ..."

In the Credit Assignment Contract which appears on pages 29 to 33 of Annex, there is also no imposition by Bank C… for acquisition of the credits in question.

The documents presented relating to the insolvency proceedings, …/12… TYLSB and …4/12… TYSLB, reveal that in both an Insolvency Plan was approved.

The Insolvency Plan aims at the liquidation of the patrimony of the insolvent entity having as objectives, among others:

• Maximize the proceeds of the liquidation of assets of the insolvent entity;

• Minimize and control the risks that, for creditors holding conditional credits against the insolvent entity, would arise from the liquidation of the company;

• Its distribution among creditors.

Regarding the accounting under inventories being framed within No. 2 of Article 26 of the CIRC

No. 2 of Article 26 of the CIRC, in the wording in force at the date of the accounting in question (year 2013) establishes that "In case inventories require a period exceeding one year to reach their condition of use or sale, borrowing costs obtained that are directly attributable to them are included in the cost of acquisition or production in accordance with the applicable specific accounting normalization."

Thus this rule does not apply to the case under analysis, it refers to borrowing costs, which may be included in the cost of acquisition or production in case inventories require a period exceeding one year to reach their condition of sale.

Based on the foregoing, none of the reasons invoked by A… for the accounting of the acquisition of the credits as an additional purchase cost can be accepted given that:

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

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

• The accounting under inventories is not framed within Article 26, No. 2 of the CIRC in the wording in force at the date of the accounting.

It is pertinent to note here by analogy what the System of Accounting Normalization (SNC) whose adoption became mandatory for IRC taxpayers starting in the year 2010 establishes regarding the derecognition of credits.

In accounting terms, according to the System of Accounting Normalization, specifically paragraph 30 of the Accounting and Financial Reporting Standard, NCRF 27-Financial Instruments, a financial asset, as is the case with credits against customers or other debtors, should only be derecognized when one of the following situations occurs:

• The contractual rights to cash flows resulting from the financial asset expire;

or (b) The entity transfers to another party all significant risks and benefits related to the financial asset; or

• The entity, despite retaining some significant risks and benefits related to the financial asset, has transferred control of the asset to another party and this party has the practical ability to sell the asset in its entirety to an unrelated third party and the possibility of exercising that ability unilaterally without needing to impose additional restrictions on the transfer. If such is the case, the entity must:

• Derecognize the asset; and

• Recognize separately any right and obligation created or retained in the Transfer

In summary, a financial asset should only be derecognized when the contractual rights to collections resulting from it are realized, expire or are transferred to another entity.

Corroborating this reasoning, a Directive was issued on 28-01-2014 by the Director General of the Tax and Customs Authority to this effect.

Pursuant to the aforementioned Directive:

• Judicial claim of credits is one of the situations in which the credit should not be derecognized in accounting terms because the contractual right of the creditor or the civil obligation of the debtor is not extinguished, since if the company resorted to court to be compensated for the amount owed it is because it does not want to abdicate the contractual right to the respective cash flows.

• Not having been extinguished (by any of the causes provided for in the Civil Code) the contractual right to cash flows resulting from the financial asset, the entity that is a creditor should not, by virtue of the provisions of paragraph 30 of NCRF 27, derecognize the asset.

• If, nevertheless, the entity that is a creditor derecognizes the credits, their amount must be added back in Table D7 of Declaration Form 22 for purposes of determining the taxable profit of the taxation period in which the derecognition occurred, since the requirements set forth in Article 41 of the CIRC for consideration of the credit as uncollectible are not observed.

• Also in cases where an execution proceeding is still ongoing, an insolvency proceeding, a special business revitalization proceeding or a business recovery procedure by extrajudicial means, the financial asset should not be derecognized from the Balance Sheet.

CONCLUSION

The accounting of the credits acquired in the amount of €5,530,117.55 in inventory account has as a consequence the recognition of that amount as expenses under Cost of Merchandise Sold in the years in which the sales of the real estate are verified, given that, as described in Chapter III.1.1, that amount was allocated proportionally to the 213 real estate properties acquired.

