Summary
Full Decision
ARBITRAL DECISION (consult full version in PDF)
The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Isaque Marcos Lameiras Ramos (member) and Ana Teixeira de Sousa (member), appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, agree to the following:
ARBITRAL DECISION
I – REPORT
1. On 10 August 2018, A..., S.A., Tax Identification Number..., with registered office at Rua..., no.º..., ..., ...-... Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to 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 the additional IRC assessment notice no. 2016..., for the tax year 2013, in the amount of €159,713.33, the compensatory interest assessment notice no. 2016..., in the amount of €13,335.41, the default interest assessment notice no. 2016..., in the amount of €253.96, the settlement reconciliation statement no. 2016... from which results the amount payable of €149,788.14, as well as the IRC source withholding assessment notice no.., relating to the period of June 2013, in the amount of €6,250.00 and corresponding compensatory interest assessment no. 2016..., in the amount of €819.86, the IRC source withholding assessment notice no.., relating to August 2013, in the amount of €12,500.00, and respective compensatory interest assessment no. 2016..., in the amount of €1,557.53, and the source withholding assessment notice no.., relating to the period of October 2013, in the amount of €18,750.00, and corresponding compensatory interest assessment no. 2016..., in the amount of €2,210.95, as well as the decision denying the administrative complaint which had the said assessment notices as subject matter.
2. To substantiate its request, the Claimant alleges, in summary, the following:
i. The IRC assessments and compensatory interest assessments suffer from a defect of form due to lack of reasoning, with the latter also suffering from omission of an essential formality due to lack of prior hearing;
ii. The expenses incurred with commissions paid to B... are tax-deductible as they correspond to operations actually performed and do not have an abnormal character or an exaggerated amount;
iii. The commissions paid to B... are not subject to autonomous taxation as the prerequisites for application of article 88, no. 8 of the Corporate Income Tax Code ("CIRC") are not met;
iv. The income paid to B... is exempt from source withholding pursuant to article 7, no. 1 of the Convention between Portugal and the United Arab Emirates to Avoid Double Taxation and Prevent Tax Evasion in Respect of Taxes on Income and article 98, no. 1 of the CIRC;
v. The expenses incurred with commissions paid to C... are tax-deductible pursuant to article 23 of the CIRC;
vi. Illegality due to violation of the inquisitorial principle and pursuit of material truth.
3. On 10-08-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
4. The Claimant did not proceed to appoint an arbitrator, so, pursuant to 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 appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable period.
5. On 28-09-2018, the parties were notified of such appointments and manifested no intention to challenge any of them.
6. In accordance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 19-10-2018.
7. On 20-11-2018, the Respondent, duly notified to that effect, filed its answer defending itself by opposition.
8. On 22-02-2019, the meeting referred to in article 18 of the RJAT was held, where witnesses presented by the Claimant were examined at the hearing.
9. Having been granted a period for submission of written submissions, the parties presented the same, commenting on the evidence produced and reiterating and developing their respective legal positions.
10. It was indicated that the final decision would be notified by the deadline established in article 21/1 of the RJAT, which deadline was extended by order of 17-04-2019.
11. The Arbitral Tribunal is materially competent and is regularly constituted pursuant to articles 2, no. 1, subparagraph a), 5 and 6, no. 2, subparagraph a), of the RJAT.
The parties have legal personality and capacity, are legitimate and are legally represented pursuant to articles 4 and 10 of the RJAT and article 1 of Regulation no. 112-A/2011, of 22 March.
The case does not suffer from any nullities.
Thus, there is no obstacle to the adjudication of the case.
Everything considered, it is necessary to deliver:
II. DECISION
A. STATEMENT OF FACTS
A.1. Facts established as proved
1. The Claimant commenced its activities on 01-03-1983 and continues, as its principal activity, "Real estate promotion (building project development)", corresponding to the CAE code 41100.
2. In the course of its activities, the Claimant was in 2013 the promoter and owner of "...", in Lisbon.
3. The Claimant's activities were severely affected in the years 2012 to 2015, a period of external financial assistance, both due to the difficulty in accessing bank credit and honoring its commitments to banks, and due to the difficulty in selling real estate that formed part of the projects it promoted.
4. In 2013, domestic real estate demand was practically non-existent and there was a period of marked decline in sales in the residential property market.
5. On 31-12-2012, the Claimant owed to D... an amount of accrued interest in the amount of €2,993,000.00, payment of which should occur during the year 2013.
6. On 31-12-2012, the Claimant's inventories totaled €55,000,000.00, notably 124 units already finished and ready for sale at "...", in Lisbon.
7. The Claimant became aware of the Golden Visa regime, created by Law no. 23/2007, with amendments introduced by Law no. 29/2012, of 9 August.
8. Customer acquisition in the Chinese and Middle Eastern markets required mastery of the language, culture and knowledge of the market of origin of potential Golden Visa customers.
9. The Claimant and its legal representatives did not have knowledge of the language, culture and markets of China and the Middle East.
10. The Claimant resorted to customer acquisition entities from the countries of residence of its target customers, namely from the People's Republic of China and the Middle East.
11. The Claimant entered into a contract with B..., a company resident in Dubai, United Arab Emirates, for the purpose of acquiring customers from third countries, namely Saudi Arabia, Sudan and Iraq.
12. According to the first clause of said contract, "For the implementation of the purpose of this Contract, the SECOND PARTY undertakes to the FIRST PARTY to provide the following services:
- Publicize, publish and promote the project ... in Middle Eastern countries.
- Accompany the travel of citizens of those countries to Portugal to visit the project and cover associated expenses."
13. The third clause of said contract states that "To meet the expenses related to the activities provided for in Clause One, the SECOND PARTY shall be entitled to remuneration resulting from its action, as per Clause One".
