IRC Deductible Costs and Essentiality Principle: CAAD Arbitration on Additional Assessment (393/2014-T)

ARBITRAL DECISION

I – REPORT

On 23 May 2014, A... SA, NIPC …, with registered office at Rua …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter abbreviated as RJAT), seeking the declaration of illegality of the act of additional Corporate Income Tax (IRC) assessment for the year 2011, bearing number 2013…, and respective compensatory interest, in the amount of €102,013.98.

In support of its request, the Applicant alleges, in summary, that the expenses which were disallowed in that additional assessment were necessary for the maintenance of its income-generating source and are therefore deductible. It also alleges, incidentally, lack of substantiation of the tax act.

On 27 May, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Applicant did not proceed with the appointment of an arbitrator; therefore, pursuant to article 6(2)(a) and article 11(1)(a) of the RJAT, the President of the Deontological Board of the CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the applicable period.

On 14 July 2014, the parties were notified of these appointments and expressed no intention to challenge any of them.

In accordance with article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 29 July 2014.

On 2 October 2014, the Respondent, duly notified for this purpose, submitted its reply defending itself solely through challenge.

On 30 October 2014, the hearing referred to in article 18 of the RJAT was held, where the witnesses presented by the Applicant were examined.

As it was deemed necessary, translations of documents attached in foreign language with the initial request were submitted to the case file by the Applicant.

A period was granted for the submission of written submissions, which were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was set for the issuance of the final decision, following the submission of submissions by the Tax Authority.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2(1)(a), 5, and 6(1) of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with articles 4 and 10 of the RJAT and article 1 of Order No. 112-A/2011, of 22 March.

The proceedings do not suffer from any defects.

Thus, there is no obstacle to the consideration of the merits of the case.

Everything considered, we proceed to render

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

1. The Applicant was subject to an inspection carried out by the Finance Directorate of ..., between 28.8.2013 and 19.11.2013, relating to IRC for 2011 and which culminated in the additional assessment of Corporate Income Tax (IRC) No. 2013….

2. These corrections were, among others, of the following amounts and related to the following grounds (in the part relevant to the present appeal proceedings):

a. Expenses (not accepted by the Tax Authority) for specialized work, invoiced by B..., in the amount of € 254,612.00;

b. Expenses (not accepted by the Tax Authority) relating to advertising invoiced by C...'s, in the amount of €105,621.00;

c. Expenses (not accepted by the Tax Authority) relating to interest borne, in the amount of €1,106.81;

d. Expenses (not accepted by the Tax Authority) incurred on third parties - D... - in the amount of €30,000.00;

e. Expenses (not accepted by the Tax Authority) for specialized work, invoiced by E..., in the amount of €148,573.42.

1. The Applicant made payment on 12-02-2014 of the additional IRC assessment mentioned above, in the amount of €102,013.98.

2. The Applicant is a company incorporated under Portuguese law whose capital was, at the date of the tax event in question in the proceedings, predominantly owned by two Belgian companies: company B... and company C...'S. Each of these companies holds a 49.982% participation in the Applicant, with the remaining 0.037% of the share capital held by the Applicant itself.

3. There was no capital relationship between the aforesaid companies holding shares in the Applicant at the date of the tax event.

4. The value of the service provisions disallowed by the Tax Authority in the assessments that are the subject of the present proceedings amounts to approximately €600,000.00, equivalent to just over 3% of the total invoicing of the Applicant in the year in question.

5. The expenses not accepted by the Tax Authority relating to work invoiced by B... to the Applicant, in the amount of €254,612.00, relate to a set of invoices issued by B... to the Applicant, with numbers 13048, of 31.3.2011; 13130, of 30.6.2011; 13175, of 30.9.2011 and 13268, of 29.12.2011, these invoices being described on p. 8 of the Inspection Report (RIT) which enumerate the services rendered to which they refer, in English language, through the following expression "Settlement of quarterly charge for services rendered by B... Coordination Center on following areas:", followed by the indication of the following terms, also in English: "General; Purchasing; Production; Marketing; Supply Chain; ...; Accounting, Investments; Human resources; Quality", and ending with the term, equally in English, "Period", followed by the indication of the letter "Q" together with a number between 1 and 4, thus referring to the quarter of the year to which they refer.

6. Regarding these invoices, it was written in the RIT, among other things, the following:

"In the invoices, as can be seen from the table referred to above, it is not stated:

o What these service provisions consist of;

o Agents who intervened in the provision of services;

o How the values allocated to A... were determined in relation to each of the service provisions;

o The designations of the service provisions mentioned in the invoices are not clear, such as for example "...", "General";

o It should also be noted that the contract presented by A... as relating to these service provisions is drawn up in English, which is also not clear, in particular because of the technicality of some terms.

For the reasons described above, it was not possible to determine the indispensability of these expenses, for purposes of article 23(1) of the IRC Code, and therefore the taxpayer was notified on 18/01/2013, during inspection activities for the periods 2005 to 2008, to "specify the service provisions in the invoices issued monthly by entity B... COORDINATION CENTER and the determination of their respective value for each of the services".

On 29/01/2013, the taxpayer, regarding the question raised, responded only with loose documents (see ANNEX 1), among which a table attached to the invoices and another table where various entities are listed. In the latter, in the column relating to A... only the numeral "3" appears in the line referring to the service provision "TECHNIEK". This service provision does not appear in the descriptive of the invoices.

The same table includes names of persons and other service provisions not mentioned in the invoices, for example: "INTERCO PRICING'', "LEGAL", "COST ACCOUNTING".

In response to this question, print-outs were also presented of an exchange of emails between A... and Mr F... (Group Financial Director) in English, where the confidentiality of some expenses included in the service provisions in question is invoked and it is even stated "(...) It is impossible to link allocation from all points of contract (...)" and "I will not give you all the details of the calculation of the B… charge to A... since this calculation is partially including headcount expenses.(...)" (emphasis ours).

In the same notification (18/01/2013), translation of the contract relating to the service provisions in question was requested. However, neither from the original English contract nor from the translation presented in response to the notification, is it possible to match the service provisions mentioned therein with those mentioned in the invoices, with the exception of those relating to: "Accounting" (designation appearing in the invoices) - "Accounting and administrative services" (designation appearing in the contract).

From the translation of the contract, relevant information is extracted, which is transcribed as follows: "B… shall maintain precise records covering discriminated expenses related to services provided under this Contract and the same shall be accessible to inspection conducted by A... LTDA and its duly authorized agents during the validity of this Agreement." (emphasis and underlined).

