CAAD 40/2016-T: Deductibility of Representation Expenses for IRC and VAT Right to Deduction

ARBITRAL AWARD

I. STATEMENT OF FACTS

1. On 27 January 2016, the commercial company A…, S.A., Tax ID…, with headquarters in … …, …, Lisbon, (hereinafter, the Claimant), in its capacity as the parent company of Group B…, taxed under the Special Taxation Regime for Groups of Companies, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2, paragraph 1, letter a), and 10, paragraphs 1, letter a), and 2, of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Tax Arbitration, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality and annulment of part of the Corporate Income Tax (IRC) assessment No. 2014…, relating to the financial year 2010, and of the additional Value Added Tax (IVA) assessments and compensatory interest assessments Nos. …, …, …, … and …, following the rejection, respectively, total and partial, of the hierarchical appeals filed against those same assessments.

The Claimant filed 29 (twenty-nine) documents and called 2 (two) witnesses, having not requested the production of any other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.1. In substance and in brief summary, the Claimant alleged the following:

• The Claimant's corporate purpose is the promotion, development and management, whether directly or indirectly, of undertakings and activities in the energy sector, both at national and international level, with a view to increasing and improving the performance of all companies in its group;

• In an extremely competitive and highly competitive market, it is necessary to invest in marketing strategies, communication and customer and shareholder (current and potential) engagement, the acquisition of the best talents from universities in order to integrate them into its workforce, and finally, in an effective policy of interaction with the media;

• It was in this context of promotion, more specifically institutional advertising, expansion and increase of notoriety and recognition by the public, that the Claimant incurred a series of expenses on events driven mainly by its Marketing and Communication Department, namely: "H…" which is a meeting of commercial staff from the B… Group with the objective of exchanging experiences in customer relationship, standardizing strategies and procedures and not involving the participation of any persons outside the Claimant; "C…" took place at the dam with the same name and allowed the Claimant to publicize the activity it carries out, given that it took place in the physical space of an emblematic infrastructure, and as such ideal to demonstrate its industrial, innovative and technological dimension; the Claimant is listed on the main Portuguese stock exchange index, has a strong international dimension and operates in a strategic sector of high public interest, so the ceremony for presenting its results is of the utmost importance and generates great expectation among both its stakeholders and the media, so given the duration of this promotional action, a "D…" was served to the media present, which as the name indicates is limited to the minimum appropriate, as is currently standard practice at any corporate event; the "E…" which constitutes an initiative in which representatives of the Portuguese media are invited with the aim of, through the exposure of topics related to the Claimant's activity, enabling the company's management bodies to answer questions, with the interview contents obviously being subject to publication; in 2010 the "F…" was also promoted, which takes place with annual frequency and aims to present to major analysts and investors the concepts, projects and strategy of Group B… for the coming years; the "G…" which fits into the context of disseminating the dimension and importance of the Claimant's activity to a younger audience, and in order to mark the conclusion of "G…" and recognize the efforts and merit of the participants, the Claimant held a ceremony to present awards to the participants; finally, the Claimant participated in "Expo Shanghai" which was the largest international trade fair held at that time, being devoted to topics of high interest to the Claimant, such as renewable energies, innovation and technology in the energy sector;

• It is incomprehensible the dismissal made by the Tax Authority, excluding the events from business reality and, as such, considering the amounts at stake "representation expenses" and as such subject to autonomous taxation, under articles 88, paragraph 3, letter a) and 88, paragraph 7 of the CIRC, in force at the time of the facts;

• Having the AT illegally assessed the Claimant with the amount of €25,481.51, by way of autonomous taxation;

• The exclusion of the right to deduction which gave rise to the additional IVA assessments and compensatory interest that the Claimant duly challenged, and contests herein, relate to tax incurred in the following events: "C…", in the amount of €4,200.00; "D…" results presentation, in the amount of €142.00; "E…", in the amount of €4,924.56; "F…", in the amount of €1,229.89; and "G…", in the amount of €4,457.18;

• The Tax Authority's understanding regarding VAT, with respect to the holding of these events, is that we are dealing with expenses that fall within article 21, paragraph 2, letter d) of the VAT Code, incurred for the direct needs of the participants in the events in question and that, to that extent, the tax in question may only be deducted up to the limit of 50%;

• The Claimant cannot accept the AT's interpretation and although it proceeded with full payment, on 30 May 2014, of the additional tax assessments and related compensatory interest in question, it considers that they are systematically based on a defect consisting of violation of law as to the factual and legal requirements for application of article 21, paragraph 2, letter d) of the VAT Code;

• The events in question were part of disclosure and promotion actions of the Claimant's image and, to that extent, intrinsically connected with the pursuit of its activity, so if such expenses are not considered unrelated to the activity carried out and, moreover, contribute to its pursuit, in addition to having a very strong advertising component, it is not clear why the right to full deduction of IVA borne by the Claimant should be questioned;

• The subjection to autonomous taxation of the expenses borne by the Claimant for the holding of the identified events based on the assumption that they are "representation expenses", as defined in article 88, paragraph 7 of the CIRC, is manifestly illegal;

• In fact, in cases where expenses constitute costs strictly related to business activity and being indispensable for the realization of revenues and maintenance of the productive source, only a grave violation of law can lead to the incidence of autonomous taxation;

• We are, in fact, dealing with a set of expenses incurred in the holding of events that prove to be fundamental and fully integrated into the Claimant's brand and communication strategy, with the entire argumentation and interpretation set forth in the act rejecting the hierarchical appeal that maintained the IRC assessment and the autonomous taxation in question being tainted with illegality;

• The autonomous taxation in question, based on the qualification of the expenses incurred by the Claimant as representation expenses, is manifestly illegal due to gross error as to the factual and legal requirements for application of articles 88, paragraph 3, letter a) and article 88, paragraph 7, both of the CIRC, in force at the time of the facts;

• When an expense is of an exclusively business character and aims at obtaining revenues should not be included within the scope of autonomous taxation as representation expenses, and an opposite understanding is not compatible with the principle of taxation on the actual profits of companies, being an excessive penalty and manifestly against the law;

• From that perspective, it would be severely penalizing the expenses with initiatives of a purely professional and/or promotional nature in the context of IRC, not recognizing (in a manner totally disconnected from business reality) their relevance through a more unfavorable taxation;

• Penalizing those expenses – by taxing them as representation expenses – would result in the Claimant being unequivocally prejudiced by incomprehensible and limiting factors of its freedom to manage its business;

• Therefore, the costs in question cannot be qualified as representation expenses under article 88, paragraph 3, letter a) and article 88, paragraph 7 of the CIRC in force at the time of the facts, under penalty of violation of the constitutional principle of taxation according to the actual profits of companies and the principle of deductibility of costs necessary for obtaining taxable revenues and maintenance of the productive source;

• All events were driven with a view to business development and with purely professional purposes, therefore the incidence of autonomous taxation on the expenses in question is tainted with the defect of violation of law as to the factual and legal requirements for application of articles 88, paragraph 3, letter a) and 88, paragraph 7 of the CIRC;

• Whereas, although formally the expenses can be qualified as representation expenses, the incidence of autonomous taxation cannot be automatic and devoid of any case-by-case assessment, and should therefore proceed to the analysis of the purposes, objectives and specificities of the events in question;

• The IRC assessment and autonomous taxation maintained by the act rejecting the hierarchical appeal duly filed by the Claimant cannot stand, therefore the Claimant should be refunded the amount of €25,385.51 illegally assessed by way of autonomous taxation, paid in the meantime, plus the condemnation of the Tax Authority to payment of compensation interest as may be due, under the terms of article 43 of the General Tax Law (LGT) and article 61 of the Tax Procedure Code (CPPT);

• The Tax Authority considered, in the inspection proceedings, that the expenses incurred by the Claimant in connection with the holding of the said promotional events would supposedly fall within the provisions of article 21, paragraph 2, letter d), of the VAT Code;

