Process: 416/2017-T

Date: March 15, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 416/2017-T) addresses fundamental questions about the hierarchy of Portuguese tax law sources and whether administrative circulars can override statutory tax benefits. Grupo A... SGPS challenged an IRC assessment of €83,680.33 for fiscal year 2013, arguing that the Tax Authority unlawfully applied Circular 7/2004 methodology instead of respecting the regime established in Article 32(2) of the Tax Benefits Statute (EBF). The central legal dispute concerns whether DSIRC circulars constitute binding law when calculating IRC deductions for SGPS holding companies. The claimant contended that Circular 7/2004 violates the constitutional principle of legality in both formal terms under Articles 103(2) of the Portuguese Constitution and 8(1) of the General Tax Law, and in procedural terms under Articles 55 LGT and 266(2) CRP. The dispute originated from a tax inspection that corrected the company's treatment of financial charges, disallowing certain financing costs as tax expenses under Article 32 EBF. The Tax Authority applied Circular 7/2004 to determine non-deductible financial charges, despite the taxpayer's argument that it had not used financing for acquiring equity participations. Procedurally, the case raises critical issues regarding the burden of proof in tax correction disputes before CAAD arbitration tribunals. The company had historically applied Circular 7/2004 methodology in previous fiscal years (2010-2012) but challenged its legal basis for 2013. The arbitral tribunal must determine whether Article 32(2) EBF establishes a self-sufficient statutory regime or whether administrative circulars can legitimately supplement or modify statutory tax benefit provisions, with significant implications for corporate tax planning and SGPS taxation in Portugal.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sofia Ricardo Borges and Fernando Manuel dos Santos Cardoso, appointed by the Deontological Board of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 07 July 2017, Grupo A… SGPS, S.A., Legal Entity no. …, with registered office at Rua …, …-… …, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the act of assessment of Corporate Income Tax (Imposto sobre o Rendimento das Pessoas Colectivas) no. 2016…, of 27-07-2016, relating to the fiscal year 2013, in the amount of € 83,680.33, and of the decision on the administrative complaint no. …2016…, which was the subject thereof.

To substantiate its request, the Claimant alleges, in summary, that the requirement to apply the methodology set out in Circular no. 7/2004 of DSIRC, underlying the aforementioned assessment, is unlawful, and that the same therefore suffers from a defect of breach of law, since it does not respect the regime established by Article 32, paragraph 2, of the EBF and violates the principle of legality, both in formal terms (Articles 103, paragraph 2, of the CRP and 8, paragraph 1, of the LGT), and in procedural terms (Articles 55 of the LGT and 266, paragraph 2, of the CRP).

Further, it alleges that, in any case, it did not use any financing for the acquisition of the equity interests it held in the fiscal year in question.

On 10-07-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT (Tax Authorities).

The Claimant failed to appoint an arbitrator, and therefore, pursuant to the provisions of Article 6, paragraph 2, subsection a) and Article 11, paragraph 1, subsection a) of the RJAT, the President of the Deontological Board of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 01-09-2017, the parties were notified of these appointments and did not manifest any intention to refuse any of them.

In accordance with the provisions of Article 11, paragraph 1, subsection c) of the RJAT, the collective Arbitral Tribunal was constituted on 18-09-2017.

On 10-03-2017, the Respondent, duly notified for this purpose, submitted its response defending itself solely by way of impugn.

Taking into account the general procedural principles of procedural economy and prohibition of useless acts, pursuant to the provisions of Article 16, subsections c) and e), and Article 29, paragraph 2, both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was dispensed with, and the parties were notified to submit optional written submissions, with a deadline of 45 days after submission of the Respondent's pleadings for issuing the final decision, which deadline was extended until the expiry of the period fixed in Article 21, paragraph 1 of the RJAT.

The Arbitral Tribunal has material competence and is regularly constituted, pursuant to Articles 2, paragraph 1, subsection a), 5 and 6, paragraph 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the judgment of the case.

All considered, it is proper to issue a decision.

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

The assessment of Corporate Income Tax no. 2016… was made following the corrections carried out in the tax inspection action conducted by the Tax Inspection Services of the Finance Directorate of …, under Cover of Service Order no. OI2016….