14. According to item 2 of clause three of the contract, "The remuneration provided for in the previous number shall be:
For 3-room units – €40,000.00
For 4-room units – €50,000.00
For 5-room units – €60,000.00
For 6-room units – €70,000.00
For 7-room units – €80,000.00
For 8-room units – €90,000.00"
15. Clause five of said contract further states that "All costs and expenses for advertising and publicity actions, as well as expenses for organization, maintenance and remuneration of its team and those resulting from customer travel from the country of origin to the project shall be solely at the account of the SECOND PARTY and not therefore at the account of the FIRST PARTY, being the same completely reimbursed from the same by the remuneration provided for in clause three".
16. Commissions to B... were only paid if the property was sold to the customer procured by it.
17. Payment of the commission did not remunerate the means used in customer acquisition but rather the results achieved.
18. The Claimant entered into, in 2013, purchase and sale contracts for the following units of Lot 46 of the project ...:
• Unit "R" sold for €525,200.00;
• Unit "P" sold for €520,000.00;
• Unit "S" sold for €520,000.00;
• Unit "J" sold for €515,200.00.
19. The invoices issued by B... identify the customers they relate to:
• Invoice issued on 26-09-2013 – identifies that the commission relates to acquisition of unit "P", Lot..., by Mr. E...;
• Invoice issued on 31-10-2013 – identifies that the commission relates to acquisition of unit "J", Lot..., by Mr. F...;
• Invoice issued on 26-09-2013 – identifies that the commission relates to acquisition of unit "S", Lot..., by Ms. G...;
• Invoice issued on 26-09-2013 – identifies that the commission relates to acquisition of unit "R", Lot..., by Mr. H....
20. The said units were only sold through the intervention of B..., which presented the purchasers to the Claimant and the properties sold by it, and mediated their acquisition.
21. The customer acquisition services provided by B... involved publicity of the Project ... to potential customers, visits to the units, which implied travel to Portugal and the consequent acquisition of airplane tickets, hotel accommodation expenses, meals, travel costs within Portugal, accompaniment of customers with translators, which involved costs borne by B....
22. B... ensured personalized accompaniment of potential customers to Portugal through the conduct of guided visits with a translator, who accompanied the potential customers from their arrival in Portugal until their return to their country of origin.
23. The commissions paid by the Claimant to B..., with registered office in Dubai, United Arab Emirates, were recognized in accounting in account 62252 – Sales Service Commissions, and paid on the following terms:
24. In 2013, the Claimant's turnover recorded an increase compared to the previous year of about 155%, resulting from the sale of 54 properties that form part of the real estate development project of the Urbanization ..., Lisbon.
25. Approximately 75% of sales made by the Claimant in 2013 were destined for citizens residing in third countries, namely China and United Arab Emirates, who benefited from the Golden Visa regime.
26. The Claimant's net result (€1,764,364.96) did not reflect the developments in its turnover, since the margin obtained was absorbed by the following items:
27. In the 2013 tax year, expenses relating to commissions, recorded in account 6225, amounted to €2,759,001.28 and resulted from invoices issued by the following entities:
28. The Claimant obtained a positive margin, achieving a net profit of €6,961,412.99 and an average margin of 26.28%.
29. The price of the customer acquisition services provided by B... did not exceed 10% of the sale price.
30. The commissions paid by the Claimant exceed the values practiced by real estate mediation companies established in Portugal, whose commissions do not exceed, as a rule, 5% of the sale value.
31. Customer acquisition companies for Golden Visas provide a more personalized service than that provided by domestic real estate mediation companies, which entails higher costs.
32. Companies with which the Claimant established service provision contracts for Chinese customer acquisition always set acquisition values, in case of success, exceeding 10%, sometimes close to 20%.
33. The Tax Inspection Services (hereinafter abbreviated as SIT) accepted as an expense the commissions paid to I..., Lda., commissions that amounted to 14% of the sale price.
34. The Claimant made payments relating to the service provision contract concluded with B..., to the accounts that were indicated by its representative, J....
35. It was on the indication of Mr. J... that part of the amounts owed to B..., in the total amount of €150,000.00, were paid to the account indicated by Mr. J..., in a total of €75,000.00 and through check no.., in the amount of €75,000.00.
36. B... does not have a permanent establishment in Portugal.
37. The Claimant presented form 21 RFI, certified by the fiscal authorities of the United Arab Emirates, in which it is expressly indicated that the actual beneficial recipient of the transfers is B....
38. The Claimant made the following bank transfers:
39. The Claimant recorded in account 62262 – Sales Service Commissions, invoices issued by the entity "C... Ltd.", in the amount of €13,125.00.
40. No written contract was concluded between the Claimant and C... (C...) Ltd.
41. The Claimant presented as proof of payment a photocopy of a bank transfer made in January 2014 in favor of C... Ltd, in the amount of €10,000.00.
42. The Claimant was subject to an external inspection procedure for the tax year 2013 in compliance with Service Order no. OI2016....
43. In the course of the inspection procedure, to demonstrate the actual performance of the operations, the Claimant proceeded to present the following elements:
• Invoices issued by B...;
• Service provision contract concluded with B...;
• Proof of means of payment used in the transaction, namely photocopy of the bank transfer in favor of B..., in the amount of €50,000.00, three bank transfers in the amount of €25,000.00 each in favor of J..., representative of B..., and a check issued by the Claimant in the amount of €75,000.00 made payable to J....
44. Following the inspection procedure, the Tax Authority proceeded with corrections to the IRC taxable base for the 2013 tax year.
45. The Claimant was notified of the draft inspection report and to, if it so wished, exercise the right to hearing in accordance with article 60 of the Complementary Framework of Tax and Customs Inspection Procedure ("RCPIT") and article 60 of the General Tax Law ("LGT").
46. The final inspection report contained the following:
47. Following notification of the Draft Inspection Report, the Claimant submitted a replacement declaration of IRC Form 22, with the inspection procedure being filed away.
48. The Claimant was notified of the additional IRC assessment notice no. 2016..., the compensatory interest assessment notice no. 2016..., the default interest assessment notice no. 2016..., the settlement reconciliation statement no. 2016..., the IRC source withholding assessment notice no.... and corresponding compensatory interest assessment no. 2016..., the IRC source withholding assessment notice no.... and respective compensatory interest assessment no. 2016... and the source withholding assessment notice no.... and corresponding compensatory interest assessment no. 2016....
