Process: 393/2018-T

Date: February 20, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (393/2018-T) addresses IRC autonomous taxation on allegedly undocumented expenses relating to a Portuguese branch of a Spanish construction company. The Tax Authority conducted inspections revealing cash account balances of €557,225.11 that lacked credibility, as physical cash counts found no actual funds at the establishment's headquarters. The assessment imposed autonomous taxation of €383,627.69 for 2012 on expenses classified as confidential/undocumented. The claimant, A..., challenged the assessment as a reversed debtor in tax enforcement proceedings, also seeking compensation for unwarranted guarantees. The case examines critical issues including whether bearer cheques recorded as cash withdrawals constitute properly documented expenses, the application of IRC autonomous taxation rates to permanent establishments of non-resident entities, and the procedural rights of reversed debtors to contest underlying tax assessments through CAAD arbitration. The tribunal analyzed the distinction between undocumented expenses (lacking supporting documentation) and confidential expenses (intentionally concealed beneficiaries) under Articles 88 and 88-A of the IRC Code, both subject to punitive autonomous taxation rates. The branch's peculiar structure—with overlapping representatives between the Spanish parent company, the Portuguese branch, and the acquiring entity—raised questions about the real nature of cash movements and whether expenses were genuinely business-related or served undisclosed purposes, triggering the heightened autonomous taxation regime designed to discourage fiscal opacity.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Prof. Dr. Suzana Fernandes da Costa and Dr. José Nunes Barata (arbitrator members), appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 24-10-2018, agree as follows:

1. REPORT

A..., divorced, NIF..., resident at Rua ..., ..., in Esposende, covered by the Tax Authority of Esposende, hereinafter briefly referred to as "Claimant", came, pursuant to Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), in the capacity of a party reversed in tax enforcement proceedings, to request the constitution of an Arbitral Tribunal to pronounce on the legality of assessment No. 2015... of 18-11-2015, in the amount of 383,627.69 euros, relating to the year 2012 and identified as IRC debt, Autonomous Taxation on confidential expenses, in which the passive taxpayer is B... Branch in Portugal, which had its tax residence at Rua ..., ..., ...-... ..., NIPC ....

The Claimant further seeks compensation for unwarranted guarantee.

The defendant is the TAX AND CUSTOMS AUTHORITY.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 17-08-2018.

Pursuant to the provisions of paragraph a) of No. 2 of article 6 and paragraph b) of No. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the Arbitrators initially designated by the Ethics Council communicated acceptance of the assignment, within the applicable deadline.

On 04-10-2018 the parties were duly notified of such appointment and did not manifest any desire to refuse the designation of arbitrators, pursuant to the combined provisions of article 11, No. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in accordance with the provisions of paragraph c) of No. 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 24-10-2018.

The Tax and Customs Administration submitted a Reply in which it defended that the request for arbitral pronouncement should be ruled unfounded.

On 10-01-2019, the meeting provided for in article 18 of the RJAT was held, in which witness evidence was produced and it was decided that the proceedings should continue with simultaneous pleadings.

The Parties submitted pleadings.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, No. 1, paragraph a), and 10, No. 1, of Decree-Law No. 10/2011, of 20 January, and is competent.

The Parties are properly represented, possess legal capacity and standing, are legitimate and are represented (articles 4 and 10, No. 2, of the same decree and article 1 of Ordinance No. 112-A/2011, of 22 March).

The proceedings are not affected by any defects of nullity.

2. STATEMENT OF FACTS

2.1. Established Facts

The following facts are considered established:

  • The Tax and Customs Authority, under service order 2014..., carried out an inspection of the company B..., Branch in Portugal (hereinafter referred to as "Branch"), with NIPC...;

  • In this inspection, a Tax Inspection Report was prepared, which is part of the administrative file, the content of which is reproduced, in which the following is stated, among other things:

The passive taxpayer commenced activity on 2006-05-05 and ceased, for VAT purposes, on 2014-03-31. It is classified under IRC in the general regime. It is registered for the main activity of CONSTRUCTION OF BUILDINGS (RESIDENTIAL AND NON-RESIDENTIAL) (CAE 41200), but was primarily engaged in concrete bridge construction in public works.

It should be noted that the passive taxpayer has the legal nature of "permanent representation" as it is a stable establishment in Portugal of a company based in Spain (with the name D...).