From the respective inspection report, the following is stated, among other things:

"In the 2013 fiscal year, the net result of the period determined by Grupo A…- SGPS, SA was € 19,113,659.79.

In turn, the taxable profit declared was € 113,208.43, as shown in the following table:

"

With respect to financial charges not accepted as a tax expense, the tax inspection report states the following:

"Financial charges not accepted as a tax expense (Article 32 of the EBF): 2013 (...)

In the 2013 fiscal year, Grupo A…– SGPS, SA did not proceed, when determining the taxable profit, to disregard the non-deductible financial charges, pursuant to paragraph 2 of Article 32 of the EBF. It should be noted that, with respect to the fiscal years 2010, 2011 and 2012, Grupo A… – SGPS, SA determined the financing costs that were not relevant for tax purposes, taking into account the provisions of paragraph 2 of Article 32 of the EBF and Circular 7/2004, of 30 March.

In the following points, the financial charges borne by Grupo A…– SGPS, SA in the 2013 fiscal year, and not accepted as a tax expense, are determined in accordance with the provisions of paragraph 2 of Article 32 of the EBF."

As regards the financial charges borne by the Claimant here, relating to financings obtained, the tax inspection report (hereinafter "TIR") states the following:

"(i) Financial charges borne and remunerated liabilities

Grupo A…– SGPS, SA bore, in 2013, financial charges relating to financings obtained in the amount of € 286,593.99. These charges were recognized in the accounting records in the following accounts of the Accounting Standardization System (SNC):

These financial charges relate to interest expenses and stamp tax associated with financings obtained through the issuance of commercial paper.

In fact, on 20 June 2010, Grupo A… – SGPS, SA entered into a contract with Bank B…, SA, Tax ID … for the organization, arrangement, registration and placement of a private issuance of commercial paper. Within the scope of this contract, Grupo A…– SGPS, SA, in its capacity as issuer, launched a Commercial Paper Issuance Programme, the maximum amount of which was € 5,000,000.00. Accounting-wise, this issuance is recognized in SNC account 25117 – Financings obtained – credit institutions - bank loans – Bank B…, SA. At the beginning of the 2013 fiscal year, this account showed a (creditor) balance of € 2,000,000.00, showing a nil balance at the end of that year.

Similarly, on 15 December 2011, this company, in its capacity as issuer, entered into a contract for the organization, domiciliation, placement, subscription guarantee and paying agent of a commercial paper issuance programme with Bank C…, SA, Tax ID…. Pursuant to this contract, the maximum amount of the programme is € 10,000,000.00 and its period of validity, that is, the period during which issuances could be made, ends on 15 December 2017.

Grupo A…– SGPS, SA recognized this financing in SNC account 25112 – Financings obtained – credit institutions - bank loans – Bank C…. Its balance at the beginning of the 2013 fiscal year was creditor in € 10,000,000.00, showing on 31 December 2013 a nil balance.

Notwithstanding the fact that these two SNC accounts (25117 and 25112) showed a nil balance at the end of the 2013 fiscal year, the financial charges (financing costs) borne by Grupo A…– SGPS, SA in that fiscal year relate to these two commercial paper issuance programmes.

By analysis of the accounting records and respective supporting documents, the existence of a loan obtained from Banking Institution D… (D…) was also verified, reflected in SNC account 25114 - Financings obtained – credit institutions - bank loans – D…. This loan was obtained during the 2013 fiscal year and at the end of that year its value was € 600,000.00."

Regarding the loans granted, the TIR states the following:

"(ii) Loans granted with remuneration and other investments generating interest

With respect to loans granted, loans granted to some of its subsidiary companies were reflected in the accounting records of Grupo A… – SGPS, SA, in a total amount in 2013 of € 695,456.54.

However, no remuneration (financial income) associated with these loans granted was recognized. As stated above, in the 2013 fiscal year, there are no remunerated loans granted, as well as other investments generating interest."

