Process: 390/2015-T

Date: April 18, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 390/2015-T addresses the requirements under Article 41(2) of the Portuguese Corporate Income Tax Code (CIRC) for deducting uncollectable credits. The CAAD ruled that taxpayers must prove they communicated to debtors the recognition of credits as uncollectable expenses, enabling symmetric tax treatment where debtors declare corresponding income. The decision clarifies that this communication requirement applies to both direct recognition of uncollectable credits and indirect recognition following prior impairment losses. The claimant argued that Article 41(2) only applied when credits were directly expensed without prior impairment recognition, but the tribunal rejected this interpretation. The court held that when credits previously subject to impairment losses become definitively uncollectable and are written off, communication remains mandatory. In this case, the taxpayer had prepared letters to debtors but failed to prove actual delivery. The CAAD supported the Tax Authority's assessment, concluding that non-compliance with the communication duty prevents tax deductibility of the uncollectable credit expense in the relevant taxation period. The ruling emphasizes that Article 41(2) stands independently from Article 41(1), extending the communication obligation beyond direct write-offs to include situations where impairment losses are cancelled upon definitive uncollectibility. The decision reinforces that proof of communication is essential for IRC purposes, though the law does not prescribe specific formal requirements for such proof, unlike VAT legislation. The tribunal noted that had the claimant proven debtor insolvency, the utility of communication might have been questioned, though this argument was not substantiated.

Full Decision

ectible credit and contributes for tax purposes, the taxpayer must prove that it provided proof of communication to the debtor of the recognition of the expense for tax purposes, so that the latter can consider that value as income for tax purposes.

Paragraph 2 of article 41 merely speaks of proof of communication, but does not explain what that proof consists of, nor does it refer to what the formal requirements for that proof are.

The tax legislator does not impose, contrary to what is provided for in the VAT Code, special duties of communication and the provision that the AT resorts to in the Response, article 141 of the CIRC, has a scope different from that which it intends to assert in the case at hand, for the previous provision provides that: "declarations and other documents which, pursuant to this Code, must be presented to any service of the tax administration, may be sent by post, under registered mail, or by facsimile provided that, being necessary, the content of the message and the moment it was sent can be confirmed" (paragraph 1 of article 141 of the CIRC).

Thus, the tax law is clear in this last provision, for it only provides for the sending of documents that must be presented to any service of the tax administration, and not any documents that serve as proofs between individuals (taxpayers) and the AT, as is the case provided for, in fine, in paragraph 2 of article 41 of the CIRC. In this provision no requirement for especially careful evidence was contemplated.

In the present case, regarding compliance with the requirement of communication to the debtor provided for in paragraph 2 of article 41, the Tax Inspection verified the existence of letters addressed to each customer, but it was not demonstrated by the Claimant the actual sending of the letters to the respective debtors.

In accordance with the Claimant, article 41 of the CIRC would only apply to cases in which credits become uncollectible without the respective impairment loss having, in a prior taxation period, been recognized tax or accounting-wise, by (i) the risk of uncollectibility not having occurred until that date, by (ii) the respective impairment loss not having been recognized, because it did not meet the requirements for its tax acceptance, or by (iii) even being admitted for tax purposes, because it does not prove sufficient as it does not cover the entire debt. In the case at hand, as the Claimant proceeded, in taxation periods prior to 2001, to the recognition of impairment losses up to the total of the credit value in question, the provision in question would not apply to it.

In short, for the Claimant, it is a prerequisite of application of article 41 (and of the duty of communication provided for in paragraph 2) that the credits are directly considered as expenses or losses of the taxation period, that is, without impairment losses having previously been recognized with respect to them.

The Claimant is not right.

The Claimant should have come to prove in the proceedings that it had communicated to the debtors this derecognition of the credit, in order to see the values of the credits considered uncollectible recognized as a tax expense for the period in which this derecognition of doubtful collection customers and, simultaneously, recognition of uncollectible credits occurred. However, the Claimant does not prove that it carried out the communication required in paragraph 2 of article 41, in fine, of the CIRC.

In fact, from the reading of article 41 of the CIRC it results that what the legislator intended was to allow the credit considered uncollectible to be considered an expense or loss of the taxation period in which uncollectibility becomes certain, even if the taxpayer has not signaled the risk of uncollectibility through the recognition in prior taxation periods of impairment losses. If an impairment loss has been recognized at an earlier time, having the same been admitted for tax purposes as a loss, the taxpayer can no longer consider directly as an expense of the taxation period in which the credit becomes uncollectible the same value. In that case, it will have to proceed with the cancellation of credits that have undergone a total impairment loss, an operation which, like the direct consideration of the credit as an expense of the taxation period in which uncollectibility occurs, should be accompanied by the communication to the debtor prescribed by paragraph 2 of article 41 of the CIRC.