• This provision, as well as the entire body of article 21 of the VAT Code is presented as anti-abuse legislation, aimed at preventing the deduction of VAT related to operations that the legislator considered as non-essential to productive activity or easily divertible to private consumption;

• Being the provisions contained in article 21 of the VAT Code subsumable to legal presumptions, they should always admit proof to the contrary, as explicitly results from article 73 of the LGT;

• If the purpose pursued by the rule is to avoid tax fraud and if the presumption of non-allocation to taxed operations admits proof to the contrary, then it shall be necessary to determine, in the specific case, the purpose for which the services were acquired in order to assess the deductible nature (or otherwise) of the IVA incurred;

• Being so, if the expenses in question are not considered unrelated to the activity carried out and, moreover, contribute to its pursuit – being subsumable to advertising expenses – it is not clear why the right to deduction of the IVA contained in these expenses should be questioned, given that they are intended for the Claimant's taxable activity;

• Having the AT based on article 21 of the VAT Code the acts of assessment, these suffer from the defect of violation of law, due to error in the factual and legal requirements, since we are dealing with expenses with purposes strictly linked to the Claimant's activity, therefore the said rule does not apply;

• As a result of this defect, the assessment acts also suffer from violation of the provisions of articles 19 and 20 of the VAT Code, by determining an illegal and inadmissible exclusion of the right to deduction of tax enshrined in these rules;

• With regard to the compensatory interest assessments contested herein, it is important to recall that they are in a relationship of dependency with the tax assessment;

• In a circumstance where the additional IVA assessments are tainted with defects affecting their validity – as is the case in the present situation – those defects communicate themselves to the corresponding compensatory interest assessments, given that these latter (due to their ancillary nature) cannot subsist without the former;

• Thus, in addition to the refund of the amount of tax assessed, in the amount of €14,954.23, the decision maintaining the assessment of compensatory interest, in the amount of €259.71 set forth in the decision rejecting the hierarchical appeal should be annulled, making the total amount to be refunded €15,213.94;

• It is manifest that the errors taining the additional tax assessment result from an "error attributable to the services resulting in payment of the tax debt in an amount exceeding that legally due", under article 43, paragraph 1 of the LGT;

• Therefore, the amount to be refunded to the Claimant should be increased by compensation interest at the legal rate, from the date of the unlawful payment of the tax until the date of processing of the credit note, which should be processed within 90 days from the start of the spontaneous performance deadline of the arbitral award, as provided in article 61 of the CPPT and without prejudice to any default interest to which the Tax Authority may be subject, under article 43, paragraph 5 of the LGT.

The Claimant concludes its initial pleading requesting the following:

"Accordingly, we request of Your Excellencies that you see fit to admit this request for constitution of a tribunal and arbitral award, under the terms and for the purposes of Decree-Law No. 10/2011, of 20 January, following the procedure provided for in articles 17 and following and applying the effects mentioned in article 13 of the said diploma, all with the proper legal consequences, concluding finally:

a) by the declaration of illegality and annulment of part of the demonstration of IRC assessment No. 2014…, relating to financial year 2010, as well as the refund of the amount unlawfully paid in the amount of €25,385.51;

b) by the declaration of illegality and annulment of the additional IVA assessments and compensatory interest assessments Nos.…, …, …, …, …, and as well as the refund of the amount unlawfully paid as tax in the amount of €14,954.23 and €259.71 relating to compensatory interest;

c) by the condemnation of the Tax Authority to payment of compensation interest as may be due on the amounts referred to in a) and b), in the total amount of €40,599.45, under the provisions of article 43 of the LGT and article 61 of the CPPT, counted from the unlawful payments made by the Claimant until the issuance of the respective credit note."

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 12 February 2016.

2. The Claimant did not proceed with the appointment of an arbitrator, therefore, under the provisions of paragraph 1 of article 6 and letter a) of paragraph 1 of article 11 of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrator of the sole arbitral tribunal, who communicated acceptance of the assignment within the applicable period.

3. On 29 March 2016, the parties were duly notified of this appointment and did not manifest the intention to challenge the appointment of the arbitrator, under the combined terms of article 11, paragraph 1, letters b) and c), of the RJAT and articles 6 and 7 of the Ethics Code of CAAD.

4. Thus, in accordance with the provision in letter c) of paragraph 1 of article 11 of the RJAT, the sole arbitral tribunal was constituted on 13 April 2016.

5. On 17 May 2016, the Respondent, duly notified for such purpose, filed its Response in which it raised the exception of illegal cumulation of claims and specifically challenged the arguments put forward by the Claimant, having concluded by the lack of merit of the present action, with its consequent dismissal of the claim.

The Respondent filed no documents and did not request the production of any other evidence.

7.1. In substance and also in brief form, it is important to extract the most relevant arguments on which the Respondent based its Response:

• The fact that the claims result from the same inspection action does not imply that we are dealing with the legal possibility of cumulation of claims provided for in article 3, paragraph 1, of the RJAT since the claims formulated in the present proceedings relate to different tax acts, more specifically IRC and IVA assessments, and do not depend on the application of the same principles or rules of law;

• That is, even though the factual circumstances to be assessed may be essentially the same, the same does not occur with the principles or rules of law to be applied, resulting evident from the claim formulated that the legal grounds invoked by the Claimant for annulment of part of the IRC assessment are not the same as those it invokes for annulment of the IVA assessments and respective compensatory interest;

• The cumulation of claims violates the provision of paragraph 1 of article 3 of the RJAT, and therefore cannot be admitted;

• There is a situation of illegal cumulation of claims, in that in the same request for arbitral award different rules of law are invoked as causes of action, some based in the CIRC, and others in the VAT Code;

• Thus, under articles 193, paragraph 2, letter c), 194, 493, paragraph 2 and 494, letter b), all of the Civil Procedure Code (applicable ex vi article 29, paragraph 1, letter e), of the RJAT), illegal cumulation of claims constitutes an exception determining dismissal of the case;

• Therefore, the exception of illegal cumulation of claims should be judged to have merit, dismissing the Respondent from the case with regard to claims that do not proceed for consideration by the Tribunal;

• Of the totality of the corrections made by the AT by reference to representation expenses – autonomous taxation, in the amount of €54,378.80, which were based on the provision of paragraph 7 of article 88 of the CIRC and the analysis of expenses recorded in the accounts, the Claimant raised an administrative appeal against the corrections made in the amount of €25,385.51 on the basis that only expenses not directly related to its activity and which do not aim at obtaining any benefit for the company fall within paragraph 7 of article 88 of the CIRC;

• The administrative appeal was totally rejected, on the basis that from the combination of paragraph 7 of article 88 of the CIRC with article 23 of the CIRC results that the expenses in question are fiscally deductible for purposes of determining taxable profit (otherwise the tax inspection would not have accepted their deductibility), and therefore there is no question about proof of their connection to the Claimant's business activity;

• The expenses in question constitute, however, expenses that by their nature the legislator understood to be subject to autonomous taxation, an understanding which also has support in case law;

• From that decision the Claimant appealed hierarchically, on the same grounds, which appeal was judged to lack merit;

• It is not understood in what way the context of promotion and advertising that the Claimant invokes for the expenses now contested differs from the remaining expenses equally subject to autonomous taxation and with which the Claimant complied;

• Although it is admitted that the expenses fall within the scope of the company's promotional activity, it was understood that they do not constitute advertising and propaganda expenses, i.e., expenses with advertisements in media, promotional advertising campaigns, advertising materials, but rather of the nature of true representation expenses;

• With respect to the "H…" event, the Claimant did not file with the administrative proceeding documents proving the alleged facts;

• Thus, the claim for annulment of the corrections made in the context of IRC should be judged to lack merit, dismissing the AT from the claim;

