CAAD Rules on IRS Presumption of Advance on Profits Under Article 6(4) – Shareholder Loan Recharacterization (Case 409/2018-T)

ARBITRAL DECISION

I. REPORT

1. On August 28, 2018, the commercial company A..., Lda., NIPC..., with registered office at Street ..., ..., ..., ... (hereinafter, Claimant), filed a request for establishment of an arbitral tribunal, pursuant to the combined provisions of articles 2, n. 1, paragraph a), and 10, nn. 1, paragraph a), and 2, of Decree-Law No. 10/2011 of January 20, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012 of December 31 (hereinafter, abbreviated as RJAT), with a view to this tribunal's pronouncement regarding:

• Declaration of illegality and annulment of the assessment of Personal Income Tax (IRS) withholding at source No. 2018..., relating to the tax year 2015, and respective compensatory interest, from which results the total amount payable of €18,239.73 (€16,800.00 of IRS and €1,439.73 of compensatory interest);

• Reimbursement of the amounts of tax and compensatory interest unduly paid, plus statutory interest at the legal rate, from the date of payment until the date of complete reimbursement.

The Claimant attached 7 (seven) documents, called 4 (four) witnesses, and requested the giving of party statements by its partner and manager, B..., without requesting the production of any other evidence.

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

1. In essence, the Claimant alleges a defect of breach of law, due to erroneous interpretation and application of the norm contained in article 6, n. 4, of the IRS Code and the consequent voidability of the aforementioned additional assessment of IRS withholding at source and the respective assessment of compensatory interest.

2.1. As appears from the request for arbitral pronouncement, the Claimant bases the challenge to the disputed tax acts, essentially, on the following arguments:

The Claimant was questioned, in an inspection proceeding, and for what is now relevant, about the nature of a debit movement detected on 31.12.2015 in account 2789003 (Other debtors and creditors), in the amount of €60,000.00, by credit in an account held in the name of the partner and manager at the time of the facts, B...; the AT alleges that the accounting movements reflected in the account of partner-manager B... are presumed to have been made as advances on account of profits.

This understanding of the AT is based on n. 4 of article 6 of the IRS Code, in the version in force at the date of the facts sub judice, which provides that entries in any current accounts of partners recorded in commercial companies, when they do not result from loans, provision of work, or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits.

Furthermore, to justify that the movement under analysis "constitutes a movement on account of profits," the AT came to argue based on the fact that the supporting document is "a posting notice of 31/12/2015, with the Manual Description of 'Loan from the Company to partner B...', in the amount of €60,000...".

Considering, without further ado, that "we are not dealing with any loan, (...), that is, the supporting document is not in compliance with the requirements provided for in articles 1142 and 1143 of the Civil Code, whereby it is an advance on account of profits, which are considered as capital income."

According to the Claimant, the debit posting made on 31.12.2015, in the amount of €60,000.00, results from a "Loan Contract," which should be reiterated by the analysis of the copy of this contract that it attaches, under the designation of document no. 6, to the request for arbitral pronouncement. Indeed, the Claimant states that the partner-manager at the time of the facts, B..., needed some funds for the exercise of his professional activity, whereby he concluded the aforementioned contract with the Claimant, through which the latter lent the amount of €60,000 and he undertook to return the lent amount within a period of 3 years, having also been stipulated that such loan would be remunerated at an annual interest rate of 3%, such interest to be paid until complete repayment of the lent amount.

In this sense, the Claimant alleges that the said amount has already been reimbursed by said B..., through the company "C... SGPS, S.A.", the total amount of €53,000, as evidenced by the banking documents and also by the tax declarations of this company, in two tranches dated 13.07.2017 and 07.05.2018, and it is expected that by year-end the loan will be fully reimbursed; it being noteworthy that the first reimbursement of €50,000, dated 13.07.2017, was made on a date prior to the beginning of the inspection, which was only legitimized two months later, by orders of 26.09.2017 and 03.10.2017, whereby it is incomprehensible how the AT could make no account of this reimbursement. The Claimant reiterates, in the same sense, that it is equally unequivocal from the accounting supporting document relating to the posting in the partner's current account that this is a "posting notice" with the description "Loan from the Company to partner B...".

The Claimant further alleges that the manner in which the loan contract is executed can only be deemed relevant for civil purposes, not for tax purposes, as it is not within the AT's purview to regulate relationships between private parties or to interfere with how civil contracts are concluded, but only to tax the realities it deems to be taxable; any contrary understanding would constitute a violation of the accounting principle underlying Tax Law, of substance over form.

Thus, given that the value in question resulted from a loan made by the Claimant to the partner-manager, the fact that the formally required legal requirements have not been complied with cannot simply disqualify the substance and materiality of the operation, which was supported by all the documentary evidence attached.

Furthermore, given that this is a rebuttable presumption, the AT would have had to demonstrate – and did not demonstrate – that the index facts were present that would allow it to frame amounts recorded in accounting as income of category E, placed at the disposal of partners; in the specific case, the AT also failed to demonstrate that the company's intention was to distribute profits to the partner. On the other hand, there were no corporate resolutions in the sense of profit distribution, as there was no general meeting to that effect and recorded in Minutes, as required by articles 246 and 376 of the Commercial Companies Code.

Furthermore, the Claimant declared its results in the Tax Declaration Model 22 of IRC and annexes, for purposes of taxation under IRC, without declaring the profits "distributed" through Declaration Model 10 and nor could it do so, since it did not proceed to any distribution or advance on account of profits.

The Claimant further states that the AT merely alleges that, by virtue of the contract not having been executed by public deed, the same was not valid and therefore should be qualified as an advance on account of profits, without having succeeded in proving this fact, that is, that the amount in question was delivered as an advance on account of profits.

Given the foregoing, the Claimant maintains that it is clear that there is a defect of lack of reasoning in the Tax Inspection Report, insofar as the AT did not prove, as it had the legal duty to do, clearly, unequivocally and with reasoned grounds, that this posting is presumed to have been made as an advance of profits.

It being equally clear, according to the Claimant, that the accounting movements that led to the correction in question were grounded in a loan already reimbursed practically in full, whereby such reality does not fit the definition of advance on account of profits, as the AT seeks to make believed.

Whereby, concludes the Claimant, the assessment now challenged is defective due to breach of law, by constituting error concerning legal and factual presuppositions that the withholding of IRS at source of the reality in question should be subject to, and should therefore be annulled.

1. The request for establishment of an arbitral tribunal was accepted and automatically notified to the AT on September 3, 2018.

