Process: 448/2017-T

Date: April 30, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 448/2017-T) addresses the critical interaction between RFAI tax credits and IRC collection deduction limits. The claimant, a Portuguese SGPS company, sought to carry forward €136,700.99 in unused RFAI (Special Investment Support Scheme) tax benefits from 2009 to 2013, arguing that Article 3(3) of RFAI explicitly permits carryforward of unused credits for four subsequent years when insufficient collection prevents full deduction. The core dispute centered on whether Article 92(1) of the IRC Code, which limits total tax benefit deductions to ensure minimum effective taxation, creates a new "insufficient collection" scenario allowing further carryforward. The claimant argued that denying carryforward would contradict legislative intent behind RFAI, which aims to promote business investment and job creation. They contended that Article 92's purpose is only to establish minimum annual tax collection, not to eliminate future-year utilization of legitimately earned tax benefits. The Tax Authority countered that IRC operates under a dualistic assessment system with separate calculations for regular income and autonomous taxation. The case raises fundamental questions about proportionality principles under the Portuguese Constitution, the reconciliation of conflicting tax provisions, and whether restrictive interpretation of tax incentive schemes is permissible. The decision has significant implications for taxpayers with multi-year RFAI credits and establishes important precedent regarding the preservation of investment tax incentives despite subsequent legislative changes imposing collection minimums.

Full Decision

ARBITRAL DECISION

Report

  1. On 26-07-2017, the company A… – SGPS, S.A., legal entity no. …, hereinafter referred to only as the Claimant, filed a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority is the Respondent.

The request for arbitral determination has as its object: i) the declaration of illegality and annulment of the act of self-assessment of corporate income tax (IRC) for 2013, insofar as it did not reflect the total benefit of the Special Investment Support Scheme – RFAI of 2009 that was deductible, in the total amount of €136,700.99, and ii) the decisions rejecting the administrative complaint and hierarchical appeal that maintained it, with the consequent annulment and reimbursement of the amounts paid, plus indemnity interest.

  1. The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and automatically notified to the Tax and Customs Authority on 31-07-2017.

2.1. Pursuant to the provisions of paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the undersigned hereto and notified the parties of this appointment on 13-09-2017.

2.2. Thus, in accordance with the provisions of paragraph c) of no. 1 of Article 11 of Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 28-09-2017, and the pertinent legal procedures were followed.

  1. The Claimant supported its request by arguing, in summary, that:

The fundamental issue under examination concerns whether it is possible for the Claimant to claim in 2013 the value of the tax benefit arising from the RFAI of the year 2009 in the part not deducted in that year and in subsequent years and, more specifically, whether this is prevented by the fact that Article 92, no. 1, of the IRC Code was applied in 2011.

Indeed, the possibility of "carrying forward" the deduction from IRC collection provided for in no. 3 of Article 3 of the RFAI to subsequent years constitutes a significant guarantee for individuals, aimed at ensuring the effectiveness of that tax benefit and corresponds to the arbitral jurisprudence on this matter (see cases no. 693/2014-T; no. 369/2015-T; no. 370/2015-T and no. 285/2016-T).

According to the provisions of no. 3 of Article 3 of the RFAI, when there was a situation of insufficient collection in 2009, expressly acknowledged by the Tax Authority, the remaining value may be deducted in the four subsequent years and, therefore, in the year 2013, without need for any other considerations, in particular as to why the same benefit cannot be entirely used in the year 2011.

Even if this were not understood and it were considered fundamental to determine why in 2011 the Claimant could not deduct the entirety of the benefit of the RFAI of 2009 in the part not previously used, it would still be necessary to conclude that, equally in that year, there was a situation of insufficient collection.

Article 92 of the IRC Code, even in its 2011 version, does not establish any limit to the possibility of carrying forward to subsequent years the value of the benefit that is not deducted in the respective year by the application of the limit of that article.

Furthermore, the legislator's intention in introducing the provision contained in Article 92 of the IRC Code would have been only to limit the use of tax benefits in a given tax period, by imposing an effective tax rate in each year, not to prejudice their carryforward to future tax periods.

That is, carrying forward to subsequent years benefits not deducted in a given year does not undermine the requirement of an effective tax rate and, therefore, of minimum IRC collection.