Indeed, while a credit is considered doubtful collection and, therefore, the recognition of an impairment with respect thereto is permitted, the loss, although accepted for tax purposes, remains awaiting the evolution of the risk of uncollectibility of the credit until it becomes definitive. At that moment, verified the conditions on which the qualification of a credit as uncollectible depends [provided for in subparagraph a) of paragraph 1 of article 41 of the CIRC], the credit is derecognized and the impairment losses cancelled. It is at that moment that the expense associated with the impossibility of collection of the credit becomes definitive and that, therefore, communication should be sent to the non-performing debtor so that the latter may consider it, symmetrically, as income. In essence, the impairment allows for anticipation of the loss, but only when uncollectibility is verified does the situation, for tax purposes, become definitive. It is, therefore, at that moment that the debtor should declare the corresponding income.

Recall that paragraph 2 of article 41 of the CIRC, from which results the obligation of communication whose compliance is at issue in the present proceeding, applies to two situations: (i) that of credits that are considered uncollectible under paragraph 1 of the same article 41 (that is, credits recognized directly as uncollectible) and (ii) that of credits considered uncollectible under the provisions of article 36 of the CIRC (that is, credits recognized indirectly as uncollectible through the derecognition of the asset by offsetting the account where the impairment losses previously recognized are recorded). In this sense, paragraph 2 stands on its own from paragraph 1 of article 41 of the CIRC, not applying only to the situations provided for in that paragraph 1 (those of direct recognition of uncollectibility), but also to the situations of indirect recognition of uncollectibility, after impairment losses have been recognized due to the credits becoming doubtful collection. Consequently, the obligation of communication therein provided for applies to both situations and is a requirement both of the direct recognition of uncollectibility and of the indirect recognition of uncollectibility.

Concluding: the AT is right in demanding compliance with the duty of communication prescribed in paragraph 2 of article 41 of the CIRC to the situation in the case at hand and, consequently, that the violation of this duty of communication entails the non-consideration of the expense in the taxation period in question.

D) On the Insolvency of the Claimant's Creditors

In the case at hand, the Claimant did not substantiate its request for declaration of illegality of the tax act based on the insolvency situation declared by the competent Court of most or all of its debtors.

Possibly, if the Claimant had petitioned that the generality of the credits in question belonged to insolvent companies, it might be possible to question the utility of the communication required in paragraph 2 of article 41 of the CIRC. In reality, the utility of this communication could possibly be nil if the Claimant had come to prove that its debtors were insolvent, and that this was the valid reason for considering the credits uncollectible from a tax perspective, even if it had not verified the formal communication required in paragraph 2 of article 41, in fine, for with the debtors in insolvency the useful effect of that communication would be nil for the collection of tax revenues by the tax administration, for in the generality of situations insolvent companies do not submit accounting and tax information, and could not come to recognize this credit as taxable income (an useful effect would only exist if the entity declared came to be admitted for recovery by the creditors' assembly). In our understanding, the evidence required for the consideration of credits as uncollectible could be made by more credible means, because proceeding from official instances, if the Claimant had chosen to invoke the particular situation of its debtors and joined: i) Declaration of insolvency from the court where the proceeding is pending; as well as the setting of a deadline for claiming the credits; and subsequently: ii) Declaration of decision of closure of the proceeding because the insolvent estate is manifestly insufficient to satisfy the costs of the proceeding and/or the other debts of the insolvent estate; or iii) Declaration from the court recognizing the partial recovery only of the credits. Notwithstanding the requirement for proof of communication to the debtor, one could consider that there was in the acts more credible evidence by being based on declarations published in the Official Gazette, with no possibility of recovering the credits and, consequently, the useful effect of the communication would be nil. Proof, by way of certificate from the Competent Court, could be constituted and even be more trustworthy than a mere communication to the debtor for purposes of the tax deductibility of those uncollectible credits, namely through the provision of the court sentence proving the impossibility of recovering its credits. When the debtor is in insolvency, and in this circumstance is not obliged to submit accounts for corporate and tax purposes, the useful effect for the Tax Administration, in terms of income would be nil, for the debtor does not have conditions to come to recognize the income resulting therefrom, neither from an accounting nor tax perspective. It would be considered, in these circumstances, completely disproportionate not to give right to the taxpayer on the grounds of the omission of a formal requirement of communication to the debtor, and contrary to the most elementary principles of justice to be restricting the means of proof. If it had been thus, another could have been the decision, but for that the Claimant would have had to come to prove that the holders of the obligation to pay were not in conditions to make it reflected in their taxable profit this forgiveness of debt, for they were insolvent and without patrimony to share and, for this reason, the useful effect of the communication required in paragraph 2 of article 41 would be nil.