In the years under analysis, the total amount of €2,477,960.53 was recognized as Cost of Merchandise Sold, with €196,374.12 in the year 2013 and €2,281,586.41 in the year 2014, which are determined in Tables 8 and 9.

The remaining part of €3,052,157.02 (€5,530,117.55 - €2,477,960.53) will be recognized as expenses in subsequent years when the sale of the real estate occurs.

Based on the described, the amount of credits acquired of €5,530,117.55 is recognized as expenses, requiring only the sale of the real estate.

As to the amount of those credits that comes to be received in full or in part as a result of the liquidation or recovery of the insolvent companies, being the accounting made under inventories and as such recognized as expenses, the amount received should be recognized as income, but, since the accounting does not reflect those credits, that income can be omitted by company A….

Based on the foregoing those credits should have been recognized as financial assets, being derecognized from the Balance Sheet only in the situations provided for in paragraph 30 of NCRF 27 described above, which to the present date have not occurred.

In conclusion, based on all the foregoing in this chapter and in Chapter III.1.1, to which reference is made, the corrections proposed in the Draft Report in the amounts of €196,374.12 and €2,281,586.41 in the years 2013 and 2014, respectively, are maintained, which are determined in Tables 8 and 9.

II - COMMISSIONS TO NON-RESIDENTS AND MARKETING DOCUMENTED WITH INVOICES ISSUED BY COMPANIES RESIDENT IN HONG KONG

Regarding the corrections in the amounts of €230,235.00 (year 2013) and €3,508,997.76 (year 2014) described and grounded in Chapter III.1.2.1, to which reference is made, the taxpayer disagrees with the grounds of the Tax Authority, having alleged and presented the following elements:

1 - F… Co. Limited (F…) and G… Limited are companies governed by Chinese law that engage in the provision of services to Chinese citizens aimed at obtaining, by them, the authorization of residence in countries of the European Union, as is the case of Portugal, through investment in real estate.

F… is a company of larger dimensions that has offices in several countries including Portugal, as can be seen on the F… website, and was distinguished by the Portuguese-Chinese Chamber of Commerce and Industry for the award of business merit, cfr. doc. 14 (Items 2, 3 and 5).

Doc. 14 is a page of a Portuguese newspaper in which F… appears as nominated for business merit awards;

2 - These companies constitute a global real estate promotion platform that provides the following services to investors:

• They make the selection of projects and real estate assets in international markets;

• They provide investors with detailed information about projects, real estate and countries;

• They have international teams of marketing and communication specialists dedicated to accompanying investors who make selection of real estate and promoters to promote to investors, they organize investment trips providing accommodation services, translators, Chinese real estate consultants, transportation;

• They have the participation of teams in investment destinations (local and Chinese) to meet the needs of investors and partners;

• They support investors in the preparation of the entire acquisition process;

• They connect with teams of Lawyers who provide support to investors in the destination country;

• They organize events, seminars and conferences, television advertisements and other promotional materials highlighting the advantages and benefits of investing/living in countries of the European Union;

• They organize all the logistics associated with the travel of potential investors to those countries, such as transportation from China to those countries, accommodation, visits to real estate and obtaining tourism visas for entry and stay in those countries from embassies and consulates;

• They assist potential clients in practically the entire investment process, providing teams of translators, consultants, lawyers, drivers, accompanying them with the SEF, the Finance authorities and in opening accounts in banks, as well as in the process of searching, selecting and acquiring real estate (Item 6);

3 - If the Tax Authority consults the F… website it verifies that this company provides all these services, cfr. prints attached as doc. 15 (pages 224 to 250 of Annex) (item 7);

4 - These services were provided by these companies to A…, as evidenced by the elements already attached within the inspection action and further by the following (item 8):

(a) The F… website contains specific information about the Portuguese Golden Visa regime;

(b) Regarding marketing consultation and promotion services in China (seminars, advertising campaigns) A… was not present and therefore does not understand which documents should have been attached to prove the realization of these services.