49. The Claimant proceeded to pay the IRC assessed in the total amount of €149,788.14 as well as the non-withheld tax in the amount of €37,500.00.
50. In the IRC assessment notice no. 2016... and respective compensatory interest assessment a set of values is indicated, which represents IRC for the 2013 tax year and the assessment may be subject to administrative complaint or judicial challenge.
51. From the compensatory interest assessment statement, the following appears:
52. On 03-05-2017, the Claimant filed an administrative complaint with the Lisbon Tax Office..., concerning said assessment notices.
53. Subsequently, the Claimant was notified of the draft decision on the administrative complaint and to, if it so wished, exercise the right to hearing.
54. The Claimant exercised the right to hearing whereby it sought to have the Tax Authority recognize the illegality of said assessment notices.
55. On 30-05-2018, the Claimant was notified of the decision denying the administrative complaint.
56. In the year 2013 the Claimant sold the following properties:
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. Reasoning of the facts established as proved and not proved
Regarding the statement of facts, the Tribunal does not need to pronounce on everything alleged by the parties, it being rather incumbent upon it to select the facts relevant to the decision and distinguish the facts proved from those not proved (see article 123, no. 2 of the Code of Tax Procedure and Process ("CPPT") and article 607, no. 3 of the Civil Procedure Code ("CPC"), applicable by virtue of article 29, no. 1, subparagraphs a) and e) of the RJAT).
Thus, the facts pertinent to the judgment of the case are selected and delineated based on their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see former article 511, no. 1 of the CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, subparagraph e) of the RJAT).
Therefore, having regard to the positions assumed by the parties, in light of article 110, no. 7 of the CPPT, the documentary evidence and the case file, and the witness evidence produced, the facts listed above were considered proved, with relevance to the decision, bearing in mind that, as stated in the Court of Appeal South judgment of 26-06-2014, delivered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".
Specifically, the facts stated under points 3, 4, 7, 8, 9, 17, 20, 21, 22, 30, 31, 32, 34, 35 and 36 are based on the testimony given, in consonance with the available documentary evidence, and even with facts that may be regarded as notorious (such as the facts stated as proved under points 4, 8 and 31).
Of particular relevance, regarding the facts stated as proved under points 17, 20, 21, 22, 32, 34, and 35, their content resulted from testimony produced which, without room for any reasonable doubt, unequivocally demonstrated the decisive intervention of B... in the sale of units to Middle Eastern citizens as well as the conduct of J... in representation of that company, including with respect to the indication of the manner of settling the amounts owed to it.
Statements made by the parties that were presented as facts consisting of strictly conclusive assertions, not susceptible to proof, and whose veracity must be assessed in relation to the concrete statement of facts established above, were neither given as proved nor as not proved.
B. ON THE LAW
As already stated, the following are the issues raised by the Claimant:
i. The IRC assessments and compensatory interest assessments suffer from a defect of form due to lack of reasoning, with the latter also suffering from omission of an essential formality due to lack of prior hearing;
ii. The expenses incurred with commissions paid to B... are tax-deductible as they correspond to operations actually performed and do not have an abnormal character or an exaggerated amount;
iii. The commissions paid to B... are not subject to autonomous taxation as the prerequisites for application of article 88, no. 8 of the CIRC are not met;
iv. The income paid to B... is exempt from source withholding pursuant to article 7, no. 1 of the Convention between Portugal and the United Arab Emirates to Avoid Double Taxation and Prevent Tax Evasion in Respect of Taxes on Income and article 98, no. 1 of the CIRC;
v. The expenses incurred with commissions paid to C... Ltd. are tax-deductible pursuant to article 23 of the CIRC;
vi. Illegality due to violation of the inquisitorial principle and pursuit of material truth.
Let us examine each of them.
*
i.
The Claimant begins by arguing that the IRC assessments and compensatory interest assessments suffer from a defect of form due to lack of reasoning, with the latter also suffering from omission of an essential formality due to lack of prior hearing.
As is well known, reasoning is a requirement of tax acts in general, being a constitutional requirement (article 268 of the Portuguese Constitution) and a legal one (article 77 of the LGT).
Briefly, it can be said that it is today undisputed in national doctrine and case law that the reasoning required must have the following characteristics:
1. Officialism: it must always proceed from the initiative of the administration, self-initiated reasoning being inadmissible;
2. Contemporaneity: it must be contemporaneous with the performance of the act, deferred reasoning being inadmissible;
3. Clarity: it must be comprehensible by an average addressee, avoiding polysemous or deeply technical concepts;
4. Completeness: it must contain all essential elements that were determinative of the decision taken. This characteristic unfolds into two requirements, namely: the duty of justification (legal norms and factuality – domain of legality) and motivation (domain of discretion or opportunity, when an assessment is needed).
Now, if reasoning is, as stated, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the reasoning required for a specific tax act should be that which is functionally necessary for it not to present itself to the taxpayer as a pure demonstration of arbitrariness. This will be – it is believed – the touchstone of compliance with the duty of reasoning: to the extent that, before an average addressee placed in the position of the actual addressee, the tax act presents itself, from a standpoint of reasonableness, as a product of pure arbitrariness by the Administration, because the reasons of fact and/or law on which it is based are not discernible, the act will suffer from lack of reasoning.
Article 77, no. 1 of the LGT provides, therefore, that: "The decision of procedure is always reasoned by means of a brief statement of the reasons of fact and law that motivated it, the reasoning being able to consist of a mere declaration of agreement with the grounds of earlier opinions, information or proposals, including those forming part of the tax inspection report."
Descending to the specific case, it is found that the assessment notices in question are reasoned exclusively on the tax return, well or badly, presented by the Claimant.
Now, as referred to in the Court of Appeal South judgment of 03-12-2015, delivered in case 07854/14:
"The reasoning of tax acts or 'acts performed in tax matters' that 'affect the rights or legally protected interests of taxpayers' was enshrined in articles 19, subparagraph b), 21, 81 and 82 of the Tax Code (see currently article 77 of the General Tax Law).