• Of the totality of the corrections made by the AT by reference to improperly deducted IVA, in the amount of €77,879.38, the Claimant raised an administrative appeal against the corrections made which generated additional IVA in the amount of €14,954.23 and compensatory interest in the amount of €10,019.02, on the basis that the IVA borne with the acquisition of goods and services now contested relates to promotional activities and is therefore fully deductible;

• The administrative appeal was totally rejected, maintaining the conclusions of the tax inspection;

• From that decision the Claimant filed a hierarchical appeal, which was partially approved, maintaining the corrections made regarding IVA and partially annulling the correction made regarding compensatory interest, that is, regarding the tax, concluding that it was not in question that the expenses had been incurred for the holding of events that contributed to strengthening the Claimant's activity, however, given the nature of those operations, and by virtue of the provision in letter d) of paragraph 2 of article 21 of the VAT Code, the same could only enjoy partial deduction of the tax incurred, and regarding compensatory interest, it was concluded that being the Claimant in the tax periods in question in a situation of tax credit, with no tax shortfall, those compensatory interest should be annulled, with the exception of the amount of €259.71 since in the period of August 2010 the Claimant was not in a situation of tax credit;

• It is not, therefore, a question of questioning the right to deduction of the IVA borne, it being taken as established the deductibility of those expenses in light of article 20 of the VAT Code, but rather of the application of the provisions in letters c) and d) of paragraph 1 and letter d) of paragraph 2 of article 21 of the VAT Code which excludes from the right to deduction 50% of the tax;

• Article 21 of the VAT Code contains no legal presumption, as, according to the legal definition of presumption contained in article 349 of the Civil Code, it results necessarily that that legal rule does not presume unknown facts from known facts, but rather and only proceeds to the legal-tax classification of known facts;

• Since article 21 of the VAT Code presumes nothing from known facts, the presumption of unknown facts cannot be rebutted as the Claimant seeks, with no place for the provision of article 73 of the LGT;

• Furthermore, if paragraph 1 of article 21 of the VAT Code established rebuttable presumptions, then the derogations to that rule contained in paragraph 2 would be devoid of sense, this rule being applicable without need to demonstrate that the expenses listed therein are intended exclusively for an activity provided for in paragraph 1 of article 20 of the VAT Code, a prerequisite prior to the application of article 21 of the VAT Code;

• The exclusions of the right to deduction provided for in paragraph 1 of article 21 of the VAT Code are based on the actual nature of the expenses, having as a prerequisite their connection to the Claimant's activity, as it is a general principle that we can only deduct IVA borne for the holding of taxable operations;

• Beyond requiring that the expenses be borne with a view to developing an economic activity that confers such right, the right to deduction of IVA depends on other requirements, such as: a) the existence of invoices issued, in legal form, in the name and possession of the taxable person; b) the IVA being borne in national territory; c) the expenses in question are not per se excluded from the right to deduction, under article 21 of the VAT Code;

• Thus, the claim for annulment of the corrections made in the context of IVA should be judged to lack merit, dismissing the AT from the claim.

The Respondent concludes its pleading thus:

"Under the terms set out above, and in other matters of law which Your Excellencies will duly supplement, the exception of illegal cumulation of claims should be judged to have merit, with the proper legal consequences.

Should the case proceed with regard to any of the claims, the same should be judged to lack merit with the consequent dismissal of the AT from the claim."

7.2. On 30 May 2016, the Respondent filed with the proceedings the respective administrative file (hereinafter, abbreviated as PA).

1. On 6 June 2016, a ruling was issued judging the exception of illegal cumulation of claims raised by the Respondent to lack merit.

2. On 28 June 2016, the hearing referred to in article 18 of the RJAT took place – in which was addressed what is contained in the respective minutes which are hereby reproduced – and further, the two witnesses called by the Claimant were examined. In that hearing, 13 October 2016 was set as the deadline for pronouncement of the arbitral award.

3. Both Parties submitted written statements, in which they reiterated the positions previously assumed in their respective pleadings.

II. PRELIMINARY MATTERS

The Arbitral Tribunal was regularly constituted and is competent.

The proceedings are not affected by any nullities.

The parties have legal standing and capacity, are properly represented and are legitimate.

There are no exceptions – beyond the one previously decided by autonomous arbitral ruling – or preliminary matters that preclude examination on the merits and of which it is necessary to rule.

III. REASONING

III.1. ON THE FACTS

§1. ESTABLISHED FACTS

The following facts are considered established:

a) The Claimant is a commercial company whose purpose is the promotion, development and management, whether directly or indirectly, of undertakings and activities in the energy sector, both at national and international level, with a view to increasing and improving the performance of all companies in its group, having as main Economic Activity Classification (CAE) the … and as secondary CAEs the … and the…. [cf. permanent certificate of commercial registration with access code: …-…-…]

b) The Claimant is listed on the main Portuguese stock exchange index, possessing a strong international dimension and operating in a strategic sector of high public interest.

c) The Claimant is considered a "taxpayer of high economic and fiscal significance", under the terms provided for in article 68-B of the LGT, appearing in the list provided for in Dispatch No. 6999/2013, of 30 April 2013, issued under the terms of the provision in Ordinance No. 107/2013, of 15 March. [cf. PA filed with the proceedings]

d) The Claimant is the parent company of group B…, which is subject to the Special Taxation Regime for Groups of Companies (RETGS). [cf. PA filed with the proceedings]

e) In terms of Corporate Income Tax (IRC), the Claimant is subject to the general IRC regime, being taxed in accordance with the special taxation regime for groups of companies (RETGS), establishing itself as the parent company of the group. [cf. PA filed with the proceedings]

f) For purposes of Value Added Tax (IVA), the Claimant is classified under the normal regime, monthly periodicity. [cf. PA filed with the proceedings]

g) On 29 September 2010, the event called "H…" took place, held by the Claimant and consisting of a meeting of commercial staff from Group B… with the objective of exchanging experiences in customer/consumer relationship, standardizing strategies and procedures, aiming to improve the quality of those commercial staff, which did not involve the participation of any persons outside the Claimant. [cf. testimony of witness I… and Doc. No. 9 attached to Initial Petition.]

h) The Claimant contracted with the company "J…, Lda." the organization of that event, comprising the supply of all goods and services necessary for its realization, for which it spent the amount of €11,965.00, plus IVA in the amount of €2,512.65, making a total amount of €14,477.65. [cf. Doc. No. 9 attached to Initial Petition.]

i) On 8 July 2010, the concert called "K…" took place, held by the Claimant at …, specifically at the dam with the same name, which, by taking place in the physical space of an emblematic infrastructure, allowed the Claimant to publicize the activity it carries out and aimed to mitigate the negative effect on the Claimant's image resulting from the construction of infrastructure which, although necessary for energy production at the … dam, caused a strong landscape impact. [cf. Doc. No. 10 attached to Initial Petition and testimony of witness I…]

j) According to a "Communication Performance – Sponsorship" analysis conducted by "Z...", that concert "was the subject of references in the media in 25 news items. The editorial space occupied was valued at €3.9 million. B… was the subject of reference in 92% of the information published and the media space occupied provided the brand with a return of €1.3 million." [cf. Doc. No. 11 attached to Initial Petition.]

k) The Claimant contracted with the company "L…, S.A." the organization of that event, comprising the supply of all goods and services necessary for its realization – namely, the study of the layout to be adopted, the creation and maximization of support spaces for the event and the supply and assembly of audiovisual equipment –, for which it spent the amount of €130,812.50, plus IVA in the amount of €26,720.63, making a total amount of €157,533.13. [cf. testimony of witness I… and Docs. Nos. 12 and 13 attached to Initial Petition.]

