Process: 444/2015-T

Date: February 17, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 444/2015-T addresses the deductibility of employee passage allowances (travel benefits) under Portuguese IRC law following a corporate spin-off. The applicant company challenged tax assessments totaling €220,541.18 for fiscal years 2009-2012, arguing that leisure travel benefits granted to employees transferred from B... airline were mandatory expenses inherited from the corporate division. The central legal issue concerns whether these costs satisfy the indispensability requirement under Article 23 of the IRC Code, which permits deduction of administrative expenses related to labor when indispensable to business operations. The applicant contended these expenses constitute legally mandated costs similar to collective bargaining obligations, not gratuitous liberalities, as the division agreement required maintaining pre-existing employee benefits. Additionally, the company invoked Article 43 of the IRC Code, arguing the benefits met generality and objective acceptance criteria since they applied uniformly to all transferred employees, even though newly hired workers received no such benefit. The tax authority rejected deductibility, treating the passage allowances as non-deductible social benefits. Key legal questions include: whether mandatory preservation of acquired employee rights through corporate restructuring satisfies indispensability tests; whether benefits limited to a specific employee category (transferred workers) can meet Article 43's generality requirement; and whether prior tax authority recognition is required for social benefit deductibility. The case illustrates fundamental tensions in Portuguese tax law between strict interpretation of expense deductibility and recognition of legally binding obligations arising from corporate restructuring operations, with significant implications for companies inheriting employee benefit obligations through mergers, spin-offs, and divisions.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sérgio de Matos and Leonor Fernandes Ferreira, appointed by the Ethics Board of the Centre for Administrative Arbitration to form an Arbitral Court, hereby agree:

I – REPORT

On 15 July 2015, A…, S.A., taxpayer no. …, with registered office at Building no. … of … Lisbon, 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 of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the assessment acts no. 2015…, no. 2015…, 2015… and 2015…, and of the account reconciliation statements no. 2015…, no. 2015…, no. 2015… and no. 2015…, relating to the fiscal years 2012, 2011, 2010 and 2009, respectively, in the total amount of €220,541.18.

To substantiate its request, the Applicant alleges, in summary, that:

– It is obligated to grant passage allowances consisting of a social benefit granted to some of its employees (those who transferred from B… to A…) and which translates into the possibility of the employee and their family members making free or reduced-tariff air travels, for leisure purposes, on B…, SA's (B…) aircraft;

– Such obligation, in its opinion, derives from the legal instrument that provides for the division, whereby such employees maintain in A… the benefits that had been granted to them whilst workers of B…;

– Such expenses are not a liberality, but a cost determined by law, mandatory, in the same manner as those of Collective Regulation or labour laws regarding other workers' rights. The expenses that the law itself imposes on it constitute an indispensable expense;

– The expenses with the granting of this social benefit constitute expenses of an administrative nature with the labour factor, provided for in article 23 of the CIRC, with a mandatory character, particularly since A… is prohibited from declining the obligation to maintain this social benefit for workers coming from B…;

– Such expenses should be considered as costs of the fiscal years in which they were incurred, by direct application of article 23 of the CIRC;

– Such expenses would be deductible expenses in light of the provisions of no. 1 of article 43, because they apply to all workers coming from B…, transferred to A… by virtue of the division process, which meets the criteria of generality and objective acceptance (article 43, no. 14 of the CIRC), even if not covering all workers of A….

– Recognition by the AT need not be prior; rather, it is observed within the scope of inspection procedures, external ones, within which inspection officers, in their discretion, decide whether to accept the expense or not, so A… did not need to formalize any prior request with such acceptance, nor conduct any bureaucratic process with the AT aimed at obtaining such recognition;

– The rules of limitation on the right to assess were violated, pursuant to article 45, no. 1 of the LGT, since on the date the inspection was conducted – 2015 – and counting the periods from the end of the year in which the tax event occurred, in the case of periodic taxes, as is the case with IRC (article 45, no. 1 LGT), the assessment had as its limit the year 2011 inclusive.

On 17-07-2015, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Applicant did not proceed with the appointment of an arbitrator, so, pursuant to the provisions of subsection a) of no. 2 of article 6 and subsection a) of no. 1 of article 11 of the RJAT, the President of the Ethics Board of the CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the charge within the applicable period.

On 15-09-2015, the parties were notified of these appointments, and did not manifest any desire to refuse any of them.