Such need for reasoning already resulted either from article 1, no. 1, subparagraphs a) and c) of decree-law 256-A/77, of 17 June, or from article 268, no. 3 of the Portuguese Constitution as amended by Constitutional Law no. 1/89 (see Gomes Canotilho and Vital Moreira, Constitution of the Portuguese Republic Annotated, 1993, p.936 et seq.; Vieira de Andrade, The Duty of Expressed Reasoning of Administrative Acts, 1990, p.53 et seq.).
Reasoning is a relative concept that may vary depending on the legal type of administrative act being examined.
It has been consistent understanding of case law and doctrine that a given act (in this case a tax administrative act) is duly reasoned whenever it is possible, through it, to discover the cognitive course used by its author to reach the final decision (see judgment of Supreme Administrative Court of 26/4/95, Portuguese Case Law Reporter, 1995, II, p.57 et seq.; A. Varela and others, Manual of Civil Procedure, Coimbra Editors, 2nd edition, 1985, p.687 et seq.; Alberto dos Reis, Annotated Civil Procedure Code, Coimbra Editors, 1984, V, p.139 et seq.). In other words, using the language of various Supreme Administrative Court judgments (see for all, judgment Supreme Administrative Court-1st Section, 6/2/90, Administrative Case Law, no. 351, p.339 et seq.), an administrative act is only reasoned if a normally diligent or reasonable addressee – a normal person – placed in the concrete situation expressed by the reasoning statement and before the specific act (which will determine, according to its diverse nature or type, greater or lesser requirement of density of reasoning elements) is in a position to know the functional (not psychological) cognitive and evaluative itinerary of the act's author. It will further be said that reasoning may be express or consist of a mere declaration of agreement of earlier opinion, information or proposal, which, in this case, constitutes an integral part of the respective act (the so-called "per relationem" reasoning – see article 125 of the Administrative Procedure Code).
If reasoning does not concretely clarify the motivation for the act, due to obscurity, contradiction or insufficiency, the act is considered not reasoned (see article 125, no. 2 of the Administrative Procedure Code). There is obscurity when the statements made by the author of the decision do not make clear the reasons why he decided as he did. In other words, the grounds of the act must be clear, so that the meaning of the reasons that determined the performance of the act can be understood with precision, thus being inadmissible the use of dubious, vague and generic expressions. Contradiction of the reasoning occurs when the reasons invoked to decide justify not the decision rendered but a decision of opposite meaning (contradiction between grounds and decision), and when grounds are invoked that are in opposition to others. In other words, the grounds of the decision must be congruent, that is, they must be premises that inevitably lead to the decision that functions as the logical and necessary conclusion of the motivation adduced. Finally, the reasoning is insufficient if its content is not sufficient to explain the reasons for the decision made. In conclusion, the reasoning must be sufficient in the sense that reasons are not left unspoken that would adequately explain the final decision (see Marcello Caetano, Manual of Administrative Law, vol.I, Almedina, 1991, p.477 et seq.; Diogo Freitas do Amaral, Course in Administrative Law, vol.II, Almedina, 2001, p.352 et seq.; Diogo Leite de Campos and Others, General Tax Law Annotated and Commented, 4th Edition, 2012, p.675 et seq.; judgment Court of Appeal South-2nd Section, 2/12/2008, case 2606/08; judgment Court of Appeal South-2nd Section, 10/11/2009, case 3510/09; judgment Court of Appeal South-2nd Section, 29/3/2011, case 4489/11).
In the specific case, it must be concluded, with the lower court, that the assessment identified in no. 1 of the statement of facts is duly reasoned, reasoning which may have summary characteristics, being a legal consequence of a tax return presented by the appellants, all as previously examined above to which reference is made, with the law expressly providing such possibility in article 77, no. 2 of the LGT (see José Maria Fernandes Pires and Others, General Tax Law Commented and Annotated, Almedina, 2015, p.835 et seq.).
Moreover, if the appellants did not consider themselves adequately informed of the reasoning of the tax act subject to this proceeding, they should have made use of the device contained in article 37, no. 1 of the Code of Tax Procedure.
In light of the above, without need for further considerations, this ground of the appeal is deemed to lack merit and the appealed decision is also confirmed on this point."
With respect to compensatory interest assessments, it has been held that "Compensatory interest functions as a penalty clause for delay in the assessment of tax attributable to the taxpayer, integrating itself in the assessment thereof, from which it derives part of its reasoning, in addition to also requiring its own segment of reasoning, but regarding its assessment, the law does not require that the Tax Authority proceed with prior hearing of the taxpayer separately and distinctly from the hearing regarding the tax from which it derives." and that "Having heard the taxpayer regarding the tax from which the compensatory interest assessment derives, it is no longer legally required that it proceed with a new hearing separately and distinctly".
In the same judgment, the following can be read, in addition to the above:
"Returning once again to the prerequisites for compensatory interest assessment as an autonomous assessment, although integrated in the tax assessment, it is evident that this must have a minimum of its own reasoning concerning, first of all, the basis of calculation, the rate applied, the time period to which it refers (4), but also and additionally, as to the fault necessary for its attribution to the taxpayer; And it is by reference to that same reasoning that it must be assessed whether the Tax Authority's power/duty to grant the taxpayer the right to prior hearing is observed.
- Now, with respect to the rate, basis of calculation and time period to which the compensatory interest refers, no margin of discretion is granted to the Tax Authority, which only has and can implement what is expressly provided for in the law, that is, regarding those prerequisites, the Tax Authority's action consists of a strictly bound procedure, so its action in that domain is not susceptible to being influenced by any arguments that the appellant could raise in order to influence the assessment act, by seeking application of a different rate or a different time period or basis of calculation, since these cannot be other than those determined by the applicable legal order.
- It is evident that the assessing entity, through oversight or for another reason, may, regarding such prerequisites, pay heed to elements it should not heed; However, such eventual circumstance does not constitute grounds for exercise of the right to prior hearing; rather, only express and clear reference to it must form part of the reasoning of the assessment so that its recipient can react against it on grounds of violation of law.