2. The Claimant did not proceed to appoint an arbitrator, whereby, pursuant to the provisions of n. 1 of article 6 and paragraph a) of n. 1 of article 11 of the RJAT, the President of the CAAD Deontological Council designated the undersigned as arbitrator of the singular Arbitral Tribunal, who communicated acceptance of the assignment within the applicable period.

4.1. On October 17, 2018, the parties were duly notified of this designation, having not expressed willingness to refuse the appointment of the arbitrator, in terms of the combined provisions of article 11, n. 1, paragraphs b) and c), of the RJAT and articles 6 and 7 of the CAAD Code of Ethics.

4.2. Thus, in accordance with the provision in paragraph c) of n. 1 of article 11 of the RJAT, the singular Arbitral Tribunal was established on November 7, 2018.

1. On December 10, 2018, the Respondent, duly notified for this purpose, filed its Response in which it specifically challenged the arguments raised by the Claimant and concluded for the lack of merit of the present action, with its consequent dismissal of the claim.

5.1. In essence and also briefly, it is important to extract the most relevant arguments on which the Respondent based its Response:

The Claimant presented a document called "loan contract," and it is true that in the company's accounting there was no "loan contract" from the company to its partner and manager B....

Said contract, executed on June 15, 2015, would concretize an alleged loan between the Claimant and that B..., shown to be signed by him, in his personal capacity, as first and as second contracting party, with no mention being made of the capacity in which he signs as first contracting party.

The execution of the alleged loan is not mentioned in any minutes of the company, having therefore not been resolved by it. Never has the existence of the aforementioned loan and the consequent commitment of the company to make available to the partner all of its liquidity (that was being generated) been mentioned in any financial statements, whether to the Tax Authority, to the Commercial Registry Office, or other interested parties.

The contract was executed as a simple private document, no payment of interest on the supposed loan is recorded in accounting, and never, until December 2015, did the Claimant's accounting reflect the existence of any loan to the partner, that is, never reflected the existence of the alleged loan contract. Furthermore, no financial documents were presented that reflected (or, much less, proved) the supposed financial transfers that allegedly would have occurred in the context of the aforementioned loan contract.

In this conformity, the Respondent maintains that the operation relevant to the matter under discussion does not refer to loans, instead being an entry in the partner's current account, presuming, for this reason, that such amount refers to the distribution of profits of the company, as established in n. 4 of article 6 of the CIRC.

Moreover, the AT further states that a true accounting of loans, even those to partners, would imply the movement of "account 41 – Financial Investments" and not the account "2789003 – Other accounts receivable and payable" which is nothing more than an account of indefinite nature related to partners.

In summary, the AT concludes that the value that was paid (made available) by the company to the partner manager, cannot, due to lack of classification, be considered a loan from the company to the partner, being able only to configure a distribution of profits or advances on account of profits. Which constitutes capital income, taxable under IRS (in accordance with n. 1 and paragraph h) of n. 2 of article 5, n. 4 of article 6, and n. 2 of paragraph a) of n. 3 of article 7 of the IRS Code) whereby, in accordance, the "Claimant was obliged to comply with the rules that establish the taxation of this income by withholding at source (in accordance with paragraph a) of n. 1 of article 71 and n. 3 of article 98 of the IRS Code).

In the specific case at hand, the Tax Authority, after analyzing the data and determinations resulting from the claimant's books, found that, in the year 2015, the company made an entry in the current account of its principal partner, that is, made available to him, becoming the holder thereof, an amount that was in "Cash." The entry not having been made as a loan, it was presumed that the same was made as a distribution of profits or advance on account of profits.

With the purpose of rebutting the aforesaid presumption, the Claimant comes, in summary, at first, to assert that the entry in the partner's current account, recorded in 2015, results from entries underlying said loan contract; however, as is evident from the inspection report, at the time the inspection action was carried out there was no contract in the accounting.

Thus, accounting, apart from not expressing this supposed reality, did not include any loan contract; indeed, it remains unclear in the learned initial request why what the Claimant intends to consider as a loan ended up not being reflected in an account appropriately designated for it. Now, says the AT, the presumption of veracity of accounting declarations and documents, provided for in article 75 of the LGT, applies only to the elements and movements contained therein.

On the other hand, says the AT that Stamp Tax (Imposto de Selo) is not shown to have been paid, which would always be due by the formalization of the contract, in legal terms, and it is certain that if the Claimant had done so, it would always prove it in the case file and/or during the inspection.

In this manner, proof is needed – which could only result from the demonstration of the exact financial movements, setting forth their origin and destination – both as to the amounts and as to the moment in which such occurred; without such proof, what remains is the reality expressed by the accounting which translates into a mere "posting notice."

The AT further states that the Claimant does not prove that the lent amount was refunded, insofar as the refund to which the Claimant alludes concerns the company "C..., SGPS, S.A." and not the said B..., and even then the payment made – being this, moreover, the very reference of the SGPS company itself – is that it is a payment made in the context of a loan to itself (SGPS) and not to B....

5.5. The Respondent did not attach documents or request the production of any other evidence, having, at the same occasion, proceeded to attach to the case file the respective administrative procedure (hereinafter, PA).

1. The Claimant dispensed with the production of evidence that it requested, ultimately, in the request for arbitral pronouncement and, consequently, both Parties dispensed with holding the meeting provided for in article 18 of the RJAT.

2. On January 21, 2019, an order was issued dispensing with the holding of the meeting referred to in article 18 of the RJAT, setting a deadline for the presentation of submissions and determining, as the deadline for the issuance of the arbitral decision, the day of April 30, 2019.

3. The Parties filed no submissions.

II. CASE MANAGEMENT

The Arbitral Tribunal was regularly established and is competent ratione materiae, given the composition of the object of the proceedings (cf. articles 2, n. 1, paragraph a) and 5 of the RJAT).

The request for arbitral pronouncement is timely, as it was filed within the deadline provided for in article 10, n. 1, paragraph a), of the RJAT.

The parties have legal personality and capacity, have standing and are duly represented (cf. articles 4 and 10, n. 2 of the RJAT and article 1 of Ordinance No. 112-A/2011 of March 22).

The proceedings do not suffer from nullities, no exceptions or preliminary issues having been raised that prevent the examination of the merits and which should be addressed.