l) The ceremony for public presentation of the Claimant's annual results to the media generates great expectation among both its stakeholders and the media and seeks to ensure that the information made available is done with high levels of accuracy and transparency. [cf. testimonies of witnesses I… and M…]

m) That ceremony has a duration of approximately two hours, being aimed at national and foreign media (namely, W... and Y...) and which is usually attended by 30 to 40 people, almost all of them journalists. [cf. testimonies of witnesses I… and M…]

n) The Claimant contracted with the company "L…, S.A." the supply of a "welcome coffee" – composed mainly of waters, soft drinks and coffees – for that ceremony which took place in March 2010, for which it spent the amount of €1,420.00, plus IVA in the amount of €284.00, making a total amount of €1,704.00. [cf. testimony of witness I… and Doc. No. 16 attached to Initial Petition.]

o) The Claimant was recognized internationally with respect to financial reporting procedures, having been ranked first in the "TOP 30 Global Rankings for Financial Disclosure Procedures" of "IR Global Rankings'10". [cf. Doc. No. 15 attached to Initial Petition.]

p) On 9 and 10 November 2010, the event called "E…" took place, held by the Claimant and to which representatives of Portuguese and foreign media were invited with the aim of, through the exposure of topics related to the Claimant's activity, enabling the company's management bodies to answer questions – with the interview contents being subject to publication – aiming thereby at the promotion of a policy of total transparency and accuracy in information. [cf. testimony of witness I… and Docs. Nos. 17 and 19 attached to Initial Petition.]

q) The Claimant contracted with the company "L…, S.A." the organization of that event, comprising the supply of all goods and services necessary for its realization, for which it spent the amount of €46,900.50, plus IVA in the amount of €9,849.11, making a total amount of €56,749.61. [cf. Doc. No. 19 attached to Initial Petition.]

r) On 19 and 20 May 2010, the event called "F…" took place, held by the Claimant and "N…" which aimed to present to major analysts and investors the concepts, projects and strategy of Group B… for the following years, having included the presentation of results and strategies inherent to the Claimant's activity, also affording those present the possibility of asking questions about the topics under analysis. [cf. testimonies of witnesses I… and M… and Docs. Nos. 20 and 21 attached to Initial Petition.]

s) 79 people attended that event, with 69 people viewing via webcast, almost all of them representatives of investment banking, shareholders, analysts and financial media. [cf. Doc. 22 attached to Initial Petition and testimony of witness M…]

t) The Claimant contracted with the company "L…, S.A." the organization of that event, comprising the supply, assembly and disassembly of audiovisual equipment and the development of the entire event layout, for which it spent the amount of €19,445.00, plus IVA in the amount of €3,889.00, making a total amount of €23,334.00. [cf. testimony of witness I… and Doc. No. 23 attached to Initial Petition.]

u) This event is of crucial importance for the Claimant to attract funds from national and foreign investors. [cf. testimony of witness M…]

v) The Claimant holds annually "G…", in a context of disseminating the dimension and importance of the activity it develops, aiming to provide university students from all faculties in the Country the opportunity to present their projects, also including the offer of internships, guaranteeing students a first professional experience and thus maximizing the possibility of future hiring and integration of participants into the Claimant's workforce, which allows the Claimant to capture the best talents and human resources. [cf. testimony of witness I…]

w) In all editions of "G…" a theme or project to be developed is defined, with the 2010 edition being devoted to the theme "Marketing and Communication Plan for Brand B… as a global player" and having counted on the participation of a total of 333 students from 31 faculties divided into 81 teams. [cf. testimony of witness I… and Docs. Nos. 24 and 25 attached to Initial Petition.]

x) In order to mark the conclusion of "G…" and recognize the efforts and merit of the participants, the Claimant held a ceremony with the aim of presenting awards to the participants, which took place at …, in Lisbon, on … 2010. [cf. testimony of witness I… and Docs. Nos. 26 and 27 attached to Initial Petition.]

y) The Claimant contracted with the company "L…, S.A." the organization of that event, comprising the supply of goods and services indispensable for its realization, for which it spent the amount of €42,455.00, plus IVA in the amount of €8,915.55, making a total amount of €51,370.55. [cf. Docs. Nos. 26 and 27 attached to Initial Petition.]

z) In the year 2010, the international fair "Expo 2010 Shanghai" was held, in which Portugal had a pavilion, and the Claimant integrated a business delegation that went there and marked its presence in the national pavilion, where it intervened in a conference devoted to topics related to renewable energies, innovation and technology in the energy sector, for which it brought some participants and media elements from our Country, and this was the first time the Claimant appeared and was known institutionally in the East. [cf. testimony of witness I… and Doc. No. 28 attached to Initial Petition.]

aa) With a view to the participation of its representatives in that international event, the Claimant contracted a set of services from "O…, S.A.", for which it spent the amount of €7,662.77.

ab) Covered by Service Order No. OI2012…, of 6 August 2012, issued by the Large Taxpayers Unit (UGC), the Claimant was subject to an external inspection procedure, relating to financial year 2010, of general scope, the main objective of which was to ascertain the tax situation of the taxpayer and obtain a reasonable degree of assurance as to whether the financial statements reflect compliance with the tax obligations inherent in the exercise of its activity. [cf. PA filed with the proceedings]

ac) The said inspection action commenced on 6 February 2013, being extended for two successive periods of three months each. [cf. PA filed with the proceedings]

ad) The Claimant, with respect to financial year 2010, gave proper compliance with the declaratory tax obligations to which it is obligated, having proceeded with the filing, namely, of the IRC Income Declaration Model 22, the Annual Statement of Simplified Business Information (IES), the Periodic IVA Declarations, Declaration Model 10, Declaration Model 19, Declaration Model 30 and Declaration Model 34. [cf. PA filed with the proceedings]

ae) In the respective draft Tax Inspection Report, the following corrections were proposed, among others, in the context of IRC and, more specifically, with respect to autonomous taxation [cf. PA filed with the proceedings]:

[details of assessments]

af) In the same draft Tax Inspection Report, the following corrections were proposed, among others, regarding the IVA deducted [cf. PA filed with the proceedings]:

[details of assessments]

ag) The Claimant was notified to, if it so wished, exercise the right to be heard regarding that draft Tax Inspection Report, which it did, by means of a written document submitted to the UGC on 3 February 2014, which is hereby entirely reproduced, having received from the AT the appreciation set out in the Tax Inspection Report which is likewise hereby reproduced. [cf. PA filed with the proceedings]

ah) In the Tax Inspection Report the following corrections were made, among others, to the calculation of IRC, specifically regarding autonomous taxation [cf. PA filed with the proceedings]:

[details of assessments]

ai) In the same Tax Inspection Report the following corrections were made, among others, regarding the IVA deducted [cf. PA filed with the proceedings]:

[details of assessments]

aj) The Claimant was notified of the Tax Inspection Report, through office No. …, dated 06/02/2014, from the Tax Inspection Services, Large Taxpayers Unit, delivered by hand at its headquarters. [cf. PA filed with the proceedings]

ak) Covered by Service Order No. OI 2014…, of 13 February 2014, issued by the UGC, an internal inspection procedure was conducted on group B… relating to financial year 2010, of partial scope, aiming to reflect in the Income Declaration Model 22 for IRC of the group, the corrections made by the AT to the IRC in the individual sphere of the Claimant, resulting from the inspection action previously identified in established fact ab). [cf. PA filed with the proceedings]

al) In the respective draft Tax Inspection Report the following corrections were proposed, among others, to the calculation of IRC of group B…, specifically regarding autonomous taxation, on the basis of the said corrections made in the individual sphere of the Claimant, [cf. PA filed with the proceedings]:

[details of assessments]

am) The Claimant was notified to, if it so wished, exercise the right to be heard regarding that draft Tax Inspection Report, which it did, by means of a written document submitted to the UGC on 24 March 2014, which is hereby entirely reproduced, having received from the AT the appreciation set out in the Tax Inspection Report which is likewise hereby reproduced. [cf. PA filed with the proceedings]:

an) In the Tax Inspection Report the following corrections were made, among others, to the calculation of IRC of group B…, specifically regarding autonomous taxation [cf. PA filed with the proceedings]:

[details of assessments]

ao) The Claimant was notified of the Tax Inspection Report, through office No. …, dated 01/08/2014, from the Tax Inspection Services, Large Taxpayers Unit, sent by registered mail with return receipt requested. [cf. PA filed with the proceedings]

ap) As a result and in consequence of the referenced corrections, the AT made:

• the IRC assessment No. 2014…, dated 11 August 2014, relating to financial year 2010, in which the amount to be refunded was calculated as €33,417,465.02 [cf. Doc. No. 1 attached to Initial Petition.];

• the additional IVA assessment No. …, relating to period 1003, in the amount of €142.00 [cf. Doc. No. 2 attached to Initial Petition.];

• the additional IVA assessment No. …, relating to period 1005, in the amount of €9,971.50 [cf. Doc. No. 3 attached to Initial Petition.];

• the additional IVA assessment No. …, relating to period 1011, in the amount of €14,997.12 [cf. Doc. No. 4 attached to Initial Petition.];

• the additional IVA assessment No. …, relating to period 1012, in the amount of €22,212.25 [cf. Doc. No. 5 attached to Initial Petition.]; and

• the assessment of compensatory interest No. …, relating to period 1008, in the amount of €259.71 [cf. Doc. No. 6 attached to Initial Petition.].

aq) The total value of autonomous taxation assessed, in the context of IRC, relating to the expenses referenced in established facts h), k), n), q), t), y) and aa), amounts to €25,385.51. [cf. PA filed with the proceedings]

ar) On 30 May 2014, the Claimant duly and timely proceeded with the voluntary and full payment of the additional IVA and compensatory interest assessments referred to in established fact ap). [cf. Docs. Nos. 2 to 6 attached to Initial Petition.]

as) On 23 September 2014, the Claimant filed an administrative appeal – whose initial request is hereby entirely reproduced – which had as its object the additional IVA and compensatory interest assessments referred to in established fact ap), with the Claimant having requested the following [cf. PA filed with the proceedings]:

"(i) the total or partial annulment of the additional IVA assessments, as the case may be, promoting, to the extent applicable, their amendment and replacement, based on the amounts now contested, in the total amount of €14,954.23;

(ii) the total annulment of the compensatory interest assessments, in the total amount of €10,019.02, given that the Claimant has always remained in a situation of tax credit with the State;

(iii) the refund of the amounts unlawfully paid in respect to the assessments mentioned in (i) and (ii) and;

(iv) the payment of compensation interest due, calculated on the amounts referred to in letters (i) and (ii), under the provisions of articles 43 of the LGT and 61 of the CPPT."

at) The said administrative appeal was filed under No. …2014… in the Tax Office of Lisbon-…, with the following draft decision being rendered on it [cf. PA filed with the proceedings]:

[details of decision]

au) The Claimant was notified, through office No. …, dated 18/12/2014, from the Large Taxpayers Unit, Tax Management and Assistance Division, sent by registered mail with return receipt requested, of that draft decision and to, if it so wished, exercise the right to be heard. [cf. PA filed with the proceedings]

av) The Claimant did not exercise that right to prior hearing. [cf. PA filed with the proceedings]

aw) The Claimant was notified, through office No. …, dated 31/12/2014, from the Large Taxpayers Unit, Tax Management and Assistance Division, sent by registered mail, of the decision rejecting the administrative appeal, with the following reasoning [cf. PA filed with the proceedings]:

[details of decision reasoning]

ax) On 30 January 2015, the Claimant filed a hierarchical appeal – whose initial request is hereby entirely reproduced – of the decision rejecting the administrative appeal referred to in the previous established fact, with the Claimant having requested the following [cf. PA filed with the proceedings]:

"(i) the annulment of the decision rejecting the administrative appeal;

(ii) the total or partial annulment of the additional IVA assessments, based on the corrections and amounts now contested, promoting, to the extent applicable, their amendment and replacement, in the total amount of €14,954.23;

(iii) the total annulment of the compensatory interest assessments, in the total amount of €10,019.02, given that the Appellant has always remained in a situation of tax credit with the State;

(iv) the refund of the amounts unlawfully paid in respect to the assessments mentioned in (ii) and (iii) and;

(v) the payment of compensation interest due, calculated on the amounts referred to in letters (ii) and (iii), under the provisions of articles 43 of the LGT and 61 of the CPPT."

ay) The said hierarchical appeal was filed under No. …2015… in the Tax Office of Lisbon-…, with a decision of partial approval being rendered on it, issued by the Value Added Tax Services Directorate (DSIVA), under the terms and with the following reasoning [cf. PA filed with the proceedings]:

[details of decision reasoning]

az) The Claimant was notified, through office No. …, dated 07/01/2016, from the Large Taxpayers Unit, Tax Management and Assistance Division, sent by registered mail, of the decision referred to in the previous established fact. [cf. Doc. No. 8 attached to Initial Petition and PA filed with the proceedings]

ba) On 4 February 2015, the Claimant filed an administrative appeal – whose initial request is hereby entirely reproduced – which had as its object the IRC assessment referred to in established fact ap), with the Claimant having requested the following [cf. PA filed with the proceedings]:

"…take steps to proceed with:

(i) the annulment of the demonstration of IRC assessment No. 2014…, relating to financial year 2010 and the subsequent demonstration of account settlement No. 2014…;

(ii) the refund of the amount unlawfully paid in the meantime, in the amount of €25,385.51, plus the corresponding compensatory interest and;

(iv) the payment of compensation interest as provided by law."

bb) The said administrative appeal was filed under No. …2015… in the Tax Office of Lisbon-…, with the following draft decision being rendered on it [cf. PA filed with the proceedings]:

[details of decision]

bc) The Claimant was notified, through office No. …, dated 13/02/2015, from the Large Taxpayers Unit, Tax Management and Assistance Division, sent by registered mail, of that draft decision and to, if it so wished, exercise the right to be heard. [cf. PA filed with the proceedings]

bd) The Claimant exercised that right to prior hearing. [cf. PA filed with the proceedings]

be) The Claimant was notified, through office, dated 18/03/2015, from the Large Taxpayers Unit, Tax Management and Assistance Division, sent by registered mail, of the decision rejecting the administrative appeal, with the following reasoning [cf. PA filed with the proceedings]:

[details of decision reasoning]

bf) On 10 April 2015, the Claimant filed a hierarchical appeal – whose initial request is hereby entirely reproduced – of the decision rejecting the administrative appeal referred to in the previous established fact, with the Claimant having requested the following [cf. PA filed with the proceedings]:

"… take steps to proceed with:

(i) the annulment of the demonstration of IRC assessment No. 2014…, relating to financial year 2010 and the subsequent demonstration of account settlement No. 2014…;

(ii) the refund of the amount unlawfully paid in the meantime, in the amount of €25,385.51, plus the corresponding compensatory interest and;

(iv) the payment of compensation interest as provided by law."

bg) The said hierarchical appeal was filed under No. …2015… in the Tax Office of Lisbon-…, with a decision of rejection being rendered on it, issued by the Corporate Income Tax Services Directorate (DSIRC), under the terms and with the following reasoning [cf. PA filed with the proceedings]:

"B – OPINION

(…)

Analyzing the reasons that led to the decision rejecting the administrative appeal sub judice, in contrast with the arguments presented by the now appellant based on legal rules in force at the time of the facts, we report:

i) Article 88, paragraph 3, letter a) of the Corporate Income Tax Code provides that the following are taxed autonomously at the rate of 10% "expenses deductible relating to representation expenses…", considered as such, in particular, expenses borne with receptions, meals, travel, outings and entertainment offered in the Country or abroad to clients or suppliers or to any other persons or entities (see paragraph 7 of the same legal rule).

ii) On the other hand, article 23 of the Corporate Income Tax Code provides that "Expenses are those which are demonstrably indispensable for the realization of revenues subject to tax, or for the maintenance of the productive source…" indicating by way of example expenses that may be contemplated in this rule.