- Consequently, regarding such grounds, it is understood that the taxpayer has no right to prior hearing before compensatory interest assessment, which means that the fact that it was not afforded the exercise thereof does not constitute any procedural irregularity and, much less, any invalidating effect on the final assessment act.
- As regards fault, as a prerequisite of the interest in question, it is understood that, being a subjective judgment, it implicitly means that the taxpayer, in the exercise of hearing, can bring to the procedure elements not previously available to the Tax Authority which may exclude it in light of relevant elements for its assessment in the terms referred above; For this reason it cannot be concluded that the mere fact of the taxpayer's knowledge of the delay in tax, the applied rate and the time period inevitably implies the act of the respective assessment, so in this domain it is understood, on the one hand, as an essential formality to be observed the notification of the recipient of the final tax act to exercise, if desired, the right to hearing, and, on the other, that the omission of such power/duty is not susceptible of being downgraded to a non-essential formality.
- However, what has just been said does not mean/imply that the right lies with the appellant.
- For, as stated above, fault is a legal concept to be extrapolated from adequate and relevant factuality, so its elimination passes through demonstration of the lack of adherence to reality of that on which the assessing entity bases that conclusive judgment, by its inadequacy for such purpose at the outset by relevant justification capable of excluding it.
- Now, in the case of compensatory interest and following what is referred above, the factuality on which the judgment of fault must rest cannot be other than that which underlies the assessment of tax understood to be in default, to the exact extent that it integrates therein pursuant to no. 8 of article 35 of the LGT.
- However, thus being, if on the one hand it is inescapable that the taxpayer must be granted exercise of the right to hearing before compensatory interest assessment under penalty of invalidity of the final act, it is equally axiomatic that exercise of that right is satisfied, as regards fault, by granting him exercise of that same right before assessment of the tax to which the compensatory interest relates, for it is there that he will have to contest the adherence to reality or justification of the circumstances of fact that may constitute the grounds of that censure(5).
- Now, "in this case", it is demonstrated that the appellant was granted the right to hearing with the notification of the draft inspection action report and from which appear, as stated in the appealed decision, all the circumstances of fact that led the Tax Authority to tax him using indicative methodology as well as the calculation criteria of the "quantum", which means that no other notification had to be made to him granting exercise of prior hearing specifically by reference to compensatory interest assessment, either because such formality must be considered complied with by the notification that for that same effect was made to him with respect to the tax, or because, as to the remaining assessment prerequisites of compensatory interest, they constitute a strictly bound conduct by the Tax Authority."
This understanding was sanctioned by the Supreme Administrative Court which already held that:
"The truth, however, is that compensatory interest assessment cannot be considered a "new fact" for purposes of right to hearing, especially since the same varies depending on the time period to be considered.
By "new fact" should be understood that which may determine alteration of tax, corrections, etc. Compensatory interest assessment amounts to only a mere arithmetic operation so by itself does not justify the right to hearing.
Thus, even though at the time of the invitation to exercise the right to hearing the compensatory interest had not been assessed, the Tax Authority was not obliged to hear again the appellant merely because compensatory interest had been assessed".
On the other hand, as stated in the Supreme Administrative Court judgment of 04-12-2013, delivered in case 01111/13, "The reasoning of a compensatory interest assessment must make known, on the factual level, the amount of tax on which the interest accrues, the rate or rates applied and the period of its accrual.", with it being certain that the assessment statement contains all the elements mentioned.
Thus, and in light of the above, the vices argued by the Claimant must lack merit.
*
ii.
Next, the Claimant alleges that the expenses incurred with commissions paid to B... are tax-deductible and are not subject to autonomous taxation because they correspond to operations actually performed and do not have an abnormal character or an exaggerated amount.
At issue in this part is therefore 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 established the following insofar as relevant to the case:
"Article 65
Payments to non-resident entities subject to a privileged tax regime
1 – Amounts paid or owing, for any reason, to individuals or entities resident outside Portuguese territory and there subject to a clearly more favorable tax regime are not deductible for purposes of determining taxable profit, unless the taxpayer can prove that such expenses correspond to operations actually performed and do not have an abnormal character or exaggerated amount.
2 – An individual or entity is considered to be subject to a clearly more favorable tax regime when the territory of residence thereof is included in the list approved by regulation of the Minister of Finance or when such entity is not taxed therein on an income tax identical or analogous to personal income tax or corporate income tax, or when, regarding the amounts paid or owing 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 the said entity were considered resident in Portuguese territory.
3 – For purposes of the previous number, taxpayers must have and, when requested by the General Directorate of Tax Revenue, provide supporting documents of the tax paid by the non-resident entity and of the calculations made to determine the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence thereof is not included in the list approved by regulation 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 of 30 days."
"Article 88
Autonomous taxation rates
(...)
8 - Expenses corresponding to amounts paid or owing, for any reason, to individuals or entities resident outside Portuguese territory and there subject to a clearly more favorable tax regime, as defined under the terms of the Code, are subject to the scheme of no. 1 or no. 2, as applicable, the applicable rates being respectively 35% or 55%, unless the taxpayer can prove that they correspond to operations actually performed and do not have an abnormal character or exaggerated amount. (...)
14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points as to taxpayers that show tax loss in the period to which any of the taxable facts referred to in the preceding numbers related to the exercise of a business activity of a commercial, industrial or agricultural nature not exempt from corporate income tax."
The territory of the United Arab Emirates was included in 2013 in the "list of countries, territories and regions with privileged taxation regimes, clearly more favorable" contained in Regulation no. 292/2011 of 8 November which amended Regulation no. 150/2004 of 13 February.
At issue in the instant case is the proof, imposed by both of the above-cited rules, regarding the effectiveness of the operations and the normal or non-exaggerated character of the operations, proof whose burden, pursuant to the applicable rules, rests on the Claimant.
As stated in the Court of Appeal South judgment of 05-11-2015, delivered in case 07022/13, we are dealing with the "application of the rule of non-acceptance of deductible expenses when in question are payments made to individuals or entities installed in tax havens unless the taxpayer proves the vectors identified above:
a- We are dealing with operations actually performed;
b- Which do not have an abnormal character or the amount in question is not exaggerated."