On the other hand, to understand that Article 92 of the IRC Code would prevent the carryforward of the RFAI benefit to subsequent years would be to hold that the legislator intended to strip the RFAI of much of its interest and purpose – the promotion of business investment and job creation – creating an unacceptable contradiction between what is provided in the RFAI (which limits the deduction to 25% of collection and permits the use of the remainder of the deduction fixed in subsequent years) and what is contained in Article 92 of the IRC Code (which limits the deduction to 10% and would not permit that carryforward).

Such contradiction could not have been intended by the legislator, and it is incomprehensible that the State Budget Law for 2011, which extended the RFAI until 31 December 2011, would have amended a provision that, if interpreted blindly, would strip the RFAI of much of its economic and tax interest.

Even if the possibility of carryforward of the RFAI tax benefit in the terms advocated could not be immediately concluded from the letter of the law, since it is manifest that the legislative intention underlying no. 3 of Article 3 of the RFAI is to permit the taxpayer to use the tax benefit to which they are entitled in subsequent years, up to a limit of four, when they cannot use it in prior years – without resorting to any analogy, but rather based on extensive interpretation – it should be concluded that a situation of insufficient collection arises from the application of Article 92 of the IRC Code.

From another perspective, the Tax and Customs Authority's interpretation that Article 92 of the IRC Code would allow restriction of the application of the RFAI involves an inadmissible restrictive interpretation of this tax scheme, which is not permitted.

In conclusion, the provision of no. 1 of Article 92 of the IRC Code, interpreted in the sense of preventing the carryforward of the RFAI tax benefit to subsequent years in the event that the taxpayer could not fully deduct the benefit established in any of the relevant years due to the application of the limit of Article 92 of the IRC Code – denying the occurrence of a situation of insufficient collection, as provided for in Article 3, no. 3, of the RFAI – shows itself to be unconstitutional by violation of the principle of proportionality, as set forth in Article 2 and no. 2 of Article 266 of the Constitution of the Portuguese Republic as a guiding and limiting principle of the activity of the Tax and Customs Authority.

  1. The Tax and Customs Authority appended the administrative record and submitted a response arguing, among other things, that:

The integration of autonomous taxation into the IRC Code (and the IRS), conferred a dualistic nature on the normative system of this tax, which was embodied, in particular, within the scope of paragraph a) of no. 1 of Article 90 of the IRC Code, in separate assessments of the respective collections, by virtue of being subject to different rules. And this, because in one case, it is the application of the rate(s) of Article 87 of the IRC Code to taxable income determined according to the rules contained in Chapter III of the Code and, in another case, it is the application of rates to the values of taxable income relating to the different situations contemplated in Article 88 of the IRC Code.

That is, there is not a single IRC assessment, but rather two assessments; that is, two distinct calculations which, although processed, pursuant to paragraph a) of no. 1 of Article 90 of the IRC Code, in the declarations referred to in Articles 120 and 122 of the same Code, are made on the basis of different parameters, since each one is materialized in the application of its own rates, provided for in Articles 87 or 88 of the IRC Code, to the respective taxable income determined equally in accordance with its own rules.

On the other hand, it is surprising that the reductive reasoning upon which the arbitral decisions that have pronounced on the question of whether tax benefits for investment can be deducted from the collection of autonomous taxation are based, insofar as they ignore the fact that such benefits, such as the RFAI, are instruments of state incentives directed at companies with the extrafiscal objective of, through research and innovation, creating knowledge and new production processes that enable improvement in competitive position in markets, create value and generate profits, and are not intended to "reward" companies that maximize the realization of expenses that constitute facts subject to autonomous taxation rates.

Following the doctrine of Arbitral Decision no. 722/2015-T, it would be necessary to conclude the illegality of the deductibility of the RFAI from the collection of autonomous taxation, without need to resort to the interpretative character given by Article 135 of Law no. 7-A/2016, of 30 March (State Budget for 2016), to no. 21 of Article 88 of the IRC Code.

As for the interpretative effect conferred by Article 135 contained in the State Budget Law for 2016, as was well decided in case no. 785/2015-T: "(…) it establishes, regarding the manner of assessment of autonomous taxation, that it 'is carried out in accordance with the provisions of Article 89 and is based on the values and rates that result from the provisions of the preceding numbers'". The Tax and Customs Authority understands that, if it is true that this new provision comes to explain how the amounts of autonomous taxation are calculated and that competence belongs to the taxpayer or the Tax and Customs Authority, it is also clear that the need to use the procedure provided for in no. 9 of Article 90 is not eliminated, in particular, in the cases provided for in its paragraph c) where assessment is the responsibility of the Tax Administration, with "on the basis of the elements available to the tax administration", which will include the possibility of assessing on the basis of autonomous taxation, if the Tax and Customs Authority has elements proving its requirements. Therefore, both before and after Law no. 97-A/2016, of 30 March, Article 90, no. 9, of the IRC Code is applicable to the assessment of autonomous taxation, that is, with assessment in an autonomous and distinct manner from that carried out in accordance with the cited Article 90.