III. REASONS

III.1. FACTS

§1. Facts Proven

The following facts are considered proven:

a) The Claimant is engaged in the organization of banquet events, weddings, baptisms, and similar activities with own supply, catering and hotel activities, namely a restaurant.

b) In the year 2015, B... was a partner and manager of the Claimant. [cf. PA]

c) Under Service Orders Nos. OI2017... and OI2017..., with orders of 26.09.2017 and 03.10.2017 respectively, first partial (VAT), becoming general on 28.12.2017, the Claimant was subject to an external inspection action, covering the years 2015 and 2016. [cf. PA and document no. 2 attached to the request for arbitral pronouncement]

d) Following this, the respective Draft Tax Inspection Report was prepared, which is here given as fully reproduced, in which the following correction relating to IRS was proposed, with the grounds that are also set forth below [cf. PA]:

"I.4.3. Personal Income Tax

By the report made in item "3" of chapter III (...) of this draft report, the withholding at source not effected amounts to €16,800.00, relating to the period indicated below, as shown in the following table:

(...)

III.3 Personal Income Tax

YEAR 2015

ADVANCE ON ACCOUNT OF PROFITS

From the analysis carried out on account 2789003 — B..., a debit movement was found on 31/12/2015, in the amount of €60,000.00, by credit from account 111-Cash A (Journal 4; Doc. 749; Description: Invoice) — Annex VI.

The aforementioned account 2789003 — B..., is held by the partner and manager of the company under analysis, B..., whereby the accounting movement made, in the amount of €60,000.00, configures an advance on account of profits. As follows:

• The supporting accounting document relating to the posting in the partner and manager's current account of the company is a "posting notice," of 31/12/2015, with the Manual Description of "Loan from the Company to partner B...", in the amount of €60,000.00. — Annex VI, p. 03;

• It is worth noting here that the granting of credit, as an activity in Portugal, is reserved for credit institutions and financial companies. However, loan contracts can be concluded for various reasons and on an occasional basis, that is, there should be justified reasons for this to occur;

• On the other hand, one must pay attention to the definition of "Loan" provided for in article 1142 of the Civil Code, as being a "(...) contract by which one of the parties lends to the other money or other fungible thing, the second being obliged to return the same amount of the same kind and quality." Also consider article 1143 of the said Code, as to form: "Without prejudice to provisions of special law, a loan contract of value exceeding €25,000 is only valid if executed by public deed or by a document authenticated by public deed, and one of value exceeding €2,500 if executed by a document signed by the borrower."

In summary, we are not dealing with any loan, as verified in the description made in points 2 and 3, that is, the supporting document is not in compliance with the requirements provided for in articles 1142 and 1143 of the Civil Code, whereby these are advances on account of profits, which are considered as capital income, as we shall see next.

Legal Framing and its Taxation

Pursuant to paragraph h) of n. 2 of article 5 of the Code of Personal Income Tax (hereinafter referred to as CIRS), capital income is considered to include "Profits and reserves made available to associates or holders and advances on account of profits, with the exception of those referred to in article 20."

In turn, n. 4 of article 6 of the same statute provides that "Postings to its favor, in any current accounts of partners, recorded in commercial or civil companies in commercial form, when they do not result from loans, provision of work or exercise of corporate offices, are presumed to have been made by way of profits or advances on the profits."

By n. 1 of article 71 of the CIRS, "Amounts are subject to withholding at source as a final tax, at the liberatory rate of 28%," while paragraph a) of said n. 1 provides for taxation at said liberatory rate "Capital income obtained in Portuguese territory, by residents or non-residents, paid by or through entities having headquarters, effective management or stable establishment here to which the payment is to be attributed and which have or should have organized accounting;".

Paragraph a) of n. 2 of article 101 of the CIRS provides that in the case of income referred to in article 71, the withholding at source provided therein falls to "Entities owing the income (...)". In turn, article 98 of the statute cited provides that: "In the cases provided for in articles 99 to 101, the entity owing the income subject to withholding at source, the registering or depository entities, as the case may be, are required, at the time of payment, maturity, even if presumed, of its being made available, of its liquidation or the determination of the respective amount, as the case may be, to deduct therefrom the amounts corresponding to the application of the rates provided therein as payment on account of the tax relating to the year in which such acts occur." And also as per n. 3 of article 98 of the CIRS "The amounts withheld under articles 99 to 101 must be remitted by the 20th day of the month following that in which they were deducted."

In this sense, the taxable person is obliged to effect the withholding at source on the date of making available the advances on account of profits, at the rate in force on the date of such operation. In the present case, the reference date should be December 31, 2015, the date indicated in the supporting accounting document (Annex VI, p. 03), which is signed by the partner and manager of the company, the value of which amounts to €60,000.00, whereby this amount, in accordance with the provision of n. 4 of article 6 of the CIRS, is presumed to have been made as advances on account of profits.

Withholding at Source for the Year 2015

By the description given throughout this chapter, the taxable person was obliged, by the posting to the partner and manager, characterized as an advance on account of profits, to effect withholding at source at the rate of 28% of the amount posted, whereby it should, by January 20, 2016, withhold and remit the IRS in the amount of €16,800.00 (60,000.00 x 28%).

With this conduct, the taxable person violated, among others, articles 5, 6, 71, 98, 99, 101 all of the CIRS."

e) The Claimant was notified, by letter no. ... of 30.01.2018, sent by registered mail (CTT registration RD ... PT) of the aforementioned Draft Tax Inspection Report and, if it wished, to exercise the right to prior hearing, which it did in terms set out in document no. 3 attached to the request for arbitral pronouncement and which is here given as fully reproduced. [cf. PA]

f) The Claimant was notified, by letter no. ... of 16.03.2018, sent by registered mail (CTT registration RH ... PT), of the Tax Inspection Report, which is here given as fully reproduced, from which the corrections above stated in fact proven d) resulted, with the reasoning that was also mentioned there, the argumentation put forward by the Claimant, in the exercise of the right to prior hearing, having received the following appreciation: [cf. PA and document no. 2 attached to the request for arbitral pronouncement]

"2.3 IRS

As reported in chapter III.3 of the Report, during the inspection actions a debit movement was found in account 2789003 — B..., in the amount of €60,000.00, by credit from account 111-Cash A — Annex VI of this Report.

It is further stated that account 2789003 — B..., is held by the partner and manager of the company under analysis, B..., whereby the accounting movement made, in the amount of €60,000.00, configures an advance on account of profits, under n. 4 of art. 6 of the CIRS, being this taxation duly supported and framed in law, as is extensively justified in chapter III.3 of this report.

Indeed, this is a rebuttable presumption, as listed in point 74 by the party in question, but which does not refute at all, as would be incumbent upon her, limiting herself to stating, in that same point, "(...) the nature of such posting could be justified (...)".