In accordance with the provisions of subsection c) of no. 1 of article 11 of the RJAT, the collective Arbitral Court was constituted on 01-10-2015.

On 03-11-2015, the Respondent, duly notified for that purpose, presented its defence solely by way of objection.

On 10-12-2015, the hearing referred to in article 18 of the RJAT took place, where the witnesses presented at the hearing by the Applicant were examined.

Having been granted a period for the presentation of written submissions, these were presented by the parties, pronouncing on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the delivery of the final decision, following the presentation of submissions by the AT.

The Arbitral Court has material jurisdiction and is regularly constituted, in accordance with articles 2, no. 1, subsection a), 5 and 6, no. 1, of the RJAT.

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

The process is free from any nullities.

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

Given all the foregoing, it is appropriate to deliver

II. DECISION

A. FACTUAL MATTERS

A.1. Facts established as proven

  1. The Applicant is a limited company classified under CAE 52230 - auxiliary activities of air transport, which provides ground handling assistance services to airlines at the airports of Lisbon, Porto, Funchal and Porto Santo, as well as related professional training.

  2. The Applicant is classified under the general IRC regime with organized accounting and under the normal VAT regime, with monthly periodicity in the fiscal years in question.

  3. On the basis of the service orders nos. OI2014…, OI2014…, OI 2013…, OI 2013… and OI 2013…, the AT – Tax and Customs Authority (hereinafter, AT), conducted a partial external inspection of the Applicant's accounting regarding the IRC of the fiscal years 2008, 2009, 2010, 2011 and 2012, as a result of which an inspection report was prepared.

  4. As a result thereof, a purely arithmetical correction was made, relating to "social utility undertakings", and to personnel costs (2008 to 2012), as social action costs, relating to "passage allowances" in the following amounts:

[Table content as in original]

  1. Such costs/expenses of the fiscal years are based on invoices issued by B…, S.A. to the Applicant, with the description of Debit for "leisure passage allowances", on a monthly basis, with the estimated value of €110,000.00, as shown in the following table:

[Table content as in original]

  1. The settlement of these invoices was made at the last invoice of each fiscal year, according to the number of "Legs" used by workers, throughout the five fiscal years identified, as set out at page 17 of the Inspection Report.

  2. Passage allowances consist of a social benefit that is granted to some of A…'s employees and that translate into the possibility of the employee and their family members making free or reduced-tariff air travels, for leisure purposes, on B…'s aircraft.

  3. The said benefit applied, in the fiscal years in question, to all workers coming from B…, S.A., who, in the range of social benefits already held, had the right to such passage allowances, but was not applied to workers directly hired anew by the Applicant, in the labour market, in relation to whom no such benefit was agreed.

  4. The cost borne by the Applicant with this social benefit resulted from the need to enable, in general terms, the actual enjoyment of the benefit associated with air passage allowances recognized to employees.

  5. Such cost could not be attributed to passage allowances actually utilized, nor, therefore, could the Applicant attribute this cost to the legal sphere of any individually identified employee.

  6. From the inspection report, it emerges, among other things, that:

a. "These expenses, as we have previously stated, are a social benefit that translates into the possibility of the employee and their family members making free or reduced-tariff air travels, for leisure purposes, on B…'s aircraft, so they do not constitute indispensable expenses for the realization of income subject to tax or for the maintenance of the productive source.";

b. "Indeed, it should be noted that the granting of this social benefit does not fall within the corporate purpose of A…. A… has as its corporate purpose the provision of ground handling assistance services to air transport. A… does not engage in air transport, but rather B… does.

The granting of this social benefit is not provided for in the Company Agreement (an instrument of collective labour regulation that binds A… and its employees), but rather in B…'s Passage Regulations, which provides that the granting of passage allowances is a liberality of B…, which may be altered at any time.

It follows from this that the granting of this social benefit, which covers not only A…'s employees, but also their respective family members, does not fall within expenses of an administrative nature, such as remuneration, which are indeed provided for in subsection d) of number 1 of article 23 of the IRC Code and with a mandatory character."

c. "In the case in question, we are dealing with a social benefit that was not taxed in the sphere of employees, for Personal Income Tax purposes.

As we have already stated, in clarification obtained from the company, the cost borne by A… with this social benefit results from the need to enable, in general terms, the actual enjoyment of the benefit associated with air passage allowances recognized to employees. This cost cannot be attributed to passage allowances actually utilized, nor, therefore, can A… attribute this cost to the legal sphere of any individually identified employee.

