CAAD 382/2018-T: IRC Deductible Expenses and Autonomous Taxation for Services from Favorable Tax Regime Territories

ARBITRAL DECISION (consult full version in PDF)

I – Report

1. On 3.08.2018, the Claimant, A..., LDA, with registered office at Rua ..., no..., in Lisbon, taxpayer identification number ..., requested from CAAD the establishment of an arbitral tribunal, pursuant to Article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to only as "LFRTA"), in which the Tax and Customs Authority (TA) is the Respondent, with a view to annulling the decisions that were rendered on the hierarchical appeals which it filed against the dismissal of gracious complaints that it submitted regarding the following additional corporate income tax (CIT) assessments and compensatory interest:

The Claimant also petitions for the annulment of the assessments identified and furthermore, alleging that it has paid the amount of the same, the condemnation of the TA to payment of compensatory interest which it considers to be due by such payment.

1. The request for establishment of the arbitral tribunal was accepted by the President of CAAD and notified to the TA.

Pursuant to the provisions of Article 6, no. 1 of the LFRTA, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable time limits, the undersigned were designated as arbitrators, who communicated their acceptance of the assignment within the regularly applicable time limit.

The Arbitral Tribunal was established on 22 October 2018.

1. The grounds presented by the Claimant in support of its claims were, in summary, as follows:

• The Claimant is assessed for Corporate Income Tax (CIT) under the general taxation regime and develops the activity of lease of real property, having sold in the fiscal years 2013 and 2014 some autonomous units.

• It was the subject of an external internal inspection procedure of partial scope, in the context of CIT, relating to the years 2013, 2014, covered by service orders nos OI2016... and OI2016... and of internal inspection to the year 2015, for purposes of controlling the deduction of tax losses, in accordance with service order no. OI2016....

• In the context of these procedures, the tax inspection considered, as far as the matter at issue is concerned, that:

  • Expenses relating to invoices for advertising paid to an entity resident in Hong Kong could not be deducted from taxable profit, on the basis of Article 65 of the CIT Code in the wording in force in 2013 and Article 23-A, paragraph r) of the same Code in the wording in force in 2014;

  • Such expenses should be subject to autonomous taxation pursuant to Article 88, nos. 8 and 14, of the CIT Code;

• The disregard of expenses referred to in subparagraph a) eliminated, in their entirety, the tax losses that the Claimant had reported in 2015, a circumstance that resulted in the additional assessment made for this fiscal year.

• The present request for arbitral pronouncement has as its object the dismissal of the hierarchical appeals presented against the assessments of the years 2013, 2014 and 2015, by virtue of which the aforementioned CIT assessments were maintained, made in accordance with what was recommended in the Inspection Report.

• On 20 April 2013, the Claimant entered into a contract with B...., with registered office in Hong Kong (hereinafter simply designated as "B..."), whereby the latter undertook to secure customers in the Chinese market for the apartments that the Claimant had for sale, obtain the signature of the reserve, provide them with documents relating to the apartments, organize and provide them with assistance on trips with a view to visiting the same, obtain the necessary documentation for the completion of the promise and sale and provide the necessary assistance to the execution of the contracts.

• Extensive documentation was attached to the Gracious Complaint of CIT for the years 2013 and 2014 with correspondence between the now Claimant and B... that demonstrates the materiality of the services.

• As stated in the CAAD judgment delivered in case no. 198/2017-T, any "provision of services for securing customers for the acquisition of real property is obviously evident, as it is a regulated professional service activity, precisely concerning real property (Decree-Law no. 69/2011, of 15 June) and, like any professional activity, is remunerated" and therefore "what would constitute abnormality would be the provision of free services to the Claimant, with B... bearing the expenses of the activity".

• The facts demonstrate that the Claimant managed to sell apartments to Chinese customers and this was possible because it hired a specialized entity that committed itself to promoting its apartments, took charge of all the logistics of the operation and brought such customers to it.

• Obviously, without the intermediation of B... it would hardly have access to all of this.

• Therefore, one cannot in this case conclude differently from what one concludes in the cited Judgment: "Under these conditions, 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".

• And thus, it must be concluded that the orders rendered on the hierarchical appeals that maintain the assessment acts relating to the years 2013 and 2014 suffer from a defect of violation of Articles 65 and 23 of the CIT Code, in the respective versions that were in force in those years.

• They further violate Article 88 of the same Code, whose application depends on the verification of the legal prerequisites for the disregard of the expenses here in question in light of those articles.

• As regards CIT of 2015, since the assessment in question is a consequence of the corrections made to the years 2013 and 2014, the respective assessment has as its basis these assessments, so it is affected by the defects that these suffer.

1. The TA, called to make a pronouncement, contested the Claimant's claim, defending itself by objection, in summary, with the following grounds:

• Regarding the contested corrections, the Claimant, after setting forth its position regarding them, comes to urge the deductibility of the expenses and as supporting documents for the respective operations presented invoices from the entity "B...", relating to "marketing consulting".

• Taking into account the generic description of the services, as well as the fact that the supplier is domiciled in a territory with a more favorable taxation regime, the Claimant was notified, pursuant to Articles 23-A and 65 of the CIT Code (2013 and 2014), to provide proof that the services contained in that invoice corresponded to operations actually carried out and that those same services did not have an abnormal character or an exaggerated amount.

• In response to the TA, the Claimant, besides payment, did not identify the nature of the services provided, namely that the same corresponded to operations actually carried out, relating to "marketing consulting" services.

• Eventually, it may come to be proven that the Claimant was, in fact, a recipient of intermediation services in the sale, taking into account, not only the contract and respective amendment attached to the case file, as the detailed description of the invoice where the detail of the services is greater, the connection that the Respondent found between each of the invoices and the sale of real property and the documents referred to in point 24 of the PPA.

• These are payments to entities resident outside Portuguese territory and there subject to a clearly more favorable fiscal regime [in the concrete case of Hong Kong, a territory that appears in the list of Decree no. 150/2004, amended by Decree no. 292/2011, applicable in the years under analysis].

• The law imposes on the taxpayer the obligation to demonstrate the occurrence of the operations and the reasonableness of the payments made, establishing a clear reversal of the burden of proof.

• The legislator, well knowing the difficulties in ascertaining (disclosing) the operations conducted by offshore companies, adopted the solution of the reversal of the burden of proof, making it thus indispensable, pursuant to the legal norms in question, that the debtor taxpayer provide proof that such expenses correspond to real operations and that they do not have an abnormal character or an exaggerated amount.