Because the elements presented by the taxpayer were considered insufficient and following the excerpt from the contract transcribed above, and having also in mind that these expenses were repeated in the following periods, the taxpayer was notified again on 08/02/2013, during inspection activities for the periods 2005 to 2008, of the following:

"( ..)

a) Specify what the service provisions mentioned in the invoices consist of, since from your response to the notification made by these services on 18/01/2013 it is not clear what each of them consists of, as is the example of the service provision designated "...";

b) Present the formula/calculation/determination of the value for each of the service provisions, since from your response to the notification made by these services on 18/01/2013, it was not clarified how the distribution of total expenses for each of the service provisions is made, taking into account that the distribution percentage differs depending on the service provision in question;

c) Present the records referred to in paragraph 5 of section II of the service provision contract concluded with entity B... COORDINATION CENTER - "B… shall maintain precise records covering discriminated expenses related to services provided under this Contract and the same shall be accessible to inspection conducted by A... LTDA. ( . )"(emphasis and underlined).

When questioned, A... responded as follows:

"1 - The service provision invoices enumerated by entity "B... Coordination Center"

a) Specification by Item of each service provided:

• "General" Salary and expenses of Administration (CEO and Personal Assistant);

• "Purchasing" - Salary and expenses of the Purchasing Management Department (Manager (…) and Team):

• "Production" - Salary and expenses of the Production Management Department (Manager (…) and Team):

• "Marketing" - Salary and expenses of the Sales and Marketing Management Department (Manager (…) and Team, International Fair Expenses, Packaging Material Development);

• "Supply Chain" - Salary and expenses of the Supply Chain Management Department (Manager (…/…) and Team);

• "..." - Salary and expenses of the Information Technology Management Department (Manager and Team).

• "Accounting" - Salary and expenses of the Finance Department (Manager and Team, Insurance, Group Administration, Coordination of Operations among Group Companies):

• "Investments" - Salary and expenses of the Investment Project Management Department (Manager (…) and Team (…)):

• "Human Resources" - Salary and expenses of the Human Resources Management Department (Manager (…) and Team):

• "Quality" - Salary and expenses of the Quality Department (Manager (…) and Team).

b) Generally, it is divided taking into account external sales of year n-1 (50%) and the budgeted production volume of the year (50%) and in some specific cases it is allocated directly to the entity in question according to its needs (Ex: If "A..." builds a New Refrigerated Chamber, it will bear more expenses from the Investment Project Management Department).

Thus, its calculation is made taking the following into account:

• "General" - Expense to be divided - 10% CEO and 90% Personal Assistant;

• "Purchasing" - Expense to be divided - 100% … and Team;

• "Production" - Expense to be divided - 70% … and Team;

• "Marketing" - Expense to be divided 100% …, 100% …, 100% …, 100% …, 92% …);

• "Supply Chain" - Expense to be divided - 100% … and Team;

• "..." - Expense to be divided - 5% Manager and Team;

• "Accounting" - Expense to be divided - 40% …, 20% Accounting, 80% Legal, 15% General),

• "Investments" - Expense to be divided - 53% … and Team;

• "Human Resources" - Expense to be divided - 100% … and Team;

• "Quality" - Expense to be divided - 100% … and Team."

In response to items a) and b) of point 1 of the notification, A..., as can be seen from the above transcription, describes summarily and generically what the items of service provisions mentioned in the invoices consist of and identifies the percentage of expenses to be divided in each of the service provisions to be distributed among the various group entities.

With respect to item c) of point 1 of the notification, A... made no response or presentation, to date. It did not even present the "(...) precise records covering discriminated expenses related to services provided under this Contract and the same shall be accessible to inspection conducted by A... LTDA., (...)" (emphasis and underlined), as established, with mandatory character, in the contract for service provisions concluded between A... and B…, and which could have clarified the indispensability of these service provisions.

In the present situation, it is further added that the entity that provided the services in question is non-resident, without a permanent establishment in national territory, making it impossible for these Inspection Services to gather information from this entity regarding the aforementioned service provisions.

Still regarding these service provisions invoiced by B…, A..., in the course of its right of hearing, within the framework of inspection procedures for the periods 2005 to 2008, provided a generic description of each of the service provisions identified in the invoices issued by B…, these being merely academic definitions, susceptible of being applicable to any company. In addition to these definitions, A... attached the international B... 2012 report and a presentation of products of C..., also including a brief presentation of this company, much in the manner of the presentation for B...

However, from the elements identified above, it was not possible to continue proving how these service provisions were concretized, thus preventing the determination of their indispensability.

In the period of 2010, as had occurred in the periods 2005 to 2009, A... has recorded in its accounting as expenses of the period, charges of the same nature charged by B…, through the invoices identified in the table above, in the total amount of €178,677.00, containing the same designations as those in the invoices that were issued in the years 2005 to 2008 by B…. In this way, the taxpayer was notified again on 02/07/2013, during the present inspection procedure for the period 2010, to inform whether the invoices for service provisions issued by B… derive from the same contract for service provisions presented in the course of inspection activities for the periods 2005 to 2008.

In response, A... states the following: "The invoices for service provisions issued monthly by entity "B... Coordination Center" derive from the same contract for Service Provision presented in the course of the previous inspection actions."

Thus, the same considerations already made and relating to the notifications made previously are maintained. Given the lack of documentation regarding these expenses, it becomes impossible to confirm their indispensability in accordance with article 23(1) of the IRC Code, despite the various steps taken to get the taxpayer to present the necessary clarifications.

It is also further to note that A…, in the period of 2011, has recorded in accounting expenses relating to specialized work by companies outside the group:

• IT service provisions, in the total value of €49,911.24 (account extracts 62680108, 62683108, 62213108, 622132208, 62214108 and 62217108;

• Administrative service provisions, in the total value of €355,062.70 (account extracts 62680101, 62680301, 62683101, 62213101, 622132201 and 62214101);

• Advertising service provisions, in the total value of €18,797.55 (account extract 222231);

• Commercial service provisions, in the total value of €4,865.99 (account extracts 62680103, 62683103, 62213103, 62214103 and 62217103);

• Agricultural service provisions, in the total value of €156,449.94 (account extracts 62680104, 62683104, 626832204, 62213104, 622132204 and 62214104);

• Warehouse service provisions, in the total value of €1,813.29 (account extracts 62682107 and 62613107);

• Laboratory service provisions, in the total value of €72,918.21 (account extracts 62680102, 62683102, 626832202, 62213102, 622132202 and 62214102);

• Maintenance service provisions, in the total value of €6,005.68 (account extracts 62680105, 62683105, 62213105);

• Hygiene service provisions, in the total value of €15,449.61 (account extract 62213106);

• Research and development service provisions, in the total value of €83,500.00 (current account extract 62213199).