In this way, the social benefit in question falls within those identified in number 1 of article 43 of the IRC Code, as being "(…) made for the benefit of the company's personnel or pensioners and their respective family members, (…) and do not constitute the nature of dependent labour income or, constituting such, are of difficult or complex individualization in relation to each of the beneficiaries", in accordance with the final part of the cited regulation.";

d. "In the case in question, we are dealing with a social benefit that was not recognized by the AT and that does not have a general character, because it does not cover all workers of A…. As we have previously stated, in accordance with the clarification provided by the company, the beneficiaries are employees whose labour relations were transmitted to A… as a result of the division of B…";

e. "in the period from 2008 to 2012 the net result for the period was always negative".

  1. It was concluded, in the report, that the costs borne by the Applicant with the passage allowances were not deductible in accordance with the combined provisions of number 1 of article 23 with number 1 of article 43, both of the IRC Code, so their increase was proposed in field 209/723 of table 07 of the income return Form 22/IRC, for purposes of determining the taxable profit for the fiscal years 2008 to 2012 of the Applicant.

  2. The Applicant was incorporated on 1 October 2003, resulting from a division operation of B…, S.A., as a direct effect and as a consequence of the privatization process of B…, S.A., established by Decree-Law of the Government no. 34/2000, of 21 March.

  3. In execution of Decree-Law no. 34/2000, a holding company, C…, SGPS, S.A., was created, and three business areas were separated: air transport, ground handling assistance and maintenance and engineering.

  4. The Applicant was the company created to pursue the ground handling assistance activity, which had previously been carried out by B….

  5. As a result of the privatization process and the constitution, by division, of the Applicant, a group of workers of B…, S.A. was transferred to it, who maintained all labour benefits, salary and all others, including therein rights constituted under those pre-existing legal relationships, such as benefits relating to "passage allowances".

  6. Such benefits are a common practice in world air transport.

  7. At B…, the granting of such benefit is not mandatory on the part of the company.

  8. Air passage allowances at B… form part of B…'s Passage Regulations, which provides that the granting of passage allowances is a liberality of B…, which may, at any time, be altered.

  9. Employees of B… who transferred to A… by virtue of the company's division, in accordance with the Division Decree-Law, maintain the right to other social benefits such as the cafeteria service and the use of the childcare facility, just as they would have if they had never left B….

  10. These benefits are expressly provided for in the Company Agreement subscribed to by the Applicant.

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 on factual matters proven and not proven

With regard to factual matters, the Court does not have to rule on everything alleged by the parties; rather, it is incumbent upon it to select the facts that matter for the decision and to distinguish proven from unproven matter (see article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable by virtue of article 29, no. 1, subsections a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated based on their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (see previous article 511, no. 1, of the CPC, corresponding to current article 596, applicable by virtue of article 29, no. 1, subsection e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110, no. 7 of the CPPT, the documentary and testimonial evidence and the administrative records attached to the file, the facts listed above were considered proven, with relevance to the decision.

Specifically, the facts listed under points 17 to 21 were confirmed by the witnesses examined, who testified in a precise and coherent manner, demonstrating direct knowledge of the facts in question.

B. ON THE LAW

Essentially, at issue in the present arbitral tax proceedings is the appreciation of the legality of the disregard of the Applicant's expenses with "passage allowances" made available to its workers who transferred from B…, at the time of that company's division process, in the context of which the Applicant was created.

The AT understands, as emerges from the Inspection Report, that such expenses do not fall within article 23 of the CIRC, because, in that authority's judgment, such expenses were not necessary for the Applicant's activity.

Let us examine this, then.

The issue sub iudice is concerned, in the first place and directly, with the application of article 23 of the CIRC.