In the database of the Tax Authority (AT), in the inter-passive taxpayer relationships, the following information appears:

However, from the analysis of the Permanent Certificate, it is concluded that the representatives in Portugal of this stable establishment were, successively and alternately A..., NIF..., and C..., NIF ... (ANNEX I):

C... is also, and has always been, the Official Accountant (TOC) of B...- BRANCH IN PORTUGAL.

Regarding the Spanish parent company (D... ...), the following information was found on the website www...es (ANNEX II):

  • Until June 2012, as sole administrator, A...;
  • From June 2012 onward, an insolvency administrator (Adm. Concurs.) E... was appointed.

It should also be noted that in the company that acquired the stable establishment in Portugal (F... S.A., NIPC...), the members of the board of directors, appointed for the four-year period of 2011-2014, are the same A..., NIF ... and C..., NIF... .

B...- BRANCH IN PORTUGAL is located at RUA ...- ...- ... ..., an address coinciding with the tax residence of the accounting office of the TOC (G..., NIPC...), where the external analysis was conducted. From the date of cessation of activity for VAT purposes (2014-03-31), the address ...-... ...- ... ..., for correspondence purposes, is also recorded in the AT registry, corresponding to the address of the cessation representative.

III. Description of facts and grounds for corrections of a purely arithmetic nature to taxable income

From the analysis of the accounting elements of the stable establishment B...- BRANCH IN PORTUGAL, now carried out under the aforementioned service order, it is concluded that although the stable establishment had been practically inactive since 2012, which led to the cessation of activity for VAT purposes and transfer of the establishment on 2014-03-31, it had on 2013-12-31 a cash balance, on debit, of 557,225.11 EUR. This was also the opening balance of the account on 2013-01-01 (extract from the 2013 cash account - ANNEX III). When questioned, the TOC referred verbally that even today (during the inspection action) this amount in cash remains unchanged.

In the inspection action, initiated on 2012-09-18 and authorized by service order No. OI2012..., conducted for analysis of the VAT refund for 2012/05, it was verified that the cash balance (account 111) shown in the general trial balance for May 2012 presented a credit balance of 700,442.42 EUR.

Given the lack of credibility of this balance, it was decided to proceed with a physical count of cash, for which Dispatch No. DI2012... dated 2012-10-11 was issued.

In the actions carried out (information and report of occurrence attached - ANNEX IV), with C..., it was concluded that there was no amount in cash at the passive taxpayer's headquarters, with A... only referring, in the facilities of company F... SA, to having some money in his possession that he could not specify the amount. It was thus concluded that the amounts recorded in cash lacked credibility.

From the analysis of the movements recorded in 2012 and 2013 in the cash account (ANNEX III), it is concluded that the cash account balance was formed mostly by the withdrawal of cheques from the company's account, recorded in the accounts as received in cash. In the accounts, only simple copies of these cheques appeared, without identification of the respective recipient. The corresponding movement was confirmed through bank statements.

These financial movements were analyzed and, under the authorization for derogation of banking secrecy, copies of all cheques proving these movements were requested in order to verify whether they had actually been withdrawn in cash (cash withdrawals) or were intended for payments to an identifiable beneficiary.

Regarding the following cheques recorded as received in cash in 2012, it was confirmed that they are indeed "bearer cheques" (ANNEX VI). The bank copy has no identified payee "to order" (that is, they are "bearer cheques") and were withdrawn at the counter:

It should be noted that the movement of cheques is measured by the bank copy of the reverse side thereof. This movement is not always very explicit as it depends on banking procedures regarding the respective record and may vary depending on the counter where they are processed.

Nevertheless, on the reverse of most cheques are identified the persons who made the withdrawals (H... and I...) who are employees of company F..., SA; NIPC ... (as mentioned previously, the persons responsible for both entities B... - BRANCH IN PORTUGAL and F... SA are the same).

Some names appearing on the reverse of cheques are not even identifiable (illegible).

Thus, it is concluded that these amounts were indeed withdrawn from the bank account and entered into the "cash" account of B... - BRANCH IN PORTUGAL, as per accounting records made.

However, in October 2012, when the physical count of cash was carried out, it was found that the nominal expression of the "cash" account had no correspondence with reality (amount in cash equal to zero).