In the TIR, regarding investments in subsidiary and associated companies, it further states that:

"(iii) Cost of acquisition of shares in capital

In accounting, in its individual accounts, for investments in subsidiaries and associates, Grupo A…- SGPS, SA adopted the Equity Method (MEP) provided for in Accounting Standard and Financial Reporting Standard (NCRF) 13 – Interests in joint ventures and investments in associates and in NCRF 15 – Investments in subsidiaries and consolidation.

According to this method, the investment is initially recognized at cost and subsequently adjusted based on changes occurring, after acquisition, in the investor's share of the net assets of the investee (NCRF 13, § 4 and NCRF 15 § 4).

With respect to the financial interest held in E…, SA, Tax ID…, although the percentage of interest is 10.00%, the company also adopted the MEP in the measurement of this financial investment.

The financial interests held by Grupo A…- SGPS, SA are recorded in SNC account 41 – Financial investments. The cost of acquisition of the shares held by the company at the end of the 2013 fiscal year amounts to € 153,252,150.51, as reflected in its accounting records. The following table presents the respective cost of acquisition of the financial interests of Grupo A… - SGPS, SA.

"

As for acquisition costs, it was written in the TIR that:

"(iv) Asset at acquisition cost

In determining the asset at acquisition cost, the gross values of the asset should be considered, thus disregarding adjustments resulting from the application of the equity method to financial investments, accumulated depreciation and amortization and impairment losses, as provided for in Information no. 880/2008 of DSIRC, of 28 February.

In the 2013 fiscal year, the asset at acquisition cost amounts to € 154,052,614.51, as shown in the following table:

"

In view of the foregoing, the tax inspection services made the following corrections:

"v) Determination of non-deductible financial charges: Article 32, paragraph 2 of the EBF

Taking into account the amounts of the various line items determined in the previous points, the following table presents a summary of the calculations made with respect to non-deductible financial charges, pursuant to paragraph 2 of Article 32 of the EBF.

As stated above, financing costs not accepted for tax purposes amount in 2013 to € 285,104.84. When determining the taxable profit for that fiscal year, Grupo A… - SGPS, SA did not proceed to increase any non-deductible financial charges.

For this reason, a purely arithmetic correction is proposed to the taxable profit declared by the company in 2013 in the amount of € 285,104.84. Accordingly, the corrected taxable profit is € 398,313.27.

"

The Claimant made voluntary payment of the assessment that is the subject of the present arbitration action on 26-09-2016.

The Claimant filed an administrative complaint, registered under no. …2017…, which was the subject of a dismissal order issued by the Head of Division of Tax Management and Assistance of the Large Taxpayers Unit, exercising delegated authority, on 10/04/2017, in the Administrative Complaint procedure.

A.2. Facts Established as Not Proven

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

A.3. Reasoning Regarding the Proven and Not Proven Matter of Fact

With respect to the matter of fact, the Tribunal does not need to pronounce itself on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven matter from the not proven (see Article 123, paragraph 2, of the CPPT and Article 607, paragraph 3 of the CPC, applicable ex vi Article 29, paragraph 1, subsections a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and delimited based on their legal relevance, which is established in light of the various plausible solutions to the legal issue(s) in question (see former Article 511, paragraph 1, of the CPC, corresponding to the current Article 596, applicable ex vi Article 29, paragraph 1, subsection e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of Article 110, paragraph 7 of the CPPT, the documentary evidence and the Administrative Process file attached to the proceedings, the facts listed above were considered proven, with relevance to the decision.

B. AS TO THE LAW

As mentioned above, at issue in the present proceedings is the appraisal of the legality of the act of assessment of Corporate Income Tax increased by no. 2016…, of 27-07-2016, relating to the fiscal year 2013, in the amount of € 83,680.33, and of the decision on the administrative complaint no. …2016…, which was its subject, regarding the correction made in the aforementioned assessment, relating to "non-deductible financial charges relating to equity interests", in which the provisions of Circular no. 7/2004, of 30 March, were applied, which embodies the Tax Authorities' interpretation of the provisions of Article 32, paragraph 2 of the EBF.

It is thus necessary to assess.

