Summary
Full Decision
ARBITRAL TAX JURISPRUDENCE
Case No. 45/2019-T
Decision Date: 2019-09-30
Corporate Income Tax (IRC)
Amount of Claim: € 119,282.86
Subject Matter: IRC – Deductibility of costs; essentiality of expenditure – article 23.
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ARBITRAL DECISION
The arbitrators Fernanda Maçãs (President), Dr. Hélder Faustino and Prof. Doctor Nuno Cunha Rodrigues (Members), appointed by the Centre for Administrative Arbitration to form this Arbitral Tribunal, agree as follows:
I – REPORT
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On 21 January 2019, A..., LDA., a commercial company limited by shares with registered office in ..., ..., ... ..., ...-... Lisbon, holder of the Single Identification Number for Legal Persons and registered in the Commercial Registry ..., (hereinafter Claimant), submitted a request for the constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, no. 1, paragraph a), and 10, no. 1, paragraph a), and no. 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters (hereinafter, abbreviated as RJAT), as amended by article 228 of Law no. 66-B/2012, of 31 December, with a view to obtaining a ruling from this tribunal concerning:
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Assessment of the legality of the additional Corporate Income Tax (IRC) assessment no. 2018..., dated 10 September 2018, relating to the tax year 2015, in the amount payable of EUR 115,328.45, and likewise, the assessments of compensatory interest nos. 2018... and 2018..., respectively, in the amounts of EUR 338.87 and EUR 9,428.22, both reflected in the account reconciliation statement no. 2018..., dated 12 September 2018, in the total amount of EUR 119,282.86, with the consequent annulment thereof.
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Condemnation of the Tax Authority (AT) to reimburse the amounts unduly borne by the Claimant, increased by the indemnifying interest due under article 43 of the General Tax Law (LGT).
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The request for constitution of an arbitral tribunal was accepted by the President of CAAD and followed normal proceedings with notification to AT on 29 January 2019.
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The Claimant did not proceed to appoint an arbitrator, therefore, pursuant to article 6, no. 2, paragraph a) and article 11, no. 1, paragraph a) of RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective Arbitral Tribunal, who communicated acceptance of the assignment within the applicable period.
3.1. On 13 March 2019, the parties were notified of this appointment and did not express any wish to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs b) and c) of RJAT and articles 6 and 7 of CAAD's Code of Ethics.
3.2. Thus, in accordance with article 11, no. 1, paragraph c) of RJAT, the Arbitral Tribunal was constituted on 2 April 2019.
3.3. By order dated 1 March 2019 of the Deputy Director-General with delegated competencies, the assessment act was partially revoked, with respect to the correction of EUR 313,890.89, relating to the deduction of financial costs, and, in compliance with no. 2 of article 13 of RJAT, notified to the Claimant on 9 March.
3.4. By request dated 19 March the Claimant requested the alteration of the value of the case, in accordance with article 97-A, no. 1, paragraph a) of CPPT, pursuant to articles 10, no. 2, paragraph e) and 29, no. 1, paragraph a) of RJA, since the value of the case would have changed from EUR 119,282.86 to EUR 39,048.27, and should likewise be relevant for purposes of court costs.
- In the arbitral request, essentially, the Claimant alleges that:
a) According to the AT, the inspection action had only as its purpose the analysis of (non-)compliance with article 67 of CIRC, referring to this in the final tax inspection report that "Given the reason that gave rise to the inspection action, control of financing costs declared by the taxpayer, the analysis of financing costs was carried out taking into account the rules established in article 67 of CIRC, concerning the regime limiting the deductibility of these costs."
b) Nevertheless, the tax inspection services made two corrections in the IRC assessment on the basis of violation of other legal provisions, namely articles 23 and 44 of CIRC and 62 of the Tax Benefits Statute (EBF).
c) In concrete terms, in the words of the inspection services regarding the correction of EUR 313,890.89, "Although the financing costs recorded by A... could be deducted in full, taking into account what is stipulated in article 67 of CIRC, it was found that part of these costs cannot be accepted for tax purposes, in accordance with no. 1 of article 23 of CIRC".
d) In turn, with regard to the correction of EUR 172,845.90, the tax inspection services state that "(...) the sum of € 172,845.90 considered as an expense by A..., in membership fees, does not fit within the provisions of article 44 of CIRC (membership fees in favor of business associations), nor does it fit within what is stipulated in article 62 of the Tax Benefits Statute (EBF)" and, likewise, that "(...) we are not dealing with an expense that could be framed in article 23 of CIRC".
e) Not having the Claimant been notified of an order altering the purposes of the tax inspection action, there is an illegality of the inspection procedure relating to the lack of competence of the inspection services to make the corrections reflected in the tax assessment, as they exceed the purposes of the inspection.
f) According to the Claimant, the tax assessment also suffers from illegality, with respect to the correction relating to the deductibility of financial costs, in the amount of EUR 313,890.89, due to violation of articles 23, nos. 1 and 2, paragraph c) of CIRC and, likewise, articles 104, no. 2 and 13 of the Portuguese Constitution (CRP).
g) The origin of this correction lies in the understanding of the AT that the interest borne through financing, via collateralized accounts at Bank B... and C... and the loan granted by Bank D..., are not susceptible to deduction in accordance with article 23, no. 1 of CIRC.
h) Effectively, the subject of the correction is limited, solely and exclusively, to the deductibility of interest borne by recourse to collateralized accounts at Bank B... and C... and the loan granted by Bank D....
i) There is therefore not at issue in the case the deductibility, for IRC purposes, of interest borne by advances through export documentary credits or possible financial charges borne under hypothetical financing contracts concluded between the Claimant and the respective foreign customers.
j) According to the Claimant, there should be considered as deductible, in accordance with and for the purposes of article 23, no. 1 of CIRC, expenses that result from a management act framed within the scope of the business activity concretely pursued by the IRC taxpayer, regardless of whether that activity is the main activity or merely an ancillary activity and of whether the management act will in concrete terms result in the actual achievement of income or even reflect a good management decision.