The fact is that the Appellant did not invoke these facts and nor joined to the proceeding at hand any documents/certificates that could prove the verification of these assumptions, namely, the insolvency of the debtors, it being certain that the burden of proof rested with it, in light of the provisions of article 74 of the General Tax Law (LGT).

Not petitioning this cause, and attending to the letter of tax law, paragraph 2 of article 41 of the CIRC, the Claimant would have to prove that it communicated this derecognition of its credits, that is, that it transformed its doubtful collection credits into uncollectible credits. However, as was said, the Claimant did not present proof of the communication effected to the debtors, which it decided to derecognize, by considering them uncollectible credits and no longer doubtful collection credits.

Not presenting the Claimant proof of the impossibility of obtaining satisfaction of its credits, there was a duty of communication imposed in paragraph 2, in fine, of article 41 of the CIRC. In this regard, the Claimant joins only 3 letters, which tend to make proof of the requirement provided for in paragraph 2, in fine, of article 41 of the CIRC, in three concrete situations, relating to customers C..., D..., E...Ltd., F..., G..., listed in the listing of credits with impairment accepted for tax purposes (see p. 6 of Annex 1 of the RIT). Prompted, by the Respondent, to join proof of sending the communication, the Claimant did not do so.

For its part, also prompted by the Claimant to provide proof at the request of the Tribunal, it merely joined a set of 58 documents, in which in only some cases is it proven that the Claimant would not be able to recover the said credits, as there was a declaration of closure of the proceeding due to insufficiency of goods in the insolvent estate. The documents presented are varied and difficult to classify for purposes of proof of the impossibility of recovering the credits. In the vast majority of the documents presented by the Claimant, it merely joins the declaration from the court declaring the debtor insolvent, and defining the deadline for claiming the credits for the creditors of said company. However, such documents do not prove the impossibility of recovery of the credits, whereby the decision of the Claimant was taken by express will of its management bodies, and not by express declaration of the court, declaring the insolvent estate to be manifestly insufficient to satisfy the debts, a reason which the Tribunal could possibly consider sufficient to not require the obligation of formal communication referred to in paragraph 2 of article 41, invoking for such the futile effect of said communication.

It was incumbent, therefore, upon the Claimant to prove that there was legal support for the cancellation of the credits previously classified as doubtful collection credits, by way of recognition of their uncollectibility, considering them uncollectible, joining to the proceeding for that purpose the evidence required from the Courts where these insolvency actions were brought.

Thus, and because the Claimant did not present sufficient proof of each of the proceedings contained in the listing delivered to the AT with the detail of uncollectible credits in 2011 and a listing of uncollectible credits with impairment accepted for tax purposes, the express duty of communication was imposed.

In summary, if the entity decided to derecognize the credits without observance of the requirements demanded in article 41 of the CIRC for their consideration as uncollectible credits, these should be added in schedule 7 of Form 22 Declaration. Accordingly, the understanding contained in Arbitral Award no. 85/2012-T, of 20.12.1012, is subscribed to, in which it is clarified that "with the accounting elimination of the said credits [provisioned], they will definitively cease to be included in the balance sheet and to have tax relevance (…). For this reason, not having legal support the elimination of the credits from the balance sheet, it is justified that the correction to taxable profit is made, considering the values of these credits for purposes of IRC taxation, as if the cancellation had not been made".

IV. DECISION

In accordance with the foregoing, the arbitrators on this Tribunal agree:

a) To dismiss in full the claims for declaration of illegality and annulment of the acts of additional assessment of Corporate Income Tax ("IRC"), relating to the period of 2011, specifically:

  • the additional assessment act identified with no. 2014..., of 20.08.2014, relating to IRC, in the amount of € 1,861,847.45, which gave rise, in accordance with the settlement statement with no. 2014..., to tax payable in the amount of € 1,879,256.72;

  • the Statements of Interest Calculation, with nos. 2014... and 2014..., authored by the AT – Collection Area, in the amounts of € 797.48 and € 148,628.77 and

b) To dismiss as moot the examination of the claim for "(...) legal compensation for provision of improper guarantee, pursuant to articles 171 of the CPPT, and 53 of the General Tax Law (...)".

CASE VALUE

In accordance with the provisions of article 306, paragraphs 1 and 2 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, 97-A), paragraph 1, subparagraph a) of the Code of Procedure and Tax Proceeding, and article 3, paragraph 2, of the Regulation on Costs in Tax Arbitration Proceedings, the case value is set at €1,879,256.72.

COSTS

Pursuant to articles 12, paragraph 2, 22, paragraph 4 of the RJAT and articles 2 and 4 of the Regulation on Costs in Tax Arbitration Proceedings and Schedule I thereto, the amount of costs is set at €24,786.00, chargeable to the Claimant.