It is not the AT's responsibility to provide proof of demonstrations of intent contrary to what the party in question states in point 76, nor is it necessary for there to be resolutions in the sense of profit distribution in a general meeting, as stated in point 77, because in this context, the tax act inherent to profit distribution would be direct and immediate. Consequently, the figure of the presumption, provided for in the norm that was applied (n. 4 of art. 6 of the CIRS), would not have a place in law.

On the other hand, in point 82, reference is made to a judgment of the Central Administrative Court of the South, but the said judgment applies only to the case examined.

In this sense, the correction should be maintained."

g) Subsequently, the Claimant was notified of the assessment of Personal Income Tax withholding at source No. 2018..., relating to the tax year 2015, in the amount of €16,800.00 and the respective assessment of compensatory interest No. 2018..., in the amount of €1,439.73, resulting in a total amount payable of €18,239.73, with a payment deadline of 07.05.2018. [cf. document no. 1 attached to the request for arbitral pronouncement]

h) On 07.05.2018, the Claimant made the full and timely payment of the aforementioned amount of €18,239.73. [cf. document no. 4 attached to the request for arbitral pronouncement]

i) In the year 2015, on specific date(s) not determined and by means equally not determined, the transfer of the amount of €60,000.00 from the Claimant to its partner and manager B... occurred.

j) In the Claimant's accounting, recorded with the date of 31.12.2015, there is a debit movement in the account "2789003 – B...", to which corresponds a credit movement of the "account 111 – Cash A", in the amount of €60,000.00, the respective supporting accounting document being a "posting notice," dated 31.12.2015, with the description "Loan from the company to partner B...", in the amount of €60,000.00, signed by B... (Journal 4; doc. 749; description: invoice). [cf. PA and document no. 5 attached to the request for arbitral pronouncement]

k) In the Claimant's accounting, for reference to the year 2015, no loan contract from the company to its partners is recorded, namely to its partner and manager B..., nor is this mentioned in the management reports and financial statements of the Claimant.

l) During the year 2015 and until December 31 of that year – the date on which the accounting records referred to above in fact proven j) were made – the Claimant's accounting never reflected the existence of any loan to the partners.

m) The private document called "Loan Contract" that constitutes document no. 6 attached to the request for arbitral pronouncement and which is here given as fully reproduced, was not delivered or shown by the Claimant to the tax inspection during the execution of the aforementioned inspection action.

n) On 13.07.2018, a bank transfer was made by the company "C... SGPS, S. A.", debited from its account no. ..., domiciled at "D...", to the account (IBAN) no. PT50..., held by the Claimant, in the amount of €50,000.00, with the following "Transfer Description: Loan from C... SGPS, SA". [cf. document no. 7 attached to the request for arbitral pronouncement]

o) On 07.05.2018, a bank transfer was made by the company "C... SGPS, S. A.", debited from its account no. ..., domiciled at "E...", to the account (IBAN) no. PT50..., held by the Claimant, in the amount of €3,000.00, with the following "Debit Account Description: loan to IS" and "Credit Account Description: loan from C... SGPS, SA". [cf. document no. 7 attached to the request for arbitral pronouncement]

p) On August 28, 2018, the Claimant filed the request for establishment of an arbitral tribunal that gave rise to the present proceedings. [cf. case management information system of CAAD]

§2. Facts Not Proven

With relevance for the appreciation and decision of the cause, the following facts were not proven:

a) Between the Claimant and its partner and manager B... was concluded the "Loan Contract" that constitutes document no. 6 attached to the request for arbitral pronouncement and which is here given as fully reproduced.

b) The bank transfers referred to in facts proven n) and o) were intended to reimburse the Claimant for the amount referred to in fact proven i).

§3. Reasoning Regarding Factual Matters

The facts pertinent to the judgment of the cause were selected and delineated according to their legal relevance, in light of the plausible solutions of the legal questions, in terms of the combined application of articles 123, n. 2, of the CPPT, 596, n. 1 and 607, n. 3, of the CPC, applicable ex vi article 29, n. 1, paragraphs a) and e), of the RJAT.

The conviction of the Tribunal was based on the facts put forward by the Parties, whose adherence to reality was not challenged, and on the critical analysis of the documentary evidence contained in the case file, including the administrative procedure, all as referred to regarding each of the probative items.

With respect to the facts not proven, it is further appropriate to state that they were so considered due to the absence of any probative means that would confirm them. Furthermore, with respect to the aforementioned "Loan Contract," in addition to the same not complying with the respective legal requirements, most notably regarding the requirements of form – to which reference will be made below – its alleged conclusion is rejected by the confrontation with facts proven j), k), l) and m), which make implausible the actual and real conclusion of such contract, that is, that the same embodies/documents any loan from the Claimant to its partner B...; indeed, if such had occurred, the Claimant's accounting would certainly reflect it – instead of containing merely a "posting notice" which, moreover, would then become unnecessary – and even more certain would be its exhibition/delivery to the tax inspection, in the course of the aforementioned inspection action.

On the other hand, regarding the aforementioned bank transfers, although the Claimant alleges that the same were intended to reimburse the aforementioned amount of €60,000.00 that was transferred to its partner B..., the fact is that, on the one hand, nothing in the case file permits the conclusion regarding the intervention of the company "C... SGPS, S. A." in the specific situation in question, and on the other hand, the descriptive details of the bank transfers made to the Claimant refer to loans to the Claimant itself (cf. facts proven n) and o)); now, if it were a matter of the alleged reimbursement, the normal thing would be for such descriptive details, instead of saying what they say, to say precisely that, that is, that the transfers were intended to carry out such reimbursement.

III.2. LEGAL MATTERS

§1. Delimitation of the Object

As was proven, in the course of the year 2015, the amount of €60,000.00 was transferred from the Claimant to its partner B..., on specific date(s) and by means not precisely determined (cf. fact proven i)).

The AT seeks to make the presumption established in article 6, n. 4, of the IRS Code prevail and, in that sense, argues that the transfer of that value should be considered an advance on account of profits.

The Claimant, in turn, alleges that the aforementioned transfer of value had an underlying loan made by it to its aforementioned partner and manager and, in that measure, understands that the requirements for applicability of said legal presumption are not met.

Thus, the question of merit submitted to this Tribunal's appreciation concerns, essentially, the application to the specific case of the presumption resulting from article 6, n. 4, of the IRS Code, with a view to determining whether the disputed tax act suffers from the pointed defect of breach of law, due to error regarding the factual and legal presuppositions.