• This double proof implies the following:

  • First, the taxpayer must demonstrate that the expenses in question correspond to real operations, endowed with legal and material existence;

  • Second, the taxpayer must prove that these expenses do not have an abnormal character or are not excessive, for which purpose it is generally required to refer to comparable situations in the market, defining the normal market standard.

• From the factuality presented, it follows that the Claimant did not prove during the inspection procedure (and continues to not prove) that the payments made correspond to operations actually carried out of advertising or that, having happened to admit, intermediation services, these are normal and not of excessive value.

• That is, the Claimant did not prove that advertising services were provided to it and, should these be intermediation services, did not prove the normal value thereof, namely, by providing proof that other operators charge an amount close to what was invoiced for the provision of similar services, and to reiterate, it is the Claimant's burden to provide such proof.

• As to the first of the prerequisites, that is, the demonstration by the Claimant that the expenses in question correspond to real operations, endowed with legal and material existence, as was well concluded in the TIR, the documentary evidence presented does not clearly demonstrate the carrying out of the advertising services shown in the invoices.

• No study or pamphlet having been submitted, which was prepared, of promotional material or conferences, or any other, relating to such advertising services.

• Although the Claimant was duly notified to that effect, it failed to prove the effectiveness of the operations, a proof to which it was obliged by virtue of the provisions of Articles 23-A and 65 (as per the year) of the CIT Code.

• In addition to the lack of proof of the effectiveness of the operations, the Claimant also, regarding the normal character and not exaggerated values paid to entities located in Hong Kong, presents no proof whatsoever.

• The correction promoted by the tax inspection services does not suffer from any defect and should thus be judged that the arbitral request is unfounded.

1. On 19 December 2018, the meeting referred to in Article 18 of the LFRTA was held, at which the testimony of the witnesses called by the Claimant was heard.

2. The parties submitted written pleadings in which, in addition to making a critical assessment of the testimonial evidence produced, they reiterated the positions already set forth in the initial petition and response.

II – Sanitation

1. The tribunal is materially competent and is regularly constituted pursuant to the LFRTA.

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

The case does not suffer from defects that would invalidate it.

1. It is necessary to resolve the following issues:

a) Are the assessments and the administrative decisions subject to these proceedings illegal?

b) Should the TA be ordered to pay the Claimant the compensatory interest petitioned?

III – Factual Matters

1. The following facts are considered proven:

• The Claimant is assessed for CIT under the general taxation regime and develops the activity of lease of real property, having sold in the fiscal years 2013 and 2014 some autonomous units.

• On 20 April 2013, the Claimant entered into a contract with B..., with registered office in Hong Kong, hereinafter simply designated as "B...", whereby the latter undertook to secure customers in the Chinese market for the apartments that the Claimant had for sale, obtain the signature of the reserve, provide them with documents relating to the apartments, organize and provide them with assistance on trips with a view to visiting the same, obtain the necessary documentation for the completion of the promise and sale and provide the necessary assistance to the execution of the contracts.

• For such services, the Claimant agreed to remuneration of 15% (fifteen percent) on the sale value of the said apartments and also a contribution of €2,000.00 (two thousand euros) per person to cover transport, with a limit, per apartment, of €4,000.00 (four thousand euros).

• This contract was amended on 7 January 2014, pursuant to which B...'s remuneration was changed to 20% of the sale price of the apartments and an additional remuneration of 5% on the price of furniture that would be sold to equip the same apartment was established.

• On 23 August 2013, the Claimant obtained a certificate of residence issued by the competent authorities of Hong Kong attesting that B... was a society resident in that territory, for the purposes of the Double Taxation Convention concluded between Portugal and Hong Kong for the year 2013, having also obtained, on 18 February 2014, an equal certificate for the year 2014.

• The services provided by B... were the subject of invoicing, the description of which was, with the exception of the invoice attached as document no. 5 to the Gracious Complaint of the years 2013 and 2014, "marketing consulting".

• These invoices provide the following description of services:

  • Identification of investors;
  • Preparation of dossiers for each apartment;
  • Preparation of promotional material;
  • Promotional activities in China (road shows, etc.);
  • Mailings to identified clients;
  • Provision of transport to potential interested parties;
  • Organization of visits to Portugal and to the apartments;
  • Legal and financial support;
  • Preparation of documentation;
  • Creation and maintenance of web platforms;
  • Post-sale service;
  • Support in the process of obtaining residence.

• Each invoice issued by B... relates to the sale of a specific apartment and to a specific buyer secured by B..., who is identified in it.

• In the correspondence exchanged between the Claimant and B... the employees of the latter who developed the services provided are identified: C..., D..., E..., F... and G....

• The services mentioned in the invoices issued by B... were actually carried out by it and paid by the Claimant.

• When the contract referred to in b. was concluded, the Claimant had, for about three years, several real properties for sale without managing to transact them, as a result of the crisis existing in the real estate market, bearing the banking charges with the loans it had contracted to acquire them.

• After the conclusion of the same contract, some real estate brokerage companies operating in Portugal began to offer services similar to those contracted, oriented towards the Chinese market, charging commissions not lower than those charged by B....

• The Claimant timely submitted income tax returns of models 22 of CIT for the years 2013 to 2015, with the expenses referred to in the invoices in question being considered in the same.

• The Claimant was subject to an external internal inspection procedure of partial scope, in the context of CIT, relating to the years 2013, 2014, covered by service orders nos OI2016... and OI2016... and of internal inspection to the year 2015, for purposes of controlling the deduction of tax losses, in accordance with service order no. OI2016....

• From the Tax Inspection Report for the years 2013 and 2014, the following is recorded, in particular:

  "It is observed, therefore, that in relation to the two fiscal years it is possible to establish an unequivocal correspondence between the unit sold, the Chinese customer and the expense with advertising imputed to the sale of the unit.

  A... incurred and paid the expenses with advertising invoiced by a single company with the designation B..., with registered office in HONG KONG, whose values reach an average of 15.1% in 2013 (€640,615.00 / €4,244,100.00) and 18.6% in 2014 (€597,070.00 / €3,211,600.00), percentages which are assumed to be high in relation to the value of the units. In fact, the expenses with advertising are absorbing between 15.1% and 18.6% of the sale value of the corresponding units, which prejudices the profitability of the company, which was negative, and which even the positive gross margin of sales could not offset, given that accounting losses were achieved (-€556,612.12 in 2013 and -€69,530.88 in 2014). Note that the gross margin was €680,459.20 in 2013 (€4,244,100.00 - €3,563,640.80) and €538,869.37 in 2014 (€3,211,600.00 - €2,672,730.63), while the expenses with advertising (already purged of VAT and corrected by €140,000.00 which are deducted from 2014 and imputed to 2013) were €640,615.00 and €597,070.00, respectively.