The Tax and Customs Authority further contests the right, invoked by the Claimant, to payment of indemnity interest, since in the situation of the instant case the assessment of tax does not stem from any error of the Services but results directly from the application of the law.

  1. By Application of 14/11/2017, the Claimant submitted a request for enlargement of the object of the Arbitral Request, pursuant to Article 63 of the Code of Administrative Procedure and Process (CPTA), applicable by force of Article 29, no. 1, paragraph c) of the RJAT, with the following grounds:

The Claimant had initially deducted in 2013 in the IRC self-assessment only €48,114.68 of the benefit of the RFAI of 2009, but subsequently concluded that, conversely, €136,700.99 was deductible.

In order to be able to deduct in 2013 the value of the RFAI of 2009 not used in prior years, an administrative complaint was filed against the self-assessment of IRC for 2013 and a hierarchical appeal of its rejection, it being the rejection of this latter that led to the present arbitral request.

The Respondent subsequently understood that the value of the RFAI to be used in 2013 was €0.00 (zero euros), and issued an additional assessment of IRC for 2013 and respective compensatory interest and correction of accounts.

The Claimant filed an administrative complaint against this additional assessment on 13-04-2017, which was pending at the date of submission of the arbitral request, having been notified of its rejection on 13-10-2017.

In this sequence, the Claimant thus requests the examination of the legality of the act of additional assessment of IRC and compensatory interest for 2013 and the rejection of the administrative complaint that maintained it unchanged.

  1. The Respondent was notified of that request and made no submissions.

  2. As no exceptions were invoked and there was no occasion for the production of evidence to be constituted, the arbitral tribunal, by order of 09-12-2017, dispensed with the meeting provided for in Article 18 of the RJAT, which it did pursuant to the principles of autonomy in case management. The date of 28-03-2018 was also set for the pronouncement of the arbitral decision.

  3. The Claimant submitted arguments supporting, in substance, the arguments of the prior documents. The Respondent submitted no counter-arguments.

Procedural Matters (Saneamento)

  1. The parties have legal capacity and standing, are duly represented (Articles 4 and 10, no. 2, of the RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March).

9.1. The arbitral tribunal is competent and has been properly constituted.

9.2. The case does not suffer from defects of form.

9.3. As we have seen, the Claimant requested, on 14-11-2017, the enlargement of the object of the present arbitral request so as to also examine the (il)legality of the act of additional assessment of IRC for 2013 and compensatory interest, as well as the resulting act of rejection of the administrative complaint filed, notified to the Claimant after submission of the present arbitral request.

9.4. Now, the act of additional assessment of IRC for 2013 and compensatory interest and, likewise, the act of rejection of the administrative complaint that maintained it unchanged, constitute acts issued as a consequence of the administrative complaint procedure whose rejection is questioned in this arbitral process and which was maintained in the rejection of the hierarchical appeal also under examination, whereby the requested enlargement is immediately permitted by Article 63, no. 1, of the Code of Administrative Procedure and Process (CPTA) applicable by force of the provision of Article 29, no. 1, paragraph c), of the RJAT. It should be noted that this enlargement of the claim does not include that relating to reimbursement of the value of tax that was the object of compensation, within the scope of the enforcement procedure, as will be analyzed further below.

9.5. Thus, there is no obstacle to examination of the merits.

Merits

III.1. Matters of Fact

  1. Findings of Fact

The following facts are determined to be proven:

  • The Claimant was, since 2008, the parent company of a group of companies (Group C…) subject to the Special Scheme for Taxation of Groups of Companies, with B…, S.A. (legal entity no. …) being one of the companies that formed part of its scope;

  • In 2009, B…, S.A. established a benefit arising from the RFAI of €383,801.01, of which in that year only €135,310.73 could be deducted, with the amount of €248,490.29 being carried forward to subsequent years;

  • In 2011, following the decision of the Tax Authority issued in reference to the request for ex officio revision of the IRC self-assessment for 2011 submitted by the Claimant, the amount of €111,789.30 was deducted, corresponding to the benefit of the RFAI of 2009;