From a general point of view, the essential features of the path established by national doctrine and case law on the matter of the indispensability of expenses can be summarized as follows:

– the judgment concerning the indispensability of expenses incurred implies that their contribution to the obtaining of income or gains subject to tax or to the maintenance of the productive source is verified, so that "The legal notion of indispensability is therefore delineated from an economic-business perspective, by direct or indirect filling of the ultimate motivation of contribution to the obtaining of profit" and "the tax deductibility of the cost depends only on a causal and justified relationship with the company's activity." (STA Decision, handed down on 30-11-2011, in case no. 0107/11);

– "the costs (…) must, from the start, respect the taxpayer company itself. That is, for a given amount to be considered a cost of that company, it is necessary that the respective activity be developed by it itself, not by other companies." (STA Decision, handed down on 30-05-2012, in case no. 0171/11);

– "a concept of indispensability which, moving away definitively from the idea of causality between expenses and income, places the emphasis on the relationship of expenses with the activity pursued by the taxpayer, that is, considering that the said concept of indispensability is verified whenever expenses are incurred in the interest of the company, in the pursuit of its respective activities." (STA Decision, handed down on 04-09-2013, in case no. 0164/12);

– the concept of indispensability is filled on a case-by-case basis, and the nexus of economic causality cannot be disconnected from the factuality of the specific case, being that "the Tax Authority cannot evaluate the indispensability of costs in light of criteria concerning the opportunity and merit of the expense. A cost is indispensable when it relates to the company's activity, and costs foreign to the company's activity will be only those in which it is not possible to discern any causal nexus with the income or gains (or with the income, in the current expression of the code - see article 23, no. 1, of the C.I.R.C.), explained in terms of normality, necessity, congruence and economic rationality." (TCA-Sul Decision, handed down on 16-10-2014, case no. 06754/13);

– "The indispensability of the cost must simply result from its connection to business activity. If the cost is not foreign to the company's activity, that is, if it relates to the normal activity of the company (regardless of whether the degree of intensity or proximity is greater or lesser), and if its existence is accepted (one is not dealing with an apparent or simulated cost), the cost is indispensable." (TCA-Norte Decision, handed down on 20-12-2011, case no. 01747/06.3BEVIS);

– "from the legal notion of cost provided by article 23 of the CIRC, it does not follow that the AT may call into question the principle of management freedom, investigating the soundness and opportunity of the company management's economic decisions and considering that only those from which profits directly accrue to the company or which prove convenient for the company can be fiscally assumed. The indispensability referred to in article 23 of the CIRC as a condition for a cost to be deductible does not refer to necessity (the expense as a sine qua non condition of profits), nor even to convenience (the expense as convenient for business organization), under pain of intolerable interference by the AT in the taxpayer's autonomy and management freedom, but requires only a relationship of economic causality, in the sense that it is sufficient that the cost be incurred in the interest of the company, in order, direct or indirectly, to obtain profits.

The legal notion of indispensability is thus delineated from an economic-business perspective, by direct or indirect filling of the ultimate motivation of contribution to the obtaining of profit. Essential costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumed under a profit-making profile. This objective purposely brings economic and tax categories closer together, through an interpretation primarily logical and economic of legal causality. An essential expense is equivalent to any cost incurred in order to obtain income and which represents an economic decrease for the company. As a rule, therefore, the tax deductibility of a cost depends only on a causal and justified relationship with the company's activity. And outside the concept of indispensability will fall only acts inconsistent with the corporate purpose, those that do not fall within the interest of the company, especially because they do not aim for profit." (STA Decision, handed down on 30-11-2011, case no. 0107/11);

– "The rule is that correctly accounted-for expenses are tax costs; the criterion of indispensability was created by the legislator, not to allow the Administration to interfere in the company's management, dictating how it should apply its means, but to prevent the tax consideration of expenses which, even though accounted for as costs, do not fall within the scope of the company's activity, were incurred not for its pursuit but for other interests unrelated to it. Strictly speaking, these are not true company costs, but expenses which, having regard to their object, were abusively accounted for as such. Without the Administration being able to evaluate the indispensability of costs in light of criteria concerning their opportunity and merit.

The concept of indispensability not only cannot be made equivalent to a strict judgment of imperative necessity, as has been said, but also cannot rest on a judgment about the convenience of the expense, necessarily made a posteriori. For example, expenses made with an advertising campaign that proved unfruitful cannot, based solely on that result, be affirmed to be dispensable.

The judgment concerning the opportunity and convenience of expenses is exclusive to the businessman. If he decides to make expenses in order to pursue the company's purpose but is unsuccessful and those expenses ultimately prove unproductive, they nonetheless remain tax costs. But every expense that he accounts for as a cost and that is shown to be foreign to the company's purpose is not a tax cost, because not indispensable.