The Claimant also raises the defect of lack of reasoning on the grounds that, in the RIT, the AT did not prove, "as it had the legal duty to do, clearly, unequivocally and with reasoned grounds, that this posting [to which fact proven j) relates] is presumed to have been made as an advance of profits."

The Tribunal is further called upon to pronounce itself on the requests for reimbursement of the amount of tax paid and payment of indemnifying interest.

§2. On the Application of the Presumption of Article 6, n. 4, of the IRS Code

Article 5, n. 1, of the IRS Code[1], headed "Capital Income," provides that "capital income" shall be understood as "fruits and other economic advantages, whatever their nature or name, whether monetary or in kind, arising, directly or indirectly, from elements of assets, property, rights or legal situations of a movable nature, as well as from the respective modification, transmission or cessation, with the exception of gains and other income taxed in other categories."

Number 2 of the same article provides that the "fruits and economic advantages referred to in the foregoing number include, in particular," among others, "profits and reserves made available to associates or holders and advances on account of profits, with the exception of those referred to in article 20" (paragraph h)).

The subsequent article 6, ruling on presumptions relating to category E income, establishes the following in its n. 4: "Postings to its favor, in any current accounts of partners, recorded in commercial or civil companies in commercial form, when they do not result from loans, provision of work, or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits."

Number 5 of the same article 6 provides that the "presumptions established in this article may be rebutted based on judicial decision, administrative act, declaration of the Bank of Portugal, or recognition by the Tax and Customs Authority."

With relevance to the situation sub judice, it is also important to invoke the following norms of the IRS Code:

• article 7, n. 1 ("Income referred to in article 5 is subject to taxation from the moment it becomes due, if maturity is presumed, it is made available to its holder, it is liquidated or from the date of determination of the respective amount, as the case may be") and 3, paragraph a), 2) ("For purposes of the provision of n. 1, regard is had: a) as to n. 2 of article 5: (...) 2) The making available, for the income referred to in paragraphs h), i), j), l) and r), as well as consignment certificates");

• article 71, n. 1, paragraph a) ("The following are subject to withholding at source as a final tax, at the liberatory rate of 28%: a) Capital income obtained in Portuguese territory, by residents or non-residents, paid by or through entities having headquarters, effective management or stable establishment here to which the payment is to be attributed and which have or should have organized accounting");

• article 98, n. 1 ("In the cases provided for in articles 99 to 101 and in others established by law, the entity owing the income subject to withholding at source, the registering or depository entities, as the case may be, are required, at the time of payment, maturity, even if presumed, of its making available, of its liquidation or the determination of the respective amount, as the case may be, to deduct therefrom the amounts corresponding to the application of the rates provided therein as payment on account of the tax relating to the year in which such acts occur");

• article 101, n. 2, paragraph a) ("In the case of income referred to in article 71, the withholding at source provided therein falls to: a) Entities owing the income referred to in numbers 1 and 4 and in paragraph c) of n. 12 of article 71").

Having made this regulatory summary, let us now focus on the analysis of the aforementioned presumption established in article 6, n. 4, of the IRS Code.

From a doctrinal perspective, we have, first and foremost, José Guilherme Xavier de Basto (IRS: Real Incidence and Determination of Net Income, Coimbra, Coimbra Editora, 2007, pp. 338 to 340) who states as follows:

"The provision of presumptions derives from the very nature of capital income, some of which are relatively easy to conceal. Thus, in certain cases, the law presumes the existence of such income, (...).

In any case, intended to prevent fraud, these presumptions, besides being rebuttable, are a limited set, as is proper for a tax aimed at taxing real and actual income.

They are restricted to those, very few, cases in which there is risk of concealment of income.

(...)

Finally, in n. 4, it is presumed that amounts recorded in any accounts of partners of commercial or civil companies in commercial form, which do not result from loans, provision of work or exercise of corporate office, correspond to profits or advances on account of profits. (...) With this presumption, a supplementary qualification of amounts is carried out, whose cause is not expressly stated in the current accounts in question. (...) What the law, with that presumption, sought to resolve was the qualification of amounts recorded whose legal "cause" was not expressly declared."

In turn, Rui Duarte Morais (On IRS, Coimbra, Almedina, 2006, p. 89) states as follows:

"Aimed at facilitating the burden of proof of the existence of the tax event by the administration, the law establishes, in art. 6, various legal presumptions, both regarding the existence of the fact generating the tax (...), and regarding the existence of income (...), and regarding the amount of taxable income (...).

These presumptions are rebuttable – in accordance with the general rule contained in art. 73 of the LGT – pursuant to n. 6 of art. 6."

On the same matter, Paula Rosado Pereira (Manual of IRS, Coimbra, Almedina, 2018, pp. 113 and 144) states that "the legislator considered it impossible to forego the adoption of some presumptions regarding capital income. Among the reasons underlying the use of such presumptions is the difficulty encountered by the AT, given the specific nature of the income of this category, in ensuring the efficiency of taxation. The presumptions serve the function of facilitating the AT's proof regarding the existence of certain income and the respective quantification.

(...)

For the rebuttal of the presumption to occur, it is necessary that, by any of the forms (...) referred to [in article 6, n. 5, of the IRS Code], facts, conditions, or interest rates different from those that would result from the application of the presumption be proven."

From a jurisprudential perspective, there are various decisions handed down on this subject, with the following deserving particular mention:

(i) Constitutional Court

Judgment No. 452/2003, of 14.10.2003, handed down in case No. 273/03:

"(...) the presumption established in n. 4 of article 7 of the CIRS, in the version prior to Law No. 30-G/2000, is not an irrebuttable presumption. Evidence of this is the fact that n. 5 of the same article comes to define the means by which such presumption may be rebutted. And the circumstance that among those means are not all "means admitted in Law" does not convert the presumption into a presumption juris et de jure. The latter is a presumption established without the possibility of contrary proof (cf. Pires de Lima and Antunes Varela, Civil Code Annotated, vol. I, 4th ed., Coimbra, 1987, pp. 312-313; J. de Oliveira Ascensão, Law. Introduction and General Theory, 6th ed., Coimbra, 1991, p. 526). Manifestly, this is not what occurs in the case in question, in which the rebuttal of the presumption can be achieved through a broad and diversified set of means: judicial decision, administrative act, declaration of the Bank of Portugal, recognition by the Directorate-General of Taxes.