  • In that year 2011, the Claimant had initially only deducted the amount of €95,805.09, having submitted a request for ex officio revision of the IRC self-assessment in order to be able to claim in that year the remaining amount which it then considered to be deductible;

  • Considering the value of the collection of Group C… in 2011, the actual deduction, to be added to the amount of €95,805.09 already accounted for, of the amount of €15,984.21, in a total of €111,789.30, there was indeed a situation of insufficient collection that determined that the amount of €136,700.99 of the RFAI of 2009 remained undeducted (€383,801.01 - €135,310.73 - €111,789.30);

  • In 2013, the Claimant had initially deducted €48,114.68 of the benefit of the RFAI of 2009, but, as a result of the decision issued regarding the request for ex officio revision of 2011, the amount to be deducted was €136,700.99;

  • The Claimant filed, on 25-05-2016, an administrative complaint against the said self-assessment act, which was rejected by order of 28-11-2016 (see document no. 2 attached with the arbitral request);

  • The Claimant filed, on 03-01-2017, a hierarchical appeal against the decision rejecting the administrative complaint, which was rejected by order of 20-04-2017 (see document no. 1 attached with the arbitral request).

  • The Respondent issued an additional assessment of IRC for 2013 and corresponding compensatory interest, in the total amount of €51,380.42, thereby disregarding the deduction of the RFAI of 2009 that the Claimant had included in its IRC self-assessment for 2013, that is, €48,114.68 (document no. 1 attached to the request for enlargement of the object of the arbitral request);

  • The Claimant was, on 06-03-2017, notified of the postal citation of the Tax and Customs Authority, dated 05-03-2017, arising from a tax debt, according to which the "Claimant should within 30 days (…) proceed to payment of the exigible debt and interest (€51,738.93), being able to provide security (in the amount of €65,324.23) or file opposition, on the grounds provided for in Article 204 of the Code of Tax Procedure and Process (document no. 1, attached by the Claimant);

  • The Claimant, in the enforcement proceeding (no. …2017…), requested its suspension by presenting a bank guarantee in the indicated amount and expressed intention to file an administrative complaint against the additional assessment of IRC for 2013 (document no. 3, attached by the Claimant);

  • Despite the security provided, the Tax Authority proceeded to compensate the value of the debt, which, according to the Tax Authority's website, rose to €31,736.12 (document no. 4, attached by the Claimant);

  • On 13-04-2017 the Claimant filed an administrative complaint against the additional assessment of IRC for 2013 and respective compensatory interest, which was pending at the date of submission of the present arbitral request (document no. 5 attached by the Claimant);

  • On 13-10-2017 the Claimant was notified of the rejection of the complaint (document no. 6 attached by the Claimant), where it can be read that "the Tax Authority understood that (i) 'The amount relating to RFAI …of €152,685.20…(…) should be considered, leaving no amount to carry forward to the following year', (ii) 'The limit provided for in no. 1 of Article 92 of the IRC Code…should be applied' (iii) The assessment …for 2013 in which a deduction from collection …of €48,114.68 for RFAI (2009) was considered should be corrected (…)'". And the same was verified, as regards the Hierarchical Appeal no. …2017… also filed by the now Complainant against the "Decision to reject" rendered in the administrative complaint no. …2016… of the IRC Self-Assessment for 2013…" From the Final Order of Rejection of the Hierarchical Appeal it can be read:

"Therefore, since the wording of no. 2 of Article 92 of the IRC Code in force in 2011, the date on which the remainder of the RFAI tax benefit of 2009 was deducted, did not provide for the RFAI as one of the tax benefits excluded from the application of the limit provided for in no. 1, in that year the entirety of the RFAI tax benefit of 2009 was deducted, leaving no amount to be deducted in 2013". (…) In such terms, it is considered appropriate to recommend that the present Administrative Complaint be judged unfounded."

  1. Findings of Fact as Not Proven

There are no facts relevant to the decision that have not been proven.

  1. Justification for Determination of Matters of Fact

The facts were determined to be proven based on critical assessment of the procedural position of the parties, the documents attached to the arbitral request, the administrative record, and the facts stated by the Parties in their respective procedural documents regarding which there is no dispute.

III.2. Matters of Law

III.2.1. Article 92, nos. 1 and 2, of the IRC Code and Article 3, no. 3, of the RFAI

As we have seen, the issue that arises is whether it is possible for the Claimant to claim in 2013 the value of the tax benefit arising from the RFAI of the year 2009 in the part not deducted in that year and in subsequent years and, more specifically, whether this is prevented by the circumstance that Article 92, no. 1, of the IRC Code was applied in 2011.