  That is, despite the gross margins of merchandising being positive and of significant value, they are absorbed by the expenses with supplies and external services relating to advertising.

  (…)

  III.2 – Advertising and propaganda

  III.2.1 – Problem statement – requirements for obtaining residence authorization

  Following the approval of Law no. 29/2012, of 9 August, which made alterations to Law no. 23/2007, of 4 July, the Portuguese government approved in 2012 legislation that altered the legal framework for entry, stay and exit of foreigners from national territory, allowing foreign citizens not members of the European Union, through investment activities, to obtain a special residence authorization, denominated "GOLD VISA" or "GOLDEN VISA", which allows foreign investors to circulate through the countries of the "Shengen" area.

  This residence authorization is granted to citizens who request it, provided they meet certain requirements, especially those related to investments, acquisition of real property and/or generation of employment, identified below:

  • Acquisition of real property of value equal to or greater than €500,000.00, where the investment may correspond to one or several real properties;

  • Transfer of capital in an amount equal to or greater than €1,000,000.00;

  • Investment that leads to the creation of at least 10 jobs.

  (…)

  In this context, it was verified that A... sold during the course of 2013 and 2014 several units to Chinese citizens, for a value greater than €500,000.00 each, facts which clearly reveal the objective of these citizens to be included in the legal provision that regulates the entry, stay and exit of foreigners from national territory, with the objective of obtaining residence authorization for free circulation in the "Shengen" area.

  Notwithstanding that the expenses with advertising and "marketing" are reflected in the accounting of A..., a different question is that of assessing the fiscal deductibility thereof, given that they assume relatively high values, and were paid to a non-resident entity of national territory. It will thus be necessary to determine whether in light of the fiscal regulations it is within A...'s power to be able to deduct them for purposes of determining the fiscal result. (…)

  Article 65 of the CIT Code provides as follows, applicable in 2013:

  "Article 65

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

  1 – Amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable fiscal regime are not deductible for purposes of determining taxable profit, unless the taxpayer can prove that such charges correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.

  2 – A natural or legal person is considered to be subject to a clearly more favorable fiscal regime when the territory of residence of the same appears in the list approved by regulation of the Minister of Finances or when it is not there subject to taxation in an income tax identical or similar to IRS or CIT, or when, in relation to the amounts paid or owed mentioned in the previous number, the amount of tax paid is equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory.

  3 – For purposes of the provision of the previous number, taxpayers must possess and, when requested by the Tax Directorate General, provide supporting elements of the tax paid by the non-resident entity and the calculations made for determining the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence of the same is not included in the list approved by regulation of the Minister of Finances.

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

  5 - The provision of the previous numbers is also applicable to amounts paid or owed indirectly, in any capacity, to the same natural or legal persons, when the taxpayer has or should have knowledge of the destination of such amounts, such knowledge being presumed when there are special relationships according to no. 4 of Article 63 between:

    a) The taxpayer and the natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable fiscal regime; or
  
    b) The taxpayer and the representative, fiduciary or interposed person who proceeds to make payment to the natural or legal persons referred to in the previous subparagraph."
  

  For its part, Article 23-A added to the CIT Code by Law no. 2/2014 of 16 January, which republished this Code, and applicable in 2014, determines:

  "Article 23-A Non-deductible charges for fiscal purposes

  1 - The following charges are not deductible for purposes of determining taxable profit, even when accounted as expenses of the taxation period:

  …

  r) Amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory, and there subject to a fiscal regime identified by regulation of the member of Government responsible for the area of finances as a clearly more favorable taxation regime, unless the taxpayer proves that such charges correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.

  …

  7 - The provision of subparagraph r) of no. 1 also applies to amounts paid or owed indirectly, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable fiscal regime, when the taxpayer has or should have knowledge of their destination, such knowledge being presumed when there are special relationships, according to no. 4 of Article 63, between the taxpayer and the said natural or legal persons, or between the taxpayer and the representative, fiduciary or interposed person who proceeds to make payment to the natural or legal persons.

  8 - The Tax and Customs Authority notifies the taxpayer to produce the proof referred to in subparagraph r) of no. 1, with a time period not less than 30 days being set for that purpose.

  …

  These norms clearly aim to combat a sort of evasive or fraudulent operations, through payments in favor of non-resident entities and established in jurisdictions of privileged fiscal position, in order to transfer income generated and located in Portugal to places with more favorable fiscal regimes, with reduced or non-existent taxation, and traditionally opposed to collaboration in the sense of providing information for fiscal purposes. The enactment of the same immediately determines the general principle of non-deductibility of expenses incurred with this type of payments consecrating, however, a safeguard clause, which operates by means of the reversal of the burden of proof, directing it to the taxpayer, to whom it will befall to comply cumulatively with two conditions, in which case if it does, the expenses will be admissible for purposes of determining the fiscal result:

  • The expenses correspond to real operations;

  • They do not have an abnormal character or an exaggerated amount.

  This is a double proof that will befall the taxpayer to produce, which, in the first place, must demonstrate that the expenses materialized in actual acts, the mere formal existence not being sufficient such as contracts, invoices and bank transfers and, in the second place, that these expenses are not abnormal or excessive, which may be done by confrontation with comparable situations in the market in a context of full competition.

  It should be noted that case law may understand that the second condition encompasses two requirements, which operate cumulatively, so that the burden on the taxpayer is directed to three and not just two:

  • That the expenses in question correspond to operations actually carried out – has to do with substance;

  • That the said operations do not have an abnormal character – has to do with nature;

  • That they do not have an exaggerated amount – has to do with the "quantum".

  (…)

  In the absence of these demonstrations, the non-deductibility of the expenses in question is verified and the consequent reintegration of the respective amounts in the fiscal result.

  (…)

  III.2.3 – Verification of compliance with deductibility requirements

  According to A..., in accordance with the characteristics of the Chinese market, the intermediation in the sale consisted of services provided with a view to advertising and "marketing", and as such were accounted for, and not as commissions, as would be more usual in the Portuguese market.

  It will thus be necessary to determine whether there is compliance with the requirements that prevent the disregard as expenses of the fiscal year, of the advertising in which the company accounts as having incurred, whose amount, excluding VAT, was €640,615.00 in 2013 and €597,070.00 in 2014.