In fact, this set of probative means at the disposal of the challenger is sufficiently broad that it cannot be said that there is a disproportionate or unreasonable restriction of instruments of proof, capable of, in practice, converting a presumption juris tantum into a presumption juris et de jure. Moreover (...), the guarantee of access to Law and to the courts provided for in article 20 of the Constitution does not contemplate the possibility of unrestricted use of all means of proof in any judicial proceeding (in this case, in a proceeding to challenge the tax assessment), nor does it prohibit the legislator from restricting the use of certain probative instruments, provided that such restriction is not configured as disproportionate or unreasonable. Now, (...) the challenger may have at his disposal a judicial decision (in which the claimant can use all means of proof generally admissible), an administrative act, a declaration of the Bank of Portugal, or recognition by the Directorate-General of Taxes, all probative means suitable for proceeding to challenge a tax assessment judicially. Finally, given the possibility of rebuttal of the presumption defined in n. 4 of article 7 of the CIRS, the constitutional principle of taxable capacity is not set aside (...)."

(ii) Supreme Administrative Court

Judgment of 15.12.2004, handed down in case No. 01187/04:

"The judicial decision, handed down in proceedings to challenge a judicial decision, according to which the taxpayer did not receive interest in a loan contract in which he was the lender, constitutes sufficient basis for rebuttal of the presumption contained in art. 7, n. 5, of the C.I.R.S."

In the reasoning of the decision, it may be read:

"Article 7, n. 2, of the CIRS provides that it is presumed that loans are remunerated.

In turn, n. 5 of this legal provision establishes that this presumption may be rebutted based on a judicial decision, administrative act, declaration of the Bank of Portugal, or recognition of the General Directorate of Taxes.

This legal provision finds its parallel in the previous art. 14 of the C. of Capital Income Tax which, in addition to establishing an identical presumption, prescribed that the same could only be rebutted "by judicial decision handed down in an action brought by the taxpayer against the State, in which it is declared to have been proven that interest was not received in advance, nor were or are due, or, being due, have a different rate, or by a declaration issued by the Bank of Portugal in which it confirms the actual interest rate practiced or its non-existence".

From the confrontation of these legal provisions results, first of all, that it is now not necessary, as it was, a judicial decision handed down in a civil action brought by the taxpayer against the State, with a view to rebuttal of such presumption.

Thus, nothing prevents the judicial decision to which art. 7, n. 5, of the CIRS now alludes from being handed down, as it was in this case, in judicial review proceedings.

On the other hand, from such confrontation it also results that, as not being provided, in the previous regime, any limitation as to the means of proof of which the interested party could make use for such purpose, it is not seen, in light of the current legal framework, that the process of formation of said judicial decision cannot be supported, (...), on witness testimony and/or documentary evidence."

(iii) Central Administrative Court South

Judgment of 13.10.2009, handed down in case No. 03221/09:

"I) Only postings made in a partner's account (and which are not proven to relate to alleged loans) are presumed, in light of the provision in n. 4 of art. 7 of the CIRS, to have been made as profits or advances on account of profits.

II) Concluding that the postings made in partners' current accounts do not result from loans, provision of work, or exercise of corporate offices, the same must be taken, presumptively, as having been made as profits or advances on account of profits (n. 4, in fine, of art. 7 of the CIRS).

III) The presumptions established in this legal provision may be rebutted based on a judicial decision, administrative act, declaration of the Bank of Portugal, or recognition by the Directorate-General of Contributions and Taxes."

Judgment of 11.01.2011, handed down in case No. 04357/10:

"III) Only postings made in a partner's account (and which are not proven to relate to alleged loans) are presumed, in light of the provision in n. 4 of art. 7 of the CIRS, to have been made as profits or advances on account of profits.

IV) Concluding that the postings made in partners' current accounts do not result from loans, provision of work, or exercise of corporate offices, the same must be taken, presumptively, as having been made as profits or advances on account of profits (n. 4, in fine, of art. 7 of the CIRS).

V) The presumptions established in this legal provision may be rebutted based on a judicial decision, administrative act, declaration of the Bank of Portugal, or recognition by the Directorate-General of Contributions and Taxes."

Judgment of 04.06.2015, handed down in case No. 07246/13:

"1- For the presumption contained in n. 4 of art. 7 of the CIRS (in force in 2000) to be able to function, it is necessary that the basis of the presumption be shown to be proven (...), on pain of the same not being able to operate and the cause having to be decided against the party burdened with that burden of proof, that is, that the amount in question was recorded as a posting in the partner's respective current account and that it did not result from a loan, provision of work, or exercise of corporate offices.

2- Such proof falls to the Tax Administration."

Judgment of 05.02.2015, handed down in case No. 08216/14:

"5. Article 5, n. 2, paragraph h), of the C.I.R.S., systematically inserted in the category of capital gains (norms of real incidence), provides as income from capital subject to the scope of I.R.S. profits, including the advance on account of profits, made available to the respective associates.

1. In turn, article 7 of the C.I.R.S. defines the moment of subjection to taxation of capital income, that is, the moment at which the tax becomes due.

2. Article 6, n. 4, of the C.I.R.S. establishes a presumption relating to capital income, to the effect that amounts recorded in any accounts of partners of commercial or civil companies in commercial form, amounts that do not result from loans, provision of work, or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits.

3. The facts index have not been gathered that permit the Tax Administration to frame recorded accounting values as category E income, made available to partners, in accordance with the provision in article 5, nn. 1 and 2, paragraph h), of the C.I.R.S., when it cannot avail itself of the presumption provided for in article 6, n. 4, of the C.I.R.S."

Judgment of 18.02.2016, handed down in case No. 08760/15:

"5. Article 5, n. 2, paragraph h), of the C.I.R.S., systematically inserted in the category of capital gains (norms of real incidence), provides as income from capital subject to the scope of I.R.S. profits, including the advance on account of profits, made available to the respective associates.

1. Article 6, n. 4, of the C.I.R.S. establishes a presumption relating to capital income, to the effect that amounts recorded in any accounts of partners of commercial or civil companies in commercial form, amounts that do not result from loans, provision of work, or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits. With this presumption the legislator sought to resolve the qualification of amounts recorded in partners' current accounts, whose legal "cause" had not been expressly declared, thus leading to such amounts being treated as distributed profits. We are, therefore, faced with a legal presumption (established expressly and directly in law), being incidental to the tax-generating event.