k) Given the progressive judicial precision of the concept of a fiscally deductible expense, it must be concluded that the relationship between expenses and revenues, in order to assess whether they fall within the business activity, is assessed in an economic sense: fiscally deductible expenses are those incurred in the interest of the company, which are linked to its capacity by insertion in its profit objective (directly or indirectly ["obtaining or securing revenues subject to IRC"]) and in the exercise of its activity, regardless of the soundness of the management acts underlying them.
l) This same understanding was, moreover, expressly reinforced by the legislator in the 2014 IRC reform, carried out by Law no. 2/2014, of 16 January, with the requirement of essentiality of expenses for the achievement of taxable revenues or the maintenance of the income-producing source being replaced by the current requirement – less stringent – of expenses incurred or borne for obtaining or securing taxable revenues in IRC.
m) The Claimant concludes that an expense will be accepted fiscally if it is immediately or mediately suitable for obtaining profits, considering the business structure of the taxpayer, whether it contributes directly to the profit objective, whether it contributes indirectly and, ultimately, to the business activity, as is the case here.
n) On the other hand, the inspection services also propose a correction translated into the non-deductibility of the amount EUR 172,845.90 concerning membership fees borne by the Claimant in favor of E... in the tax year 2015.
o) In sum, the inspection services understand that the amount in question cannot be accepted as a fiscal expense of the 2015 tax year since it is not capable of being framed in articles 44 of CIRC and 62 of EBF.
p) Indeed, the Claimant does not challenge the understanding that the expense in question is not susceptible to subsumption within the provisions of articles 44 of CIRC and 62 of EBF.
q) However, in response to what was invoked in the prior hearing, the inspection services defend that the expense is also not deductible in accordance with article 23 of CIRC, since it allegedly does not constitute an expense borne in the interest of the company.
r) Now, the tax inspection services made the present correction because they considered that the promotional expenses in question do not benefit from business scope since, the AT alleges, those promotional activities did not result, until the 2015 tax year, in the direct acquisition of new customers for the Claimant.
s) It should be noted that the Angolan market constitutes the main market of operation for the Claimant, being essential for the maintenance of its commercial activity.
t) Effectively, the expense with membership fees whose deductibility is being challenged by the AT represents an effort by the Claimant to consolidate its image and credibility with customers in the Angolan market – especially in areas such as the pharmaceutical and school markets – and, likewise, to ensure networking opportunities with other relevant entities in that market, with a view to enhancing its activity.
u) The connection of the expense with the activity carried out by the Claimant is evident, which includes development in various areas, encompassing pharmaceutical and school product areas.
v) Despite acknowledging that the deductibility of expenses depends solely on assessing the connection with the business activity, the AT concludes for the non-deductibility of the expenses without, however, invoking pertinent reasons that call into question the connection between the expenses and the business activity, emphasizing that those promotional efforts did not allow the acquisition of new customers unrelated to the Claimant.
w) In conclusion, the expenses with membership fees borne in 2015, assumed on the basis of the promotional and reputational motivations explained, are related to the commercial activity of the Claimant constituting, a fortiori, deductible expenses for determining the taxable profit of the 2015 tax year in accordance with article 23, no. 1 of CIRC, on penalty of the interpretation followed by the Respondent of article 23 of CIRC suffering from material unconstitutionality due to violation of the principles of taxation on actual income and taxpaying capacity, provided for in articles 104, no. 2 and 13 of the CRP, respectively, from which the illegality of the act in question follows.
- On 16 May 2019, the Respondent, duly notified for this purpose, submitted its Answer, concluding for the inadmissibility of the present action, based, in sum, on the following arguments:
a) The Respondent begins by stating that, by order dated 1 March 2019 of the Deputy Director-General with delegated competencies, the assessment act was partially revoked and, in compliance with no. 2 of article 13 of RJAT, notified to the Claimant.
b) The Respondent proceeded to revoke the part of the assessment corresponding to the disregard of financial costs, in accordance with article 23 of the IRC Code, maintaining part of the assessment relating to the disregard of the deductibility of membership fees, whereby only the legality of the assessment corresponding to the deductibility of membership fees in the amount of EUR 172,845.90 paid by the Claimant to Company E... is discussed in the case.
c) Initially the Claimant alleges that the AT services failed to comply with articles 14 and 15 of the Complementary Regime for Tax and Customs Inspection Procedures (RCPITA), since the AT would be limited to controlling deductible net financing costs in accordance with article 67 of CIRC.
d) The AT understands that the Claimant was duly notified that it would be inspected regarding the IRC for the 2015 tax year and that the inspection acts would take place at its own facilities or those of third parties with whom it had economic relations, whereby it was therefore perfectly aware of the terms in which the inspection procedure would take place and which actually took place without any overstepping of competencies on the part of the inspection services, contrary to what is argued.
e) During the inspection it was stated that the membership fees to E... were recorded on the basis of two credit notes duly identified and issued by A... to its Angolan customer F..., LDA., having served as a set-off between A... and its customer.
f) Apart from the fact that the recording was carried out in an unconventional manner, the two documents supposedly issued by E..., relating to the membership fees, do not adequately identify the recipient, as the name is incomplete and does not present a tax identification number.
g) The basis for the corrections necessarily related to non-compliance with the requirements of article 23 of CIRC.
h) It is in that tax rule that the conditions are defined for expenses to be fiscally deductible, which will only be accepted if they pass the first test of essentiality required by article 23 of CIRC.
i) Considering the basis for the corrections contained in the inspection report, the costs declared by the Claimant succumbed to the test of essentiality, whereby the burden of proof was on the Claimant in the present arbitral action to demonstrate that the amounts disregarded could be subsumed within the legal concept of an expense.
j) Essential requirements for the payment of membership fees to be valued and accepted as a fiscal expense are, on the one hand, the proof of the expenses and, on the other, their essentiality for obtaining taxable gains.
k) The essentiality of expenses for obtaining taxable gains makes the tax deductibility of the cost depend on a justified relationship with the company's productive activity and this essentiality is verified provided that such charges are connected with the obtaining of profit.
l) This essentiality that the Claimant failed to prove either in the inspection procedure or in the present case, as was its responsibility.
m) For all the above, the correction made by the inspection in the amount of EUR 172,845.90 relating to membership fees, as it does not fit within the spirit of article 23 of CIRC, should be maintained in the legal order.