Article 32, paragraph 2 of the EBF, in the applicable wording, provides, among other things, that "financial charges borne with the (...) acquisition [of equity interests held for a period of not less than one year] do not contribute to the formation of taxable profit" of SGPSs, SCRs and ICRs.

In turn, Article 120 of the applicable CIRC imposes upon Corporate Income Tax payers the obligation to submit their periodic income statement as provided by law, this statement being, as a rule, the basis for the tax assessment, as provided in Article 90, paragraph 1, subsection a) of the same CIRC, and it is certain that the statement form made available contains a specific field for recording the value relating to the aforementioned provision of Article 32, paragraph 2 of the EBF, namely Table 07, which, in the case, was completed by the Claimant.

Thus, Corporate Income Tax payers to whom the provision of the Article in question of the EBF is applicable have the obligation to state in their periodic Corporate Income Tax return the amount of financial charges borne with the acquisition of equity interests held for a period of not less than one year, and cannot be exempted from such obligation by alleging, for example, that it is not possible for them to establish any direct allocation of the financial charges borne to the equity interests held.

Indeed, not only does the principle of legality not require that an expense be accepted by virtue of the difficulty or subjective impossibility of demonstrating the prerequisites upon which the law makes its deductibility depend (in this case, not having been borne with the acquisition of equity interests held for a period of not less than one year), but, in concrete terms, such difficulty would – exclusively and in the first instance – always be objectively imputable to the taxpayer who, being the one who incurs the expenses with financial charges and who determines their purpose, is the one who could demonstrate, better than anyone, whether, and which of such expenses had the purpose of acquiring equity interests held for a period of not less than one year.

Thus, regardless of the greater or lesser difficulty – or even the impossibility – subjectively in determining the relevant amount for the purposes of Article 32, paragraph 2 of the EBF, taxpayers covered by the respective provision will be obliged to state in their tax declaration an amount for this purpose – even if it is zero – and cannot be exempted from such obligation on the pretext that it is difficult, or impossible, to specify such amount.

The declared amount, will enjoy, provided that the respective prerequisites are met, the presumption of truthfulness enshrined in Article 75, paragraph 1 of the LGT, and therefore, once the amount that, in the taxpayer's judgment, is appropriate is declared, it will be the responsibility of the Tax Authorities, if they disagree with it, to produce proof that such amount is not correct, either by demonstrating a direct allocation of the financial charges borne to the acquisition of the equity interests, or by using a direct criterion – direct assessment – or by resorting to the methods of indirect taxation, in accordance with the general provisions of the LGT, provided that the respective prerequisites are met, which includes the "Impossibility of direct and exact proof and quantification of elements indispensable for the correct determination of the taxable matter of any tax" (Article 87, paragraph 1, subsection b) of the LGT).

On this particular issue, the Respondent ventures in the present arbitration proceedings that "whether in the procedural phase or in the present arbitration process, unless I am mistaken, the Claimant fails to specifically prove the destination of the financings obtained and the corresponding associated financial charges (...) Proof that would always be its responsibility.", and that "What is in fact verified is the non-compliance with its burden of proof".

However, the Respondent has no reason in this matter. Indeed, at the outset, as stated in the Award issued in case 258/2015T of CAAD, cited by the Respondent itself, "in relation to expenses duly documented (in relation to which the truthfulness of the cost is presumed for the purposes of determining taxable profit in the context of Corporate Income Tax) it is the responsibility of the Tax Administration to allege the existence of elements capable of putting such truthfulness in question, namely by the statement of objective, solid and consistent indications that translate a high probability that such documents do not represent actual transactions.".

On the other hand, what is at issue in the proceedings, while a basis for the corrections made by the Tax Authorities, to which the Tribunal is bound, is not the application of Article 23 of the CIRC, but, as has been seen, the application of Article 32 of the EBF, interpreted by Circular no. 7/2004, of 30 March. It was that provision of the EBF that was applied by the tax act now under review, and it is from the prohibition established by that same provision, in the part that prohibits the consideration of the expenses provided therein for the calculation of taxable profit, that the Tax Authorities intend to rely to sustain the correction it made, and therefore, there is no doubt, in light of the provisions of Article 74, paragraph 1 of the LGT, that it is upon this Authority that the burden of proof of the prerequisites contained in the provision of the aforementioned rule falls.