The elements that A… has and can provide are those attached as doc. 16 which prove that F… hired the former footballer J… to promote Portugal in 18 conferences in the cities of Beijing and Jinan ... which had well-attended attendance of respectively 600 to 800 people, which is sufficient to prove the realization of these services;

(c) Regarding services related to the identification of investors, transportation from China to Portugal, prospecting visits, obtaining tax number, legal and financial diligence, procedures and preparation of necessary documents, after-sales, issuance of the process leading to authorization of residence and preparation of documentation and assistance to the client during the public deed process, it also does not understand which documents should have been attached to prove the realization of these services, since they were performed by these companies, therefore beyond A….

The elements that A… has and can provide are the following:

I) Copies of translated promise of sale and purchase contracts by a translator who signs documents;

II) Copies of sale and purchase contracts where they appear as representatives of the Chinese purchasers lawyers of law firms K… which provided services to F… and G…;

III) Receipts/statement attesting receipt of the deposit amount;

IV) Property purchase confirmation forms with all information about the purchase;

V) Emails exchanged between F…, A… and lawyers of law firms K…, about the transactions being mostly in English language.

Documents 17, 18 and 19 presented contain the elements identified from I) to V).

(d) Attaches list of F… collaborators with whom A… exchanged emails, established telephone contacts and who intervened in the sale of real estate to investors they recruited (doc. 20), list of promoters/projects that used the services of F… (doc. 21), list of real estate brokerage firms that worked with the Asian market and with international commissions (doc. 22).

5 - All these documents as well as those previously provided to the Tax Authority prove that the services contracted and billed to A… were effectively provided (Item 9);

6 - A… not only demonstrated that the services debited by F… and G… were effectively provided but that the same influenced the sale of the real estate, having fulfilled the burden of proof to which the anti-abuse clause referred to in Article 65 of the CIRC alludes (items 25 and 26);

7 - Regarding the amounts charged by these companies, the commissions paid by A… to these Chinese companies, between 15% and 21% of the sale price, and equal to those charged by all companies that provide this type of service aimed at attracting Chinese investors, according to contracts that are attached by way of example, cfr. doc. 26 (Item 29);

8 - If the Tax Authority compares the commissions borne by all the companies that are being inspected, it will reach the conclusion that not only did no company bear commissions of an amount lower than that borne by A…, but there were companies that bore commissions of a higher amount, such as for example L… and M…, SA which bore commissions of 25%, cfr. doc. 27 (Items 31 and 32);

9 - All this permits us to conclude that the amount paid by A… as commissions was not exaggerated, it was the cost imposed by these companies, identical to that charged by other equivalent companies to all Portuguese companies (Items 33 and 34);

10 - In light of the foregoing and the evidence produced, A… considers it evident that the corrections and autonomous taxation proposed in the Draft Report lack legal basis and that the Tax Authority is failing to comply with the principles of reasonableness and proportionality that guide administrative activity, wherefore the Final Report to be issued should give reason to A… and not propose any tax corrections (items 68 and 69).

ASSESSMENT

Described in items 1 to 9 of this chapter, to which reference is made, are the grounds and documents presented by A… which it considers constitute the dual evidence that is incumbent upon the taxpayer to present cumulatively, required by the CIRC, No. 4 of Article 65 (applicable in 2013) and No. 8 of Article 23-A (applicable in 2014) that:

• The charges debited by entities resident outside Portuguese territory and therein subject to a more favorable tax regime correspond to effectively realized operations;

• Those charges do not have an abnormal character or an exaggerated amount.

Thus, given that we are faced with specific requirements of an anti-abuse rule which places the responsibility of dual evidence on the taxpayer through the reversal of the burden of proof, the evidence, although not subject to any formalism pursuant to Articles 352 and following of the Civil Code, being at the taxpayer's disposal all means of proof, must be unequivocal, rigorous and clear.

A - Regarding proof of the effective realization of the operations

Described in items 1 to 6 of this chapter to which reference is made are the grounds that A… considers that the Tax Authority must recognize as proof of the effective realization of the operations.