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By order dated 21 May 2019, the parties were notified of the Arbitral Tribunal's decision to waive the holding of the meeting referred to in article 18 of RJAT, and were invited to submit written pleadings, with 2 October 2019 being fixed as the deadline for issuing the arbitral decision.
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The parties submitted written pleadings.
II – PRELIMINARY RULING
The Arbitral Tribunal was regularly constituted and is competent ratione materiae, considering the characterization of the subject matter of the case (cf. articles 2, no. 1, paragraph a) and 5 of RJAT).
The request for arbitral ruling is timely, as it was submitted within the period provided for in article 10, no. 1, paragraph a) of RJAT.
The parties have legal personality and capacity, have standing and are properly represented (cf. articles 4 and 10, no. 2 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).
The case is not affected by any nullities.
As for the value of the case, the present request for arbitral ruling is brought against the tax assessment act of additional IRC dated 10 September 2018, relating to the year 2015, in the amount of EUR 115,328.45 and the respective assessments of compensatory interest, in the total amount of EUR 119,282.86.
Corrections made by the Respondent are at issue, with EUR 313,890.89 relating to the disregard as an expense for purposes of determining taxable result of financial costs, in accordance with article 23 of CRIC and EUR 172,845.90 corresponding to the disregard of the deduction of membership fees, in accordance with article 44 of CIRC and article 62 of EBF.
As we have seen, by order dated 1 March of the Deputy Director-General the assessment act under review was partially revoked, maintaining only the correction of the amount EUR 172,845.90 corresponding to the disregard of the deduction of membership fees.
In determining the value of the case, regard must be had to the time when the action is brought, except where there is a counterclaim or intervention, as follows from article 299, no. 1 of CPC (applicable pursuant to article 29, no. 1, paragraph e) of RJAT).
As it flows from article 259, no. 1 of CPC (applicable pursuant to article 29, no. 1, paragraph e) of RJAT), the case is initiated by bringing the action and this is considered brought, filed or pending once the respective initial pleading is received in the registry, that is, in the case of the tax arbitral process, once the request for constitution of the Arbitral Tribunal is received in the registry of CAAD.
Accordingly, as stated by Jorge Lopes de Sousa (Guide to Tax Arbitration, revised and updated, 2nd edition, Almedina, Coimbra, 2017, p. 153), "modifications in value arising from revocation, ratification, reform or conversion of the tax assessment whose illegality was raised or from withdrawal or reduction of claims are irrelevant.
Likewise, any extension of the original claim that is considered admissible, as being a development or consequence of the original claim (article 265, no. 2 of CPC), such as, for example, an increase arising from indemnifying interest or indemnity for undue guarantee, shall not imply alteration of the value of the case."
Accordingly, the value of the case remains fixed by the Claimant at EUR 119,282.86, and the request for its alteration is dismissed, with the competence of the collective tribunal likewise being maintained.
III – REASONING
III-1. FACTUAL FINDINGS
§1. Established Facts
The following facts are considered established as relevant to the decision to be given in the present case:
a) The Claimant is a commercial company with registered office and actual management in Portuguese territory which, within the scope of its commercial activity, is primarily engaged in general trade, including wholesale trade, import and export, commissions and representations of national and foreign companies, being subject to the general taxation regime for IRC purposes;
b) In the 2015 tax year the Claimant carried out exports to various customers established in Angola (cf. Document no. 3 attached with the request for arbitral ruling);
c) In the 2015 tax year the Claimant was included in the list of member entities of the General Assembly of the Foundation... ("E...") (cf. Document no. 9 attached with the initial pleading);
d) E... is dedicated, by statutory mandate, to the promotion of health, education and professional training (cf. Document no. 10 attached with the initial pleading);
e) The General Assembly constitutes one of the main bodies of E... and has the nature of a consultative body of the President of the Board of Trustees, meeting twice a year with the objective of promoting the pursuit of the institution's respective purposes (cf. Document no. 10);
f) In its capacity as member of the General Assembly the Claimant proceeded, in the 2015 tax year, to the payment of the respective membership fees in the total amount of EUR 172,845.90 (cf. Document no. 11 attached with the initial pleading);
g) In compliance with Service Order no. OI 2017..., between May and August 2017 the Claimant was subject to an external inspection action, of partial scope, with reference to the 2015 tax year, carried out by Team 11 of Division I of Department C of the Team... of the Lisbon Finance Directorate (cf. Document no. 2 attached with the initial pleading), which resulted in the following corrections:
h) On 21 August 2018, the Claimant was notified of the draft tax inspection report, in the context of which the AT concluded, with respect to the deductibility of financing costs under article 67 of CIRC, the following: "Given the reason that gave rise to the inspection action, control of financing costs declared by the taxpayer, the analysis of financing costs was carried out taking into account the rules established in article 67 of CIRC, concerning the regime limiting the deductibility of these costs. (...) In light of the foregoing, the financing costs recorded by the taxpayer are within the limit stipulated in paragraph a) of no. 1 of article 67 of CIRC, of € 1,000,000.00, even with the addition of stamp duty inherent to the financing operations (€ 39,564.04) (...) Although the financing costs recorded by A... could be deducted in full, taking into account what is stipulated in article 67 of CIRC, it was found that part of these costs cannot be accepted for tax purposes, in accordance with no. 1 of article 23 of CIRC" (cf. Document no. 12 attached with the initial pleading);
i) Following that notification – and despite the submission of a prior hearing in which it requested the annulment of the proposed corrections – the Claimant was notified of the final tax inspection report by way of Office Letter no.... dated 31 August 2018, in which the AT maintained the proposed corrections (cf. Document no. 2 attached with the initial pleading);
j) With respect to the membership fees paid by the Claimant to E... in the 2015 tax year, it was found that "In the account 'Other Expenses and Losses' (6883 – Membership Fees) two sums of € 86,422.95 (USD 100,000.00) were recorded on the basis of credit notes nos.... and ..., dated 2015-06-30, issued by A... to its Angolan customer 'F..., Lda.', with the description 'Fees E...' (for 2014 and 2015). The said credit notes served as the basis for the recording of expenses, arising from membership fees in the total amount of € 172,845.90, and served as a set-off between A... and its customer 'F..., Lda.'. Attached to credit notes nos. 3500032 and 3500033 are two documents supposedly issued by the 'Foundation E...' (...) relating to annual membership fees for the years 2014 and 2015, in the value of USD 100,000.00 per year. In these documents the recipient thereof ('A..., LDA.') is not properly identified (incomplete name and absence of tax identification) (...)" (cf. Document no. 2 attached with the initial pleading);
k) As a consequence of the mentioned corrections the Claimant was notified of the tax assessment in question and of the account reconciliation statement no. 2018..., which reflected the debt compensation no. 2018..., dated 31 October 2018, by means of which the AT applied the debt determined in the contested tax assessment to a credit in favor of the taxpayer (cf. Documents nos. 1 and 13 attached with the initial pleading);
l) On 21 January 2019, the Claimant submitted the request for constitution and arbitral ruling which gave rise to the present case;
m) By order dated 1 March 2019 of the Deputy Director-General with delegated competencies, the assessment act was partially revoked and, in compliance with no. 2 of article 13 of RJAT, the Claimant was notified;
n) Effectively, the AT revoked part of the assessment corresponding to the disregard of financial costs in accordance with article 23 of CIRC, maintaining part of the assessment relating to the disregard of the deductibility of membership fees, in the amount of EUR 172,845.90.