It is thus concluded that the amount corresponding to those cheques was, from an accounting standpoint: "parked" in the "cash" account but not actually residing there, had a destination that was objectively unidentifiable, which by its obscurity can only be classified as undocumented expenses, with the necessary tax consequences.

There is no indication of the necessity of these withdrawals being made from the passive taxpayer's own bank account to remain intact in cash, as the cash account balance remains unchanged until the end of 2013. It is not reasonable for the company to have these very high amounts in cash: not to meet treasury needs (payments). The balance has remained unchanged since the end of 2012 and the passive taxpayer had no activity and formally ceased since 2014-03-31.

It should be noted, analyzing the bank statements and the information collected from financial institutions, that very significant amounts entered the bank account of B...- BRANCH IN PORTUGAL, as a result of the sale of the participations it held in company J... SA (NIPC...) now designated as F... S.A. Between January and May 2012, due to the sale of these participations (extract from account 41111 - Capital Participations - ANNEX V), the amount of 402,000.00 EUR entered the B... - BRANCH IN PORTUGAL bank account.

Having verified that on 2012-10-11, a date after the cash withdrawals, the cash balance was non-existent, an analysis of the movements from that date until 2012-12-31 was carried out to assess their correspondence with reality, and it was concluded that there is no credibility as to the correspondence of these entries with reality as they were recorded based on internal documents without any external supporting document or reveal themselves to be neutral in terms of justification of balances, as detailed below.

Entry No. ... (with the description "banking operations"), on the credit side in the amount of 7,889.31 EUR refers to the deposit of amounts received from customers and previously recorded as received in cash, in entry 110003, on the debit side in the same amount of 7,889.31 EUR. These two entries, debit and credit to the cash account, for the same amount, offset each other.

Entries No. 120001 (of 2012-12-05), 120002 and 120003 (of 2012-12-14), journal 12, on the credit side of the "cash" account, also do not represent a true cash outflow, as they refer to expenses paid by company F... SA, whose entry into "cash" is recorded for the same amount, in entry 120001 (of 2012-12-14), journal 16. These entries also offset each other (amount recorded as debit equal to amount recorded as credit).

The credit entry of 104,523.50 EUR recorded in the cash account on 2012-12-01 was made by counterpart to the account of supplier K..., account 22111108 (ANNEX VII), the supporting document for this accounting movement was requested and justification therefor, having been justified by the TOC, that it consisted of prior payments made by the Spanish parent company to also the parent company of supplier K... and that this movement was a "meeting of accounts," not representing an actual payment or cash outflow on this date, but rather a payment at an earlier date. To document this situation, the document appearing in annex VII was presented as an example, referring to a payment made on 2012-01-30, which confirms that this amount no longer existed in cash in October 2012.

The remaining entries in the cash account after 2012-10-11 refer to entries of meetings of accounts without any external supporting document. The highest amount recorded in entry 12003, of 2012-12-01, in the amount of 19,200.00 EUR, on the credit side of the cash account, offsets the balance of the account of supplier L..., LDA (ANNEX VIII). Although it is an internal document, the supplier was requested to provide a copy of the current account from 2012 onwards in order to confirm the veracity of the financial movement. The supplier did not send any current account statement, stating that "it has no commercial operations between the firm L..., Lda and B... Branch in Portugal and that "the last year in which operations occurred between the two firms was in 2010". It is thus confirmed that these entries have no correspondence with the reality of the financial movements that occurred.

Thus, regarding the cash balance on 2012-10-11, of 699,211.55 EUR, which was verified by physical count to be non-existent, it is concluded that these are financial amounts whose origin is proven but whose application was not identified as to its nature, origin or purpose, and should therefore be classified as undocumented and, therefore, fall within the scope of art. 88, No. 1 of the IRC Code.

These undocumented expenses are taxed autonomously pursuant to No. 1 of art. 88 of the IRC Code, at the rate of 50%, so that, pursuant to this rule, the amount of 349,605.78 EUR will be added, in field 365, of table 10, of the income declaration Form 22, for the year 2012, corresponding to 50% of the amounts recorded in cash in October 2012 that were not physically in cash at the time of the physical count carried out.