Regarding the evidence elements presented, also identified in the items referred to, are the following:

• Page of a Portuguese newspaper in which F… appears as nominated for business merit awards - doc. 14;

Doc. 14 is a page of a Portuguese newspaper in which F… appears as nominated for business merit awards;

• Prints from the F… website - doc. 15 (pages 224 to 250 of Annex).

In those prints there is no reference to company A… or its real estate;

• Images related to footballer J… regarding his participation in China in campaigns to promote Portugal (doc. 16);

Doc. 16 contains images related to footballer J… regarding his participation in campaigns to promote Portugal, it being noted that his participation occurred in the year 2016, given that in the documents presented the following appears (Google translation) (pages 251 to 253 of Annex):

• The subsidiaries of Group N… Portugal invited world footballer J… for a signing ceremony;

• On 03 September 2016, world footballer J… arrived at the headquarters of Group N… to participate in a signing ceremony...

• Copies of promise of sale and purchase contracts and copies of sale and purchase deeds (doc. 17 and 18);

• Property purchase confirmation forms with all information about the purchase and receipts/statement attesting receipt of the deposit amount (doc. 17 and 18);

• Emails exchanged between F…, A… and lawyers of law firms K…, about the transactions being mostly in English language (doc. 19);

• List of F… collaborators with whom A… exchanged emails and List of promoters/projects that used the services of F… (doc. 20 and 21);

Doc. 21 contains the name of 30 Portuguese companies (page 254 of Annex);

• List of real estate brokerage firms that worked with the Asian market and with international commissions (doc. 22).

Doc. 22 contains the name of 12 real estate companies, some of which are Portuguese (page 255 of Annex);

The documents described above do not sufficiently prove the realization of the services billed in the invoices, described in Table 10, that is, they do not demonstrate the intervention of companies F… and G… aimed at the sale of company A…'s real estate:

• In the recruitment of clients through the holding of seminars, conferences, campaigns, television advertisements or use of other promotional materials.

Doc. 16 presented as evidence of promotional campaign promoted by F…, through the former footballer J…, as referred to above, reveals that this campaign occurred in the financial year 2016, wherefore it did not influence the sales that occurred in the years under analysis (2013 and 2014);

• In the travel of purchasers to Portugal;

• In air transportation from China to Portugal and in accommodation in Portugal;

• In obtaining tourism visas for entry to Portugal from the Embassy and Portuguese consulates and it was not demonstrated that these Visas exist;

• In the realization of the other services described in the invoices in question. On this matter, a part of the ruling delivered on 19/02/2015 in case 08126/14 in the Central Administrative Court of the South (TCAS) is transcribed, which judged a case of payment to non-resident entities subject to a privileged tax regime, highlighting the importance of proof demonstration:

'Regarding proof of the veracity of the operation it will not suffice the presentation of written documents, namely contracts executed between the parties, since these are presumed simulated, nor the demonstration of payment of the price, as such is not questioned. What must be subject to proof is rather the effective provision of services, or the receipt of a loan, that is, the commercial fact that was at the origin of the payment of the same price that appears as a cost to be deducted under IRC'.

Based on the foregoing, it is considered that there is no effective proof of the realization of the services billed in the invoices.

B - Regarding the abnormal character or exaggerated amount

Described in items 7 to 9 of this chapter to which reference is made are the grounds and elements that A… considers that the Tax Authority must recognize as proof that the amount paid by A… as commissions was not exaggerated.

On this matter a part of the aforementioned ruling is transcribed.

"Already as to the proof of the non-existence of the abnormal character or exaggerated expenses this must pass through the demonstration that the contract, whose veracity was proved, presents itself as balanced. For that purpose, the taxpayer should demonstrate what the real importance of the advantages gained by the contract in question is, as well as make proof that the charges established constitute the fair remuneration of those advantages, notably by comparison with the costs of similar services in the market."

As proof of similar services in the market, A… limited itself to presenting four contracts executed with the companies indicated in Table 15 (doc. 26).