The central question to be decided in the present case thus revolves around the meaning and scope to be given to Article 92 of the IRC Code, especially in conjunction with what is provided in Article 3, no. 3, of the RFAI.

As the Claimant refers, there is abundant jurisprudence from CAAD on this matter, in particular contained in arbitral decisions no. 693/2014-T; no. 369/2015-T; no. 370/2015-T; no. 285/2016-T, and more recently, case no. 501/2017-T.

In the same sense, Arbitral Decision delivered in case no. 311/2016-T, with which we concur, we will follow closely, as it is entirely applicable in the case at hand.

Let us begin by examining the content of Article 92 of the IRC Code, in the version in force in 2011:

"1 - For entities that exercise, as a principal activity, a commercial, industrial or agricultural activity, as well as non-residents with permanent establishment in Portuguese territory, the tax assessed pursuant to no. 1 of Article 90, net of deductions provided for in paragraphs a) and b) of no. 2 of the same article, shall not be less than 90% of the amount that would be assessed if the taxpayer did not benefit from tax incentives and the schemes provided for in no. 13 of Article 43 and in Article 75.

2 - The following are excluded from the provisions of the preceding number:
a) Those that are contractual in nature;

b) The System of Tax Incentives for Business Research and Development II (SIFIDE II);

c) Tax benefits to free trade zones provided for in Articles 33 and following of the Tax Benefits Statute and those operating by rate reduction;

d) Those provided for in Articles 19, 32, 32-A, and 42 of the Tax Benefits Statute.

Until 31 December 2010, no. 2 of Article 92 of the IRC Code exhaustively listed the tax benefits that should be considered for purposes of calculating the assessment result, among them the tax benefit relating to the RFAI. From the 2011 tax year onwards, all tax benefits that were not expressly excluded were to be considered in such calculation, pursuant to the wording of no. 2 of Article 92 of the IRC Code introduced by Law no. 55-A/2010, of 31 December.

With respect to the 2011 tax year, the tax benefit relating to the RFAI was not provided for in no. 2 of Article 92 of the IRC Code, whereby it should be considered for purposes of calculating the assessment result.

The first conclusion to be drawn from such provision is that the tax benefit in the matter of IRC provided for in the RFAI was subordinated, from 2011 onwards, to the global limit of deductions from collection then provided for in no. 1 of Article 92 of the IRC Code.

However, as arbitral jurisprudence has concluded, and with which we concur[1], "this conclusion is not sufficient to resolve the question, because the possibility of carryforward of the RFAI tax benefit does not necessarily affect the limit of Article 92, no. 1. It suffices that, in the year in question, the amount of the tax benefit that, when added to the remaining tax benefits and schemes provided therein, does not exceed the limit of 25% [in this case, 10%] of collection, be used, so as to permit the tax assessed not to be less than 75% [in this case, 90%] of what would be assessed if the taxpayer did not benefit from tax benefits and the schemes provided for in no. 13 of Article 43 and in Article 75.

"If in order to achieve the objectives of ensuring that, in each year, the tax collected does not result in less than a certain percentage of that which would be due if deductions relating to tax benefits (except those listed in no. 2 of art. 90) did not exist, it suffices that the deduction from collection not exceed 25% [in this case, 10%] of collection.

"Thus, no obstacle arises from Article 92, no. 1, of the IRC Code to the carryforward of deductible amounts, provided that, in each year, the minimum limit of tax assessed that is sought is not exceeded."

Let us now analyze what is provided in no. 3 of Article 3 of the RFAI, when it establishes that: when the deduction referred to in the preceding number cannot be made in full due to insufficient collection, the amount still not deducted may be deducted, under the same conditions, in the assessments of the four following years.

"It is evident that this provision has as its underlying basis a legislative intention that tax benefits supporting investment be utilized by taxpayers, in a reasonable measure, which will be the four years subsequent to that in which the investment occurs.

"This possibility of deduction in the four subsequent periods constitutes an important guarantee for the taxpayer, by increasing the possibilities for this to enjoy the tax benefit in full, freeing him from the contingency of there being insufficient collection for full deduction in the year of the investment, the possibility of carryforward should be considered as an important or even decisive factor for motivating investment decisions.

"Presuming that the legislator enacted the most correct solution (Article 9, no. 3, of the Civil Code) to achieve the intended objective of encouraging investment, the reference to the possibility of carryforward in the event of insufficient collection should not be interpreted in the sense of making it difficult for taxpayers to enjoy the tax benefit, because the objective of the provision is precisely the opposite, to increase the possibilities for taxpayers to be able effectively to enjoy the benefit, which legislatively is understood to be a fair counterpart of the investment.