NOTIFY

Lisbon, 18-4-2016

The Collective Arbitral Tribunal,

José Poças Falcão
(President)

Ana Maria Rodrigues
(Member)

Raquel Franco
(Member)

[1] From a tax perspective, these were designated as provisions for doubtful collection customers until 2005. From 2006 to 2013, inclusive, designated as adjustments in receivables.

[2] It is important to note in this regard the provisions of the Civil Code, which provides as causes of extinction of obligations the following:

  • Performance;

  • Dation in payment (article 837);

  • Consignment in deposit (article 841);

  • Compensation (article 847);

  • Novation (article 857);

  • Remission (article 863);

  • and, Confusion (article 868).

[3] The main change to the regime had a relatively short period of validity, as paragraph 2 was revoked by Law no. 2/2104. The Committee's choice, as stated in the Final Report of the Commission, regarding the change to the regime of uncollectible credits, was to abandon the accessory obligation of the duty of communication provided for in the current paragraph 2 of article 41 of the IRC Code, given the high costs it implied, especially for entities that have final consumers as customers, where this communication has no relevance from a tax perspective.

[4] Although this account is not coded in the SNC Chart of Accounts (Ordinance 1011/2009, of 9 September), the generality of operators chooses to use code 21.7 - Doubtful collection customers.

Frequently Asked Questions

Automatically Created

What does Article 41(2) of the CIRC establish regarding uncollectable credits for IRC purposes?
Article 41(2) of the CIRC establishes that when a taxpayer recognizes an uncollectable credit as a tax-deductible expense, proof of communication to the debtor is mandatory. This ensures the debtor can symmetrically declare the corresponding amount as taxable income. The provision applies to both direct recognition of uncollectable credits under Article 41(1) and indirect recognition through write-off of credits previously subject to impairment losses under Article 36. Unlike VAT legislation, Article 41(2) does not specify formal requirements for the proof of communication, requiring only that the taxpayer demonstrate the debtor was actually informed of the credit's tax treatment.
What is the duty of communication to the debtor when writing off uncollectable credits under Portuguese corporate income tax law?
The duty of communication to the debtor when writing off uncollectable credits requires the creditor company to inform the debtor that the credit has been recognized as an uncollectable expense for tax purposes. This communication enables the debtor to declare the corresponding amount as income, maintaining tax symmetry. The communication is required both when credits are directly written off as uncollectable and when previously impaired credits are definitively written off after becoming certain of non-recovery. While Portuguese tax law does not impose specific formal requirements (such as registered mail mandatory for VAT), the taxpayer must prove actual delivery occurred, not merely that communication documents were prepared.
Can a company deduct uncollectable credits without notifying the debtor as required by the CIRC?
No, a company cannot deduct uncollectable credits without notifying the debtor as required by Article 41(2) of the CIRC. In Process 390/2015-T, the CAAD confirmed that failure to comply with the communication duty prevents recognition of the expense in the taxation period. The claimant had prepared letters to customers but could not prove actual sending to debtors, and consequently the Tax Authority's additional assessment was upheld. The communication requirement is essential for tax deductibility regardless of whether the credit is directly recognized as uncollectable or written off after prior impairment recognition. Non-compliance with this obligation results in the expense being disallowed for IRC purposes.
How did the CAAD rule on the additional IRC assessment in process 390/2015-T?
The CAAD ruled in favor of the Tax Authority in process 390/2015-T, upholding the additional IRC assessment. The tribunal concluded that the claimant failed to prove compliance with the communication duty prescribed in Article 41(2) of the CIRC. Although the taxpayer had prepared letters addressed to each debtor, it could not demonstrate actual delivery. The court rejected the claimant's argument that Article 41(2) only applied to direct write-offs without prior impairment recognition, holding instead that the communication requirement applies equally when credits previously subject to impairment losses are definitively written off. The decision confirmed that without proof of communication to debtors, the uncollectable credit expense cannot be deducted in the relevant taxation period.
What procedural requirements must be met to classify credits as uncollectable under Portuguese IRC regulations?
To classify credits as uncollectable under Portuguese IRC regulations, several procedural requirements must be met according to Article 41 of the CIRC: (1) substantive conditions for uncollectibility under Article 41(1)(a) must be verified, demonstrating the credit has become definitively uncollectable; (2) the taxpayer must communicate to the debtor that the credit is being recognized as an uncollectable expense for tax purposes; (3) proof of actual delivery of this communication must be maintained and producible to tax authorities; (4) if impairment losses were previously recognized, the credit write-off must involve cancellation of those impairment accounts; (5) the debtor must be informed so they can symmetrically declare the amount as taxable income. The communication requirement applies regardless of whether uncollectibility is recognized directly or following prior impairment, and failure to prove compliance prevents tax deductibility of the expense.