  • Following the inspection action, the Tax and Customs Authority issued assessment No. 2015..., the content of which is reproduced, in the amount of €383,627.69 (€349,605.78 of autonomous taxation and €34,021.91 of compensatory interest), in which the passive taxpayer is the aforementioned Branch (document No. 1, attached with the request for arbitral pronouncement, the content of which is reproduced);

  • On 17-05-2018, in tax enforcement proceedings No. ...2016..., a dispatch was issued determining its reversal against the Claimant here, in the capacity of subsidiary liable party (document No. 1, attached with the request for arbitral pronouncement, the content of which is reproduced);

  • The aforementioned Branch is a permanent representation in Portugal of the Spanish national company D..., which had its headquarters at ... No. ..., ... in ... (Valladolid), Spain, there with the taxpayer number..., as follows from the certificate of the Commercial Registry that forms part of document No. 4 attached with the request for arbitral pronouncement, the content of which is reproduced;

  • The company D... was declared insolvent by judgment of 4 May 2012, rendered by the Spanish court, ... Valladolid (document No. 5 attached with the request for arbitral pronouncement, the content of which is reproduced);

  • From June 2012 onwards, E... was appointed administrator of the insolvency (page 3 of the Tax Inspection Report);

  • On 30-04-2011, the establishment of the insolvent company, the only establishment of the company in Portugal, had been transferred in its entirety by transfer to the company then known as J..., SA (document No. 6 attached with the request for arbitral pronouncement, the content of which is reproduced);

  • By virtue of the transfer of the establishment, the company D..., of Spain, became the holder of shares in the capital of company J..., SA, the transferee;

  • In 2011, the aforementioned shares were transferred to third parties, for value, and the amount of 402 thousand euros entered the bank account of B... BRANCH IN PORTUGAL (page 6 of the Report, last paragraph), which was deposited in the account of the Branch (testimony of witness C...);

  • Which, together with various receipts relating to the activity carried out in previous years, namely receipts from clients not included in the transfer, allowed company D... to have in liquid funds in bank deposits and still in an account held by its establishment in Portugal, an amount of approximately seven hundred thousand euros;

  • The amounts available in banks, in the value of 406,400 euros, were the subject of various withdrawals, always by cheque issued to bearer and withdrawn at the counter in cash, by H... and I..., not being identifiable, with some of the names of those who made the withdrawals not being identifiable (testimonies of witnesses C... and H...);

  • Such cash withdrawals were recorded in the cash account, having resulted in a balance of this account in May 2012 of seven hundred thousand four hundred and forty-two euros and forty-two cents (testimony of witness C...);

  • On such date such amounts would not exist in the company's coffers in cash, cheques or any other reality that would permit the continuation of such amount recorded in the Cash account;

  • In 2012, B... Branch in Portugal was already practically inactive, which led to the cessation of activity for VAT purposes and transfer of the establishment on 31-03-2014, but had on 31-12-2013 a cash balance, on debit, of € 557,225.11;

  • On 11-10-2012, a date after the withdrawals, the cash balance was non-existent;

  • It was the Claimant A... who decided to have the withdrawals of deposited money made that he took to the company in Spain, not making bank transfers because the parent company D... SL was in a difficult economic situation and wanted to avoid the amounts being retained by the bank, as it had bank overdrafts (testimony of witness M...);

  • The money was received in Spain and used primarily (approximately 80%) to pay the company's personnel in Spain (testimony of witness M...);

  • Payments to personnel were made before the presentation for insolvency (testimony of witness M...);

  • The company in Spain, following the insolvency, remained indebted to Social Security and the Spanish Tax Administration (testimony of witness M...);

  • The payments were recorded in the Spanish company (testimony of witness M...);

  • In the insolvency the workers claimed compensation (testimony of witness M...);

  • Supplier K... was paid the amount of 104,523.50 euros in Spain and with funds originating from company D... (page 7 of the Tax Inspection Report and testimony of witness M...);

  • After the insolvency it was the respective administrator who remained in control of the company's documentation (testimony of witness M...);

  • The Claimant provided bank guarantee to suspend tax enforcement proceedings No. ...2016..., instituted for coercive collection of assessment No. 2015... (document No. 7 attached with the request for arbitral pronouncement, the content of which is reproduced);

  • On 27-07-2018, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Unproven Facts and Justification of the Decision on Facts

It was not proven that from 2012 onwards there was any activity of the Branch generating income, having terminated the contracts it had at the beginning of that year (testimony of witness C...).

The facts were considered proven based on the testimonies of witnesses and documents attached by the Claimant and in the administrative file.