§2. Unproven Facts
No facts with relevance to the assessment and decision of the case remain unproven.
§3. Reasoning of Established Facts
The facts pertinent to the judgment of the case were chosen and identified according to their legal relevance, in light of the plausible solutions of the legal questions, in accordance with the combined application of articles 123, no. 2 of the Code of Tax Procedure and Process (CPPT), 596, no. 1 and 607, no. 3 of the Code of Civil Procedure (CPC), applicable pursuant to article 29, no. 1, paragraphs a) and e) of RJAT.
With regard to the factual matter proved, the Tribunal's conviction was based on the facts stated by the parties, whose correspondence to reality was not put in question, and on the critical analysis of the documentary evidence, which appears in the case file, including the administrative process.
III-2. LEGAL FINDINGS
§1. Delimitation of the Object of the Case
The Claimant came to request assessment of the legality of the additional Corporate Income Tax (IRC) assessment no. 2018..., dated 10 September 2018, relating to the 2015 tax year, in the amount payable of EUR 115,328.45, and likewise of the assessments of compensatory interest nos. 2018... and 2018..., respectively, in the amounts of EUR 338.87 and EUR 9,428.22, both reflected in the account reconciliation statement no. 2018... dated 12 September 2018, in the total amount of EUR 119,282.86, with the consequent annulment thereof.
The Claimant questions the corrections made by the Respondent, with EUR 313,890.89 relating to the disregard of financial costs, in accordance with article 23 of CRIC and EUR 172,845.90 to the disregard of the deduction of membership fees, in accordance with article 44 of CIRC and article 62 of EBF.
In the answer the Respondent stated that, by order dated 1 March 2019 of the Deputy Director-General with delegated competencies, the assessment act was partially revoked in the part corresponding to the disregard of financial costs in accordance with article 23 of CIRC, maintaining part of the assessment relating to the disregard of the deductibility of membership fees, in the amount of EUR 172,845.90.
The results that the Claimant intended to achieve with the present arbitral case are thereby partially attained, and it must be decided, with appropriate adaptations, that there is supervenient lack of utility of the dispute in this part.
Accordingly, the central question discussed in the present case concerns the legality of the additional IRC assessment dated 10 September 2018, relating to the 2015 tax year, in the part corresponding to the deductibility of membership fees in the amount of EUR 172,845.90 paid by the Claimant to Company E....
As we have seen, to support the request for declaration of illegality the Claimant invokes, in summary, the following defects:
i) Violation of the purposes of the inspection (cf. articles 14 and 15 of the Complementary Regime for Tax and Customs Inspection Procedures – RCPITA);
ii) Susceptibility of deduction of financial costs in the amount of EUR 313,890.89 (cf. articles 23, nos. 1 and 2, paragraph c) of CIRC and 13 and 104, no. 2 of the CRP), a question subsequently reduced to EUR 172,845.90, concerning membership fees borne by the Claimant in favor of E... in the 2015 tax year.
§2. Legality of the Assessment
A) Analysis of the First Defect
The Claimant states, in the initial pleading, that the aforementioned Service Order delineated the inspection in question as an "(...) external action of partial scope, in the context of IRC, with a view to controlling deductible net financing costs, in accordance with article 67 of the IRC Code (CIRC)" (cf. article 42 of the initial pleading).
The Claimant further adds, in article 43 of the initial pleading, that "(...) according to the AT, the inspection action had only as its purpose the analysis of (non-)compliance with article 67 of CIRC" to conclude, in article 53, that "(...) although the inspection action was initiated with the purpose of inspecting the Claimant's compliance with article 67 of CIRC, the AT ended up promoting corrections based on articles 23 and 44 of CIRC and 62 of EBF" which will have determined that inspection action has seen, "(...) in practice, its purposes broadened for analysis of compliance with obligations beyond those provided for in article 67 of CIRC, as appears from the content of the corrections made in the final tax inspection report".
In this context, the Claimant concludes that "(...) by making corrections to the Claimant's taxable matter that exceed the purposes of the inspection action, the inspection services overstepped their inspection mandate, tainting the tax assessment under examination with illegality due to violation of articles 12 and 15 of RCPITA, requiring its annulment in accordance with article 163, no. of CPA. Applicable pursuant to article 4, paragraph e) of RCPITA, all with the other legal consequences."
For its part, the AT alleged, in its answer, that the "(...) Claimant was duly notified that it would be inspected regarding the IRC for the 2015 tax year and that the inspection acts would take place at its own facilities or those of third parties with whom it had economic relations" (cf. article 22 of the answer).
The first question to be decided is therefore whether, in making corrections to the Claimant's taxable matter, the inspection services overstepped their inspection mandate, tainting the tax assessment under examination with illegality due to violation of articles 12 and 15 of RCPITA.
Let us examine this.