Of the service provisions listed above, some examples are presented which are supported by documentation with invoices and other supporting documents and where the service provisions are duly identified:

a) IT services: internal record No. 04-020379 and No. 04-120302 (…), which includes the technicians involved, the hours they charge, the type/reason for intervention, the cost/hour/technician); internal record No. 04-080147 (…), which identifies the "IT support provision" service; and the period to which it relates; internal record No. 04-110365 (…), relating to printer rental, identifying the printer, the department to which it belongs and the number/count of prints;

b) Specialized administrative services: internal record No. 04-010142 (monthly provision …); internal record No. 04-040112 and 04-100354 (…); internal record No. 04-070174 (Lawyer …);

c) internal record No. 06-120046 (process of recognition as producer organization and technical-economic study QREN application);

d) Advertising services: internal record No. 04-010107 and 04-090085, of Marketing services and own brand development - …;

e) Commercial services: internal record No. 04-010093 (monthly provision of official customs broker); internal record No. 04-050303;

f) Agricultural services: internal record No. 05-030007 - Polytechnic Institute ... ­ nitrogen analyses; internal record No. 05-110081 - vegetable waste - …, Lda; internal record No. 05-120124 - soil preparation services G...;

g) Laboratory services: internal record No. 04-020274, of "Control of deadlines and insect cultures Feb. to July 2011" - … Environmental Protection, Lda; internal record No. 04-020182, of laboratory services according to attached list - … PORTUGAL - … SA; internal record No. 04-040111, of annual packaging declaration … - …; internal record No. 04­110253, BRC certification audit services, which identifies the services covered by the certification, the number of technicians and the days on which they occurred;

h) Hygiene services: internal record No. 04-020073, 04-020074, 04-050041, 04-080146 ­ Company …–…, SA.

Beyond these expenses totaling around €750,000.00, A... incurred in the period of 2011 another approximately €450,000.00 with specialized services provided by group companies, which include those analyzed in this point (services from B…).

Thus, in view of the above, the lack of documentation regarding the expenses incurred with service provisions invoiced by B..., in the period of 2010[2], in the amount of €254,612.00, makes it impossible to confirm their indispensability, so, in accordance with article 23(1) of the IRC Code, the deduction of these expenses cannot be accepted for tax purposes."

1. The expenses not accepted by the Tax Authority relating to specialized work invoiced by C... to the Applicant relate to invoice No. 01/212994 of 09/12/2011, in the amount of €105,621.00, issued by C... to the Applicant, with the descriptive "INTERV PUBLICITAIRE - Invoice for the advertising intervention and exhibition expenses 2011".

2. Regarding this invoice, it was written in the RIT, among other things, the following:

"Since the designation appearing in the invoice that supports this expense is very generic and does not specifically identify what advertising expenses it refers to, the taxpayer was requested, during inspection activities for the periods 2005 to 2008, to present the contract relating to these expenses, since the description of the invoices relating to the periods 2005 and 2006 mention the existence of a contract.

This contract was presented in the course of the previous inspection activities and the same refers to some types of advertising expenses, as referred to in clause 1: "(...)insertion of advertisements on regular dates in professional journals and this for its most important markets (United Kingdom. Belgium, France, Germany, Netherlands. Scandinavia). C... is present at international fairs such as Fair … - France, …-Germany ,…-France, …­ Germany, …-Netherlands , …-Germany-United Kingdom, ...".

In light of what was established in this contract, the taxpayer was requested, in the course of inspection activities for the periods 2005 to 2008, to "Present supporting documents of the advertising expenses invoiced by entity C...- NIF: …, (.. .) recorded in account extract No. "6223632102", (...)".

In response to what was requested in the notification, A... presented the following elements:

§ Email print-out from Mr. F... (Group Financial Director), of 18/01/2013, stating that "Concerning amounts invoiced by C...: it are the same amounts of the marketing expenses invoiced from B… to A...Lda. Logic behind this: both shareholders are making the same efforts to help A... to penetrate the community and external market."

§ Copy of the invoice issued by C... and relating to advertising expenses, already identified above;

§ Table attached to the invoices issued by B... COORDINATION CENTER (B…) - NIF: …, relating to expenses with specialized services - B…;

§ Email print-out from Mr. F... (Group Financial Director), of 21/01/2013, stating that "(.. .) a. Joint-venture agreement: see point 17 for the service invoices. b. Manufacturing agreement: point 6 and 7 describe the pricing mechanism."; and

§ The contract "Joint-Venture Agreement between B... and C..., dated 8 November 2004", where point 17 is highlighted, whose translation presented by A... says the following: "(.. .) The parties agree that they will charge A... compensation for the costs and services provided for the benefit of A.... B... CC will present annually a proposal for compensation to be charged by B... CC and by C... for services to be provided to A... during that year. The compensations will be discussed and approved at the first Board Meeting of A... at each new financial period. Any compensation for services to be provided by B... or by C... shall be on an equitable and commercially reasonable basis."

It is further added that the amount invoiced by C... to A..., relating to advertising, coincides in value with that invoiced by B... COORDINATION CENTER (B…), as stated in the email of 18/01/2013 from Mr. F..., which he justifies as a result of the same efforts made by the two Belgian entities to integrate A... into the community and international market.

In the course of this action for the period 2011, the taxpayer was again notified on 11/10/2013, to "Regarding the invoice for service provision No. 01/212994, of 09/12/2011, issued by entity C...- NIF: …, in the amount of €105,621.00, with the description of "Invoice for advertising intervention and exhibition expenses 2011", recorded in current account extract "6221321102 - C... (Belgium)", by internal record No. 04-120325, inform whether it derives from the same contract for service provisions presented in the course of inspection activities for the periods 2005 to 2008. If not, present the respective contract. In any case, present supporting documents of this service provision".

In response, A… states that "The invoice for service provisions No. 01/212994, of 09/12/2011, issued by entity "C...", derives from the same type of Service Provision contract presented in the course of previous Inspection actions." And it attached in annex 3, a service provision contract with the same description of the service provision of the contract that was presented in the course of the previous inspection activities, with the value matching that mentioned in the invoice (€105,621.00), concluded on 01/07/2012, mentioning in the second item of clause 2 that in each year C... will invoice A… for the services contracted for the current calendar year as of 30/06, with the description of "contribution to the costs of publicity and fairs for C... for the current calendar year 2011".

These data now presented are not coherent with the content of the invoice issued by C..., except for the amount, since it was issued on 09/12/2011 and contains another description: "INTERV PUBLICITAIRE - Invoice for advertising intervention and exhibition expenses 2011".

The lack of coherence between the data contained in the invoice and those contained in the contract and the lack of presentation of supporting documents of the advertising performed by C... to A..., namely evidence of participation in the fairs identified in the contract, advertisements published in specialized journals, advertising leaflets, or other advertising actions, based on what was established in the contract between the two entities, does not allow confirmation of the indispensability of the advertising expenses recorded in this period, in accordance with article 23(1) of the IRC Code, despite the steps taken.

It should also be noted that, since the entity that provided the services in question is non-resident, without a permanent establishment in national territory, it is not possible for these Inspection Services to gather information from this entity regarding the aforementioned service provisions.

Thus, it is concluded that in accordance with article 23(1) of the IRC Code the deduction of the advertising expenses invoiced by C... to A..., in the amount of €105,621.00, cannot be accepted for tax purposes."

1. To each invoice referred to in points 7 and 9 above, corresponds a financial flow duly recorded by the accounting of A..., which was paid through bank transfer.