  In this context, and in compliance with the formality of no. 4 of Article 65 (for 2013) and no. 8 of Article 23-A (for 2014) of the CIT Code, the company was notified on 07 June 2016 to present by 12 July 2016 documentary proof of actual compliance with the requirements regarding the materiality of the operations and absence of their abnormal character and exaggerated amount, as well as the proof documents referred to in no. 2 of Article 98 of the CIT Code (for 2013 and 2014) that prove the waiver of withholding (see Annex 7 with 7 pages).

  After the period granted in the notifications elapsed, the following was responded for the two fiscal years (see Annex 8 with 3 pages):

  "Given the need to attract foreign investment to Portugal, the Government created, in August 2012, a regime for the granting and renewal of so-called "golden visas" to citizens of countries not belonging to the European Union willing to invest in Portugal. The Special Regime of Residence Authorization for Investment Activity in Portugal was very positive for our company since it allowed it access to other markets, namely the Chinese market to carry out its sales given that the Portuguese market was in strong contraction.

  With this environment, it was thus possible for the company to stimulate sales, and to that end it undertook marketing actions aimed at those markets which later came to be concretized in sales whose deeds we attach. These actions were developed through the company B.... This situation had as impact the reduction of our merchandising margin through the increase in marketing costs, advertising and respective provision of services to customers.

  The advertising expenses and provision of services charged by the firm B... relating to the year 2013 amounted to €500,615.00, and are documented with contract, invoices and respective payment documents already delivered to your tax inspector, as well as the RFI."

  For 2014 the response is the same, with the particularity of mentioning that expenses amount to €657,150.00, although in reality they total €737,070.00, as per invoices identified in the tables of subsection II.3.8.3-iii)-B.

  In addition to these responses, the following documents are included:

  • sale deeds of the units (which appear in the accounting);
  • service provision contract designated "Framework Agreement" with the company B... (see Annex 9 with 5 pages):

  III.2.3.1 - Regarding the existence of a more favorable fiscal regime

  At the outset, it must be determined whether the jurisdiction of privileged fiscal position is included in the legal provision of no. 2 of Article 65 applicable in 2013, and subparagraph r) of no. 1 of Article 23-A, in force in 2014, both of the CIT Code. Now, in the concrete case of HONG KONG, it is the jurisdiction listed in no. 31 of Decree no. 292/2011, applicable in the years under analysis of 2013 and 2014, so for the situation in question and for the two fiscal years, the sole premise of inclusion in the list approved by regulation of the Minister of Finances applies in common. That is, when it is verified that amounts are being paid to an entity, in this case the legal person B..., resident outside Portuguese territory and located in a jurisdiction listed in the aforementioned regulation, the condition that determines the verification of the premise for the subsumption in the concept of clearly more favorable fiscal regime occurs.

  III.2.3.2 - Regarding the requirement of actual completion of the operations

  It is incumbent upon the taxpayer to demonstrate that the operations involving payments to non-residents subject to a more favorable fiscal regime were actually carried out. This reversal of the burden of proof is materialized in the demonstration of the effectiveness of the carrying out of the operation which, if not supplied, implies that the charges resulting from it are not deductible.

  Now, from the documentary analysis it was found that A... has in its files the deeds and the "Framework Agreement" attached to the responses and furthermore:

  • Invoices issued by said service provider;
  • Means of payment of invoices through bank transfers from H..., in which the beneficiary of the payments coincides with the issuer of the invoices.

  However, although this set of documents furnishes the operation with the fulfillment of formal requirements, it lacks being proven substantively, a gap that was not filled for the following reasons:

  • It was not evidenced that any action, advertising campaign or equivalent, concrete and effective, was carried out by said service provider company aimed at the sale of units;

  • That having occurred, the same was appropriate and directed to the objective, that is, in the eventuality of having been carried out was it intended to try to sell units or rather any other product?

  • Product which might not even be commercialized by the company;

  • The proof that the service was in fact provided through the presentation, in particular, of market prospecting studies, advantages in investment, marketing campaigns, since no evidence of the same was presented in paper, recordings, video, computer media, digital or any other medium;

  • And even if such physical evidence of the work carried out were shown, it would still be necessary to demonstrate the adequacy of each of them to the requirements of Article 23 of the CIT Code;

  • And that, beyond the contract, no exchange of any correspondence or contacts with the alleged service provider, connected with the services that allegedly it intermediated, was evidenced.

  It is not sufficient, therefore, the existence of contract, invoices or bank transfers; it is necessary to have evidence of a whole set of carrying out of actions, activities or concrete advertising campaigns, that is, of complementary justifying elements to the fiscally relevant documentation, without which well-founded doubts remain about the effective carrying out of the operations that the invoices intend to substantiate.

  In summary, there is no proof whatsoever of the material completion of advertising by the company based in HONG KONG. In the response to the notification, only a brief justification of the commercial strategy followed by the company was described, which it is not the TA's responsibility to evaluate or assess, as it is a decision of the strict domain of business management, but that provides no concrete element about the advertising allegedly carried out by the HONG KONG company.

  Moreover, the invoices themselves of the said company are deficient in their description by only laconically referring to "Marketing Consulting" without any specification or reference to the concrete acts of marketing allegedly practiced.

  Now, not overlooking that pursuant to the legislation already cited, it is the duty of A... to demonstrate the material evidence that sustains that advertising was carried out, the same failed to do so, so this requirement of deductibility is not filled.

  III.2.3.3 – Regarding abnormal character

  Although the CIT Code does not define or delimit what is the abnormal character of an expense or, to the contrary, by the positive, the normal character, this may be understood as the set of intrinsic characteristics that define the nature of a good, service or act, habitually practiced and used in business activity and which, being necessary, has attributes of consonance with the objective of effectively achieving the statutory objectives.

  In the abstract, advertising could undoubtedly contribute to that objective, and thus be assumed as a normal expense; however, if A... did not evidence that the said service provider company practiced any concrete act aimed at promoting the sale of units, the legitimate question arises of whether what is invoiced as advertising is in reality an expense of that nature.

  That is, if it failed to prove substance, it is not possible to assess whether what is qualified as advertising or "Marketing Consulting" will not instead be some other type of expense, although labeled as such so that in the context of CIT it can be fiscally deducted. That is, if the proof of economic materiality failed, it leaves open the suspicion, inherent in the legal presumption of the norms of Articles 65 and 23-A of the CIT Code, that it is an expense which, being able to be unknown, will not rather have a strange nature, uncharacteristic and devoid of economic rationality, in relation to the statutory objectives, in which case it will already not be normal, but instead misaligned with business habits.

  Whereby it is concluded that, A... having failed to produce any material proof that permits assessing the intrinsic nature of the expense, or its consonance with the business activity, it is not possible to assess its normal character. Also here it failed to meet the burden that the law imposes on it.