The tax inspection procedure aims at the observation of tax realities, the verification of compliance with tax obligations and the prevention of tax infractions (article 2, no. 1 of the Complementary Regime for Tax and Customs Inspection Procedures – RCPITA), and may be initiated up to the end of the period of limitation for the right to make an assessment, is continuous and must be completed within a maximum period of six months from notification of its commencement, a period which may be extended before its expiry, under the conditions provided for in article 36 of RCPITA.
As for the purposes, the tax inspection procedure is classified, in accordance with article 12, no. 1 of RCPITA, as (a) Verification and certification procedure, aiming to confirm compliance with the obligations of taxpayers and other tax-obligated parties and (b) Information procedure, aiming to comply with legal information or opinion duties with which tax inspection is legally charged.
As for the scope, the tax inspection procedure may be general or polivalent, if it covers the totality of the tax situation or the set of tax duties of the inspected party (article 14, no. 1 paragraph a) of RCPITA) and partial or univalent, when it concerns only some taxes or duties of taxpayers or other tax-obligated parties (article 14, no. 1 paragraph b) of RCPITA) and also when it aims only at consultation and collection of certain documents and elements and verification of the computer systems used by taxpayers or other tax-obligated parties (article 14, no. 2 of RCPITA).
Finally, with respect to amplitude or temporal extension, the tax inspection procedure may cover only one or more than one tax period (article 14, no. 3 of RCPITA).
The classification initially attributed by the AT to a tax inspection procedure may be altered during its execution, with respect to its purposes, scope and extension, by a reasoned order of the entity that ordered it, to be notified to the inspected entity (article 15, no. 1 of RCPITA).
In the case at hand, and in accordance with what is contained in service order OI2017..., the inspection action was characterized as, being relative to the 2015 tax year, an "external action of partial scope, in the context of IRC, with a view to controlling deductible net financing costs, in accordance with article 67 of CIRC."
The procedure was therefore delimited as to temporal extension: it encompassed the 2015 tax year.
Nevertheless, the procedure delimited, more precisely, the control aimed at: "deductible net financing costs".
It is true that the inspection action refers, in the final part, to article 67 of CIRC.
However, it cannot be considered that the circumstance that, ultimately, the qualification (or non-qualification) of certain costs could be determined in light of another article – for example, article 23 of CIRC – implies the illegality consequent upon the tax assessment under examination.
The purposes of the inspection action were respected: analysis of the Claimant's 2015 tax year.
Note, moreover, that the Claimant had an opportunity to comment on "deductible net financing costs" in the prior hearing – which it did on 14 August 2018 – having, at that time, argued that expenses borne with E... membership fees fell within the provision of article 23, no. 1 of CIRC.
Being at issue merely the legal characterization of the expenses subject to challenge, it is considered that there was therefore no omission of any essential formality, all the more so since the Claimant had the opportunity to intervene, being notified to exercise the right of hearing on the draft report, in accordance with article 60 of RCPITA.
B) The Claimant also invokes the susceptibility of deduction of financial costs in the amount of EUR 313,890.89 (cf. articles 23, nos. 1 and 2, paragraph c) of CIRC and 13 and 104, no. 2 of the CRP) amount subsequently corrected to EUR 172,845.90, corresponding to the deductibility of membership fees paid by the Claimant to company E...:
It should be considered, prima facie, that the AT revoked part of the assessment corresponding to the disregard of financial costs in accordance with article 23 of the IRC Code, maintaining part of the assessment relating to the disregard of the deductibility of membership fees (cf. article 4 of the answer) whereby only the legality of the assessment corresponding to the deductibility of membership fees in the amount of EUR 172,845.90 paid by the Claimant to company E... is discussed in the present case (cf. article 5 of the AT's answer).
We must limit ourselves, in this regard, to what is stated by the Claimant in articles 192 to 234 of the initial pleading (without prejudice to the reference to the dogmatic elaboration of the provision in article 23, no. 1 of CIRC made by the Claimant and carried out in the previous chapter of the initial pleading, as indicated at the beginning of article 215 of the initial pleading).
Let us analyze this defect.
The Claimant does not challenge the understanding, shared by the AT, according to which the expense in question is not susceptible to subsumption within the provision of articles 44 of CIRC and 62 of EBF (cf. article 195 of the initial pleading).
The Claimant further adds that, "by fiscally deducting the expense by its actual amount – and not by an increased value in accordance with those provisions – it is manifestly evident that the Claimant itself understands those provisions to be non-applicable, the expense having been deducted, for tax purposes, only by force of the general rule inscribed in no. 1 of article 23 of CIRC" (cf. article 201 of the initial pleading).
It is precisely at this point that the Claimant and the AT differ since the latter understands that the expense is not deductible in accordance with article 23 of CIRC, since it does not constitute an expense borne in the interest of the company.
It is necessary, therefore, to make a brief digression regarding article 23 of CIRC in order then to attempt to subsume it to the concrete case.
i) Interpretation of article 23 of CIRC in the version resulting from Decree-Law no. 159/2009, of 13 July:
Article 23, nos. 1 and 3 of CIRC provided, at the time to which the contested facts refer, as follows, in the part that is relevant here:
"Article 23
Expenses and Losses
1 - For determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or secure revenues subject to IRC are deductible.
(...)
3 - The deductible expenses under the foregoing numbers must be documented proof, regardless of the nature or support of the documents used for this purpose.
(...)"
With respect to cost deductibility provided for in article 23, no. 1 of CIRC the Claimant states, in articles 107 and 108 of the initial pleading, the following:
"It follows from the cited rule, insofar as it represents the interpretation unanimously accepted by doctrine and jurisprudence, that expenses incurred by a company within and by virtue of its business activity are deductible, which by definition will have as its objective the obtaining of profit.
A contrario sensu, article 23 of CIRC only allows for the fiscal disregard of extra-business expenses, that is, those that do not present any affinity with the activity of the taxpayer such as, for example, expenses with private expenses of partners, refusing that this affinity can be assessed freely from any subjective judgment on the part of the AT."
It is necessary, therefore, to analyze whether the expenses sub judice occurred "within and by virtue of the (...) business activity [of the Claimant], which by definition will have as its objective the obtaining of profit."