As written in the Award of the TCA-Norte of 25-05-2016, issued in case 00264/10.1BECBR:

"IV. By virtue of Article 74, paragraph 1 LGT, it is the responsibility of the Tax Administration to raise and prove the dispensability of the cost in question in order to exercise its right to correct the alleged deductions of the respective amounts as tax costs.

V. It is upon the Tax Administration that the burden of proving the existence of all the prerequisites that determined it to make corrections to what was declared by the taxpayer, and it is therefore obliged to inquire into the verification of the tax fact that it claims to have existed, through carrying out all necessary steps to discover the material truth.

VI. Thus, it is the Tax Administration that bears the burden of proof of the verification of the legal prerequisites binding its action, that is, the burden of proving that the assessment cannot be based on the elements provided by the taxpayer and that recourse to indirect methods became the only way to calculate the tax to be assessed.".

It is thus concluded that, given that the Tax Administration is taking a corrective action, it bears the burden of proof that the legal prerequisites of its action are met, pursuant to Article 74, paragraph 1 of the LGT, and that, given that a correction is merely arithmetic in nature regarding the value to be considered for the purposes of Article 32, paragraph 2 of the EBF, the burden of proof incumbent upon it consists in demonstrating what the correct value is for the purposes of the aforementioned rule, and not merely that it is not possible for it to indicate a value, or "the extreme difficulty of using, in this matter, a method of direct or specific allocation".

Now, in the case, such demonstration is not, confessedly and in any way, made, and therefore the assessment that is the subject of the present arbitration proceeding, and the administrative complaint that maintained it in the legal order, suffer, first and foremost, from error in their factual prerequisites.

Indeed, there is no evidence that the amount borne with financial charges for the acquisition of equity interests relevant for the purposes of the provision of Article 32, paragraph 2 of the EBF in question is not the amount declared by the Claimant, but the amount considered by the assessment under challenge.

Indeed, what the Tax Authorities say is that they cannot determine a value for this purpose. Now, if that is the case, as the Respondent confessedly acknowledges, a situation is created that is, if not one of insufficiency of proof, then at least one of reasonable doubt, which would always have to be resolved against the party burdened with the burden of proof.

That is to say, and in summary: once a value is declared by the taxpayer in accordance with the law, the assessment shall be made on the basis of the declaration made, as required by Article 90, paragraph 1, subsection a) of the CIRC in the applicable wording. Such assessment may only be annulled for error of fact or law, provided that the party seeking such annulment, whether it be the Tax Authorities or the taxpayer, fulfills the burden of proof incumbent upon it, which in this case means the actual demonstration (beyond any reasonable doubt) of the amount of tax to be assessed, and not – as occurs in this case with the Respondent – with the demonstration of a difficulty or even impossibility in indicating the correct amount, and subsequent application of a criterion discretionarily determined, without any legal support for that purpose.

It will not be relevant, therefore, what the subjective motivation is for the indication of a corrected amount or what calculation method was used to arrive at it. In order to proceed with the correction of a declared amount, in such terms as to imply its replacement by another, by means of a purely arithmetic correction, it becomes necessary to demonstrate, beyond any reasonable doubt, that the new amount to be considered is, in fact, the correct one.

Now, in the case, the Tax Authorities do not do so; they do not demonstrate, nor even allege, that the new amount they considered for the purposes of the tax assessment, in the matter that is relevant to the proceedings (charges relevant to the second part of Article 32, paragraph 2 of the EBF), which would justify the partial correction of the Claimant's self-assessment, is the correct one.

What the Tax Authorities did in the case was, in fact and confessedly, the application of an indirect method of determining the taxable matter, without demonstrating the verification of the prerequisites that allow recourse to the same, nor following the procedures legally imposed for this purpose.

Indeed, as written in the Award of the STA of 08/03/2017, issued in case 0227/16, "Point 7 of Circular no. 7/2004, of 30.03, of DSIRC, establishes an indirect, presumptive method of allocation of financial charges in disrespect of Articles 87 to 90 of the LGT and is therefore unlawful.".