iii) It appears thus that, in practice, the legislator intended, with respect to certain expenses, where representation expenses are included, to reduce the tax advantage conferred on these expenses via their tax deduction in determining taxable profit, establishing, for this purpose, autonomous taxation with respect to the same.

iv) This evidence is perceivable when the legislator attributes, only, relevance for purposes of subjection to autonomous taxation, to "expenses deductible relating to representation expenses".

v) Now, knowing that autonomous taxation of representation expenses can only occur when deductible expenses are at issue, this requirement of the legislator evidently demonstrates the purpose of taxing the expenses in question that present an undeniable connection to the economic activity developed by taxpayers and the pursuit of their corporate purpose.

vi) With reference to representation expenses, autonomous taxation, only, is not applicable when we are in the presence of expenses considered by taxpayers as "non-deductible", that is, those that did not contribute to the formation of taxable profit.

vii) It should be noted further that the legislator did not adopt any prerogative when representation expenses are borne in correlation with and in the normal exercise of the activity of taxpayers, leading us to conclude that Autonomous Taxation is a legal requirement for all expenses encompassed by the definition contained in paragraph 7 of article 88 of the Corporate Income Tax Code.

viii) We are of the opinion that, if it were the legislator's intention to remove from autonomous taxation representation expenses that, unequivocally, were associated with the activity of each taxpayer, it would have made that exclusion in an express manner as it did with respect to deductible expenses relating to light passenger or mixed vehicles (see paragraph 6 of article 88 of the Corporate Income Tax Code).

ix) It is a rule of objective scope, with the legislator intending with the same to tax independently representation expenses, which, by themselves, constitute autonomous tax facts.

x) In that sense, we refer to the Decision of the Constitutional Court No. 310/2012 issued in the context of Case 150/2012, where it is stated that "… in the case each expense effected is taxed, considered in itself, and subject to a determined rate, with autonomous taxation being calculated independently of IRC".

xi) It is understood, therefore, that autonomous taxation amounts, only, to a penalty of taxpayers who bear the expenses listed in article 88 of the Corporate Income Tax Code, compelling them to adopt more restrictive behavior with respect to the same. In accordance with the foregoing it is mentioned the decision of the Constitutional Court No. 18/2011, Case No. 204/2010, "For their part, paragraphs 3 and 4 of article 81 relate to expenses deductible as costs for purposes of IRC, that is, to expenses that were demonstrably indispensable to the realization of revenues, in light of what article 23, paragraph 1, of the CIRC establishes, with the taxation provided for in these provisions being explained by the legislative intention to encourage companies to reduce as much as possible expenses that adversely affect tax revenue".

xii) Equally, the Decision of the Arbitral Tribunal – Case No. 92/2013-T mentions that "The genesis and scope of autonomous taxation will not lead to any other sense than that it would be incumbent on the taxpayer, who bore/made the expenses that are at their origin, to equally be subject to them".

xiii) Therefore, in light of the foregoing, after analysis of the events sub judice we are of the opinion that the same integrate the concept of representation expenses, not presenting characteristics to be classified as account 6222 of the Accounting Standardization System (SNC) – Advertising and propaganda, as the appellant claims.

xiv) We are of the opinion that, notwithstanding the admission that the events in question possess the attributes that the now appellant confers on them, that is they allow testimony of the activity developed by the appellant (production of electricity from hydroelectric sources) making known its assets, also providing significant media projection, the truth is that the type of expenses borne take on the nature of representation expenses – "receptions, meals, travel, outings and entertainment offered in the country or abroad to clients or suppliers or to any other persons or entities" – and not Advertising and Propaganda expenses – "advertisements in media, promotional advertising campaigns, advertising materials".

xv) With respect to the event "The Customer Experience" which the now appellant alleges to be an internal meeting of commercial character we are to note that the now appellant did not file with the administrative proceedings documents that indisputably demonstrated that circumstance, maintaining itself thus the correction made as autonomous taxation.

xvi) The understanding fully subscribed set out in the inspection procedure and in the administrative appeal, according to which the accounting recognition and corresponding tax deductibility of expenses borne by the appellant that involve third-party entities fall within the concept of representation expenses, being the same taxed autonomously, at the rate of 10%, under paragraph 7 of article 88 of the Corporate Income Tax Code.

xvii) It should further be noted that, in the specific case, there is no type of legal presumption, as the reasons for the conduct of the AT and the criterion of decision are reflected in the law, more specifically in letter a) of paragraph 3 and paragraph 7 of article 88 both of the Corporate Income Tax Code, in the wording in force at the time of the facts.

xviii) It is important further to emphasize that this Services Directorate can only pronounce itself on matters and legal rules within the scope of IRC, reason why we do not express ourselves on the inspection action, in the context of IVA, mentioned in the request.

IV – CONCLUSION

For all the foregoing, perceiving no illegality in the decision appealed from, the decision rejecting the administrative appeal should be maintained, in such terms as the present petition does not merit approval, proposing itself thus the rejection of the present hierarchical appeal."

bh) The Claimant was notified, through office No. …, dated 28/10/2015, from the Large Taxpayers Unit, Tax Management and Assistance Division, sent by registered mail, of the decision referred to in the previous established fact. [cf. Doc. No. 7 attached to Initial Petition and PA filed with the proceedings]

bi) On 27 January 2016, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceedings. [cf. case management information system of CAAD]

§2. UNESTABLISHED FACTS

With relevance to the assessment and decision of the case, there are no facts that have not been established.

§3. REASONING REGARDING THE FACTS

With respect to the established facts, the Tribunal's conviction was based on the facts pleaded by the Parties, whose adherence to reality was not challenged, on the documents and the administrative file filed with the proceedings and, further, on the witness evidence produced.

Regarding the testimony given by the witnesses called by the Claimant – I… [employee of the Claimant for approximately 10 years, being responsible for the Brand, Marketing and Communications Directorate of the Claimant (questioned on the factual matter contained in articles 7 to 65 of the Initial Petition)] and M…[employee of the Claimant for approximately 10 years, being responsible for the Investor Relations Directorate of the Claimant (questioned on the factual matter contained in articles 22 to 26 and 36 to 43 of the Initial Petition)] who testified in a clear, objective and impartial manner on the facts to which they were questioned, demonstrating unequivocal and detailed direct knowledge of the same, whereby their testimony merited full credibility –, the same clarified and corroborated, in substance, the factual allegations of the Claimant, on which they testified.

III.2. ON THE LAW

In the specific case at issue, we have that the Claimant comes to petition – following the rejection, respectively, total and partial of hierarchical appeals it filed – for the declaration of illegality and annulment of part of the IRC assessment No. 2014…, relating to financial year 2010 and the declaration of illegality and annulment of the additional IVA and compensatory interest assessments Nos.…, …, …, … and…, relating to periods 1003, 1005, 1008, 1011 and 1012.

As results from the established facts, we have that the facts put for assessment by this Arbitral Tribunal, whether regarding the IRC assessment contested, or as to the additional IVA assessments impugned, are essentially the same; in fact, in one case and the other it is important to assess the factual matter relating to the various events promoted by the Claimant – cf. established facts g), i), l), p), r), v) and z) – and to the expenses incurred by it with the acquisition of goods and services relating to their organization – cf. established facts h), k), n), q), t), y) and aa).

The Claimant defends, in sum, that the events in question are part of actions for disclosure and promotion of its business image, intrinsically connected with the pursuit of its activity and that, being so, those expenses cannot be considered unrelated to the activity carried out, and indeed, contribute to its pursuit, having a very strong advertising component.

Therefore, the Claimant does not perceive why the same should be considered as representation expenses and, as such, subject to autonomous taxation in the context of IRC, and why the right to deduction of the respective IVA should be questioned.