In this context, it is understood that past jurisprudence should be revisited, issued with respect to the requirement that was verified in light of article 23, no. 1 of the IRC Code in the version resulting from Decree-Law no. 159/2009, of 13 July, in accordance with which expenses had to be essential.
It is true that such requirement does not appear, currently, expressly in article 23, no. 1 of the IRC Code.
But it is equally true that we can, based on the interpretation made by the courts of that rule, attempt to reach the interpretation of the current wording of article 23 of the IRC Code seeking, in particular, to understand whether the expenses sub judice occurred "within and by virtue of the (...) business activity [of the Claimant], which by definition will have as its objective the obtaining of profit."
The possibility of cost deductibility, in light of article 23, no. 1 of the IRC Code – in the version resulting from Decree-Law no. 159/2009, of 13 July – was, in the past, the subject of diverse jurisprudence issued by both CAAD and administrative courts which we will analyze below.
According to the understanding of the Southern Administrative Central Court "...the legal notion of essentiality is therefore understood as a perspective of economic-business nature, by direct or indirect fulfillment of the ultimate motivation of contributing to the obtaining of profit" (Judgment of the TCA South, of 27 March 2012, Case no. 053120/12).
The aforementioned judgment further adds that "...the deductibility of the cost depends only on a causal and justified relationship with the activity of the company. And outside the concept of essentiality will remain only the acts that do not conform to the social objective, those that do not fit within the interest of the company, especially because they do not aim at profit".
In this sense, provided that the orientation of expenses for the pursuit of the company's activity and, consequently, for the obtaining of profit is proven, it is understood that the criterion of essentiality is met, being outside the scope of the Tax Authority to make value judgments about the soundness of business management.
Still in accordance with the judgment issued in case 444/2015-T, "from a general point of view, the essential features of the path established by national doctrine and jurisprudence on the essentiality of expenses can be summarized as follows":
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the judgment on the essentiality of expenses borne implies that its contribution to the obtaining of revenues or gains subject to tax or to the maintenance of the income-producing source be verified, whereby "The legal notion of essentiality is therefore understood as a perspective of economic-business nature, by direct or indirect fulfillment of the ultimate motivation of contributing to the obtaining of profit" and "the tax deductibility of the cost depends only on a causal and justified relationship with the activity of the company." (Judgment of the STA, issued on 30-11-2011, in case no. 0107/11);
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the costs (...) cannot fail to respect the company taxpayer itself. That is, for a given sum to be considered a cost of that company it is necessary that the respective activity be developed by it itself, not by other companies." (Judgment of the STA, issued on 30-05-2012, in case no. 0171/11);
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"a concept of essentiality that, moving definitively away from the idea of causality between expenses and revenues, places the emphasis on the relationship of expenses with the activity pursued by the taxpayer, that is, considering that the said concept of essentiality is verified whenever expenses are incurred in the interest of the company, in the pursuit of its respective activities." (Judgment of the STA, issued on 04-09-2013, in case no. 0164/12);
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the concept of essentiality is case-by-case and the nexus of economic causality cannot be disconnected from the factuality of the concrete case, and "the Tax Authority cannot assess the essentiality of costs in light of criteria based on the opportunity and merit of the expense. A cost is essential when it relates to the activity of the company, and costs foreign to the activity of the company will be only those in which no causal nexus can be found with the revenues or gains (or with the revenue, in the current expression of the code - cf. art. 23, no. 1 of C.I.R.C.), explained in terms of normality, necessity, congruence and economic rationality." (Judgment of the TCA-South, issued on 16-10-2014, case no. 06754/13);
"The essentiality of the cost must simply result from its link to business activity. If the cost is not foreign to the activity of the company, 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 essential." (Judgment of the TCA-North, issued on 20-12-2011, case no. 01747/06.3BEVIS);
"...from the legal notion of cost provided by article 23 of CIRC it does not follow that the AT can call into question the principle of freedom of management, scrutinizing the soundness and opportunity of the economic decisions of the company's management 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 essentiality to which article 23 of CIRC refers as a condition for a cost to be deductible does not refer to necessity (the expense as a sine qua non condition of revenues), nor even to convenience (the expense as convenient for business organization), on pain of intolerable interference by the AT in the autonomy and freedom of management of the taxpayer, but requires only an economic causal relationship, in the sense that it is sufficient that the cost be incurred in the interest of the company, in order, directly or indirectly, to obtain profits."
The legal notion of essentiality was therefore understood as a perspective of economic-business nature, by direct or indirect fulfillment of the ultimate motivation of contributing to the obtaining of profit.
Essential costs were equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsuming into a profit profile. This objective deliberately approximated economic and fiscal categories through an interpretation primarily logical and economic of legal causality (emphasis added).
The indispensable expense was equivalent to every cost incurred in order to obtain income and which represented an economic decline for the company. As a rule, therefore, the tax deductibility of the cost depended only on a causal and justified relationship with the activity of the company. And "outside the concept of essentiality will remain only acts that do not conform to the social objective, those that do not fit within the interest of the company, especially because they do not aim at profit." (Judgment of the STA, issued on 30-11-2011, case no. 0107/11);
"The rule is that correctly recorded expenses are fiscal costs; the criterion of essentiality was created by the legislator, not to allow the Administration to interfere in the management of the company, dictating how it should apply its means, but to prevent the fiscal consideration of expenses that, even if recorded as costs, are not inscribed within the scope of the company's activity, were incurred not for its pursuit but for other interests foreign to it. Strictly speaking, these are not true costs of the company, but expenses that, having regard to their object, were abusively recorded as such. Without the Administration being able to assess the essentiality of costs in light of criteria relating to their opportunity and merit.
The concept of essentiality not only could not be equated to a strict judgment of imperious necessity, as already stated, but also could not be based on a judgment about the convenience of the expense, made necessarily a posteriori.
For example, expenses made with an advertising campaign that proved unsuccessful could not, solely on the basis of that result, be stated to be dispensable.
The judgment about the opportunity and convenience of expenses was exclusive to the businessman. If he decided to make expenses with a view to pursuing the company's objective but was unsuccessful and those expenses proved, ultimately, fruitless, they remained fiscal costs.
But any expense recorded as a cost and shown to be foreign to the company's objective was not a fiscal cost, because not essential.