It was not proven what destination was given to the money withdrawn by cheque from the Branch's account, which was recorded in cash but did not exist when the inspection was carried out, with only being determined that at least part of it was sent to the aforementioned Spanish company.

The witnesses questioned appeared to testify with impartiality and, as to the facts mentioned above regarding which each is indicated as means of proof, with direct knowledge of the facts.

3. LEGAL ISSUES

B... Branch in Portugal had a fixed installation in Portugal, through which a commercial and industrial activity was exercised, and therefore falls within the concept of "stable establishment" referred to in art. 5 of the CIRC.

Withdrawals were made of amounts that were in the Branch's bank account and the corresponding amounts were not found under its ownership, nor were documents presented regarding the destination given to them, whereby the Tax and Customs Authority understood that autonomous taxation provided for in article 88, No. 1, of the CIRC should be applied to the Branch.

Following the non-payment of the autonomous taxation assessed, a tax enforcement proceeding was instituted, in which it was decided to reverse the reversal against the Claimant here, who challenged the assessment of the autonomous taxation.

The Claimant does not challenge that the stable establishment of a non-resident entity, which constitutes the branch, is subject to the autonomous taxation provided for in article 88 of the CIRC.

The question is not to evaluate whether the requirements for reversal of the enforcement are met, but only to know whether the assessment is affected by the defect that the Claimant imputes to it.

The defect that the Claimant imputes to the assessment is, in essence, that autonomous taxation is provided for "undocumented expenses" and that, in the case at hand, the amounts withdrawn from the bank deposit were delivered to the parent company, whereby, in the Claimant's view, one is not before "expenses," for purposes of article 88, No. 1, of the CIRC.

The concept of "expenses" used in article 88, No. 1, of the CIRC is not defined in this Code and does not coincide with that of "costs," defined in article 23 of the CIRC (which includes, namely, "losses" and "adjustments"), whereby the expression should be given the scope it has in common language, of a outflow of money from a company's assets.

Thus, the undocumented expenses referred to in article 88, No. 1, of the CIRC are reduced to outflows of financial means from the company's assets without a supporting document that permits determining the nature of the expense or the beneficiary.

Within the scope of the relationships of a branch with its respective parent company, the transfer of funds from one to the other does not represent, in economic terms, an expense, as there is no outflow of financial means from the company.

In fact, the branch that constitutes a stable establishment does not constitute an autonomous enterprise in relation to the parent company, being only separated, for tax purposes, with the application of a special taxation regime.

The stable establishments of commercial companies non-resident in Portugal have tax personality, falling within the concept of "autonomous patrimony" for purposes of tax law.

The scope of this concept of "autonomous patrimony" for tax purposes was analyzed in the judgment of the Supreme Administrative Court of 07-05-2008, rendered in case No. 0200/08, in which the following is stated: ( [1] )

However, the scope of the attribution of tax legal personality is relevant exclusively for purposes of taxation, for the determination of tax obligations, not transforming entities without legal personality into distinct persons, for purposes of their relations with debtors.

The attribution of tax personality to entities without legal personality, namely to stable establishments of non-residents in Portuguese territory, constitutes a fiction, valid only for determining the measure of taxation, justified by reasons of equity in the intergovernmental distribution of tax revenue, which amounts to the entity without legal personality being treated as if it were a distinct entity from the natural or legal person that creates it, for purposes of determining the taxation that should apply to its activity in Portugal.

That is, the attribution of tax personality to entities without legal personality that do not have their seat or effective management in Portuguese territory is intended only to determine the "extension of the tax obligation," in the terminology of art. 4 of the CIRC, in whose No. 2 it is stated that "legal entities and other entities that do not have their seat or effective management in Portuguese territory are subject to IRC only as to income obtained therein."

But the attribution of tax personality to a "stable establishment" without legal personality has no consequences at the level of the assets of the parent company, as all property assigned to the activity of that stable establishment continues to belong to the company that created it.

(...)

When one speaks of "autonomous patrimony" for purposes of tax law, it is not with the meaning that the concept of autonomous patrimony assumes for purposes of civil law, which results in a special regime of assignment of certain property to the payment of certain debts ( [2] ).