Doc. 26 contains four contracts executed with the companies indicated in Table 15, which appear on pages 256 to 288 of Annex, it being noted that the agreed commissions vary between 8% and 12% and between 16% and 20%, being two companies resident in national territory.

From analysis of the Table it is verified that:

• Two companies practice percentages significantly lower than those practiced by company F…, between 8% to 12%;

• Only one company practices the same percentage as company F…, 20%, and only in cases where the quantity sold is between 16 and 20 real estate properties.

Thus by comparison with similar services in the market, based on the examples provided by A…, also here it is concluded that, not having A… produced any proof that it is not exaggerated the amount of the commission charged by companies F… and G…, it is considered as not met this requirement.

CONCLUSION

Taking into account all the foregoing, based on the methodology defended by the Tax Authority on this matter, it is the understanding of the Tax Authority that the elements presented by A… do not meet the requirements enshrined in the IRC Code, Article 65, No. 1 (applicable in 2013) and in Article 23-A, No. 1, subparagraph r) (applicable in 2014), wherefore the corrections proposed in the Draft Report are maintained.

The charges debited by companies F… and G… recognized as expenses are not deductible for purposes of determining the taxable profit of the years 2013 and 2014 and are subject to autonomous taxation pursuant to the provisions of Nos. 1 and 8 of Article 88 of the IRC Code.

III - COMMISSIONS TO NON-RESIDENTS WITHOUT DOCUMENTARY SUPPORT

Regarding the correction in the amount of €955,700.78 (year 2014) described and grounded in Chapter III.1.2.2, to which reference is made, the taxpayer disagrees with the grounds of the Tax Authority, having alleged the following:

1 - Until the date of closure of accounts for the financial year 2014, A… had not received the invoices for the intermediation commissions from company F… (Item 61);

2 - In accordance with No. 1 of Article 18 of the CIRC, income and expenses are imputable to the taxation period in which they are obtained or borne independently of their receipt or payment, in accordance with the economic accrual regime and on this basis the values of the missing commissions were estimated and added to expenses, relating to sales already made but whose invoices were not in its possession (Items 62 and 63);

3 - Given the non-deductibility of VAT, the value of the corresponding VAT was estimated and added to expenses that would become due upon accounting and consequent self-assessment of the corresponding invoices (Item 64).

4 - The expenses are documentarily justified with the internal document of miscellaneous operations 60/120184 in accordance with applicable accounting and tax provisions (Item 65);

No applicable accounting and tax provisions are indicated

5 - The jurisprudence of the Supreme Administrative Court has come to defend that the supporting and justifying document of expenses under IRC is not confused with nor exhausted in the requirement of an invoice.

As an example of the Jurisprudence invoked, it mentions the ruling of 07-05-2012 of the Supreme Administrative Court regarding case 0658/11 where the following can be read: "Under IRC, the supporting and justifying document of costs for purposes of the provisions of Articles 23, No. 1 and 42, No. 1, subparagraph g) of the CIRC do not have to assume the essential formalities required for invoices under VAT, since the requirement of documentary evidence is not confused with nor exhausted in the requirement of an invoice, sufficing only a written document, in principle external and with mention of the fundamental characteristics of the operation, since contrary to what happens with VAT, under IRC, the justification of the cost constitutes a probative formality and, therefore, replaceable by any other kind of evidence" (Item 67).

ASSESSMENT

The grounds invoked by A… for the expenses documented by internal document to be considered tax deductible, described above, were already invoked in the course of the inspection procedure in response to notification made, as appears on page 25.

The ruling dated 07-05-2012, relating to case 0658/11 referred to in the exercise of the right to hearing by the taxpayer relates to facts occurring in the years 2005 and 2006 and refers to supporting and justifying documents of expenses for purposes of the provisions of Article 42, No. 1, subparagraph g) of the CIRC in the wording in force in those years and until the financial year 2009, that is, until the entry into force of Decree-Law No. 159/2009 of 13/07 which republished the CIRC.