2. B..., in 2011, held the know-how at the level of industrial productions, constituting all the operational support of its units spread throughout Europe, through a central structure, designated B... COORDINATION CENTER (B…), which provided technical knowledge and assistance, training, merchandising and also undertook sales actions in international markets.

3. At B… the chief executive officers of the various productive units of the group met to define market strategies, prepare annual budgets and analyze the performance of the different productive units.

4. The Applicant specialized in the production of certain types of foodstuffs, in particular peppers, which was, in 2011, predominantly marketed externally through its Belgian shareholders.

5. An agreement called "Joint venture agreement between B... and C...", dated 8.11.2004, was concluded, where in its number 17 it states that: "The parties agree that they will charge A... compensation for the costs and services provided for the benefit of A.... B... CC will present annually a proposal for compensation to be charged by B... CC and by C... for services to be provided to A... during that year".

6. A contract was also concluded between C... and A..., where C... undertook to incur expenses with advertising in markets such as English, Belgian and French, and ensure presence in a set of fairs identified in the contract, as well as the publication of advertisements for the products it transacted.

7. B... has decision-making power over the volume and specificity of the Applicant's production and closely monitors its purchasing processes, production, quality control, commercial promotion, market monitoring, supply chain, financial activities and human resources management.

8. The descriptive of the invoices of B... mentioned above refers to services provided in the following areas: "; Purchasing; Production; Marketing; Supply Chain; ...; Accounting, Investments; Human resources; Quality"

i. "General": contribution of the Applicant in the salary and expenses of the Administration (Chief Executive Officer and Personal Assistant) of B...;

ii. "Purchasing": contribution of the Applicant in the salary and expenses of the Purchasing Management Department (Manager and Team) of B...;

iii. "Production": contribution of the Applicant in the salary and expenses of the Production Management Department (Manager and Team) of B...;

iv. "Marketing": contribution of the Applicant in the salary and expenses of the Sales and Marketing Management Department (Manager and Team, International Fair Expenses, Packaging Material Development) of B...;

v. "Supply Chain": contribution of the Applicant in the salary and expenses of the Supply Chain Management Department (Manager and Team) of B...;

vi. "...": contribution of the Applicant in the salary and expenses of the Information Technology Management Department (Manager and Team) of B...;

vii. "Accounting": contribution of the Applicant in the salary and expenses of the Finance Department (Manager and Team, Insurance, Group Administration, Coordination of Operations among Group Companies) of B...;

viii. "Investments": contribution of the Applicant in the salary and expenses of the Investment Project Management Department (Manager and Team) of B...;

ix. "Human Resources": contribution of the Applicant in the salary and expenses of the Human Resources Management Department (Manager (…) and Team) of B...;

x. "Quality": contribution of the Applicant in the salary and expenses of the Quality Department (Manager and Team) of B....

1. The Applicant had at its disposal, in the year 2011, the services of B... described in the preceding number, having benefited from them both at the level of production in Portugal and at the level of sales abroad, and benefited from the promotion of its products by C..., at the level of its foreign sales, and from the sales accounted for by the Applicant in the year 2011, 36% of the total went to B... and 21% of the total went to C..., and the invoicing of the Applicant that took place in the domestic market amounted to around 38% of the total in that year.

2. The expenses not accepted by the Tax Authority relating to charges considered as incurring on third parties refer to the balance of the supplier current account extract "22131220374 - G..., Lda", a company established by A... in 2009, which presented throughout the year 2011 a debit balance arising from the fact that A... delivered to it, between February and December, varying amounts, which in total amounted to €530,000.00.

3. Regarding this invoice, it was written in the RIT, among other things, the following:

"In accordance with the 2011 Management Report of the taxpayer, "At the beginning of 2009, A... established a new company "G... - …, Lda.", whose activity is related to the cultivation and marketing of agricultural products, as well as various related processes, namely the production of plants in nurseries and their marketing, the purchase and sale of agrochemical and phytosanitary products, the provision of various services to agricultural companies, among others."

In the period under analysis, A... has commercial relations with its associate, G..., Lda, both upstream (purchases) and downstream (sales). According to the response given to the notification made in the course of this inspection procedure, A... states that G...:

"-Sells raw materials and phytopharmaceutical products to D...", which in turn sells to its associates, including "A...";

• Purchases, through "D...", services, plants and seeds from A..."." (...)

A... was questioned in the course of notification whether there is any financing contract for G..., Lda, given this considerable amount of "advances". In response, A... said: "These were not advances, but rather deliveries to meet immediate treasury needs ( ..), although there is no contract. Both the reference to advances and the accounts used for accounting records constitute errors determined by the parameterization of the Commercial and Treasury Management Systems."

Well, with due respect for a different opinion, "meeting immediate treasury needs", is nothing more than a "financing", all the more so that, with there also being sales from A... to G..., Lda, no set-off movements were verified between the supplier and client account extracts.

Thus, regardless of whether or not a financing contract was formalized, the facts account for the fact that A... financed G..., Lda during the year 2011, in the amount of €530,000.00, as is evident from the current account extract identified above.

For its part, A… resorts to financings from the parent company "B... COORDINATION CENTER (B…)" - NIF: …, not only for the exercise of its activity, but also for the financing of G..., Lda referred to above, incurring expenses with interest.

These interest expenses were accounted for in the current account extract "691121101 - Interest Borne Parent Company.", in the total amount of €521,648.60, with €328,264.54 relating to short-term loan interest, in accordance with the following records: (...)

The financing of G..., Lda caused A... to incur the need for financing in the same measure as the financing granted, which resulted in it bearing more expenses than those indispensable for its activity, which is not accepted for tax purposes in accordance with article 23(1) of the IRC Code.

Thus, it is necessary to remove from the expenses incurred with interest on financings to A..., the amount corresponding to interest calculated on the value of the financing from A... to C…, Lda."

1. In the taxation period of 2011, there were investments greater than the financings obtained by the Applicant, among which are the acquisitions of tangible fixed assets in the amount €9,424,691, which exceeded the financings obtained until December 2011 (€9,000,000).

2. The expenses not accepted for tax purposes relating to charges that incur on third parties, described in the RIT, were invoiced by entity H..., Lda (NIPC: 504370910), and recognized by the Applicant in the period 2011, in the current account extract "62680101 ­ Other Services - Administrative", in the amount of €30,000.00, relate to expenses regarding the process of recognition as a producer organization of a company.

3. Regarding this invoice, it was written in the RIT, among other things, the following:

"The taxpayer was questioned, by notification dated 11/10/2013, to "(...) present the supporting documents of the services described in the invoices No. (s) 312010, (...) and 14/2011, issued by H..., Lda (NIPC: 504 370 910), as well as justify, for purposes of article 23(1) of the CIRC, the indispensability of these expenses".