  III.2.3.4 – Regarding exaggerated amount

  To assess this characteristic, that is, that payments are adequate to the real value of services provided, it appears that the cost-benefit relationship would be appropriate, the condition being considered met provided that revenues compensate the respective expenses, that is, that future revenues are of such amount that they justified the respective charge, excepting cases where the attempt to penetrate other markets was not successful and the service inherent to the expense was actually carried out.

  Concretely, and as already previously referred, the sales were directly carried out by A... to Chinese customers, without intermediaries, although incurring and paying expenses with advertising invoiced by a single company with the designation B..., with registered office in HONG KONG, whose values reach an average of 15.1% in 2013 (€640,615.00 / €4,244,100.00) and 18.6% in 2014 (€597,070.00 / €3,211,600.00), percentages which are assumed to be high in relation to the value of the units. In fact, the expenses with advertising are absorbing between 15.1% and 18.6% of the sale value of the corresponding units, which prejudices the profitability of the company, which was negative, and which even the positive gross margin of sales could not offset, given that accounting losses were achieved (-€556,612.12 in 2013 and -€69,530.88 in 2014). Note that the gross margin was €680,459.20 in 2013 (€4,244,100.00 - €3,563,640.80) and €538,869.37 in 2014 (€3,211,600.00 - €2,672,730.63), while the expenses with advertising (already purged of VAT and corrected by €140,000.00 which are deducted from 2014 and imputed to 2013) were €640,615.00 and €597,070.00, respectively.

  (…)

  That is, despite the gross margins of merchandising being positive and of significant value, they are absorbed by the expenses with supplies and external services relating to "marketing" paid to the advertising company located in HONG KONG.

  Now, in situations involving human intervention with studies, projects, or advertising as in the case in question, the taxpayer should possess in its files elements that would permit judging the adequacy of the amount to the purpose and enable assessment of possible exaggeration, in particular:

  • identification of the human resources involved, hours applied and hourly rates per consultant;

  • evidence of meetings, "surveys";

  • travels;

  • whether whoever executed it has professional experience;

  • whether bids were requested in the national or international market for comparative purposes and, if affirmatively, what reason the bid of an entity resident in a jurisdiction of privileged fiscal position was preferred over others with other locations.

  It would be also a factor of great relevance the knowledge and identification of the holders of the capital of the "off-shore" entity so as to assess whether they are independent in relation to the company in question, as relevant elements to eliminate the presumption of untruthfulness of the expense, until proven otherwise, which it is the duty of A... to produce.

  There would equally be a need to allow assessment of whether the amount of services charged is appropriate, taking into account the market and the risk of the operation, by comparison with those that would be applied by other entities in an equivalent context, in obedience and compliance with the "at arm's length" principle, which also did not occur, as no relevant elements directed at this objective were presented.

  The fiscal legislator justifies the requirement of compliance with this requirement, cumulatively with the others, with the doubt whether one is not in the presence of simulated operations, without real existence, devoid of economic reality and disproportionate, intended to foster tax evasion, through recourse to the strategy of interposing "spin-offs" of drainage of income upstream, so as to achieve a dual objective of absorption of the gross margin and possible profits and transfer of income to a jurisdiction where taxation is lesser.

  Effectively, one cannot overlook the possibility that the amounts invoiced by the HONG KONG company are inflated in relation to what an intervention for purposes of advertising would justify for the commercialization of the product in question (units). As was seen, they represent 15.1% of the value of sales in 2013 and 18.6% in 2014, and absorb completely the gross margin of sales, causing a final loss in the operational activity.

  And for that purpose a comparison with the corresponding situation in the domestic market suffices. In it, an intermediary acts as a commission agent, commonly designated as a real estate agent, whose intervention implies the securing of the customer, promotion of the product on "websites", placement of signs on the property, advertisements in newspapers, distribution of pamphlets, erection of "billboards", and may still provide legal support, in particular in the preparation of contracts of promise of purchase and sale and even promote all legal proceedings with official entities such as city councils and notaries, aiming to prepare the property for the act of sale.

  As is public knowledge, this activity implies the payment to the real estate company of a commission that is usually 5% of the sale value of the property, which in some cases may be less and reach 3%, or be more and reach 6%.

  This is, as described, a professional activity that in itself already implies the effectuation of advertising so that, comparing the respective rate with that practiced by the HONG KONG company, it is easily concluded as to the exaggerated amount charged by the latter.

  Even if it is borne in mind that the advertising, having been practiced, occurred in a different geographic context, where other remuneration may be practiced, it will not cease to be borne in mind, based on common sense and from an empirical judgment, without the need for recourse to technical knowledge, that the rate paid by A... appears exaggerated, given the negative impact on the profitability of the company, and putting into question the balance that should preside over the cost-benefit relationship.

  Also here it is concluded that, A... having failed to produce any proof that there is no exaggeration in the amount of advertising, it is considered that this requirement is not met.

  (…)

  III.2.3.6 – Regarding the elements presented

  Resulting from the notification to present proof of compliance with the conditions of deductibility, A... confined itself to a justification of the reason that led it to find in the Chinese market a solution alternative to compensate for the contraction of the domestic real estate market, "and to that end undertook marketing actions aimed at those markets which later came to be concretized in sales".

  It further states that these actions were developed by a company based in HONG KONG and that this intervention implied the "reduction of its merchandising margin through the increase in marketing, advertising and respective provision of services costs to customers".

  Now, and not overlooking the importance that the legislative initiative of creating the regime for the granting of special residence authorization, through investment in Portugal, had in the revitalization of the real estate market, and that it is the prerogative of the businessperson to search for new markets with a view to the development of its activity, the burden that fiscal law requires to accept payments to non-residents as deductible, when they are located in low taxation jurisdictions, was not met, divided cumulatively among the following requirements:

  • The production of proof of the actual completion of advertising;

  • The production of proof of the normality of the payment;

  • The production of proof that the amount is not exaggerated.

  Whereby it is concluded that, A... having not met the burden of proof consecrated in the provisions of Articles 65 and 23-A of the CIT Code, the expenses relating to the payments in question are fiscally disregarded in the fiscal years 2013 and 2014.