Now, as had already been written in the Award of the TCA-Norte of 15-01-2015, issued in case 00946/09.0BEPRT:

"1. In the period of validity of paragraph 2 of Article 31 of the EBF as amended by Law no. 32-B/2002, of 30 December, the capital gains and losses realized by SGPSs through the costly transfer of equity interests, provided they are held for a period of not less than one year and also the financial charges borne with their acquisition, do not contribute to the formation of the taxable profit of the companies.

  1. The method of determination of which financial charges were borne with the acquisition of such equity interests must aim at a criterion of direct and actual allocation and not at the indirect or presumed criterion provided for in Circular no. 7/2004, of 30 March.".

Thus, in addition to suffering from error in the factual prerequisites, in that it proceeded with the application of purely technical corrections, the assessment that is the subject of the present arbitration action, in the part now under consideration, suffers from a defect of procedure and error in the legal prerequisites, by applying an indirect method of determining the taxable matter without following the procedures legally prescribed for this, and based on the prerequisites of direct assessment.

In view of all the foregoing, the arbitral application should be upheld.

The Claimant further requests that the Respondent be condemned to reimburse the tax improperly paid, plus compensatory interest, pursuant to Article 43, paragraph 1, of the LGT.

In accordance with the provisions of subsection b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim to which no recourse or impugn may be available binds the Tax Administration from the expiry of the period provided for recourse or impugn, and the latter must, in the exact terms of the success of the arbitral decision in favor of the passive subject and until the expiry of the period provided for spontaneous execution of sentences of judicial tax courts, "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been performed, adopting the necessary acts and operations for this purpose", which is in line with what is provided for in Article 100 of the LGT, applicable by virtue of the provisions of subsection a) of paragraph 1 of Article 29 of the RJAT.

Paragraph 5 of Article 24 of the Legal Regime for Tax Arbitration, which provides that "interest is due, regardless of its nature, as provided for in the General Tax Law and in the Code of Procedure and Process in Tax Matters", is nothing more than the recognition of the right to compensatory interest in the arbitration proceeding.

In the case in question, given that the illegality of the assessment act has been declared, for reasons attributable to the Tax Authorities, which performed it in violation of the law, compensatory interest is due, pursuant to Article 43, paragraph 1, of the LGT and Article 61 of the CPPT, calculated on the amount that the Claimant improperly paid.

Such interest shall be considered due from the date of improper payment until the moment of its respective reimbursement.

C. DECISION

Under these terms, this Arbitral Tribunal decides to find the arbitral application well-founded and, consequently:

  1. To annul the act of assessment of Corporate Income Tax no. 2016…, of 27-07-2016, relating to the fiscal year 2013, in the amount of € 83,680.33, and the decision on the administrative complaint no. …2016…, which was its subject;

  2. To condemn the Respondent to the restitution of the tax improperly paid, plus compensatory interest, as indicated above;

  3. To condemn the Respondent to pay the costs of the proceedings, set out below.

D. Value of the Proceedings

The value of the proceedings is set at € 83,680.33, pursuant to Article 97-A, paragraph 1, subsection a), of the Code of Procedure and Process in Tax Matters, applicable by virtue of subsections a) and b) of paragraph 1 of Article 29 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at € 2,754.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the application was entirely well-founded, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the aforementioned Regulation.

Let notice be given.

Lisbon, 15 March 2018

The Presiding Arbitrator

(José Pedro Carvalho - Reporting Arbitrator)

The Arbitrator Member

(Sofia Ricardo Borges)

The Arbitrator Member

(Fernando Manuel dos Santos Cardoso)

[1] Which include proper documentation and observance of applicable commercial and accounting rules (see Article 75, paragraph 1 of the LGT), as well as proper compliance with duties of cooperation (see Article 75, paragraph 2, subsection b) of the LGT).

[2] See Award of the STA of 23-09-2015, issued in case 0134/11, available at www.dgsi.pt, where it can be read that "It is exclusively in light of the reasoning expressed by the Tax Authorities when performing the additional VAT assessment that the legality of this tax act should be assessed.".