2. Being in question the claimed rebuttal of a legal presumption relative (iuris tantum), the burden was upon the challenger and now appellant to produce proof to the contrary (cfr. article 350, n. 2, of the Civil Code), that is, to develop probative action directed against the casuistic fact presumed, with the objective and in such a manner as to convince the adjudicator that, notwithstanding the occurrence of the fact (postings in partners' current accounts, recorded in commercial companies) that serves as the basis for the functioning of the presumption invoked, the presumed fact did not occur and/or the presumed right does not exist. Furthermore, given that the presumption provided for in article 6, n. 4, of the C.I.R.S. is involved, by virtue of the express provision in n. 5 of the same norm, the inescapable necessity that the same can only be rebutted by the four means of proof therein, taxatively, provided, a judicial decision, administrative act, declaration of the Bank of Portugal, or recognition by the Directorate-General of Taxes, establishing law specific probative procedure for such purpose in article 64 of the C.P.P.T."

(iv) Central Administrative Court North:

Judgment of 07.07.2016, handed down in case No. 00446/11.9BEBRG:

"I - Article 5, n. 2, paragraph a), of the CIRS, systematically inserted in the category of capital gains (norms of real incidence), provides as capital income subject to the scope of IRS profits, including the advance on account of profits, made available to the respective associates.

II - Article 6, n. 4, of the CIRS establishes a presumption relating to capital income, to the effect that amounts recorded in any accounts of partners of commercial or civil companies in commercial form, amounts that do not result from loans, provision of work, or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits.

III - Only postings made in a partner's account (and which are not proven to relate to alleged loans) are presumed, in light of the provision in n. 4 of article 6 of the CIRS, to have been made as profits or advances on account of profits.

(...)

V - It fell to the Tax Administration to prove the presuppositions of its action (cfr. article 74, n. 1, of the LGT), (...)."

(v) CAAD:

Judgment of 14.06.2013, handed down in case No. 130/2012-T:

"On the central question: application of the presumption of art. 6, n. 4, of the CIRS

With respect to the central question – the application of the presumption contained in article 6, n. 4 of the CIRS, as well as to know whether the same was affected by the existence of an alleged loan contract – one must pay attention, first of all, to the tenor of the aforementioned regulatory provision: Postings in any current accounts of partners, recorded in commercial or civil companies in commercial form, when they do not result from loans, provision of work or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits.

In the present case, the only means invoked by the Claimant to the effect of not applying the presumption was to allege that the postings in the accounts of its partners derived from a loan contract (not being, thus, a matter of provision of work or exercise of corporate offices).

In turn, n. 5 of the same article provides on how the referred presumption may be rebutted: based on a judicial decision, administrative act, declaration of the Bank of Portugal, recognition by the Directorate-General of Taxes [today the Tax and Customs Authority].

The presumption not having been rebutted by any of the indicated means, it remains to verify whether the taxable person proved the existence of the alleged loan, without having been provided by the Claimant itself with any explanation for the alleged disappearance of such an important document as would be the original of a loan contract, having limited itself to declaring, without more, that the same was lost.

Indeed, not only was the contract whose existence the Claimant alleged not physically presented – to the inspectors only an alleged copy was sent by electronic mail and belatedly – but also was it declared lost, in the hearing, the party statement, accepted in accordance with article 16, paragraph c), of Decree-Law No. 10/2011 of January 20, having failed to convince the Tribunal of the existence of the contract.

Added to this, in the sense of the non-existence of any loan contract, are the facts verified in the course of the inspection that the Tribunal considered proven, to be recalled: (1) non-existence of a corporate resolution due to the non-existence of any minutes relating to the loans; (2) the absence of mention of the corrective character of the postings made; (3) the non-declaration by the partner manager of the Claimant and by its tax technician, at the time of the inspection, of the respective existence.

Indeed, it is to be added that from the analysis of the text transmitted as being that of the loan contract, various omissions and incongruencies result that make impossible that the same can be considered a true loan contract capable of making the application of the presumption of n. 4 of art. 6 of the CIRS fail. Indeed: (1) the capacity of manager was not invoked by the signatory, as is required by article 260, n. 4 of the Commercial Companies Code; (2) authentication of the signature did not take place; (3) the payment of stamp tax did not take place at the time of execution of the contract; (4) the contract, if it had been executed, should have been by public deed (article 143 of the Civil Code), form which is a requirement ad substantiam and, for this reason, to its non-observance the general rule of article 364 of the same Code must be applied, with the consequence that the failure to comply imports the invalidity of the contract, as provided for in article 219.

(...) For these reasons, it is not possible to invoke article 75 of the General Tax Law in the sense of the authenticity of the document, and it is further added that the same does not appear in the documentation of the company, nor in the books, nor in the accounting.

All seen, there must be concluded the non-existence of a loan contract concluded between the Claimant and its partner manager, which means that to the postings made by the latter in the current accounts of its partners the presumption of the already identified n. 4 of art. 6 of the CIRS must be applied. Hence the amounts in question being taxable in IRS, by virtue of articles 5 n. 1 and 2 paragraph h) and 6 n. 4, and subject to withholding at source, in accordance with articles 71 n. 1 paragraph c) and 98 of the same Code and, given the provision in article 7 n. 3 paragraph a) s/n. 2 of the same Code - which, in the temporal aspect of the objective presupposition, establishes the making available as the relevant moment for subjection to taxation - the dates for taxation, in the case sub judice, are the dates on which the postings of the amounts were made in the accounts of the partner manager, and with the rates then in force."

Judgment of 25.06.2013, handed down in case No. 131/2012-T:

"The application of the presumption provided for in article 6-4 of the CIRS

Article 6-4 of the CIRS provides:

Postings in any current accounts of partners, recorded in commercial or civil companies in commercial form, when they do not result from loans, provision of work, or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits.

Presumptions are the inferences that the law or adjudicator draws from a known fact to affirm an unknown fact – art. 349 of the Civil Code (CC).

Whoever has a legal presumption in his favor is spared from proving the fact to which it conducts – n. 1 of art. 350 of the CC.

It falls to the AT to demonstrate the existence of the facts (postings in any accounts of partners) that lead to the presumption that it is a matter of profits or advances of these, taxable under IRS [capital income of category E – articles 5-1 and 2/h) and 7-1 and 3 – n. 2/a), of the CIRS].

And it falls to the challenger to demonstrate that the postings result from loans, provision of work, or exercise of corporate offices to justify, in particular, the non-fulfillment of the tax obligation to withhold IRS at source [arts 71-1/c) and 98-3, of the CIRS]

Subsumption

In this case, such postings or credits in favor of the partner of the respondent company are demonstrated, (...).