  (…)

  III.2.7 - Autonomous Taxation

  Given that the taxpayer did not proceed with the proof mentioned above, and the expenses in question were not accepted fiscally as an expense of the fiscal year, they are subject to autonomous taxation at the rate of 35%, as provided in no. 1 and no. 8 of Article 88 of the CIT Code, taxation that is burdened with an additional 10 percentage points pursuant to no. 14 of the same article, should a tax loss be presented, which occurred in 2013. So one has:

  Fiscal year 2013:

  (€500,615.00 + €140,000.00) x (0.35 + 0.10) = €640,615 x 0.45 = €288,276.75

  Fiscal year 2014:

  €597,070.00 x 0.35 = €208,974.50 (…)"

• The Claimant presented, within the period granted to it to exercise the right of hearing on the Project of the Tax Inspection Report, replacement CIT models 22 of the years 2013 and 2014, in conformity with the project report of the inspection procedure, which gave rise to the assessments subject to these proceedings, relating to these taxation periods.

• The disregard of the expenses in conformity with the conclusions of the inspection procedure eliminated, in their entirety, the tax losses that the Claimant had reported for 2015, a circumstance that resulted in the additional assessment made for this fiscal year.

• The Claimant presented on 22.08.2016 replacement CIT tax returns for the years 2013 and 2014, which contained the corrections proposed in the Project of the Tax Inspection Report.

• The Claimant presented a gracious complaint of the CIT assessments of 2013 and 2014 that were notified to it on 19 December 2016, and this petition for annulment was dismissed by ruling of 30 May 2017, of the Head of the Finance Division of the Lisbon Finance Directorate, notified on 5 June of the same year.

• From this decision it filed, on 3 July 2017, a hierarchical appeal of this decision, which was also dismissed, by ruling of the Director of the Central Service of the CIT Services Directorate, of 16 May 2018, notified on 25 of the same month.

• Regarding the CIT assessment of the fiscal year 2015, which reflects the effect of the elimination of tax losses from the previous years, it presented, on 7 February 2017, a gracious complaint which was also dismissed, by ruling of 24 October 2017, of the Head of the Finance Division of the Lisbon Finance Directorate, notified on 27 of the same month.

• In the face of this decision, it filed, on 22 November 2017, a hierarchical appeal which was dismissed by ruling of the Director of the Central Service of the CIT Services Directorate, of 28 June 2018, notified on 3 July of the same year.

1. With interest for the resolution of the case, there are no unproven facts.

2. The Tribunal's conviction regarding the resolution of the factual matters is grounded in the documentary and testimonial evidence produced, assessed in light of the rules of experience, with the same being entirely consistent in the sense of what was decided.

Regarding the testimony provided by I... and J... at an arbitral meeting intended for the examination of witnesses, the same revealed knowledge of the environment in which the Claimant operates, of the temporal circumstances and of the concrete facts here in question, and were in the sense of confirming what the Claimant alleged. The witnesses were convinced in their testimony, revealing no cause for concern regarding the sincerity and truthfulness thereof, in addition to which the same are coherent with what normally occurs and with the documents contained in the case file.

Regarding the documentary evidence, the following documents contained in the case file were relevant for the conviction of the tribunal, which were not subject to objection by the Respondent:

• Documents 6 to 10 attached to the Gracious Complaint of CIT of the years 2013 and 2014, relating to work connected with the preparation of the documentation necessary for the execution of the contracts.

• Documents 7 and 25 attached to the Gracious Complaint of the years 2013 and 2014 relating to services provided by B... in the domain of legal and financial support.

• Documents 7, 9, 19, and 26 attached to the Gracious Complaint of the years 2013 and 2014 relating to post-sale services.

• Document 8 attached to the Gracious Complaint of the years 2013 and 2014 relating to work of customer identification carried out by B....

• Document 20 attached to the Gracious Complaint of the years 2013 and 2014 relating to work of organization of visits to Portugal by Chinese customers carried out by B....

• Documents 11, 12, 13, 14 and 16 attached to the Gracious Complaint of the years 2013 and 2014 relating to the involvement of B... in the process of closing business negotiations.

• Document 17 attached to the Gracious Complaint of the years 2013 and 2014 relating to the promotion of the apartments.

• Document 18 attached to the Gracious Complaint of the years 2013 and 2014, relating to the preparation of dossiers per apartment.

• Documents 28, 29, 30 and 31 attached to the Gracious Complaint of the years 2013 and 2014, relating to requests for payment of the commissions owed by the Claimant here to B... for the services provided.

IV - Applicable Law

1. Deductibility of expenses

The central issue to be resolved, as presented by the Claimant, is whether to admit or not the deduction from taxable profit of 2013 and 2014 of the expenses invoiced by company B..., with registered office in Hong Kong.

The Tax and Customs Authority did not accept the deductibility of the Claimant's expenses relating to payments to the said company with registered office in Hong Kong, on the basis of Articles 65 of the CIT Code, in the wording of Law no. 64-B/2011, of 30 December (in force in 2013) and 23-A, no. 1, subparagraph r) of the same Code, in the wording of Law no. 2/2014, of 16 January (in force in 2014). The cited legal norms, at the time of the facts, provided as follows:

Article 65

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

1 – Amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory and there subject to a clearly more favorable fiscal regime are not deductible for purposes of determining taxable profit, unless the taxpayer can prove that such charges correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.

2 – A natural or legal person is considered to be subject to a clearly more favorable fiscal regime when the territory of residence of the same appears in the list approved by regulation of the Minister of Finances or when it is not there subject to taxation in an income tax identical or similar to IRS or CIT, or when, in relation to the amounts paid or owed mentioned in the previous number, the amount of tax paid is equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory.

3 – For purposes of the provision of the previous number, taxpayers must possess and, when requested by the Tax Directorate General, provide supporting elements of the tax paid by the non-resident entity and the calculations made for determining the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence of the same is not included in the list approved by regulation of the Minister of Finances.

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 23-A

Non-deductible charges for fiscal purposes

1 - The following charges are not deductible for purposes of determining taxable profit, even when accounted as expenses of the taxation period:

(…)

r) Amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory, and there subject to a fiscal regime identified by regulation of the member of Government responsible for the area of finances as a clearly more favorable taxation regime, unless the taxpayer proves that such charges correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.

Article 23-A, no. 1, subparagraph r) of the CIT Code in 2014 underwent a renumbering and systematic reorganization, changing from Article 65, which is revoked, to Article 23-A which governs non-deductible charges.

The anti-abuse rule specific to payments to non-resident entities and located in a fiscal haven is not provided for in Article 65 and later in Article 23-A, no. 1, subparagraph r) of the CIT Code, created with the aim of combating fraud and tax evasion, provides that payments made to entities resident outside Portugal and located in a tax haven are not deductible for purposes of determining taxable profit, even if accounted as expenses in the taxation period.