We understand (…) that, under pain of violation of the principle of tax capacity, the Administration can only exclude expenses not directly removed by law under strong motivation that convinces that they were incurred beyond the corporate objective, that is, in the pursuit of another interest than the business one, or, at least, with evident excess, deviating, in relation to the objective needs and capacities of the company." (STA Decision, handed down on 29-03-2006, case no. 01236/05).

The criteria for appreciation of the indispensability of expenses having thus been defined, in light of article 23 of the CIRC, it remains, then, the operation of applying such criteria to the specific case, appreciating, in that light, the arguments of the AT that sustain its position.

Having examined the reasoning of the Inspection Report, it is verified that the correction proposal formulated therein, and now in issue, rests essentially on the understanding that "The granting of this social benefit ... is provided for in B…'s Passage Regulations, which provides that the granting of passage allowances is a liberality of B…, which may be altered at any time.".

With all due respect, herein lies the fundamental error of the Inspection Report. Indeed, although "passage allowances" constitute a liberality of B…, with its existence being entirely dependent on the will of that company, the same does not occur in the sphere of the Applicant.

In fact, as established in the file and emerges from the applicable legal framework, the Applicant is a company that was created by division of B…, and was entrusted with the exercise of the ground handling assistance activity that had previously been carried out by that company.

Indeed, number 2 of article 14 of Decree-Law no. …/89, of 9 May, as amended by Decree-Law no. …/2000, of 14 March, provides that:

"2 - To ensure the objectives referred to in the preceding number, and following the establishment of C…, SGPS, S.A., B…, S.A., may, by means of simple division, allocate part of its assets to create the following two new companies:

a) D…, S.A., or, briefly, D…, S.A.;

b) E…, S.A.".

Number 7 of the same article 14 further provides that:

"D…, S.A., shall have as its principal purpose the provision of ground handling assistance services to air transport, in accordance with Decree-Law 275/99, of 23 July, succeeding B…, S.A. in its position, for the purposes of the provisions of nos. 1 and 2 of article 39 of the same law; the company's assets shall consist of the assets and liabilities and other liabilities currently allocated to the ground handling assistance activity within B…, S.A."

Article 16, also of the same law, under the heading "Rights of workers", provides that:

"1 - Workers employed by, pre-retirees and pensioners of B…, S.A., who remain there or who are incorporated into the companies resulting from the division or in C…, SGPS, S.A., maintain all rights, including seniority, benefits and obligations that they held on the date of the effectuation of the division referred to in nos. 2 and 3 of article 14.

2 - The company agreements in force at B…, S.A., on the date of the division shall remain in force, regardless of the new ownership of the labour relationships by the restructured companies referred to in article 14."

Also, Article 9, subsection j) of the Resolution of the Council of Ministers no. …/2003, of 2.10.2003, published in the Official Gazette, … series of...11.2003, required that those interested in acquiring the Applicant's share capital attach to their acquisition proposal, among other elements:

"j) - Declaration of commitment regarding the maintenance of the rights of A…, S.A.'s workers, in accordance with the provisions of article 16 of Decree-Law no. …/98, of 9 May, as amended by Decree-Law no. …/2000 of 14 March; the draft of this declaration constitutes Annex III to this specifications document;".

And in Annex V of the same Resolution appears the following:

"Rights and benefits of B…, S.A.'s workers who transferred to A…, S.A.

Within the limits and terms of articles 37 of the LCT, 9 of Decree-Law no. 519-C1/79, of 29 December, and 16 of Decree-Law no. …/98, of 9 May, as amended by article 1 of Decree-Law no. …/2000, of 14 March, below are set out the rights and benefits provided for in the various company agreements in force, protocols and other internal regulations, applicable to workers currently bound to B…, S.A., and who are incorporated into A…, S.A.

Thus:

A - Rights held on the date of the effectuation of the division:

Active workers:

Professional category and respective functions;

Company/airline seniority;

Remuneration, with all salary components at the time the division takes effect;

Work time limits;

Accrued holidays;

Pre-retirees:

Pre-retirement benefit;

Right to early retirement for old age at 60 years;

Retirees - B… retirement supplement.

B - Benefits held on the date of the effectuation of the division:

Cafeteria:

Childcare facility;

Health insurance;

Life insurance;

Passage allowances;

Right to use the company's medical services."

It is thus verified that the Applicant is obligated, by law and by virtue of the public procurement procedure relating to its privatization, to ensure to workers in its service who transferred from B…, the benefit of passage allowances.