The respondent, to justify the non-withholding at source, sought to demonstrate that the postings and amounts provided to the aforementioned partner occurred in execution of a loan contract, concluded on 1-2-2002, in writing, between the respondent (...) and a partner of the same name.

This "contract," only in the form of a photocopy, was presented to the Tax Inspection after some insistence.

The original of such a document was not presented, the omission having been justified by the loss of that title.

Now, it being a matter of a loan, the respective proof was subject to form: either a public deed or a document signed by the borrower – article 1143 CC.

Only the commercial loan between merchants permits – which is not the case of the case file in which only the alleged lender has that status -, any kind of proof, whatever the value – article 396 of the Commercial Code.

That is: even if the original of the alleged contract had been exhibited – and only thus could the necessary burden be complied with (and not by mere photocopy), it could not be considered proven the existence and subsistence of such a contract once the lack of legal form imports the nullity of the legal transaction – article 220 of the CC.

In the case and given the alleged lent amounts – exceeding €20,000 – only a public deed would meet this probative requirement.

Thus it is that, the loan not being proven nor any other valid basis for considering the presumption provided for in article 6-4 of the CIRS rebutted, what must necessarily and legally prevail is the reality expressed by the accounting and which demonstrates that, at various times in 2010 (the most significant reported to 1-12-2010) and 2011, postings were made as credit, in partners' current accounts, of various amounts (totaling the overall amount determined and which was the object of the assessments sub judicio).

Judgment of 06.01.2014, handed down in case No. 165/2013-T:

"The Respondent understands that the Loan Contract does not meet the formal requirements demanded by article 1143 of the Civil Code, for which reason it is not valid. Thus, it considers that we are dealing with advances of profits, which should have been taxed in IRS.

It is true that, in accordance with the provision of article 1143 of the Civil Code, a loan of value exceeding €25,000 is only valid if executed by public deed and one of value exceeding €2,500 if executed by a document signed by the borrower. It follows in article 294 of the Civil Code that legal transactions concluded against the provision of an imperative character, as is the case, are null.

Nullity, in accordance with the provision of article 286 of the Civil Code, is invocable at any time by any interested party and may be declared motu proprio by the court. The declaration of nullity has retroactive effect, in accordance with the provision of n. 1 of article 289 of the Civil Code, and everything that was provided must be refunded.

Indeed, (...), we are dealing with a matter of civil law, whereby, in accordance with the provision of n. 2 of article 11 of the LGT, the tax norms under analysis must be interpreted by resorting to the terms proper to this area of law. On the other hand, tax law, or the application made of it, cannot create regulatory provisions different from those existing in the proper statutes.

In other words: the Civil Code provides that loan contracts that do not comply with the requirements of form legally established are null, not being able to produce any effects, with everything provided being refunded (the borrower must refund the value received and the lender must refund any interest received). This is the sanction legally provided for non-compliance with the formal requirements associated with a loan contract. Fundamentally, the law determines that it is as if the loan contract never existed, with both the contract and its effects disappearing from the legal order.

This is the only consequence of non-compliance with the formal requirements provided for in law. It does not follow, however, from the law, that consequences other than those provided by law can arise from a null loan contract. And thus, the tax law cannot be applied in the sense of drawing consequences different from those legally provided from non-compliance with this formality. That is, if the loan contract is null due to lack of form, it can be determined that refund of what was provided is necessary, but it cannot be considered that from the invalidity it results that the amounts paid under the contract have a nature other than that of a loan.

Thus, it must be concluded that the fact that the formalities in the execution of the loan contract were bypassed cannot have as a consequence that the contract did not exist and, therefore, we are dealing with a different reality – in the case, an advance on account of profits. And if, given the nullity of the contract, the parties are obliged to refund what they received, it could, at the limit, be understood that the same should occur in this case, the partner-manager being obliged to refund the values recorded in the afore-identified account, but it cannot be considered that, due to non-compliance with the formalities that are associated with the execution of this type of contract, the operation substantially practiced (a loan) should be qualified differently.

It is true that, in accordance with the provision of n. 4 of article 36 of the LGT, "The qualification of the legal transaction made by the parties, even in an authentic document, does not bind the tax administration." On the other hand, it is also appropriate to mention n. 1 of article 74 of the LGT, in accordance with which the burden of proof of the facts constituting rights falls upon whoever invokes them, as well as to mention n. 1 of article 75 of the same statute, in accordance with which the records of the accounting of taxpayers are presumed to be true and made in good faith, when carried out in accordance with the legislation on taxation and commerce. This presumption does not occur when one of the circumstances provided for in n. 2 of article 75 of the LGT – which is not the case.

Furthermore, in accordance with the provision of article 293 of the Civil Code, "The null or avoided transaction may be converted into a transaction of a different type or content, of which it contains the requirements of substance and form, when the purpose pursued by the parties permits the supposition that they would have wanted it, if they had foreseen the invalidity." Thus, at the limit, it could be considered that we are dealing with a promissory contract of a loan, which would not have to comply with the requirements of form, in accordance with the provision of n. 1 of article 410 of the Civil Code. Thus, the payments would be made on account of a definitive loan contract, to be concluded on a date to be indicated.

It is also worth noting that the recording of the amounts paid to the partner was made in account 268, which is an account of Shareholders/Partners – Other Operations. Usually, operations with partners that are not advances of profits, attributed results, or available profits are recorded in this account, among others. The credit recording reflects a payment made by the company, whereby the recording made for accounting purposes is consistent with the classification that was given to the operation.

Therefore, it is verified that the accounting recording of the movements associated with this operation, in the various tax years in question, is carried out in terms similar to that of a loan contract. Here too should be mentioned the provision of n. 1 of article 75 of the LGT, that is, given that the Claimant's accounting has not been questioned, it should be considered that the same reflects the reality of the facts – and, therefore, that a loan contract was indeed concluded between the Claimant and the partner-manager.

In sum, it is verified that the assessments issued have as their only basis the failure by the Claimant to comply with the formalities associated with the execution of the loan contract. However, such basis is merely formal. Number 4 of article 6 of the Personal Income Tax Code established a presumption to the effect that "postings in any current accounts of partners, recorded in commercial or civil companies in commercial form, when they do not result from loans, provision of work, or exercise of corporate offices, are presumed to have been made as profits or advances on account of profits." Presumptions can be rebutted, in accordance with the provision of n. 2 of article 351 of the Civil Code, which was verified in this case – the Claimant presented the Loan Contract concluded with the partner