Within the scope of tax law, "what imprints the separation or autonomy on the patrimony in question is not its special assignment, nor the separate character of its administration, nor its subjection to a given liability regime for debts, but the fact that the law subjects a mass of property and rights to unitary fiscal treatment." (...) "The patrimonial autonomy of Tax Law – and which is commonly referred to as "equating to independent enterprise" – reveals itself while the law subjects to independent taxation the profits that are directly attributable to it, instead of taxing the legal entity as a whole or taxing the resident abroad analytically for each isolated income they obtain, through withholding at source." ( [3] )

"However, among us, the patrimonial autonomy of the establishments has not led to the attribution of legal personality, for tax purposes, in such a way that the taxpayer continues to be the resident abroad, only taxed in the country where the branch is located through a methodology identical to that of legal entities resident therein. Indeed, article 13, No. 1, of the CIRS, and article 2 of the CIRC, consider the taxpayer of the tax, not the stable establishment, in itself considered, but the natural or legal persons, resident abroad, who are its holders." ( [4] )

Thus, financial flows occurring within the patrimonial scope of the non-resident company, namely between the parent company and its branch, which is a stable establishment, cannot be relevant as "expenses," as these are flows within the same company, as the Claimant argues.

In fact, as the Supreme Administrative Court says in the judgment cited, "the taxpayer continues to be the resident abroad, only taxed in the country where the branch is located through a methodology identical to that of legal entities resident therein."

But, this fiction of autonomy of the stable establishment in relation to the non-resident enterprise exists only for purposes of taxation based on income and within the scope of determining taxable profit, for which articles 55 and 56 of the CIRC provide a special regime.

Indeed, from article 4, Nos. 2 and 3, of the CIRC, which provide for the "extension of the tax obligation" to non-resident entities in Portuguese territory "only as to income obtained therein," considering as such "those attributable to a stable establishment situated therein," it does not establish a generalized equating of the stable establishment to an independent entity from the parent company, namely for purposes of taxation provided for in the CIRC that do not apply to income, such as the autonomous taxation provided for in No. 1 of article 88 of the CIRC.

Thus, with no such fiction provided for purposes distinct from income taxation, namely for purposes of taxation based on expenses, one must conclude that the movements of money between a non-resident enterprise and its stable establishment in Portugal are to be considered, outside the scope of income taxation, as realized within the scope of the same company.

And, therefore, as the transfer of funds from the stable establishment to the parent company does not imply an outflow of money from the company, one is not before "expenses," for purposes of No. 1 of article 88 of the CIRC, as the Claimant argues.

In light of this understanding, without prejudice to the possible relevance that the lack of documentation may have within the scope of the application of the special regime provided for in articles 55 and 56 of the CIRC for determining the taxable profit of the stable establishment (a question that is not the subject of this proceedings), one must conclude that monetary transfers from a branch to the parent company do not constitute "expenses," for purposes of autonomous taxation provided for in No. 1 of article 88 of the CIRC.

In the case at hand, the witness evidence produced points clearly in the direction that at least most of the amounts that were not found in cash at the Branch were delivered to the parent company and used by it in its activity (including to pay supplier K..., as is acknowledged in the Tax Inspection Report).

At the very least, in light of the evidence produced, one would have to remain in a situation of doubt as to the destination of those amounts, which, by force of the provision in article 100, No. 1, of the CPPT, must be procedurally valued in favor of the taxpayer and not against it.

For the above reasons, the assessment challenged is affected by a defect of violation of law, due to misinterpretation of article 88, No. 1, of the CIRC, which justifies its annulment pursuant to article 163, No. 1, of the Code of Administrative Procedure, subsidiarily applicable pursuant to the provision in article 2, paragraph c), of the LGT.

4. COMPENSATION FOR UNWARRANTED GUARANTEE AND COMPENSATORY INTEREST

The Claimant provided guarantee to suspend the tax enforcement proceeding instituted for coercive collection of the assessed amount and "requests the condemnation of the TA to pay for the expenses of providing the guarantee and compensatory interest on such amount paid and to be paid while the guarantee is in effect, at the legal rate from the date of payments until the effective date of compensation, to be calculated in execution of judgment."

4.1. Compensatory Interest

Pursuant to article 43, No. 1, of the LGT, "compensatory interest is due when it is determined, in a administrative objection or judicial challenge, that there was an error attributable to the services resulting in payment of the tax debt in an amount greater than that legally owed."