It may further be read in the same judgment that:
"It should further be stated that the law does not require any formalism in such proofs, with the system of free proof thus applying to them and the taxpayer being able to avail itself of all means of proof permitted by law (see e.g. articles 352 et seq. of the Civil Code). Regarding proof of the truth of the operation, mere exhibition of written documents, namely contracts entered into by the parties, will not suffice since these are presumed to be simulated, nor demonstration of payment of the price, for such is not in question. What must be subject to proof is rather the actual performance of services (...) or that is, the commercial fact that was at the origin of payment of that same price that appears as a cost to be deducted for purposes of corporate income tax. As for proof of the non-existence of abnormal or exaggerated character of expenses, this must pass through demonstration that the contract, whose truth has been proved, presents itself as balanced. To that end, the taxpayer should demonstrate what the real importance of the advantages obtained from the contract in question is, such as proving that the expenses established constitute fair remuneration for those advantages, particularly by comparison with the costs of similar services in the market."
It will therefore be in light of the criterion indicated that the legality of the tax acts sub iudice must be assessed.
Let us see, then.
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As follows from the rules in question and the judicial interpretation made thereof previously set out, it must be determined whether proof is made that:
a. We are dealing with operations actually performed; and that
b. They do not have an abnormal character or the amount in question is not exaggerated.
Regarding the first circumstance, the Tax Authority considers, in summary, that "there is no proof whatsoever of the material performance of the service provided by the entity based in Dubai."
With all due respect, no reasonable doubt regarding the occurrence of the operations in question is justified in the concrete case.
Indeed, as follows from the facts proved and as the Tax Authority itself acknowledges in the Inspection Report, the Claimant had exponential growth in sales volume from 2012 to 2013 brought about by increased sales of properties to citizens from China and the United Arab Emirates.
On the other hand, the undisputed fact that the properties in question were actually sold to citizens from the Middle East, without any circumstance being found or indicated which suggests that they came into contact with the Claimant and its properties other than through the intermediation of B....
Hence, from a standpoint of normality, there should be no reasonable doubt that the services that were invoiced by B..., in conformity with the contract concluded with the Claimant, were actually performed.
As was written in the arbitral case 198/2017T, in terms transposable to the present case:
"Indeed, the fact, which is not disputed, that the Claimant sold a large quantity of properties to Chinese citizens is indirect but compelling proof that there was efficient customer acquisition activity, as without this it is not seen how they could have known that the Claimant had properties for sale. On the other hand, the fact that remuneration of B… was only paid precisely if it resulted in concretization of the sales ensures that there were no payments that did not have underlying customer acquisition activity.
For this reason, it is not justified that it not be considered proved that the expenses incurred by the Claimant with payments to B… correspond to operations actually performed.
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"; "whether those who executed it have professional experience", for, in addition to being information that normally will not be accessible to those contracting with a foreign company for customer acquisition services, there will be little concern for the purchaser when payments are made only based on results.
It must even be said that the requirement of "identification of human resources involved" and the determination of their professional experience in an activity of the described dimension goes beyond the limits of reasonableness, for in its literal sense it will encompass the identification of all those who provided airline transport services, services in restaurants and hotels, taxi drivers, etc."
Thus, it is to be considered that there is sufficient proof that the payments in question correspond to operations actually performed.
Moreover, it cannot be overlooked that regarding virtually identical services provided by company I..., the Tax Authority had no doubt whatsoever regarding the effectiveness of the operations.
In this framework, it is therefore necessary to assess whether the operations at issue do not have an abnormal character or the amount in question is not exaggerated in light of the judicial understanding referenced above according to which "the taxpayer should demonstrate what the real importance of the advantages obtained from the contract in question is, such as proving that the expenses established constitute fair remuneration for those advantages, particularly by comparison with the costs of similar services in the market."
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Regarding the verification or lack thereof of operations with abnormal or exaggerated character, the Tax Authority states in summary that:
- "the normal character may be understood as the set of intrinsic characteristics that define the nature of a good or service habitually practiced and used in business activity with the objective of effectively achieving statutory objectives";
- "Regarding exaggerated amounts in transactions, it must be assessed whether payments are appropriate to the real value of the services provided and whether the cost-benefit relationship will be appropriate."
Now, taking into account the evidence produced and the facts stated as proved, it must be concluded that both of the said criteria chosen by the Tax Authority are fulfilled.
Indeed, concretely, it is established that in 2013 the Claimant sold 54 properties that formed part of the real estate development project of the Urbanization..., Lisbon, and approximately 75% of sales made by the Claimant in 2013 were destined for citizens resident in third countries, namely China and United Arab Emirates, who benefited from the Golden Visa regime, and being also that in such sales it paid commissions identical to or higher than those now at issue.
From this it will follow, without room for reasonable doubt, that:
- the customer acquisition service for foreign citizens interested in acquiring properties in order to meet the prerequisites to benefit from the Golden Visa regime, at the time of the taxable facts, was a service habitually practiced and used in business activity to which the Claimant dedicated itself, with the objective of effectively achieving its statutory objectives; and that
- the payments are appropriate to the real value of the services provided and the cost-benefit relationship is appropriate.
Thus, as regards the first aspect indicated, it may even be regarded as a notorious fact that in the years following the institution of the Golden Visa regime and, moreover, in consonance with what was the intentionality underlying that institution, companies operating in the real estate area availed themselves of the services of companies specialized in intermediation between such companies and foreign citizens interested in acquiring properties to meet the prerequisites to benefit from the Golden Visa regime.
As regards the second aspect indicated, concretely, payments are in question in the order of values representative of 10% of the sale price of the properties.