No. 2 of Article 65 of the CIT Code enshrines indices or prerequisites that it is incumbent upon the Tax Authority to demonstrate, wishing to activate the norm (cf. Article 74, no. 1, of the General Tax Law, GTL): when the territory of residence of the natural or legal person appears in the list approved by regulation of the Minister of Finances or when it is not there subject to taxation in an income tax identical or similar to IRS or CIT, or when, in relation to the amounts paid or owed mentioned in the previous number, the amount of tax paid is equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory.

To ensure safety in determining which countries or territories, Decree no. 292/2011, of 8 November contains the so-called Portuguese "black list". With the proof of the inclusion of the territory of Hong Kong in the said regulation, the Respondent is dispensed from proving that the company there based was not taxed in income tax identical or similar to IRS or CIT, or that the amount of tax paid was equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory given the alternative nature of the elements.

On this question, Article 23-A applicable to the fiscal years 2014 brought no change. Amounts paid or owed, in any capacity, to natural or legal persons resident outside Portuguese territory, and there subject to a fiscal regime identified by regulation of the member of Government responsible for the area of finances as a clearly more favorable taxation regime are not deductible. It is sufficient for the Respondent to demonstrate that payments were made to residents outside Portuguese territory and that that territory is included in the regulation of more favorable taxation regimes. Being the territory included in this regulation, the Respondent does not have to demonstrate that that territory is subject to a more favorable fiscal regime.

The territory of Hong Kong was and continues to be included in the "list of countries, territories and regions with privileged taxation regimes, clearly more favorable", which was contained in Decree no. 292/2011, of 8 November, which amended Decree no. 150/2004, of 13 February.

Reverting to the case of the records, the Public Treasury made proof of the prerequisites to activate the norm under exegesis, since the payment in question was made by the Claimant to an entity with registered office in a country with a privileged taxation regime as per Decree no. 1272/2001, of 9/11 (concretely, the territory of Hong Kong appears under no. 31 of the list of countries contained in the mentioned regulation), a diploma which came to establish which countries or territories should be qualified as "tax havens" or subject to privileged taxation regimes, as can be seen from its preamble.

This is the "black list" approved by Decree no. 150/2004, of 13 February, in whose preamble it says that "Given the difficulties in defining 'tax haven' or 'clearly more favorable fiscal regime', the national legislator, following the guidance followed by other legal-fiscal orders, opted, in some cases, for reasons of legal certainty, for the system of case-by-case enumeration and, in others, for a mixed system, being, however, aware that such solutions require periodic revisions of the countries, territories or regions that appear in the list".

In the case of Hong Kong, this territory is expressly contained in the regulation and should therefore be considered a territory with a more favorable taxation regime.

In the course of the tax inspection procedure, the Claimant presented several documents to prove the operations carried out by B....

However, the Tax and Customs Authority understood that the amounts of payments to the said company are not deductible, for the following reasons, in summary:

• It was not evidenced that any action, advertising campaign or equivalent, concrete and effective, was carried out by said service provider company aimed at the sale of units;

• That having occurred, the same was appropriate and directed to the objective, that is, in the eventuality of having been carried out was it intended to try to sell units or rather any other product?

• Product which might not even be commercialized by the company;

• The proof that the service was in fact provided through the presentation, in particular, of market prospecting studies, advantages in investment, marketing campaigns, since no evidence of the same was presented in paper, recordings, video, computer media, digital or any other medium;

• And even if such physical evidence of the work carried out were shown, it would still be necessary to demonstrate the adequacy of each of them to the requirements of Article 23 of the CIT Code;

• And that, beyond the contract, no exchange of any correspondence or contacts with the alleged service provider, connected with the services that allegedly it intermediated, was evidenced.

Pursuant to Article 65 (applicable for the fiscal year 2013) and Article 23 of the CIT Code (applicable for the fiscal year 2014), the rule of non-deductibility of these expenses may, however, be set aside in the event that the taxpayer proves, in any manner, that such charges correspond to:

• Operations actually carried out; and

• Operations that do not have an abnormal character or an exaggerated amount.

There is thus a reversal of the burden of proof that now burdens the taxpayer. As is contained in the Decision of the Central Administrative Court of the South of 04.11.2003, case no. 7464/02: "In summary, the legislator distrusted the operations carried out with these entities, in which costs are accounted for, and presumed that these do not have the counterparts invoked, saving in any case, the possibility of effective demonstration by the taxpayer of these counterparts, which better than anyone will know, concretely, what they were."

Citing SALDANHA SANCHES: "the law, when it reverses the burden of proof in relation to payments made to low tax zones that destroy the natural connection between deductible cost of A and income subject to tax of B, is removing from that cost the presumption of truthfulness, until proven otherwise, that accompanies any cost properly documented, and should therefore show that the service existed and that the amount of payment is not exaggerated."

It should further be stated that the law does not require any formalism in these proofs, thus prevailing as to the same the system of free proof and the taxpayer may avail itself of all means of proof permitted by law (Articles 352 et seq. of the Civil Code, 115, no. 1 of the Code of Tax Procedure and Process, ex vi Article 29, no. 1, subparagraph a) of the LFRTA).

1. Proof of the completion of the operations

Regarding the proof of the first requirement, it resulted from the evidence produced that an activity of securing Chinese citizens for the purchase of real property of the Claimant was carried out by B... in the years 2013 and 2014.

This activity of securing included the identification of buyers, preparation of dossiers for each apartment, preparation of promotional material, organization of visits to Portugal (accommodation, transport and translator) and to the apartments, legal support with a view to the acquisition of the real property, preparation of documentation, post-sale services (connection of electricity, gas and water to the acquired real property and monitoring of the respective decoration).

The services of B... also included support for obtaining residence visa, for which purpose lawyers were contracted.

In the various correspondence exchanged between the Claimant and B... the employees of the latter who developed the services provided are identified: C..., D..., E... and G....

For each invoice issued by B... there is a direct connection with the sale of a specific apartment. The invoice identifies the buyer secured by B....

There is no justification for doubts about the completion of this activity, not only because commercial documentation and correspondence exchanged between the Claimant and B... relating to these activities were attached, but also because this was shown by the evidence produced at the hearing, by those who had direct contact in Portugal with these activities.

In fact, the fact, which is not disputed, that the Claimant sold a large quantity of real property to Chinese citizens is an indirect, but convincing proof, that there was an efficient activity of securing, for without this one does not see how they could have known that the Claimant had real property for sale. On the other hand, the fact that B...'s remuneration was only paid precisely if it resulted in the concretization of the sales, ensures that there were no payments that did not have underlying activity of securing.