The burden in question is not, therefore, a possibility, a liberality, but a genuine obligation arising from the division process, being specifically a counterpart for the acquisition of the assets that came to it in that process, as emerges expressly from number 7 of article 14 of Decree-Law no. …/89, of 9 May, as amended by Decree-Law no. …/2000, of 14 March.

That is: by means of the division process, the Applicant acquired a set of assets, which integrate its patrimony, and, concomitantly, a set of liabilities and responsibilities (which include the burden with passage allowances for the workers who transferred from B…, who had previously held them and as long as B… ensures them to its own workers), liabilities and responsibilities that cannot fail to be configured as a counterpart to the assets that were awarded to it in the division, as being, truly and in sum, synallagmatically connected with these.

The burdens in question, properly understood, thus have, in the sphere of the Applicant, a genuinely onerous nature – and not that of liberality, so one cannot, as such, ratify the consideration that "These expenses, as we have previously stated, are a social benefit that translates into the possibility of the employee and their family members making free or reduced-tariff air travels, for leisure purposes, on B…'s aircraft, so they do not constitute indispensable expenses for the realization of income subject to tax or for the maintenance of the productive source.".

It is believed to be irrelevant to the appreciation of the issue sub iudice the circumstance that "the granting of this social benefit does not fall within the corporate purpose of A…." Indeed, being a burden assumed as a counterpart for a transfer of assets that came to it by the division process, nothing requires that such burden fall within the scope of the Applicant's corporate purpose, just as do not, for example, insurance, or childcare and cafeteria.

Similarly, the circumstance that "the granting of this social benefit is not provided for in the Company Agreement (an instrument of collective labour regulation that binds A… and its employees), but rather in B…'s Passage Regulations", contends neither with the detected mandatory nature of the expense for the Applicant, arising from law and the commitments resulting from the public procurement procedure of privatization, nor with its business nature, resulting from the necessity of assumption of the said expense, as a counterpart for the acquisition of assets in the division process, indispensable for the exercise of the Applicant's activity.

It shall likewise not be relevant, in the judgment of the necessity of the expense, the circumstance that the benefit was, or "was not taxed in the sphere of employees, for Personal Income Tax purposes.", since these are distinct matters – that of the necessity of the expense and that of taxation in PIT – the same applying to the circumstance that "the cost cannot be attributed to passage allowances actually utilized and, therefore, A… cannot attribute this cost to the legal sphere of any individually identified employee.".

Finally, neither is ratified the judgment according to which "we are dealing with a social benefit that was not recognized by the AT and that does not have a general character, because it does not cover all workers of A….", starting from the fact that, although of determinable scope, the benefit in question applies generically to a certain category of workers (those who transferred from B…), there being therefore a general criterion that delimits its scope of applicability. In any case, given the deductibility of the cost, in accordance with article 23 of the CIRC, as set out above, it will, in such perspective, always be irrelevant the general or individual character of the benefit in question.

In this way, the tax acts subject to the present arbitral action being defective due to error in the framing of the facts and in the application of law to them, they should be annulled, as the arbitral request succeeds.

C. DECISION

On these grounds, this Arbitral Court decides to uphold the arbitral request filed and, consequently,

a) Annul the assessment acts no. 2015…, no. 2015…, 2015… and 2015…, and the account reconciliation statements no. 2015…, no. 2015…, no. 2015… and no. 2015…, relating to the fiscal years 2012, 2011, 2010 and 2009;

b) Condemn the Respondent to pay the costs of the proceedings.

D. Value of the proceedings

The value of the proceedings is fixed at €220,541.18, in accordance with article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subsections a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Rules of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €4,284.00, in accordance with Table I of the Rules of Costs in Tax Arbitration Proceedings, to be paid by the Respondent since the request was entirely successful, in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Rules.

Let notification be made.