In the response, the taxpayer attached "(...) supporting documents of delivery (at the Regional Directorate of Agriculture and Fisheries of Lisbon and Vale do Tejo and at AICEP - Agency for Investment and External Trade of Portugal) of those described in the invoices No.(s)º 31201, 1112011 and 1412011, issued by entity 'T…, Lda'"

The aforementioned attached documents consist of:

• a consultation record in the PAS (Simplified Access Platform) regarding the QREN project (invoice No. 11/2011, of 28/06/2011), where A... is identified as the promoting entity;

• a letter dated 30/09/2011, addressed by D...-…, Lda to the Director of the Regional Directorate of Agriculture and Fisheries of Lisbon and Vale do Tejo, presenting its operational program for the three-year period 2012-2014;

• a letter dated 30/09/2011, addressed by D...- …, Lda to the Director of the Regional Directorate of Agriculture and Fisheries of Lisbon and Vale do Tejo, requesting recognition as a Producer Organization.

It is noted that only the expenses documented with invoice 11/2011 relate to A.... The expenses relating to invoices 3/2010 and 14/2011, because they are charges that incur on third parties, in this case D…, Lda do not constitute fiscally deductible expenses, as provided for in article 45(1)(c) of the IRC Code. Thus, the amount of €30,000.00 is to be added to the result declared by A..., relating to these expenses, by violation of articles 23(1) and 45(1)(c), both of the IRC Code."

1. The invoices to which the preceding numbers refer were issued by company H..., under a contract concluded between A... and this entity, a contract concluded on 08-03-2010, where in its article 1 it expressly states the following:

"The purpose of this contract is the provision by H... of a set of services under the Project Process of Recognition as a Producer Organization and Preparation of the Respective Operational Plan of company I... as described in the PROPOSAL".

1. From the proposal attached to the contract, it appears that I... (which was finally designated D...) was to be a company headquartered in Portugal, being recognized as a producer organization, in whose structure various companies would be included, such as A... itself, G…, a company owned by A..., and others.

2. Further from the same proposal: "with this new framework, A... and the group of companies where it is included intends to definitely enhance the advantages resulting from the process of concentration of supply and coordination of productive and commercial strategy, institutionalizing it internally and in a way that is perceptible and valued by the market".

3. D... assumed the mission, among others, of acquiring raw materials from different producers, subsequently selling to A... the products that interest it so that they are subsequently marketed.

4. The expenses not accepted by the Tax Authority relating to specialized work - Administrative - invoiced by "E...", were mostly recorded in the current account extract "622132201 - Specialized Work - Administrative", but also in other expense extracts identified in the RIT, relating to "Service Provisions - Interim Management" and "General Expenses", as described in the invoices issued by entity E..., NIF: …, totaling the amount of €148,573.42, as evidenced in the RIT.

5. Regarding this invoice, it appears in the RIT, among other things, the following:

"Regarding the expenses designated "General Expenses", the invoiced amount corresponds to that of a listing of expenses with stays, meals, air travel, vehicle rental, diesel, tolls, parking, attached to the respective invoices, but do not present any supporting documents for these expenses, with the exception of those relating to internal record No. 04-060103, corresponding to invoice No. 01-000007, of 28/06/2011, in the amount of €2,582.16. As regards this internal record, it is found that the expenses were incurred with company employees (e.g. …, …, …, …) and with a member of the Board of Directors (…E...), in accordance with the supporting documents attached to the invoice. For this reason, these expenses are accepted for tax purposes.

Regarding the internal records discriminated in the table above, considering that no information exists beyond that cited in the preceding paragraph, the taxpayer was notified to "Regarding the current account extract "622132201 - Specialized Administrative Work", clarify what the services contained in the invoices recognized in internal records Nos. 04-020062, 04­030070, 04-040055, 04-050098, 04-060102, 04-060103, 04-080048, 04-080371, 04-090195, 04-110001, 04-110129 and 04-120215 consisted of and present the respective supporting documents."

In response, A... states that "The services contained in the invoices, recognized in internal records No. (...) are related to the Internal Management of the Company, which briefly performs the following functions:

• General Management:

• Periodically inform the Board through the presentation of elements for appreciation of the company's management and reports;

• Supervise and coordinate the activities of employees;

• Agricultural Area

• Validate the planning of sowing, planting and crop management:

• Validate the contracted areas, prices and conditions in accordance with the needs of the group:

• Monitor the evolution and course of crops;

• Productive Area

• Ensure the necessary means for planned productions, namely at the level of investment in equipment and infrastructure;

• Supervise the operation and alert to failures and improvements to be made.

• Maintenance and Automation Area

• Monitor the availability and conservation of equipment and alert to necessary improvements;

• Ensure the existence of means and time for correct execution of the maintenance plan;

• Financial Area:

• Participate, in collaboration with the Board of Group Administration, in financial policy;

• Participate, in collaboration with the Board of Group Administration, in the definition of the company's general objectives, in the determination of investment priorities (based on cost and profitability estimates), in the preparation of the investment plan and necessary financing means;

• Prepare Plans for Company Expansion, requesting the approval of the Group Board;"

In this response, A... presented a summary of what it considers to be the service provisions contained in the invoices, with the designation "Service Provisions Interim Management", without having presented any document in which the various actions contained in the summary are manifested, that is, it did not present, for example, reports, validation of sowing planning, contract validation, alerts to failures and improvements, company expansion plans.

It also did not present any supporting documents regarding the expenses contained in the internal records mentioned above in the table, under the designation "General Expenses".

With this procedure, A... did not justify its claims with documentation, not having presented the respective supporting documents, either of the service provisions designated "Service Provisions Interim Management", or of those designated "General Expenses", thereby making impossible the confirmation of the indispensability of these expenses, not being able for them to be accepted for tax purposes and proceeding with their increase to the net result of the period declared by the taxpayer, in the amount of €148,573.42, for not being considered as duly documented, as provided for in article 23(1) and item g) of article 45(1), both of the IRC Code."

1. The invoices to which the preceding numbers refer consist of service provisions, which are divided into two aspects: a first ("Interim Management"), corresponding to 11 invoices, valued at €12,803.00 each, totaling a value of €140,833.00; and a second designated "General Expenses", of varying amount, the sum of 11 invoices totaling the final value of €7,740.42.

2. The first correspond to the payment of services that the company of … E... provided to A..., namely while a member of the board of directors of the company.

3. As for the remaining invoices, in the amount of €7,740.42, presented by E... to A..., relating to expenses incurred by the former in the context of the services it provided to the latter (A...), the Tax Authority did not accept as justified a total of €5,158.32.

4. The invoices not accepted correspond to expenses invoiced to A..., relating to the provision of services previously referred to, with trips, travels and stays of … E... from, to and in Portugal.