For this reason, it is not justified that it not be considered proven that the expenses incurred by the Claimant with payments to B... correspond to operations actually carried out.

Accordingly, it is to be considered proven that the payments correspond to operations actually carried out.

1. Proof of non-abnormality and non-exaggeration

In relation to the proof of the second requirement, we will have to verify whether the payment for the service of real estate intermediation is normal and is not exaggerated.

It is indispensable that both requirements (normality and non-exaggeration) are met, so that companies can effectively deduct payments made to entities based in tax havens.

Regarding "normality", the payment of remuneration for the services of securing customers for the sale of real property is normal, being regulated by Law no. 15/2013 of 08.02. The said diploma in its Article 19 regulates the remuneration of the provider of these services. Thus, we cannot fail to conclude that the payment of this service is normal.

As for the requirement of non-exaggeration, we will have to analyze the amount of the commissions. The exaggerated character, or lack thereof, of the commissions should be assessed, by common sense, that is, by an empirical judgment without recourse to technical knowledge.

In this case, we understand it necessary to analyze whether the contract is balanced. For this purpose, we must first have regard to the concrete circumstances of the Claimant at the time of entering into the contract with B....

In this light, it appears relevant to us to take into account the fact that the Claimant had not sold its new real property for three years. The crisis in the real estate sector begun in 2009 is a public and notorious fact that affected the entire real estate sector and implied a drastic reduction of real estate activity.

Another concrete circumstance of the Claimant relevant to the facts concerns its bank indebtedness. Since the Claimant could not sell its assets (real property), it could not liquidate the bank debts.

This was the context of the Claimant at the time of entering into the contract with B... and which is not irrelevant to the analysis of the contractual terms.

As for the contract terms themselves, the balance of the contract is demonstrated through the demonstration of the real importance of its advantages and of the charges as just remuneration for the services provided, comparatively to the costs of equal or similar services practiced in the market. It is not appropriate to compare the percentages charged by B... (15.1% in 2013 and 18.6% in 2014) with the commissions usually paid in real estate brokerage (5%) because B... provided services that are not included in the normal intermediation services such as the dissemination in China, the payment of trips from China to Portugal, accommodation, food, transport in Portugal, interpreters and legal services for the obtaining of visas. The term of comparison made by the Respondent is manifestly unsuitable in the concrete case.

According to the testimonial evidence, for the same type of services, at least one recognized real estate intermediation company, widely implemented in national territory, charged about 20%.

In light of the above, taking into account the circumstances of the Claimant and the values normally charged for identical services, the payments made to B... 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 the payments made to B... is further reinforced by the fact that the Claimant was not affected by the payments it made to it, since it only paid it when it concretized the sale of the real property.

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

Thus, it is concluded that the assessment act relating to the fiscal year 2013 suffers from a defect of violation of Article 65, no. 1, of the CIT Code and the assessment act relating to the fiscal year 2014 suffers from a defect of violation of Article 23, no. 1, subparagraph r), of the CIT Code in the respective versions that were in force in those years.

The assessment of the other defects imputed to the CIT assessments of 2013 and 2014 is prejudiced by the solution reached above.

As for the CIT assessment of fiscal year 2015, there is a nexus of prejudiciality or dependence in relation to the CIT assessments of 2013 and 2014. The corrections made by the TA in the years 2013 and 2014 prevented the deduction of losses in the fiscal year 2015, under Article 52, no. 1 of the CIT Code (in force in 2015).

As we concluded above, the corrections made by the TA are illegal. Accordingly, the CIT assessment of fiscal year 2015, as far as the non-deduction of losses from the years 2013 and 2014 violates the provision of Article 52, no. 1 of the CIT Code.

1. Compensatory Interest

Pursuant to no. 1 of Article 43 of the GTL, "Compensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount greater than legally due."

The requirements for the right to compensatory interest provided for in Article 43, no. 1, of the GTL, are the following:

a) That there is an error in a tax assessment act;

b) That the error is attributable to the services;

c) That the existence of this error is determined in a process of gracious complaint or judicial challenge;

d) That from this error resulted the payment of a tax debt in an amount greater than legally due.

The CIT assessments of fiscal years 2013, 2014 and 2015 were not made by the TA, so this error cannot be charged to it, by the same from the date of its delivery. These are three self-assessments, with the error not being attributable to the services.

However, it is unquestionable that after the presentation of the gracious complaints (19/12/2016- fiscal years 2013 and 2014; 07/02/2017- fiscal year 2015) the TA possessed all the factual and legal elements to restore the legality of the taxation. The TA expressly dismissed the gracious complaints (30/05/2017 – fiscal years 2013 and 2014; 24/10/2017 – fiscal year 2015).

It is incumbent upon the TA to restore legality (Article 55 of the GTL), and it cannot be indifferent to the maintenance of an illegal act. Furthermore, the TA has the duty to revise tax acts if it detects a situation of illegal tax collection (Articles 266, no. 2, of the Constitution of the Portuguese Republic and 55 of the GTL), within the time limits of Article 78 of the GTL.

With the gracious complaints dismissed, the error becomes attributable to the TA. In this sense, cf. Decision of the CACS of 16.01.2014, case no. 05306/12: "3) With excessive delimitation of the taxable base, from the moment when the TA, being in possession of all necessary elements, could have corrected the error, and still did not proceed, that is, from the date of exhaustion of the duty to decide the gracious complaint, the error determining the illegal collection of the tax in question is attributable to the services."

In the same sense, Judge Counselor Jorge Lopes de Sousa asserts the following: "(…) the error will become attributable to the Tax Administration after the eventual dismissal of the claim presented by the taxpayer, that is, from the moment that, for the first time, the Tax Administration takes a position on the taxpayer's situation, having the necessary elements to render a decision with correct assumptions." In CTPP Annotated, Vol. I, Áreas Editora, 2011, Page 537

Accordingly, the request for compensatory interest proceeds, which should be calculated, at the rate determined in accordance with the provision of Article 43, no. 4, of the GTL, from 30/05/2017 for fiscal years 2013 and 2014 and from 24/10/2017 for fiscal year 2015, until the restitution of the tax paid in excess.

V - Decision

In light of all that is stated above, it is decided:

1. To find the request for arbitral pronouncement on the illegality of the CIT assessments no. 2016 ... (fiscal year 2013), 2016 ... (fiscal year 2014) and 2016 ... (fiscal year 2015) to be well-founded, and in consequence to annul the assessments;

2. To find the request for payment of compensatory interest to be well-founded, at the legal rate, calculated from 30/05/2017 for fiscal years 2013