"Thus, in a teleological interpretation, which permits finding in the law a way to ensure the objectives intended legislatively and not prejudice them, the possibility of deduction should exist in the generality of situations where the IRC collection available to enjoy the tax benefit is not sufficient for its full utilization, which is nonetheless an interpretation with correspondence in the letter of the law, because from Article 92, no. 1, of the IRC Code results a reduction in the collection available to enjoy tax benefits in IRC. And, therefore, when this available collection is insufficient to deduct the totality of the tax benefit resulting from the investment, we will be facing a situation of 'insufficient collection' for purposes of Article 3, no. 3, of the RFAI.

"Thus, it is concluded that the position defended by the Claimant has in the letter of the law, even by merely declarative interpretation, verbal correspondence in the letter of Article 3, no. 3, of the RFAI, sufficiently expressed, such as required by Article 9, no. 2, of the Civil Code. Beyond that, even if extensive interpretation were necessary, it would be permitted by Article 10 of the Tax Benefits Statute, because it is clear that the legislative intention underlying no. 3 of Article 3 of the RFAI is to permit the taxpayer to use the tax benefit to which they are entitled in subsequent years, up to the limit of four, when they cannot use it in prior years.

"On the other hand, this interpretation is the one that ensures valuable congruence of the legal system, because it would not be coherent to admit in Article 3, no. 1, paragraph a), of the RFAI a deduction from IRC collection of up to 25% and, at the same time, to restrict definitively the benefit by way of Article 92, no. 1, of the IRC Code.

"Therefore, if it is true that the concerns of consolidation of public finances may justify that, in each year, the obtaining of minimum IRC revenue be imposed over the tax benefit, those concerns can no longer explain that there not be the possibility of utilizing the tax benefit in one of the four subsequent years, if such utilization in any of them does not affect such consolidation.

"It is concluded, thus, that the tax benefit resulting from the RFAI in the matter of IRC can only be used to the extent that it does not prejudice the limit provided for in Article 92, no. 1, of the IRC Code, but no legal obstacle is perceived to the part not utilized in the year of investment being able to be used for deduction from IRC collection in subsequent years, up to the limit provided for in no. 3 of Article 3 of the RFAI."

"Given the foregoing, in the case at hand, inasmuch as the limit provided for in Article 92, no. 1, of the IRC Code did not permit deduction from collection of the total amount of the investment that benefits from the RFAI scheme, the Claimant did not have to impute all of that investment to that year, remaining without right to deduction in the part in which that limit would be exceeded, and could make use of the faculty provided for in no. 3 of Article 3 of the RFAI."

"With respect to the issue that concerns determining to which IRC collection, if to the initial (prior to application of Article 92, no. 1, of the IRC Code) or to that available (after application of Article 92, no. 1, of the IRC Code), the RFAI tax benefit should be deducted, the jurisprudence mentioned above is unanimous in considering that the collection at issue is the available collection (after application of Article 92, no. 1, of the IRC Code), on penalty of the taxpayer seeing the possibilities diminished of enjoying the tax benefit in question, which would constitute a disincentive contrary in sign to the grant of the benefit itself. In this context, it would not be systematically coherent to admit in Article 3, no. 1, paragraph a), of the RFAI a deduction from IRC collection of up to 25% and, at the same time, restrict definitively this benefit by way of application of Article 92, no. 1, of the IRC Code.

"Indeed, the limitation imposed by Article 92, no. 1, of the IRC Code leads to diminution of the available collection of the year, restricting, accordingly, the deductions to be made in that year. In this way, by force of Article 3, no. 3, of the RFAI, the taxpayer should be able to deduct from collection in the four subsequent years the tax benefit relating to the RFAI that could not be deducted by force of said diminution of collection.

"This interpretation, in the sense of admission of carryforward of the tax benefit relating to the RFAI, also presents itself as the most in accord with the Constitution, particularly with the principles of protection of confidence and equality" (see Arbitral Decision delivered in case no. 501/2017-T).

Thus, pursuant to no. 3 of Article 3 of the RFAI, given that in 2009 there was a situation of insufficient collection that prevented the Claimant from deducting the entirety of the RFAI tax benefit, the remaining amount may be deducted in the four subsequent years and, therefore, in the year 2013, with this conclusion not being prevented by what is provided in Article 92, no. 1, of the IRC Code.