Thus, the right to compensatory interest depends on the existence of an unwarranted payment of the tax debt that is the subject of challenge.

It was not proven that the Claimant paid the "tax debt" in question, whereby the request for compensatory interest is unfounded.

4.2. Compensation for Unwarranted Guarantee

Article 171 of the CPPT establishes that "compensation in case of a bank guarantee or equivalent unwarranted provided shall be requested in the proceeding in which the legality of the enforceable debt is contested" and that "compensation should be requested in the administrative objection, challenge or appeal or if its ground is subsequent within 30 days after its occurrence."

Thus, it is unequivocal that the process of judicial challenge encompasses the possibility of condemnation for payment of unwarranted guarantee and it is even, in principle, the appropriate procedural means to formulate such a request, which is justified by obvious reasons of procedural economy, as the right to compensation for unwarranted guarantee depends on what is decided regarding the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal and for arbitral pronouncement has as its corollary that the "legality of the enforceable debt" will now be discussed in the arbitral proceeding, whereby, as results from the express wording of such No. 1 of the aforementioned article 171 of the CPPT, the arbitral proceeding is also the appropriate one to consider the request for compensation for unwarranted guarantee.

The regime for the right to compensation for unwarranted guarantee is contained in article 53 of the LGT, which establishes the following:

Article 53

Guarantee in case of unwarranted provision

  1. The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified totally or partially for the prejudices resulting from its provision, if held for a period exceeding three years in proportion to the amount due in administrative appeal, challenge or opposition to enforcement that have as their object the debt guaranteed.

  2. The period referred to in the preceding number does not apply when it is verified, in administrative objection or judicial challenge, that there was an error attributable to the services in the assessment of the tax.

  3. The compensation referred to in No. 1 is limited to a maximum of the amount resulting from the application to the guaranteed amount of the rate of compensatory interest provided for in this law and may be requested in the administrative objection or judicial challenge proceeding itself, or autonomously.

  4. Compensation for unwarranted provision of guarantee shall be paid by offset against tax revenue for the year in which the payment was made.

In the case at hand, it is manifest that the error underlying the assessment challenged is attributable to the Tax and Customs Authority, as the assessment was made at its initiative and the Claimant in no way contributed to this error being committed.

For this reason, the Claimant is entitled to compensation for the guarantee provided.

As there are no elements that permit determining the exact amount of compensation, the condemnation must be made with reference to what is assessed in execution of the present judgment, in accordance with the provision in article 609, No. 2, of the Code of Civil Procedure, subsidiarily applicable by force of the provision in article 29, No. 1, paragraph e), of the RJAT.

5. DECISION

For these reasons, the Arbitral Tribunal agrees to:

  • Rule the request for arbitral pronouncement founded as to the illegality of assessment No. 2015... of 18-11-2015 and annul it;

  • Rule the request for compensatory interest unfounded and absolve the Tax and Customs Authority of this request;

  • Rule founded the request for condemnation of the Tax and Customs Authority to pay to the Claimant the compensation that is assessed in execution of the present judgment for the guarantee provided to suspend the tax enforcement proceeding instituted for coercive collection of the assessed amount.

6. VALUE OF PROCEEDINGS

In accordance with the provision in articles 306, No. 2, of the CPC and 97-A, No. 1, paragraph a), of the CPPT and 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 383,627.69.

7. COSTS

Pursuant to art. 22, No. 4, of the RJAT, the amount of costs is fixed at € 6,426.00, pursuant to Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 20-02-2019

The Arbitrators

(Jorge Lopes de Sousa)

(Suzana Fernandes da Costa)

(José Nunes Barata)

[1] In the same sense, see the judgment of the Supreme Administrative Court of 24-9-2008, case No. 0199/08.

[2] According to MANUEL DE ANDRADE, General Theory of Civil Law, volume I, pages 218-219, autonomous patrimony is the "patrimonial group to which the legal order gives a special treatment, distinct from the remaining patrimony of the holder, from the point of view of liability for debts."

[3] ALBERTO XAVIER, International Tax Law, 2nd edition, page 326.