"We understand (...) that, on pain of violation of the principle of taxpaying capacity, the Administration can only exclude expenses not directly ruled out by law under a strong motivation that convinces that they were incurred beyond the social objective, that is, in the pursuit of another interest than the business one or, at least, with clear excess, deviant, in light of the objective needs and capacities of the company." (Judgment of the STA, issued on 29-03-2006, case no. 01236/05).
Similarly, it was stated in case no. 648/2017-T of CAAD that the assessment of the proven essentiality of expenses for the achievement of revenues subject to tax or for the maintenance of the income-producing source, to which no. 1 of article 23 of CIRC referred, could only be done with respect to the entity that records and bears them, as results from repeated jurisprudence of the STA, of which an example is its Judgment of 30.05.2012, case no. 171/11, which concluded: "costs cannot fail to respect the company taxpayer itself. That is, for a given sum to be considered a cost of that company it is necessary that the respective activity be developed by it itself, not by other companies", as well as the STA judgment of 10.7.2002, case no. 0246/02, which decided: "the costs foreseen in that article 23 must respect the company taxpayer itself", whereby "for a given sum to be considered a cost of that company it is necessary that the respective activity be developed by it itself, not by other companies even if in a relationship of control".
As stated by the TCA North judgment of 14.3.2013, case no. 01393/06.1, "only costs that were proven to be essential for the achievement of revenues or gains or for the maintenance of the income-producing source but of the company itself and not of a third party should be considered costs of the fiscal year. That is, costs must be attributed to the activity developed by the company in question and not by another company".
In summary, the concept of essentiality does not appear in the current wording of article 23, no. 1 of CIRC.
Therefore, the expense cannot currently be assessed in light of a strict judgment of imperious necessity. Nevertheless, the jurisprudence previously referred to also analyzed the convenience of the expense, as was explained.
From here we can therefore attempt to analyze whether the expenses sub judice occurred "within and by virtue of the (...) business activity [of the Claimant], which by definition will have as its objective the obtaining of profit."
ii) The deductibility of costs in the case sub judice in light of the provision in article 23, no. 1 of CIRC in the version resulting from Law no. 2/2014, of 16 January:
It is now important to subsume the established facts to the provision of article 23, no. 1 of CIRC in the version resulting from Law no. 2/2014, of 16 January.
The issue is whether the expenses sub judice occurred "within and by virtue of the (...) business activity [of the Claimant], which by definition will have as its objective the obtaining of profit."
For this purpose, and in other words, we can consider that the expense is equivalent to every cost incurred in order to obtain income and which represents an economic decline for the company. Tax deductibility of the cost therefore depends, and only, on a causal and justified relationship with the activity of the company.
As appears from the facts established as proved, it was demonstrated that the Claimant deducted the amount of EUR 172,845.90 concerning membership fees borne by the Claimant in favor of E... in the 2015 tax year.
Thus, the requirement of proof of the cost is met.
With respect to the other requirement arising from article 23 of CIRC (connection of expenses to revenues subject to tax) the Respondent considered, referring to the requirement of essentiality (which, it is reiterated, is not expressly provided for in the current wording of article 23, no. 1) that "(...) the costs declared by the Claimant succumbed to the test of essentiality, whereby the burden of proof was on the Claimant in the present arbitral action to demonstrate that the amounts disregarded could be subsumed within the legal concept of an expense." (cf. article 40 of the answer)
As we have seen the concept of essentiality does not appear in the current wording of article 23, no. 1 of CIRC. Therefore, the expense cannot currently be assessed in light of a strict judgment of imperious necessity.
Strictly speaking, what matters to ascertain is whether the expenses sub judice occurred "within and by virtue of the (...) business activity [of the Claimant], which by definition will have as its objective the obtaining of profit."
This implies ascertaining whether the membership fees paid by the Claimant to E... occurred within and by virtue of the business activity thereof, which by definition will have as its objective the obtaining of profit.
Here it must be recalled that it was established as proved that E... is an Angolan foundation which, under no. 1 of article 2 of its Statutes (Scope and Purposes) "is a private social institution of national scope, established to give organized expression to the moral duty of solidarity and justice, for purposes of support for:
a) Children and youth,
b) Family;
c) Social integration;
d) Protection in old age and invalidity;
e) Promotion of health;
f) Education;
g) Professional training;
h) Physical education;
i) Sport;
j) Social housing;"
It is therefore a matter of knowing whether the membership fees paid by the Claimant to E... have the potential to influence positively the obtaining of revenues by the Claimant.
In this way, it is strictly in relation to the entity whose costs are under consideration for purposes of determining its taxable profit that it is important to assess, taking into account the business activity it develops, the tax deductibility of the financial charges.
It is therefore necessary to ascertain the necessity, adequacy, normality or connection to a profitable business of the costs under consideration, that is, the expense recorded by the Claimant arising from the payment of membership fees to E....
Effectively, in the economic causal relationship of the cost with the interest of the company, the business interest that is assessed is that of the company itself that fiscally deducts the cost.
As appears from the factuality established as proved and set out above, in the case at hand, the economic and financial motivations that influenced the decision did not limit themselves to the interest of the Claimant.
In truth, one does not see how membership fees to a Foundation "established to give organized expression to the moral duty of solidarity and justice" can be of business interest.
The Claimant invokes, for this purpose, tenuous and scarcely perceptible links between E... and the business interest of the Claimant.
It states, in the initial pleading, that "the central relevance that the Angolan market assumes in the commercial activity of the Claimant (...) drove the incurring of promotional and image consolidation activities such as those at issue in the case." (cf. article 208 of the initial pleading), that "intending the Claimant to continue to consolidate its business in the Angolan market and being E... a preponderant foundation in Angola, the Claimant tightens its links with that market through that same institution." (cf. article 210 of the initial pleading) and, finally, that "the Claimant aims to maintain and expand its customer base – whether related or not related to the A... Group – being reputation essential for this purpose and the institution in question contributing much to this positive image." (cf. article 213 of the initial pleading).
However, and contrary to what is concluded by the Claimant in article 214 of the initial pleading, the connection of the expense with the activity carried out by the Claimant is minimally evident.