In this framework, it appears that the epicenter of the disagreement opposing the Parties in these proceedings lies in the determination of the nature of the referenced expenses, which will depend above all on the judgment made regarding the classification and justification of the mentioned events in light of what constitutes the Claimant's business activity. The answer to this first and essential question will condition the subsequent legal-tax classification of those expenses in the context of IRC and IVA, as the characterization made of those expenses will then serve to determine their correct classification in the context of IRC and IVA, to be done in accordance with the proper norms of one and the other tax.

§1. ON THE CLASSIFICATION OF THE EVENTS PROMOTED BY THE CLAIMANT WITHIN THE SCOPE OF ITS ACTIVITY

As results from the established facts, the Claimant is the parent company of Group B…, has as its purpose the promotion, development and management, whether directly or indirectly, of undertakings and activities in the energy sector, both at national and international level, with a view to increasing and improving the performance of all companies in its group, being listed on the main Portuguese stock exchange index.

The sector of activity in which the Claimant operates – the energy sector (electricity and gas) – is, as is well known, highly competitive and competitive, both at internal and international level.

It is a public fact that the Claimant and its group are active and strongly present both in the national market and in the international market, whether in the pursuit of its corporate purpose – internally it is the largest producer, distributor and marketer of electricity and, externally, is implemented in more than 10 countries, whereby its customer universe amounts to the millions – or in the capture of the financial resources necessary to the development of its activity – presently, the Claimant is, moreover, a commercial company mostly held by foreign shareholders.

In light of this framework, it is therefore important to clarify whether the referenced events promoted by the Claimant are part or not of the pursuit of its corporate purpose, for which it is determinative to take into account their respective specificities and purposes.

The event called "H…", as was established, consisted of "a meeting of commercial staff from Group B… with the objective of exchanging experiences in customer/consumer relationship, standardizing strategies and procedures, aiming to improve the quality of those commercial staff, which did not involve the participation of any persons outside the Claimant" (established fact g)).

This was thus an event with particular focus on the strategy for customer relationship of Group B… and therefore with a markedly commercial character, it being evident its intrinsic connection with the pursuit of the Claimant's activity and, more specifically, with the promotion of its image and its services among the consuming public.

As is well known, the current techniques for customer retention and loyalty are of crucial importance for any company, as, although discounting the need to acquire new customers, it is an evident fact of business management that already-acquired customers are those that generate value, both through what they acquire/consume and through "word of mouth" of their satisfaction and, therefore, are the basis of the company's activity.

The concert called "K…", held by the Claimant at the dam …, as was proven, "allowed the Claimant to publicize the activity it carries out and aimed to mitigate the negative effect on the Claimant's image resulting from the construction of infrastructure which, although necessary for energy production at the … dam, caused a strong landscape impact" (established fact i)). Furthermore, with respect to this event, it was equally proven that, "according to a "Communication Performance – Sponsorship" analysis conducted by "Z...", that concert "was the subject of references in the media in 25 news items. The editorial space occupied was valued at €3.9 million. A… was the subject of reference in 92% of the information published and the media space occupied provided the brand with a return of €1.3 million."" (established fact j)).

The facts speak for themselves, without need of any further comment, it being meridianly evident that this was a significant action for disclosure and promotion of the Claimant's image and brand, with a strong advertising component.

The ceremony for public presentation of the Claimant's annual results to the media is an event which, as was proven, "seeks to ensure that the information made available is done with high levels of accuracy and transparency" (established fact l)), being aimed at "national and foreign media (namely, W... and Y...) and which is usually attended by 30 to 40 people, almost all of them journalists" (established fact m)).

For a company with the dimension of the Claimant, with a multinational vocation and listed on the stock exchange, the annual presentation of its financial results, in addition to generating natural expectation among the general public and, in particular, among analysts and investors, will be an important moment for publicizing and projecting its image and its brand, as, moreover, results evidenced by the international recognition of which the Claimant was the object "with respect to financial reporting procedures, having been ranked first in the "TOP 30 Global Rankings for Financial Disclosure Procedures" of "IR Global Rankings'10"" (established fact o)).

The same is to be said, with respect to its inclusion in a clear strategy of communication and promotion of the Claimant's image and brand, concerning the event called "E…", "held by the Claimant and for which representatives of Portuguese and foreign media were invited with the aim of, through the exposure of topics related to the Claimant's activity, enabling the company's management bodies to answer questions – with the interview contents being subject to publication – aiming thereby at the promotion of a policy of total transparency and accuracy in information" (established fact p)).

The event designated "F…" "aimed to present to major analysts and investors the concepts, projects and strategy of Group B… for the following years, having included the presentation of results and strategies inherent to the Claimant's activity, also affording those present the possibility of asking questions about the topics under analysis" (established fact r)), being, as was proven, "of crucial importance for the Claimant to attract funds from national and foreign investors" (established fact u)).

Here too the facts point to an event for disclosure and promotion of the activity and, therefore, of the image and brand of the Claimant, in this case among a universe of people and institutions that is essential to the pursuit of the Claimant's activity, as it allows it to attract the financial resources it needs to realize its business projects.

With respect to "G…" both the competition itself – which provides the Claimant with the possibility of future hiring and integration of participants into its workforce, thus allowing it to capture the best talents and human resources (cf. established fact v)) – and the closing ceremony and award presentation to the participants, are events that have broad public disclosure, always having the Claimant's brand as "backdrop", whereby the advertising component is here strong and indubitably present.

With respect to the Claimant's participation in the international event "Expo 2010 Shanghai" – in which our country was present, "with the Claimant integrating a business delegation that went there and marked its presence in the national pavilion, where it intervened in a conference devoted to topics related to renewable energies, innovation and technology in the energy sector" (established fact z)) –, we cannot fail to recall that the Claimant is a multinational company and, to that extent, events like this – in which almost all the countries of the world are present – appear of crucial importance for the Claimant to promote its image and its brand, aiming to expand and implement its activity in other markets, whereby this event should be considered as part of the Claimant's communication and marketing strategy.

In summary and conclusively, we understand that all and each of the stated events constitute actions for disclosure and promotion of the image and brand of the Claimant, part of a communication and marketing strategy intrinsic and clearly connected with the pursuit of its activity.

§2. ON THE LEGAL-TAX CLASSIFICATION OF THE EXPENSES INCURRED BY THE CLAIMANT WITH THE HOLDING OF THE EVENTS

§2.1. IN THE CONTEXT OF IRC

§2.1.1. ON REPRESENTATION EXPENSES

The tax base for IRC is enshrined in article 3 of the Corporate Income Tax Code, with its paragraph 2 defining taxable profit as that resulting from the "difference between the values of net assets at the end and beginning of the tax period, with the corrections established in this Code".

On the other hand, it is in articles 17 and following of the same legislation that the general rules for determining taxable profit are enshrined, being specified in article 23 thereof which costs, as such, should be considered by law.

For the tax concept of cost the definition contained in the aforementioned article 23 applies, which, after conveying to us, in a broad manner, the notion of costs or losses as encompassing all expenses effected by the company that are, demonstrably, indispensable for the realization of revenues or for the maintenance of the productive source, proceeds to a merely exemplary enumeration of various expenses of this type.

We are dealing with a concept of cost that can be considered common to the tax balance and the commercial balance. The tax definition of cost, as a broader concept than production and acquisition costs, departs from a broad perspective of activity and of business necessity, thus establishing an objective connection between the activity of the latter and the expenses that, inevitably, will result from it. And it does so with a clearly fiscal purpose, which consists in distinguishing between costs that can be accepted for tax purposes and that, therefore, will influence the calculation of taxable profit and those that cannot be accepted for such purposes.

The costs or losses of the company thus constitute the negative elements of the profit and loss account, which are tax deductible when, being properly documented, they are indispensable for the realization of revenues or for the maintenance of the productive source of the company in question. The absence of any of these requirements implies the non-consideration of the referred elements as costs, the respective amounts thus having to be added back to the accounting result.