[4] Author and Work Cited

Frequently Asked Questions

Automatically Created

What are autonomous taxation rules for undocumented expenses (despesas não documentadas) under Portuguese IRC?
Autonomous taxation on undocumented expenses (despesas não documentadas) under Portuguese IRC is governed by Article 88 of the IRC Code. These are expenses lacking proper supporting documentation required by law, subject to punitive autonomous tax rates (currently 50-70% depending on the entity type) applied independently of corporate income tax. The regime aims to discourage tax evasion by penalizing inadequate documentation. Undocumented expenses differ from confidential expenses (despesas confidenciais) under Article 88-A, which involve intentionally concealed beneficiaries. Both trigger autonomous taxation but serve different compliance objectives—documentation standards versus transparency of economic beneficiaries.
How does IRC autonomous taxation apply to a branch or permanent establishment (estabelecimento estável) of a non-resident company in Portugal?
IRC autonomous taxation applies to Portuguese branches and permanent establishments (estabelecimentos estáveis) of non-resident companies under the same rules applicable to resident entities, pursuant to Article 4 of the IRC Code. The branch is treated as a separate taxpayer for IRC purposes, subject to autonomous taxation on undocumented expenses, confidential expenses, vehicle expenses, and entertainment costs. The branch must maintain proper accounting records in Portugal and comply with Portuguese documentation requirements. Tax obligations attach to the permanent establishment itself, though the non-resident parent company may be subsidiarily liable. Reversed debtors, including legal representatives of branches, can be held personally liable under Article 24 of the LGT (General Tax Law) for unpaid IRC debts including autonomous taxation assessments.
Can a tax reversal (reversão fiscal) debtor challenge the underlying IRC assessment through CAAD arbitration?
Yes, a tax reversal (reversão fiscal) debtor can challenge the underlying IRC assessment through CAAD arbitration. Article 11(2) of Decree-Law 10/2011 expressly grants standing to reversed debtors to contest both the reversal decision and the substantive legality of the underlying tax debt. This ensures reversed debtors—who may be held personally liable for corporate tax debts—have full procedural rights to challenge assessments they did not originally contest. The reversed debtor can raise all grounds available to the original taxpayer, including substantive challenges to autonomous taxation calculations, documentation adequacy, and legal interpretation. CAAD jurisdiction extends to reviewing whether expenses were properly classified as undocumented or confidential and whether autonomous taxation rates were correctly applied. Additionally, reversed debtors may seek compensation for undue guarantees provided during enforcement proceedings if the underlying assessment is annulled.
What is the legal distinction between undocumented expenses and confidential expenses for autonomous taxation purposes in Portugal?
The legal distinction between undocumented expenses (despesas não documentadas) and confidential expenses (despesas confidenciais) for autonomous taxation purposes lies in their regulatory basis and policy rationale. Undocumented expenses under Article 88 IRC lack required supporting documentation (invoices, receipts, contracts) mandated by accounting and tax law, triggering autonomous taxation as a penalty for inadequate record-keeping that impedes tax verification. Confidential expenses under Article 88-A IRC involve documented transactions where the beneficiary's identity is intentionally concealed or the expense serves purposes outside normal business operations, suggesting potential illegitimate payments. Both face high autonomous taxation rates (50-70%), but confidential expenses carry additional stigma of intentional opacity. The classification affects burden of proof: undocumented expenses focus on documentation existence and adequacy, while confidential expenses examine beneficiary identification and business purpose. Bearer cheques and cash payments without identified recipients typically qualify as confidential expenses even if some documentation exists.
Is compensation for undue guarantees (garantia indevida) available in CAAD arbitral proceedings related to IRC disputes?
Yes, compensation for undue guarantees (garantia indevida) is available in CAAD arbitral proceedings related to IRC disputes under Article 171 of the Tax Procedure Code (CPPT) and Article 53(4) of the LGT. When taxpayers or reversed debtors provide guarantees (bank guarantees, pledges, surety bonds) to suspend tax enforcement and subsequently obtain favorable arbitral decisions annulling or reducing the tax debt, they are entitled to compensation for costs incurred in providing the guarantee. Compensation covers guarantee commission fees, bank charges, and interest paid during the guarantee period, calculated from guarantee provision until debt extinction. The CAAD tribunal has jurisdiction to award such compensation as ancillary relief when declaring the underlying tax assessment illegal. Claimants must specifically request guarantee compensation and prove costs incurred. The regime recognizes that taxpayers should not bear financial costs for guarantees protecting against ultimately illegal tax assessments, ensuring effective access to judicial review without prohibitive collateral requirements.