In such terms, the Claimant's request for declaration of illegality and consequent annulment of the IRC self-assessment act for 2013 in the part in which it did not reflect the entirety of the benefit of the RFAI of 2009 that was deductible is well-founded, as is the request relating to the decision rejecting the hierarchical appeal that maintained it and, likewise, that relating to the declaration of illegality and annulment of the act of additional IRC assessment and the respective compensatory interest for 2013.

III.2.2. Indemnity Interest and Reimbursement of the Amount Subject to Compensation

The Claimant further requests payment of indemnity interest, pursuant to Article 43, no. 1, of the General Tax Law (LGT), calculated on the amount of tax and corresponding compensatory interest already paid in excess.

In light of the request for enlargement of the object of the case, with respect to the act of additional IRC assessment for 2013, as well as the resulting act of rejection of the administrative complaint filed, the Claimant also requests the condemnation of the Respondent for compensation for the provision of a bank guarantee, pursuant to Article 53 of the LGT.

In accordance with the provisions of paragraph b) of Article 24 of the Legal Framework for Tax Arbitration, the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and this must, in the exact terms of the arbitral decision's favorable finding for the taxpayer and until the end of the period provided for voluntary execution of sentences of tax judicial courts, "restore the situation that would have existed if the tax act that is the object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose", which is in harmony with what is provided in Article 100 of the LGT, applicable by force of paragraph a) of no. 1 of Article 29 of the Legal Framework for Tax Arbitration.

Now, pursuant to no. 5 of Article 24 of the Legal Framework for Tax Arbitration in stating that "payment of interest, regardless of its nature, is due, in the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process" is nothing more than recognition of the right to indemnity interest in the arbitral process.

Doctrine has also held that it falls within the scope of the competence of arbitral tribunals the fixing of the effects of their decisions, in the same terms provided for judicial challenge, in particular, as to condemnation to indemnity interest or to condemnation for compensation by undue security [see Carla Castelo Trindade (2016), "Legal Framework for Tax Arbitration Annotated", 121 and Jorge Lopes de Sousa (2013), "Commentary on the Legal Framework for Tax Arbitration", 116].

Of the various situations in which indemnity interest is due indicated in Article 43 of the LGT, there will be occasion for it if it is understood that error attributable to the services occurred.

In the case at hand, we have tax improperly paid that was the object of self-assessment, whereby the Tax and Customs Authority had no intervention in the practice of the act on which the payment was based, it being to the Claimant itself that the practice thereof is attributable.

As can be read in Arbitral Decision 748/2016-T: "Therefore, as to the self-assessment act, there was no error attributable to the services, and there is consequently no right to indemnity interest arising from its practice.

"However, the same is not true of the decision on the administrative complaint, because the Claimant's contention regarding the illegality of the self-assessment should have been accepted, and the non-acceptance of the contentions is attributable to the Tax and Customs Authority.

"This case of the Tax and Customs Authority maintaining a situation of illegality, when it should have restored it, should be framed, by mere declarative interpretation, in no. 1 of Article 43 of the LGT, because it is a situation in which there is adequate causal nexus between an error attributable to the services and the maintenance of an improper payment and the omission of restoration of legality when the action that would restore it should be performed must be equated to the action ([2])".

Thus, it should be understood that, from the moment the period for decision on the administrative complaint was completed, indemnity interest began to accrue.

Indemnity interest shall be calculated at the legal rate and paid in accordance with the provisions of Articles 43, no. 1, and 35, no. 10 of the LGT, Article 24, no. 1, of the RJAT, Articles 61, nos. 3 and 4, of the Code of Tax Procedure and Process, Article 559 of the Civil Code, and Ordinance no. 291/2003, of 8 April (or such other(s) as may alter the legal rate).

In summary, in the case of this decision, it is evident that, as a consequence of the declaration of illegality of the acts of IRC self-assessment for 2013, which were the object of rejection of an illegal administrative complaint and hierarchical appeal, there is occasion for payment of indemnity interest, calculated from the moment the period for decision on the administrative complaint was completed, in accordance with the applicable legal terms.

As to the request for annulment of the additional assessment of IRC for 2013, the Claimant is entitled to compensation for the bank guarantee improperly provided, all in the amount to be determined in the course of execution of the decision.

As for the request for reimbursement of the value of tax that was the subject of compensation, this is, as results from the evidence, an act performed in the course of the enforcement proceeding, whose examination of legality exceeds the competence of this Arbitral Tribunal.