[3] Available at www.dgsi.pt.

[4] In this sense, see, for example, Award TCA-South of 16-01-2007, issued in case 00911/03, available at www.dgsi.pt.

[5] See point no. 7 of Circular 7/2004.

[6] It being understood that, for the application of an indirect method, which is another alternative available to the Tax Authorities and which does not require the demonstration of the effective correspondence with reality of the value resulting from the application of such method, the prerequisites must naturally be observed, the procedures followed and the corresponding distribution of the burden of proof complied with as legally provided for this purpose.

[7] Available at www.dgsi.pt; See also Award of the STA of 31/05/2017, issued in case 1229/15

[8] Idem.

Frequently Asked Questions

Automatically Created

What does Article 32(2) of the EBF establish regarding tax benefits for holding companies (SGPS) under IRC?
Article 32(2) of the EBF establishes a special tax regime for holding companies (SGPS) regarding the treatment of financial charges. It governs which financing costs can be deducted as tax expenses under IRC. The provision creates a statutory framework that, according to the taxpayer's argument in this case, should prevail over administrative interpretations. The specific regime limits the deductibility of financial charges related to the acquisition and holding of equity participations, distinguishing SGPS companies from ordinary corporations for IRC purposes.
Is Circular 7/2004 from DSIRC legally binding when calculating IRC deductions for equity participation financing?
Circular 7/2004 from DSIRC is an administrative interpretation issued by the Tax Authority, but its legal binding force is precisely what this arbitration challenges. The claimant argues that such circulars cannot override statutory provisions in the EBF, violating the constitutional principle of legality (Article 103(2) CRP) which requires taxes to be created by law, not administrative acts. The taxpayer contends that Circular 7/2004 imposes requirements beyond what Article 32(2) EBF establishes, making it ultra vires and non-binding. This raises fundamental questions about the hierarchy between statutory tax benefits and administrative guidance in Portuguese tax law.
Who bears the burden of proof in IRC tax correction disputes before CAAD arbitration tribunals?
In IRC tax correction disputes before CAAD arbitration tribunals, the burden of proof is a critical procedural issue listed as a central theme of this case. Generally, under Portuguese tax law, the Tax Authority bears the burden of proving facts that justify tax assessments and corrections, while taxpayers must prove facts that support tax benefits or deductions they claim. The specific distribution in official correction cases (correcção oficiosa) involves the Tax Authority demonstrating the factual and legal basis for disallowing expenses, while the taxpayer may need to prove they meet statutory requirements for tax benefits under Article 32 EBF.
Can the Portuguese Tax Authority (AT) impose its own methodology via circular to override a statutory tax benefit under the EBF?
The claimant argues that the Portuguese Tax Authority cannot impose its own methodology via circular to override statutory tax benefits under the EBF. This position is based on the constitutional principle of legality in taxation, which requires that tax obligations and benefits be established by law (Articles 103(2) CRP and 8(1) LGT), not by administrative acts. According to this argument, Circular 7/2004 violates both formal legality by creating obligations beyond statutory provisions and procedural legality under Articles 55 LGT and 266(2) CRP. The case challenges whether administrative circulars can modify or supplement the self-contained regime of Article 32(2) EBF without legislative authorization.
What are the grounds for declaring an IRC tax assessment illegal under the principles of legality (Articles 103 CRP and 8 LGT)?
Under Portuguese tax law, an IRC assessment can be declared illegal based on breach of the principle of legality in multiple dimensions. Formal legality requires compliance with Articles 103(2) of the Portuguese Constitution and 8(1) of the General Tax Law, meaning taxes and tax benefits must be established by statute, not administrative acts. Procedural legality requires compliance with Articles 55 LGT (taxpayer rights in tax procedures) and 266(2) CRP (principles of administrative action including legality, proportionality, and good faith). Additionally, the assessment must respect applicable statutory regimes like Article 32(2) EBF. Grounds for illegality include: applying non-binding administrative circulars as if they were law, exceeding statutory provisions, violating procedural guarantees, and factual errors in applying tax law to established facts.