A.2. Facts Established as Not Proven

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

A.3. Substantiation of Proven and Not Proven Facts

With respect to the factual matters, the Court does not have to pronounce on everything that was alleged by the parties, but rather its duty is to select the facts that matter for the decision and discriminate the proven matter from the not proven (cf. art. 123(2) of the CPPT and article 607(3) of the CPC, applicable by virtue of article 29(1), items a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and selected based on their legal relevance, which is established in consideration of the various plausible solutions of the legal question(s) (cf. previous article 511(1) of the CPC, corresponding to current article 596, applicable by virtue of article 29(1), item e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110(7) of the CPPT, the documentary evidence and the case file joined to the proceedings, the facts listed above in points 1 to 10, 12, 13, 20 and 21 were considered proven with relevance to the decision.

The facts listed in points 11 to 14 and 17 to 19, 28, 32 and 34 were also taken into account in light of the testimony evidence which, in a manner consistent with all the documentation in the case file and other materials joined to the proceedings, elucidated the tribunal on the terms of the relationship between the Applicant and its shareholders, as well as in detail on the content of the services to which the invoices questioned in the proceedings referred.

The fact referred to in point 19 was further considered in light of a judgment of normalcy, resulting from the comprehensiveness of the situation presented to the Tribunal, which includes a Portuguese company held by two multinationals (which, having no relations between themselves, reconcile in the Applicant converging but conflicting interests, in that the expense of the Applicant in favor of one necessarily prejudices the other) and which directs its production for disposal principally through exports, within which it has no structure of its own.

B. LEGAL MATTERS

Essentially, it is at issue in these proceedings whether, as the Applicant alleges, the act of additional assessment relating to the year 2011, which is the subject of the present proceedings, suffers, in part, from error in its factual assumptions, and whether, without expressly formulating such a question autonomously, it also raises the lack of substantiation of such act (articles 28 and 109 of the initial request).

Since vices that lead to nullity or non-existence of the impugned acts have not been alleged, nor has the Court been expressly requested to address the issues raised in a determined order, in accordance with article 124 of the CPPT, it is necessary to know which vice, "whose determination will establish, according to the prudent judgment of the judge, more stable or effective protection of the injured interests", which in this case will be the alleged error in the assumptions of the impugned act.

At issue in these proceedings are five distinct situations, namely:

i. Expenses (not accepted by the Tax Authority) for specialized work, invoiced by B..., in the amount of €254,612.00;

ii. Expenses (not accepted by the Tax Authority) relating to advertising invoiced by C..., in the amount of €105,621.00;

iii. Expenses (not accepted by the Tax Authority) relating to interest borne, in the amount of €1,106.81;

iv. Expenses (not accepted by the Tax Authority) incurring on third parties - D... - in the amount of €30,000.00;

v. Expenses (not accepted by the Tax Authority) for specialized work, invoiced by E..., in the amount of €148,573.42.

Transversally at issue in the questions raised is whether, concerning the expenses indicated, the assumptions of article 23(1) of the CIRC are or are not satisfied, the content of which is hereby transcribed:

"Expenses are those that are demonstrably indispensable for the realization of income subject to taxation or for the maintenance of the income-generating source, namely:

a) Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general expenses for production, conservation and repair;

b) Those relating to distribution and sales, encompassing those for transport, advertising and placement of merchandise and products;

c) Of a financial nature, such as interest on borrowed capital applied in the business, discounts, premiums, transfers, exchange differences, credit operation expenses, debt collection, issuance of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;

d) Of an administrative nature, such as remuneration, including that attributed as profit sharing, cost allowances, current material consumption, transport and communications, rents, litigation, insurance, including life insurance and "Life" branch operations, contributions to retirement savings funds, contributions to pension funds and to any supplementary social security schemes, as well as expenses with benefits upon cessation of employment and other post-employment or long-term benefits of employees;

e) Those relating to analysis, rationalization, investigation and consultation;

f) Of a fiscal and parafiscal nature;

g) Depreciation and amortization;

h) Adjustments in inventories, impairment losses and provisions;

i) Expenses resulting from the application of fair value in financial instruments;

j) Expenses resulting from the application of fair value in consumable biological assets that are not multi-year forestry operations;

l) Realized losses;

m) Indemnifications resulting from events whose risk is not insurable.".

Regarding the question at hand, the Tax Authority argues, in summary, that "It was not possible for the Tax Authority to determine demonstrably what the service provisions referred to in the respective invoices consisted of, for purposes of determining their tax deductibility."[3], given that "the clarifications obtained, (...) are vague and generic, not allowing identification of the specifically provided service, as to its origin, nature, destination and amount, for purposes of determining its tax deductibility."[4].

The Tax Authority believes that it would be indispensable[5], to "demonstrate what the service provisions consisted of" and "determine their indispensability", to know "namely:

• The agents who intervened in the provision of services, (...);

• The determination of the values allocated to A... in relation to each of the service provisions (...);

• The third parties (customers, suppliers, financiers, business organizations, subcontracting entities, etc.) involved in the aforementioned service provisions (...);

• The contracts, agreements, partnerships, documents in which group strategies, commercial and marketing actions, evidence of exhibitions and fairs, evidence of exhibitions and fairs, evidence of intervention in audits and reports, implementation of new projects and technologies, regular visits to units, recruitment processes of senior executives (...).".

The Tax Authority concludes, in summary, that "In the case of these proceedings, the Tax Authority challenged, substantiatedly it must be said, the fiscal relevance of certain amounts, accounted for as expenses of the period.", therefore, "It was the responsibility (...) of the Applicant to prove this indispensability"[6].

The Tax Authority also offers that "it is not in question that the invoiced services have been provided"[7], that "It is not (...) a question of challenging the veracity of the invoices"[8].

Given this, the main problem raised in the present proceedings is whether or not the expenses documented by the invoices of B..., C... and E…, identified above, whose effectiveness is not even challenged, as was seen, by the Respondent, existed, but only whether the information provided by the Applicant is sufficient to support the essentiality of these costs as required by article 23 of the CIRC.

The documents relating to the costs in question are deemed sufficient to show that the applicant incurred the expenses to which they refer, which, moreover, is also not contested by the Tax Authority.

In effect, and for example, as was written in the STA Decision of 05-07-2012, rendered in case 0658/11[9], "In IRC matters, the document proving and justifying costs for purposes of articles 23(1) and 42(1)(g) of the CIRC, does not have to assume the essential formalities required for invoices in VAT matters, since the requirement for documentary evidence is not confused with or exhausted in the requirement for an invoice, it being sufficient only a written document, in principle external and with mention of the fundamental characteristics of the transaction, since contrary to what happens with VAT, in IRC matters, the justification of the cost is a probative formality and, therefore, replaceable by any other kind of proof.".

Thus, contrary to what happens in VAT (art. 36(5)), the concept of a proving document does not necessarily have to correspond to the invoice issued with the detail that is required in the CIVA. In the field of IRC, the requirements will be less, it being sufficient that the proving document explicitly states, in a clear manner, the main characteristics of the transaction, that is, the subjects, the price, the date and the object of the transaction, even admitting that the proof of the cost does not have to be made exclusively through written documentation.