In such terms, the Respondent should be absolved of the charge with respect to the request for condemnation to reimburse the value of tax subject to compensation.

IV. Decision

In such terms, it is decided in this Arbitral Tribunal:

  1. To judge well-founded the request for declaration of illegality of the act of rejection of the hierarchical appeal, insofar as it did not reflect the entirety of the benefit of the RFAI of 2009 that was deductible;

  2. To judge illegal the mentioned act of explicit rejection of the hierarchical appeal and, in this sequence, to annul the act of IRC self-assessment for 2013;

  3. To judge well-founded the request for declaration of illegality of the act of rejection of the administrative complaint, with the consequent annulment of the act of additional IRC assessment and the respective compensatory interest for 2013;

  4. To condemn the Respondent, as to the request referenced in item 1), to payment of indemnity interest, calculated from the moment the period for decision on the administrative complaint was completed, in accordance with the applicable legal terms, until the moment of full payment of the legally owed amounts;

  5. To condemn the Respondent, as to the request referenced in item 3), to pay to the Claimant compensation for undue security, in accordance with Article 53 of the LGT;

  6. To absolve the Respondent of the charge with respect to the request for condemnation to reimburse the value of tax subject to compensation.

V. Value of the Case

The value of the case is set at €136,700.99 (one hundred thirty-six thousand, seven hundred euros and ninety-nine cents) in accordance with the provisions of Article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), Article 97-A, no. 1, paragraph a) of the Code of Tax Procedure and Process, and Article 306 of the Code of Civil Procedure.

VI. Costs

The amount of costs is set at €3,060.00 (three thousand and sixty euros), pursuant to the provisions of Article 22, no. 4 of the RJAT and Table I attached to the RCPAT, at the charge of the Respondent, in accordance with the provisions of Article 12, no. 2, of the RJAT and Article 4, no. 4 of the RCPAT.

Let notice be given.

Lisbon, 30 April 2018.

The Collective Arbitral Tribunal

Fernanda Maçãs
(Arbitrator President)

Hélder Faustino
(Arbitrator Vogal)

Miguel Patrício
(Arbitrator Vogal)

[1] Decision CAAD no. 693/2014, arbitrators Jorge de Sousa, Henrique Nogueira Nunes and Nuno Pombo.

([2]) ANTUNES VARELA, Of Obligations in General, 10th edition, page 528:

"Omission, as pure negative attitude, cannot generate physically or materially the damage suffered by the injured party; but it is understood that omission is the cause of the damage, whenever there is a special legal duty to perform an act that, surely or very probably, would have prevented the completion of that damage".

Frequently Asked Questions

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Can RFAI tax credits from 2009 be carried forward and deducted in subsequent IRC tax years under Article 3(3) of RFAI?
Yes, Article 3(3) of RFAI explicitly permits carryforward of unused tax credits to the four subsequent tax years when there is insufficient IRC collection in the year the investment was made. The CAAD arbitral tribunal has consistently recognized this carryforward right in multiple decisions (693/2014-T, 369/2015-T, 370/2015-T, 285/2016-T) as essential to ensuring the effectiveness of the RFAI tax benefit scheme and protecting taxpayer rights to utilize legitimately earned investment incentives.
Does the application of Article 92(1) of the IRC Code prevent the carryforward of unused RFAI tax benefit deductions?
The central legal question is whether Article 92(1) of the IRC Code, which limits total tax benefit deductions to ensure a minimum effective tax rate, constitutes a new form of 'insufficient collection' that triggers further carryforward rights under RFAI Article 3(3). The claimant argues that Article 92's purpose is solely to establish minimum annual taxation, not to eliminate the carryforward mechanism. Denying carryforward would create an irreconcilable contradiction between RFAI provisions (allowing 4-year carryforward) and Article 92 limitations, potentially rendering the investment incentive scheme ineffective and violating constitutional proportionality principles.
What is the CAAD arbitral tribunal's position on the right to report unused RFAI deductions to future tax periods?
CAAD arbitral jurisprudence consistently supports the taxpayer's right to carry forward unused RFAI deductions to subsequent years as a fundamental guarantee of the tax benefit's effectiveness. This position aligns with the legislative intent to promote business investment and job creation through RFAI. However, the specific interaction with Article 92(1) limits presents a novel interpretive challenge requiring reconciliation of competing statutory provisions to preserve both the investment incentive's purpose and the minimum effective taxation requirement introduced in subsequent legislation.