Now, whether taking into account the value – likewise notorious – of approximately 5% practiced by domestic/traditional real estate intermediation or taking into account the values practiced by said intermediation companies that came to operate in the Golden Visa market, which in this case is established to reach values of 14%, it cannot be characterized as abnormal or exaggerated the value of 10% practiced by B..., especially in light of the circumstances and risks inherent in the services at issue which entail, on the one hand, the prospecting and accompaniment of interested parties in the acquisition of properties originating from geographies and cultural contexts very distant, and on the other, the inherent risk of such services only being remunerated in case of actual business conclusion and in function of its value.
Hence there are no doubts that the values at issue correspond, in their context, to normal operations and do not have an exaggerated character.
Restating what was written in the aforementioned arbitral judgment delivered in case 198/2017T:
"To decide whether or not there is exaggeration one cannot take as comparison terms the percentages of commissions that the Tax and Customs Authority says are usually charged by real estate companies, between 3% and 5%, for that developed by B… is not limited to what is normally carried out in real estate mediation, which does not involve expenses on the order of those proved to be borne by B… (payment for travel, accommodation, meals, transportation, interpreters, etc.).
On the other hand, the assessment of the non-exaggeration requirement should be made taking into account the situation of the taxpayer, seeking to determine whether the payment should be considered excessive from his perspective in the context in which he must decide to pay for the services.
From this perspective, payment would be exaggerated when it is demonstrated that the taxpayer could obtain the same service for a lower amount.
It follows from the evidence produced that the Claimant intended to sell the properties as quickly as possible, as it was expected that the construction and sale process of the properties would be completed by 2010, five years after the start of construction, and had still not managed to sell them by 2013 and 2014 due to the economic and financial crisis affecting Portugal.
The evidence produced is also to the effect that the Claimant could not obtain customer acquisition with payment of commissions lower than those of B…, which did not accept lower rates, nor from other service providers for customer acquisition, for none provided it customers who would pay the sale 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 customer acquisition services and there being no alternative at a lower price.
The reasonableness of payments made to B… is further strengthened by the fact that the Claimant was not affected by the payments it made to it, as it only paid when it concretized the sale of properties and what it paid to B… was added to the sale price that the Claimant itself set and intended to obtain for itself.
Based on the foregoing, it is concluded that the Claimant proved that payments made to B… were not abnormal nor exaggerated."
As referred to in the transcribed judgment, it is considered that the assessment of the normal and non-exaggerated character of the operations should relate to the specific case, taking into account the specific situation in which such operations took place, it not being possible to formulate "tables" or formulas a priori which would mechanically exclude certain types of operations from the scope of reasonableness or relegate them to the plane of exaggeration.
In the case, the commissions in question arise in the scenario of acute economic crisis where the market was practically at a standstill and where the services remunerated by those commissions bring significant added value to the product sold, at the outset and in this case by enabling its sale, freeing funds for reduction of liabilities and corresponding financial charges associated therewith.
On the other hand, the service being paid only based on result, there is an increased risk for the provider who must bear – notably – substantial costs to bring clients "from the other side of the world" and additional assurance for the service purchaser, which only arises from the obligation to pay, having assured the return resulting from concretization of its sales, it being noted also that the activity at issue allowed accommodating the additional cost while assuring a profit margin for the seller.
Finally, in the case no indication is detected or substantiated by the Tax Authority of any fraud or tax evasion.
Hence it should be considered that the commissions paid to B... are deductible for tax purposes and that the corresponding payments are not subject to autonomous taxation as they correspond to operations actually performed and do not have an abnormal character or an exaggerated amount.
Thus and in light of all the foregoing, it is considered that the tax act subject to the present arbitration action suffers in this part from error in the statement of facts and consequent error in law and should therefore be annulled, accordingly proceeding in this part the arbitration request.
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iii.
The Claimant continues arguing that the income paid to B... is exempt from source withholding pursuant to article 7, no. 1 of the Convention between Portugal and the United Arab Emirates to Avoid Double Taxation and Prevent Tax Evasion in Respect of Taxes on Income and article 98, no. 1 of the CIRC.
The issue arises insofar as the payments that the Claimant states were made to B... were made in the name of J....
As the Tax Authority states, the exemption from source withholding on the payments at issue is dependent "on presentation of form 21 RFI, duly certified by the fiscal authorities of that country, in the name of the actual beneficial recipient of the income."
And as follows from the facts proved, the Claimant presented form 21 RFI certified by the fiscal authorities of the United Arab Emirates in which it is expressly indicated that the actual beneficial recipient of the transfers is B....
What must therefore be determined is whether the actual beneficial recipient of the payments at issue was the recipient thereof – J... – or whether rather it was company B....
Now as follows from the facts proved, payments were made at the indication of said J... as representative of company B... to the bank accounts identified by him.
Hence it cannot be concluded otherwise than that J... is not the actual beneficial recipient of the payments at issue.
Indeed, contrary to what the Tax Authority assumes, it is a matter of public knowledge that payments are not always made directly to the creditor, it being legal and admissible that they be made to third parties at the creditor's instruction, as moreover is expressly provided for in article 770 of the Civil Code.
On the other hand, it is likewise notorious that the concept of actual beneficial recipient of the payment does not necessarily equate to the concept of recipient of the payment as the person who financially receives it, instead aiming rather to encompass the holder of the economic interest satisfied with the payment.
From this standpoint there is no doubt that the Claimant settled debts to B..., so this will be the actual beneficial recipient of the operations at issue.
Hence it must be held that the source withholding on such payments is improper and accordingly the arbitration request also proceeds on this point.
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iv.
Finally, the Claimant sustains that the expenses incurred with commissions paid to C... Ltd. are tax-deductible pursuant to article 23 of the CIRC.
Regarding this matter, it is not deemed possible to uphold the Claimant's position.
Indeed, regarding the burden of proof in this matter, it has been held by national case law that:
"1. Only costs that do not have a causal and justified relationship with the productive activity of the company are not indispensable, that is the indispensability of fiscal expenses must be understood "as referring to the connection of costs to the activity developed by the taxpayer".