As was written in the STA Decision of 16-03-2005, rendered in case 00340/03:

"1. For duly documented expenses there is to be presumed the veracity of the cost for purposes of determining taxable profit in IRC matters, reason for which it is incumbent on the Tax Authority to allege the existence of elements capable of putting this veracity in question, namely by the enumeration of objective, solid and consistent indications, which translate a high probability that these documents do not support real transactions.

1. For undocumented or insufficiently documented expenses it is incumbent on the taxpayer to prove the respective cost, as article 23 of the CIRC imposes on it, by demonstrating that the transactions were effectively carried out, being possible for it to this effect resort to other means of proof (namely complementary means of documentary proof and testimony evidence) to demonstrate this and convince of the goodness of the corresponding accounting entry and the illegality of the correction that the Tax Authority has carried out by virtue of this lack or insufficient documentation.".

In the same sense, in the TCA-South Decision of 20-04-2010, rendered in case 03632/09, it can be read: "Thus, the probative inefficacy of the accounting entries does not prevent their supplementation by other means of proof admitted in law and appropriate to substantiate the fairness of the assessment by proving the underlying commercial transaction to the deficient record or documentary support of that accounting entry.".

It is not without relevance to observe that in the recent IRC reform the legislator has come to establish increased requirements in the proving documents, very similar to those of VAT (23 (4)) which allows to infer, on the one hand, that these requirements did not exist before and, on the other, that such requirements were not – as they are not – as strict in IRC as in VAT.

Arriving here, it is believed that it is not proper to grant the Tax Authority's position when it understands that it would be indispensable, to "demonstrate what the service provisions consisted of" and "determine their indispensability", to know "namely:

• The agents who intervened in the provision of services, (...);

• The determination of the values allocated to A... in relation to each of the service provisions (...);

• The third parties (customers, suppliers, financiers, business organizations, subcontracting entities, etc.) involved in the aforementioned service provisions (...);

• The contracts, agreements, partnerships, documents in which group strategies, commercial and marketing actions, evidence of exhibitions and fairs, evidence of exhibitions and fairs, evidence of intervention in audits and reports, implementation of new projects and technologies, regular visits to units, recruitment processes of senior executives (...).", since this lacks legal foundation from the outset.

On the other hand, the Tax Authority's position that "challenged, substantiatedly (...) the fiscal relevance of certain amounts, accounted for as expenses of the period." is not subscribed to either.

In effect, objectively, the Tax Authority did not collect or present any positive proof that raises any doubt about the utility or necessity of the expenses in which the Applicant, admittedly, incurred. Rather, the Tax Authority merely casts upon these expenses a Cartesian doubt, demanding proof beyond a reasonable doubt to accept their deductibility.

As was written in the TCA-South Decision of 30-01-2007, rendered in case 01486/06:

"IV.- It is in the concept of indispensability inherent in article 23 of the CIRC that the essential question of the tax treatment of business costs is rooted and upon which the fundamental distinction is based between the cost genuinely incurred in the collective interest of the company and what may result only from the individual interest of a shareholder, a group of shareholders or their entirety and which cannot, therefore, be considered a cost.

V.- This is an expense with a business purpose which does not mean that it has from the outset an immediate and directly profitable purpose, but that it has, in its origin and cause, a business purpose, the law granting the Tax Authority sufficient powers to refuse acceptance as a tax cost of expenses that cannot be considered compatible with the purposes pursued by the company."

As can be seen, the proof of the essentiality of a cost demonstrably incurred passes, not by a microscopic demonstration of the anatomy of the cost, but rather by the connection, from a point of view of reasonableness, to the "collective interest of the company", by the evidencing of a business cause and origin.

Thus, and moreover, article 23(1) of the CIRC enumerates in its items a series of exemplary situations of the requirement established in its body, which should not, in line with what Prof. Teixeira Ribeiro understood in light of the CCI[10], be understood other than that when the costs or losses are specifically listed in article 23, the presumption is of their essentiality, correspondingly relieving the taxpayer of the burden of proof, which is precisely the purpose of the enumeration (drawn from, moreover, the use of the expression "namely").

Now, as is gathered from the facts established as proven, the expenses in question in these proceedings fall within the various items of article 23(1) of the CIRC, being essentially reducible to expenses relating to production (item a)) and distribution and sale of products, including advertising (item b)), also including expenses relating to administrative expenses (item d)) as well as analysis, rationalization, investigation and consultation (item e)).

Moreover, and independently, it is certain that it results from the evidence produced, consolidated in the facts established as proven, that the Applicant effectively used the invoiced services, and such services are not only, objectively and by their nature, potentially revenue-generating, but the Applicant derived concrete benefits from them, translated into its production and sales.

Now, all this is sufficient for the essentiality of the expenses in question to be considered demonstrated. And, this being demonstrated, it is not lawful to reason that the failure to demonstrate the form of calculation of the specific amount of the expense – and its possible exaggeration – implies its complete disregard.

As was written in case 91-2012-T of the CAAD[11]:

"Faced with the impossibility of ascertaining which services were provided and their indispensability, the tax administration notified the Applicant to, among other things, specify, date and quantify these services.

The Applicant provided clarifications, but after profound analysis was unable to ascertain which intra-group services were provided nor their quantification, nor their date.

Following this impossibility of ascertainment, the tax administration understood that article 23 of the CIRC was violated, because the Applicant did not demonstrate the indispensability of the costs referred to in the realization of profits nor in the maintenance of the income-generating source and concluded that it had to give a negative answer to the question of whether "there was effectively an intra-group service provision"

(...)

In the case in question, having the tax administration concluded that it could not be ascertained which services were performed and their quantification, it adopted an understanding that amounts to saying that none of the services provided, which it did not know, was necessary for the realization of profits or maintenance of the income-generating source.

This understanding has no correspondence with reality, since some services were provided, as results from the factual matter established, therefore the acts of assessment relating to the years 2007 and 2008, in the part in which they were based on the corrections relating to "Management fees", suffer from error in the factual assumptions.

Moreover, having applied the regime of article 23 of the CIRC to a situation in which it is not applicable, those acts suffer from the vice of violation of law by error in the legal assumptions."

The Tax Authority's argumentation in this matter thus ends up showing some contradiction, in that on the one hand it assumes not to question that the services were provided and, on the other hand, declares it does not know anything to do with those ("origin, nature, destination and amount"), being a case to ask what services those are, then, that the Tax Authority admits have been provided...

Also, the very allusion, without drawing the proper consequences therefrom – particularly at the level of autonomous taxation – to the possible occurrence of confidential expenses, made in the RIT and replicated in the Tax Authority's Response already in the arbitral proceedings, shows this aforementioned lack of understanding. In effect, the refusal of a supplier to reveal its method of fixing the price of a good or service, effectively provided, is not capable of making the expense confidential. This was incurred for the good or service effectively provided, in the amount demonstrably paid to the identified recipient, and it is therefore known all elements for the same not to be reduced to confidential expenses.