The requirement of indispensability of a cost has been jurisprudentially interpreted as an indeterminate concept requiring case-by-case fulfillment, as a result of an analysis from an economic-business perspective, in the perception of a relationship of economic causality between the assumption of an expense and its realization in the interest of the company, having regard to the corporate purpose of the commercial entity in question, with actions by the Tax Administration being precluded that place into question the principle of freedom of management and autonomy of will of the taxpayer. Nevertheless, if the Tax Administration has reasonable grounds to doubt the inclusion in the corporate interest of a particular expense, the burden is on the taxpayer to prove that such operation falls within its corporate purpose (see, among others, the decision of the STA, of 29 March 2006, issued in case No. 01236/05 and the decision of the TCA Sul, of 22 January 2015, issued in case No. 05327/122).

It is further important to note that it is the understanding of jurisprudence and doctrine that the Tax Administration cannot assess the indispensability of costs in light of criteria focusing on the opportunity and merit of the expense. A cost is indispensable when it relates to the company's activity, with costs unrelated to the company's activity being only those in which it is not possible to discern any causal nexus with revenues or gains (or with income, in the current expression of the code – cf. article 23, paragraph 1, of the Corporate Income Tax Code), explained in terms of normality, necessity, congruence and economic rationality (see, among others, the decision of the STA, of 21 April 2010, issued in case No. 0774/09, and the decision of the TCA Sul, of 16 October 2014, issued in case No. 6754/13).

That said, having regard to what is the epicenter of the disagreement existing between the parties regarding the legal-tax classification of the expenses incurred by the Claimant with the holding of the aforesaid events, let us now center our attention on the analysis of representation expenses.

Article 37, letter a), of the Local Tax Code provided that representation expenses were not considered as costs or losses of the exercise, being recorded under any heading and even if properly documented, to the extent that the Directorate General of Taxes and Contributions deemed them excessive.

In light of the regime provided for in the said legal rule, doctrine defined representation expenses as those that aimed to cover the travel of managers of companies or their representatives, whenever such travel was in service of the same and should be properly documented to be considered costs by the Tax Administration.

The Corporate Income Tax Code, approved by Decree-Law No. 442-B/88, of 30 November, in the original wording of article 41, paragraph 1, letter g), came to determine that representation expenses are not tax costs, being recorded under any heading, to the extent that the Directorate General of Taxes deemed them excessive.

In any of the legal rules mentioned the quantum of representation expenses was not set forth in law and depended on the subjectivity of interpretation by the Tax Administration. Thus, the quantum of representation expenses not accepted fiscally was subject to the discretionary power of the Tax Administration, with the taxpayer able to appeal hierarchically to the Minister of Finance, in case of disagreement with the decision of the Directorate General of Taxes.

With Law No. 39-B/94, of 27 December (State Budget Law 1995), in effect from 1 January 1995, article 41, paragraph 1, letter g), of the Corporate Income Tax Code, came to not consider as a tax cost representation expenses, recorded under any heading, to the proportion of 20%. With this legislative amendment, the quantification at 20% of the non-consideration as a tax cost of representation expenses, the legislator sought to resolve the said subjective problems inherent in the reasonableness criterion to be analyzed by the Tax Administration. Furthermore, paragraph 3 of the cited article 41 established that representation expenses are considered, namely, expenses borne with receptions, meals, travel, outings and entertainment offered in the country or abroad to clients or suppliers or to any other persons or entities.

Subsequently, article 41, paragraph 5, of Law No. 3-B/2000, of 4 April (State Budget Law 2000), came to revoke, among other things, article 41, paragraphs 3 and 4, of the Corporate Income Tax Code, integrating these expenses in article 4 of Decree-Law No. 192/90, of 9 June, further establishing, in its paragraph 3, that representation expenses are taxed autonomously in IRS or IRC, as the case may be, at a rate of 6.4%.

Law No. 30-G/2000, of 29 December (the so-called "Tax Reform Law"), which entered into effect on 1 January 2001, in its article 6 added article 69-A to the Corporate Income Tax Code, it being that in paragraph 3 of this new provision representation expenses come to be taxed autonomously, at the rate corresponding to 20% of the higher normal rate, representation expenses.

Finally, through Decree-Law No. 198/2001, of 3 July, which proceeded with the renumbering of the articles of the Corporate Income Tax Code, autonomous taxation of representation expenses came to be included in article 81, paragraph 3, of that legal compendium, maintaining the autonomous taxation rate at 20%. In this manner, greater tax revenue in IRC is ensured, as autonomous taxation of such expenses is characterized by the fact that the company pays tax, independent of obtaining tax profit or loss. The subjection to autonomous taxation of such expenses implies that each act of expense is considered an autonomous tax fact, to which the taxpayer is subject, whether or not it will have taxable income in IRC at the end of the respective economic exercise.

Having regard to what is now provided in article 88, paragraph 7, of the Corporate Income Tax Code, "representation expenses are considered, namely, expenses borne with receptions, meals, travel, outings and entertainment offered in the Country or abroad to clients or suppliers or to any other persons or entities", with the same being taxed autonomously at the rate of 10% (paragraph 3 of the same article 88).

To conclude, it should be noted that only representation expenses that are properly documented and recorded are deductible, thus having to satisfy the requirement of indispensability provided for in the already cited article 23 of the Corporate Income Tax Code, so that they be considered as such.

§2.1.2. OF THE SPECIFIC CASE

Reverting to the case at issue, it is important to start by emphasizing that, as the AT itself expressly recognizes, there is "not the least question about the context in which the expenses under discussion (…) were incurred, it being taken as established that they are directly related to the exercise of the Claimant's activity".

Consequently, the question to be clarified is, solely, whether the IRC assessment contested suffers or does not suffer from the invalidating defect of error in the qualification of the mentioned expenses borne by the Claimant as representation expenses and, therefore, whether the same should or should not be subject to autonomous taxation, under article 88, paragraph 3, of the Corporate Income Tax Code.

Having regard to what we said above regarding the classification of the events promoted by the Claimant within the scope of its business activity, we believe that it appears uncontroversial, without need of further developments – which, certainly, would err by being redundant –, to state that we are dealing with expenses that are intended, not to represent the Claimant where it does not find itself present – therefore, outside its main activity (core business) –, but to ensure the development of its corporate purpose, within the economic circuit where this naturally manifests itself, which extends beyond the national market (recall that we are in the presence of a player in the international energy market).

In this framework, we are not dealing with representation expenses, but rather with costs inherent to the normal development of the Claimant's activity, with clearly promotional purposes for the image and brand of the Claimant, which are relevant as a cost, for purposes of the provision of article 23, paragraph 1, of the Corporate Income Tax Code – although only mediately do the same lead to the obtaining of gains or the maintenance of the productive source – and are not, therefore, subject to autonomous taxation.

Consequently, the act of IRC assessment contested suffers from the defect of violation of law, due to error in the factual and legal requirements, consisting in the erroneous interpretation and application of the provision of article 88, paragraphs 3, letter a), and 7, of the Corporate Income Tax Code, which import the respective annulment.

The act of rejection of administrative appeal No. …2015… and the act of rejection of hierarchical appeal No. …2015… suffer from the same invalidating defect, whereby they will also be annulled finally.

§2.2. IN THE CONTEXT OF IVA

§2.2.1. ON THE RIGHT TO DEDUCTION OF VAT

The right to deduction of IVA constitutes a central pillar of the common VAT system and aims to free taxpayers from the burden of tax within the scope of their economic activities, so as to guarantee tax neutrality whatever the purposes or results of those activities, on the condition that the mentioned activities are themselves, subject to IVA.

As Sérgio Vasques notes, "[t]he principle of neutrality on which IVA is based is only concrete when taxpayers discharge the burden of tax, subtracting the VAT incurred in their inputs from the IVA they calculate on their outputs."

The right to deduction is made positive, among us, in article 19 of the Value Added Tax Code, from which results [...]