2. It is certain that the burden of proof of indispensability of its costs does not fall on the taxpayer.
3. However, if the tax authority/Tax Authority, acting subject to the principle of legality, with grounds, triggers doubt about the justified relationship of a particular expense with the activity of the taxpayer, necessarily and logically, as it is better positioned to do so, it falls to the latter an explanation of the "economic congruence" of the operation which cannot be fulfilled with abstract and conclusive allegation that the expense is in the interest of the company and/or the existence of justified relationship with the activity developed, instead requiring that the taxpayer allege and prove concrete facts subject to examination capable of demonstrating the reality, truthfulness of the business actions giving rise to the expenses recorded in order that among other things the control function of the Tax Authority is not rendered impossible."
In the case it is considered that the prediction of no. 3 of the summary of the transcribed Judgment is verified, that is, the Tax Authority raised grounded doubt about the justified relationship between the expense recorded by the taxpayer and the activity of the latter.
And it bases such doubt essentially on the circumstance that "the invoice issued by the Chinese entity with the indication 'sample' does not itemize the good or service provided, containing only the generic designation: 'commission', does not reference or identify the property in question, its location, unit, urbanization in which it is inserted, or even the buyer."
As such grounds cannot be deemed unjustified, it must be considered that "necessarily and logically, as it is better positioned to do so, it falls to the latter an explanation of the 'economic congruence' of the operation which cannot be fulfilled with abstract and conclusive allegation that the expense is in the interest of the company and/or the existence of justified relationship with the activity developed, instead requiring that the taxpayer allege and prove concrete facts subject to examination capable of demonstrating the reality, truthfulness of the business actions giving rise to the expenses recorded in order that among other things the control function of the Tax Authority is not rendered impossible."
Now the Claimant did not allege and consequently did not prove any "concrete facts subject to examination capable of demonstrating the reality, truthfulness of the business actions giving rise to the expenses recorded in order that among other things the control function of the Tax Authority is not rendered impossible."
In this manner, as the burden of proof incumbent on the Claimant is not met the arbitration request in this part must lack merit.
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v.
Finally, the Claimant sustains the occurrence of illegality due to violation of the inquisitorial principle and pursuit of material truth, insofar as in summary "the Tax Inspection Services intending to demonstrate the incorrect accounting of expenses could not have failed to provide proof of the prerequisites on which such incorrect accounting by the Claimant was based. which is not the case here."
Now as already seen the assessment notices now in issue rest on the replacement declaration presented by the Claimant and not on the inspection procedure to which it was subject.
Hence regardless of the occurrence or lack thereof of the argued violations of the inquisitorial principle and pursuit of material truth in the inspection procedure, such violations would not be in any case susceptible of repercussing on the assessments sub iudice to the extent that these do not rest on the conclusions thereof but on the Claimant's declaration.
The arbitration request must therefore lack merit on this point.
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vi.
In light of all the foregoing, the arbitration request formulated must partly proceed regarding:
a) The tax assessed resulting from non-consideration as deductible expenses of payments made to B...;
b) The tax relating to autonomous taxation applied to those same payments;
c) The tax relating to source withholding on the payments to said B..., in the person of J....
Consequently the tax assessment and corresponding interest notices should be annulled with the arbitration request lacking merit as to the remainder.
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vii.
As to the request for compensation interest formulated by the Claimant, article 43, no. 1 of the LGT provides that compensation interest is due when it is determined that there was error attributable to the services from which results payment of the tax debt in an amount higher than legally due.
In the case the error affecting the partially annulled assessments is attributable to the Tax and Customs Authority which issued them without the necessary legal support.
The Claimant therefore has the right to be reimbursed the amount it paid (pursuant to the provisions of articles 100 of the LGT and 24, no. 1 of the RJAT) by force of the partially annulled acts and further to be compensated for the improper payment through payment of compensation interest by the Respondent from the date of such payment until its reimbursement at the legal suppletory rate pursuant to articles 43, nos. 1 and 4 and 35, no. 10 of the LGT, article 559 of the Civil Code and Regulation no. 291/2003 of 8 April.
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C. DECISION
For these reasons the Arbitral Tribunal decides to render partially merited the arbitration request formulated and in consequence:
a) Partially annul, in the terms above determined, the additional IRC assessment notices no. 2016..., for the tax year 2013, in the amount of €159,713.33, compensatory interest assessment no. 2016..., in the amount of €13,335.41, default interest assessment no. 2016..., in the amount of €253.96, and the settlement reconciliation statement no. 2016... from which results the amount payable of €149,788.14;
b) Annul the IRC source withholding assessment notice no... relating to the period of June 2013 in the amount of €6,250.00 and corresponding compensatory interest assessment no. 2016..., in the amount of €819.86, the IRC source withholding assessment notice no... relating to August 2013 in the amount of €12,500.00 and respective compensatory interest assessment no. 2016..., in the amount of €1,557.53, and the source withholding assessment notice no... relating to the period of October 2013 in the amount of €18,750.00 and corresponding compensatory interest assessment no. 2016..., in the amount of €2,210.95;
c) Annul, consequently and correspondingly, the decision denying the administrative complaint that maintained said assessment notices now annulled;
d) Condemn the Respondent to payment of compensation interest in the terms fixed above;
e) Condemn the parties in case costs in proportion to their respective failure to succeed fixing the amount of €60.00 charged to the Claimant and €3,612.00 charged to the Respondent.
D. Case Value
The case value is fixed at €191,876.48 pursuant to article 97-A, no. 1, a) of the Code of Tax Procedure and Process applicable by force of subparagraphs a) and b) of no. 1 of article 29 of the RJAT and no. 3 of article 3 of the Regulation on Costs in Tax Arbitration Proceedings.
E. Costs
The arbitration fee is fixed at €3,672.00 pursuant to Table I of the Regulation on Costs of Tax Arbitration Proceedings to be paid by the parties in proportion to their respective failure to succeed as the request was partially merited pursuant to articles 12, no. 2 and 22, no. 4 both of the RJAT and article 4, no. 5 of the said Regulation.
Notify.
Lisbon, 17 June 2019
The Presiding Arbitrator
(José Pedro Carvalho)
The Arbitrator Member
(Isaque Marcos Lameiras Ramos)
The Arbitrator Member
(Ana Teixeira de Sousa)
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