Strictly speaking, the payment of fees to a philanthropic institution cannot be understood as an expense borne in the interest of the company to obtain or secure revenues subject to IRC, in light of the provision of article 23, no. 1 of CIRC.
Two distinct realities – and interests – are at issue.
In one case, participation in the social bodies of E..., in pursuit of a social utility – it is sought to "give organized expression to the moral duty of solidarity and justice" – constituting the fee for the Claimant a duty of payment as an associate and participant in community associative life.
In the other case – the Claimant – should incur expenses in its business interest.
In sum, the intervention of the Claimant in the said Foundation has nothing to do with its business activity.
The correction made by the AT, subject of the present case, is therefore legitimate, since, as acknowledged by the Supreme Administrative Court in the judgment issued on 29-03-2006, case no. 01236/05, "the Administration can only exclude expenses not directly ruled out by law under a strong motivation that convinces that they were incurred beyond the social objective, that is, in the pursuit of another interest than the business one or, at least, with clear excess, deviant, in light of the objective needs and capacities of the company".
It is true that one could speculate about the possibility of the expense in question being subsumed within the provision of articles 44 of CIRC and 62 of EBF.
However, in the present case, as we have seen, both the Claimant and the AT are in agreement that this is not the case whereby the question in dispute concerns the possible subsumption of that cost in article 23 of CIRC and, consequently, being considered deductible.
In these terms, the scrutiny that the AT conducted of the membership fees to E... is congruent and sufficient to conclude that such costs do not occur within and by virtue of the business activity of the Claimant.
From this it must be concluded that, in the situation of the case, there is no place for "the positive judgment of subsumption in the company activity" by which the costs "will be equivalent to costs incurred in the interest of the company" (although they do not have to be essential) (cf. STA judgment of 30.11.2011, case no. 0107/11).
Accordingly, the membership fees paid by the Claimant to E... do not occur within and by virtue of the business activity of the Claimant, for tax purposes under article 23 of CIRC, with the requirement relating to the allocation of costs to the business interest of the Claimant not being met.
Finally, the Claimant alleges that the AT will have violated the constitutional principle of taxation on actual profit, provided for in article 104, no. 2 of the CRP, which requires that taxation of taxpayers be done taking into account all their revenues and, likewise, all their expenses whose fiscal relevance should not be ruled out by law.
However, as was decided, the expenses invoked by the Claimant should not, in light of the law, have fiscal relevance whereby the Claimant's invocation of the constitutional principle of taxation on actual profit, to the concrete case, does not proceed.
In consequence, in light of the provision of article 23 of CIRC, there is no defect of violation of law imputable to the additional IRC assessment no. 2018..., dated 10 September 2018, relating to the 2015 tax year, in the amount payable of EUR 115,328.45, reason for which the main claim must fail and all consequent claims formulated by the Claimant likewise fail, relating to the main claim.
The claim likewise fails regarding the non-fulfillment of the legal requirements for assessment of compensatory interest, since, in this case, contrary to what is alleged by the Claimant, we are not dealing with a mere and understandable divergence of criteria between the AT and the taxpayer.
The main and subsidiary claims failing, the claim for reimbursement and indemnifying interest consequently fails.
III-3. RESPONSIBILITY FOR COSTS
As we have seen, the Respondent stated in its Answer that it partially satisfied the request for arbitral ruling that the Claimant made, such that the results that the Claimant aimed to achieve are partially attained.
In accordance with the provision of article 536, no. 3 of CPC, applicable pursuant to article 29, no. 1, paragraph e) of RJAT, in cases of extinction of the instance due to impossibility or supervenient lack of utility of the dispute (excepting those provided for in the foregoing numbers), responsibility for costs rests with the plaintiff or claimant, except if such impossibility or lack of utility is attributable to the defendant or respondent, in which case the latter is responsible for all costs; no. 4 of the same article provides, insofar as it is relevant to note here, that it is considered, in particular, that the supervenient lack of utility of the dispute is attributable to the defendant or respondent when it arises from the voluntary satisfaction, by the latter, of the claim of the plaintiff or claimant.
In the case at hand, as has been demonstrated, the Claimant's claim was partially satisfied voluntarily by the AT, by the latter having partially revoked the contested tax assessment, but the conduct of the assessment act that gave rise to the present request for arbitration remains the responsibility of the Respondent.
Terms in which the Respondent must be condemned to pay costs with respect to the correction in the amount of EUR 313,890.89 and the Claimant be condemned to pay costs in the part of its failure, relating to the correction in the amount of EUR 172,845.90.
V - DECISION
In terms of the foregoing this Arbitral Tribunal decides:
a) To declare the instance partially extinct, in the part relating to the correction in the amount of EUR 313,890.89, due to supervenient lack of utility of the dispute;
b) To judge partially inadmissible the arbitral claim, in the part whose illegality is discussed in the case and relating to the correction in the amount of EUR 172,845.90 and, in consequence,
c) To maintain in the legal order the additional Corporate Income Tax (IRC) assessment no. 2018..., dated 10 September 2018, relating to the 2015 tax year, in the part relating to the correction mentioned above;
d) To judge likewise inadmissible the claim regarding the non-fulfillment of the legal requirements for assessment of compensatory interest, as well as the claim for indemnifying interest;
e) To condemn the parties in costs proportionate to their respective failure.
VI - VALUE OF THE CASE
The value of the case is fixed at EUR 119,282.86 (one hundred nineteen thousand two hundred eighty-two euros and eighty-six cents), in accordance with the provision of articles 299, no. 1 and 259, no. 1 of CPC, applicable by virtue of article 29, no. 1, paragraph e) of RJAT, and likewise article 97-A, no. 1, a) of CPPT, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of RJAT and no. 2 of article 3 of the Regulation on Costs in Tax Arbitration Processes.
VII - COSTS
Pursuant to article 22, no. 4 of RJAT, and in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Processes, the amount of costs is fixed at EUR 3,060.00 (three thousand sixty euros), divided in proportion to the respective failure in the proportion of 67.25% charged to the Respondent and 32.75% charged to the Claimant.
Let notification be made.
Lisbon, 30 September 2019
The Collective Arbitral Tribunal
(Maria Fernanda Maçãs)
(Hélder Faustino)
(Nuno Cunha Rodrigues)
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