Lisbon

17 February 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Sérgio de Matos)

The Arbitrator Member

(Leonor Fernandes Ferreira)

Frequently Asked Questions

Automatically Created

Are employee travel benefits inherited from a corporate spin-off deductible as business expenses under Article 23 of the Portuguese IRC Code?
Under Article 23 of the Portuguese IRC Code, employee travel benefits inherited from a corporate spin-off may be deductible if they satisfy the indispensability requirement. In Process 444/2015-T, the applicant argued that passage allowances for transferred employees constituted mandatory administrative expenses related to labor, imposed by the legal instrument governing the corporate division. The key determination hinges on whether maintaining these pre-existing benefits is legally obligatory and indispensable to business operations, rather than a gratuitous liberality. If the division agreement contractually or legally requires preserving such benefits for transferred workers, and the company cannot decline this obligation, the expenses may qualify as indispensable costs under Article 23. However, tax authorities often scrutinize whether benefits limited to specific employee categories truly meet necessity standards, particularly when they involve leisure travel rather than direct operational needs.
What is the indispensability requirement for expense deduction in Portuguese corporate income tax (IRC)?
The indispensability requirement for expense deduction in Portuguese IRC law, embodied in Article 23 of the IRC Code, requires that expenses be necessary and appropriate for generating taxable income or maintaining the income-producing source. Costs must demonstrate a clear nexus to business operations rather than constituting gratuitous liberalities or voluntary gifts. Indispensability is assessed objectively, considering whether a prudent business operator in similar circumstances would incur such expenses. For personnel costs, indispensability typically encompasses salaries, mandatory social charges, and legally or contractually required benefits. In Process 444/2015-T, the dispute centered on whether inherited employee travel benefits constituted indispensable expenses when legally mandated by corporate restructuring instruments, analogous to collective bargaining obligations. The test examines whether expenses are imposed by law, contract, or operational necessity, not merely voluntary management choices, even if costs don't generate direct revenue.
Can mandatory social benefits for transferred employees qualify as deductible administrative costs under IRC?
Mandatory social benefits for transferred employees can potentially qualify as deductible administrative costs under IRC Article 23 when they constitute legally binding obligations arising from corporate restructuring operations. In Process 444/2015-T, the applicant argued that passage allowances for employees transferred from B... airline represented mandatory costs imposed by the division instrument, comparable to obligations under collective regulations or labor law. The critical factor is whether the company has legal obligation—not mere discretion—to maintain these benefits. If the corporate division agreement, applicable labor law, or contractual succession principles require preserving pre-existing employee benefits, such expenses may satisfy Article 23's indispensability test as mandatory personnel costs. However, classification as 'mandatory' requires demonstrating genuine legal compulsion rather than voluntary continuation of historical practices. The expense must be unavoidable given legal constraints, not simply management policy, to distinguish mandatory obligations from non-deductible liberalities.
How does CAAD arbitration handle disputes over the tax treatment of legally mandated employee benefits?
CAAD arbitration handles disputes over legally mandated employee benefits by examining whether challenged expenses satisfy IRC deductibility requirements through comprehensive factual and legal analysis. In Process 444/2015-T, the tribunal followed standard procedures: accepting the arbitration request, constituting a three-arbitrator panel, hearing witness testimony, reviewing documentary evidence (including invoices and the corporate division instrument), and allowing written submissions from both parties. The tribunal analyzes whether benefits constitute indispensable expenses under Article 23 or qualify under Article 43's social benefit provisions. Key considerations include: examining corporate restructuring documents to verify legal obligations; distinguishing between mandatory costs and voluntary liberalities; assessing whether benefits meet generality and objective acceptance criteria; and evaluating whether prior tax authority recognition was required. CAAD provides independent judicial review of tax authority assessments, applying legal interpretation to specific factual circumstances while considering taxpayer burden-of-proof obligations and applicable limitation periods for tax assessments.
Does Article 43 of the IRC Code allow deduction of benefits granted only to a specific group of employees after a company restructuring?
Article 43 of the IRC Code potentially allows deduction of benefits granted to specific employee groups after company restructuring, provided they meet generality and objective acceptance criteria within the applicable employee category. In Process 444/2015-T, the applicant argued that passage allowances qualified under Article 43(1) because they applied uniformly to all workers transferred from B... airline, satisfying Article 43(14)'s requirements even though newly hired employees received no such benefit. The generality criterion doesn't necessarily require benefits extend to all company employees universally; rather, it may be satisfied when benefits apply consistently to an objectively defined category (e.g., all transferred employees from a specific corporate division). Objective acceptance means benefits are granted based on pre-established, non-arbitrary criteria rather than individual discretion. However, tax authorities may challenge whether category-specific benefits truly meet generality standards, particularly when excluding significant employee populations. The deductibility analysis examines whether the defined category has objective business justification connected to legal obligations from corporate restructuring, rather than arbitrary discrimination between employee groups.