This provision of the CIRC established that expenses not duly documented are not deductible for purposes of determining taxable profit, even when accounted for as costs or losses of the financial year.

The correction in question was made pursuant to the provisions of Article 23-A, No. 1, subparagraph c) of the CIRC (in force in the financial year 2014), which specifically establishes that expenses whose documentation does not comply with the provisions of Nos. 3 and 4 of Article 23 are not deductible for purposes of determining taxable profit, even when accounted for as expenses of the taxation period.

Nos. 3 and 4 of Article 23 of the CIRC establish that:

3 - Deductible expenses pursuant to the preceding numbers must be documentarily proven, regardless of the nature or support of the documents used for such purpose.

4 - In the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, the supporting document referred to in the preceding number must contain, at a minimum, the following elements:

a) Name or legal designation of the goods supplier or service provider and of the purchaser or recipient;

b) Tax identification numbers of the goods supplier or service provider and of the purchaser or recipient, always when these are entities with residence or permanent establishment in national territory;

c) Quantity and usual designation of the goods acquired or of the services provided;

d) Value of the consideration, namely the price;

e) Date on which the goods were acquired or on which the services were rendered.

Regarding the value of the estimated VAT, as stated by A…, given the non-deductibility of VAT, the value of the estimated VAT was recognized as expenses in the amount of €178,708.28 corresponding to the estimated commissions in the amount of €776,992.50.

Taking into account that in the financial years 2013 and 2014 A… was exempt from VAT by virtue of the provisions of Article 9 of the VAT Code:

• The right to deduction of the tax is not granted, as established by Article 20 of the same Code;

• It is not required to file the periodic declaration pursuant to Article 41;

• The VAT due pursuant to subparagraph a) of No. 6 of Article 6 of the VAT Code is remitted to the State through the Model P2 Payment Form within the period established in No. 3 of Article 27 of the VAT Code.

The estimated VAT, under appraisal to date, does not appear in any Model P2 Payment Form, wherefore it was not remitted to the State, as confirmed by A… when stating that the estimated VAT becomes due upon accounting for the missing invoices.

Given the non-deductibility of VAT, the VAT due pursuant to subparagraph a) of No. 6 of Article 6 of the VAT Code could be recognized as an expense, but only at the moment it becomes due, that is, at the moment of accounting for the invoices in question and the consequent payment to the State.

Thus, similar to the estimated value of the commissions, it is considered that the corresponding estimated VAT in the amount of €178,708.28, recognized as an expense under account 62251-Commissions is not documentarily proven, wherefore it is not deductible for tax purposes pursuant to subparagraph c) of No. 1 of Article 23-A of the CIRC.

Based on the grounds described above, both the estimated value of the commissions of €776,992.50 and the value of the corresponding estimated VAT of €178,708.28, in total of €955,700.78, recognized as expenses in account 62251 - Commissions, are considered not documentarily proven, wherefore they are not deductible for tax purposes pursuant to subparagraph c) of No. 1 of Article 23-A of the CIRC.

OPERATIVE PART

The Arbitral Tribunal, having examined the proceedings, heard the arguments and considered the evidence adduced:

DECIDES:

1. To uphold the assessment decision based on the corrections to Corporate Income Tax for the years 2013 and 2014, rejecting the claimant's appeal.

2. To maintain the corrections relating to the accounting for the Credit Assignment Contract in the amounts of €196,374.12 (year 2013) and €2,281,586.41 (year 2014), as well as the corresponding tax adjustment of the expense deduction.

3. To maintain the corrections relating to Commissions to Non-Residents documented with invoices issued by companies resident in Hong Kong in the amounts of €230,235.00 (year 2013) and €3,508,997.76 (year 2014), and the corresponding autonomous taxation at rates of 45% for 2013 and 35% for 2014.

4. To maintain the correction relating to Commissions to Non-Residents without documentary support in the amount of €955,700.78 (year 2014), as such expenses are not documentarily proven.

5. To dismiss the claimant's requests for indemnity interest and compensation for undue guarantees.

Given in Lisbon, on [date]

The three arbitrators