A distinct question from the one just addressed would be that of the reasonableness of its quantification. This would be a matter of knowing whether, being the services demonstrably provided "indispensable for the realization of income subject to taxation or for the maintenance of the income-generating source", as in the case they unquestionably are, the value fixed and paid as consideration was adequate or not.

This question – which would fall into the field of transfer pricing – was not, however, raised by the Tax Authority.

Much of what has been said above applies, mutatis mutandis, to the expenses not accepted by the Tax Authority, considered as incurring on third parties (D...) in the amount of €30,000.00, in that the legal basis for their disregard was also article 23(1) of the CIRC.

Regarding this situation, it is further added that, as results from the facts established as proven, the payments in question were made under a contract concluded between the Applicant and the entity issuing the invoice, it being certain that nothing indicates, to the contrary, that the aforementioned contractual reality is devoid of economic substance.

In effect, it is revealed that the establishment of the entity representative of producers was established to a large extent in the interest and economic benefit of the Applicant, and therefore the respective expenses are objectively justifiable in light of the indispensability criterion already analyzed.

Finally, regarding the expenses not accepted by the Tax Authority relating to interest borne, in the amount of €1,106.81, essentially it is a question of knowing whether the cash deliveries made by the Applicant to its subsidiary do or do not relate to a financing, secondly, whether such financing is relatable to the financial costs borne by the Applicant itself, and thirdly, if that is the case, whether these costs, insofar as they are relatable to the financing found, are or are not deductible.

The answer to the first question is believed to necessarily be affirmative.

In effect, cash deliveries with an obligation to return will always, in all cases, regardless of the legal form given to them, be a financing.

As regards the question of the relationship of such financing to the financial costs borne by the Applicant itself, it will also, it is believed, have to be concluded affirmatively.

In fact, contrary to what the Applicant alleges, the circumstance that in the taxation period of 2011 there were investments exceeding the financings obtained by the Applicant, which exceeded the financings obtained until December 2011, will not be relevant, given the fungibility proper to the nature of money.

In effect, and naturally, if the Applicant had not effected the financings in question, it would have been possible for it to finance itself in smaller amounts, consequently bearing lower financial costs.

Arriving here, the question arises of whether the additional financing costs borne by the Applicant, in this context, are or are not deductible, as indispensable for the maintenance of the income-generating source.

It should be said from the outset that it is considered that this question should be the subject of a concrete answer, it not resulting from the nature of things that an unremunerated financing of a subsidiary company should be considered dispensable to the maintenance of the income-generating source.

Thus, it should be based on the circumstances of the specific case that it will have to be ascertained whether the financial costs related to the financing of the subsidiary meet the requirement of indispensability.

Now, in the present case, nothing is ascertained in this regard. That is, no justification is found in the facts established as proven to support the indispensability of these expenses for the maintenance of the Applicant's income-generating source.

Thus, appealing to the doctrine of the STA Decision of 30-11-2011, rendered in case 0107/11, it is understood that in the specific case "In light of article 23 of the CIRC, costs with interest and stamp duty on bank loans contracted by a company and applied in the free financing of associated companies are not to be considered as fiscally relevant.", it not being, correspondingly, to consider as fiscally relevant the expenses of the Applicant related to the financing of G..., there being nothing therefore to censure to the act which is the subject of the present proceedings in this part.

Since, with respect to this situation, the violation of the duty of substantiation of the decision has not been alleged, which moreover is, objectively in the case, fulfilled, it is not necessary, in this part, to address this question.

Thus suffering, in this manner and for all that has been stated, the assessment that is the subject of these proceedings, from the vice of violation of law by error in the legal assumptions, in the following parts:

i. Expenses (not accepted by the Tax Authority) for specialized work, invoiced by B..., in the amount of €254,612.00;

ii. Expenses (not accepted by the Tax Authority) relating to advertising invoiced by C..., in the amount of €105,621.00;

iii. Expenses (not accepted by the Tax Authority) incurring on third parties - D... - in the amount of €30,000.00;

iv. Expenses (not accepted by the Tax Authority) for specialized work, invoiced by E..., in the amount of €148,573.42.

the same should be partially annulled, the arbitral request proceeding in this part, and therefore being without prejudice to the knowledge of the form vice concomitantly alleged in points 28 and 109 of the Initial Request.

The Applicant couples with the request for annulment of the tax act which is the subject of these proceedings the request for condemnation of the Tax Authority in the payment of compensatory interest.

In the case in question, it is manifest that the illegality of the assessment act, whose amount the Applicant paid, is attributable to the Tax Administration, which, on its initiative, carried it out without legal support.

Consequently, the Applicant is entitled to compensatory interest, in accordance with article 43(1) of the LGT and 61 of the CPPT.

Compensatory interest is due from the date of payment made, and calculated on the basis of its respective value, until its full return to the Applicant, at the legal rate, in accordance with articles 43(1) and (4) and 35(10) of the LGT, 61 of the CPPT and 559 of the Civil Code and Order No. 291/2003, of 8 April (without prejudice to any subsequent amendments to the legal rate).

C. DECISION

By these means, this Arbitral Tribunal decides to judge the arbitral request partially granted and, in consequence:

a) partially annul the tax act which is the subject of these proceedings, in the part relating to the following corrections:

i. Expenses for specialized work, invoiced by B..., in the amount of €254,612.00;

ii. Expenses relating to advertising invoiced by C..., in the amount of €105,621.00;

iii. Expenses incurring on third parties - D... - in the amount of €30,000.00;

iv. Expenses for specialized work, invoiced by E..., in the amount of €148,573.42.

b) Condemn the Tax Authority to return to the Applicant the tax unduly paid, resulting from those corrections, together with compensatory interest;

c) Judge the present arbitral action unfounded in the remaining part;

d) Condemn the Tax Authority and the Applicant in the costs of proceedings, in the amounts, respectively, of €3,026.35 and €33.65, having regard to what has been paid.

D. Value of the Proceedings

The value of the proceedings is set at €102,013.98, in accordance with article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by force of items a) and b) of article 29(1) of the RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is set at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Tax Authority and the Applicant, in proportion to their respective defeat (€3,026.35/€33.65), since the request was partially granted, in accordance with articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the said Regulation.

Let notification be made.

Lisbon

03 March 2015

The Presiding Arbitrator

(José Pedro Carvalho - Relator)

The Arbitrator Member

(João Santos Pinto)

The Arbitrator Member

(Nuno Maldonado Sousa)

[1] According to the old spelling.

[2] Lapse in the report

[3] Point 14 of the Response. Although these are considerations made regarding the invoices issued by B…, its philosophy is equally underlying the disregard of the invoices of C… and E….

[4] Point 21 of the Response.

[5] Point 27 of the Response.

[6] Points 9 et seq. of the Response.

[7] Point 11 of the Response.

[8] Point 32 of the Response.

[9] Available at www.dgsi.pt, as with the remaining jurisprudence cited without source.

[10] Commentary to the Supreme Court Decision of 9 October 1985, RLJ No. 3743, p. 39-43.

[11] Available at www.caad.org.pt.