CAAD 462/2018-T: Deductibility of Expenses and Autonomous Taxation in IRC – Tax Court Decision 2019

ARBITRAL DECISION

I. REPORT

1. On 20-09-2018, the company A..., S.A., previously named B..., S.A., legal entity no...., with registered office at Rua..., no...., ... (hereinafter "Claimant" or "A..."), filed an application for constitution of an Arbitral Tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter "RJAT").

2. The Claimant seeks the annulment of the decision rejecting the gracious claim and, likewise, of the additional assessment of Corporate Income Tax ("CIT") which was the subject thereof, relating to the tax year 2014, in the contested part of €55,117.95, further petitioning for recognition of the right to compensatory interest.

3. The Tax and Customs Authority (hereinafter "Respondent" or "TA") is the respondent party.

4. The application for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the TA on 21-09-2018.

5. By the Deontological Council of CAAD, the arbitrator signing this decision was appointed, the parties having been notified on 12-11-2018, and having expressed no intention to refuse the appointment, in accordance with article 11, no. 1, subsections a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

6. The Singular Arbitral Tribunal has been regularly constituted since 03-12-2018 to hear and decide the subject matter of this dispute (articles 2, no. 1, subsection a) and 30, no. 1 of the RJAT).

7. On 18-01-2019, the Respondent, duly notified for this purpose, filed its response, defending itself solely by challenge.

8. On 21-03-2019, the meeting referred to in article 18 of the RJAT took place, with examination of the witnesses called by the Claimant, Mrs. C... and Mr. D..., as well as testimony from Mr. E..., in his capacity as administrator (cf. Minutes of the Meeting of the Singular Arbitral Tribunal).

9. The Tribunal notified both parties to submit successive written submissions within 8 days, deciding that the final decision would be rendered within 30 days after submission of written submissions by the Respondent or expiry of the time granted to it.

10. Only the Claimant chose to submit written submissions, which it did on 28-03-2019.

Summary of the Parties' Positions

A. Of the Claimant:

1. To substantiate its request, the Claimant alleges, in summary, that:

The Claimant was subject to an inspection action, pursuant to Service Orders OI2015... and OI2016..., which resulted in corrections to the taxable matter and subsequent calculation of tax, in the context of CIT, for the tax period 2014, which resulted in additional CIT assessment no. 2016..., with an amount payable, including compensatory interest, of €58,885.38.

Of the corrections made by the TA, the Claimant does not accept the correction of the amount of €16,981.20, referring to part of the expenses incurred in the context of the local accommodation activity, as well as the correction of the amount of €128,750.00, relating to a commission paid to an entity resident in Hong Kong, which was not accepted fiscally under subsection r) of no. 1 of article 23-A of the CIT Code, with consequent autonomous taxation on the expense incurred with such payment to the entity resident in Hong Kong, under no. 8 of article 88 of the CIT Code, all better summarized in the tables below:

The Claimant filed a gracious claim against the aforesaid assessment, which was rejected by the TA, by order notified to the Claimant on 26 June 2018.

The Claimant alleges that the aforesaid assessment is illegal, first and foremost, due to failure to notify the draft tax inspection report, with consequent preterition of the right to be heard.

Furthermore, according to the Claimant, the assessment is also illegal due to a defect of violation of law by erroneous appraisal of facts and law.

Thus, according to the Claimant, the expenses incurred by reference to the tourist accommodation activity to which the "Quinta..." is dedicated are related to the activity developed, and it is evident the direct relationship between the expense, the Claimant's activity and the income obtained, and the TA should recognize the indispensability of the expenses in question.

For its part, with regard to the expense incurred with the commission paid to the Hong Kong entity for the sale of real estate to a Chinese citizen, the commercial operation for which the Claimant paid the agreed consideration (and normal and widespread in the real estate market segment that resorts to the Chinese market) is real, and the amount of that consideration paid to the entity with headquarters in Hong Kong is not excessive, corresponding to normal values practiced in the market segment of the activity of the said entity, in addition to which the amount was entirely passed on to the price of sale to the Chinese buyer.

Finally petitioning for the declaration of illegality and annulment (i) of the rejection of the gracious claim insofar as it refused the annulment of the additional CIT assessment in the contested part of €55,117.95, as well as (ii) of the additional CIT assessment in the contested part of €55,117.95, and for recognition of compensatory interest, on the portion of tax additionally assessed and paid (in the amount of €55,117.95), counted from the date on which the respective payment was made (that is, from 12 December 2016).

B. Of the Respondent:

1. For its part, in terms of the response filed, the Respondent:

refers, for reasons of procedural economy, to the factual and legal grounds underlying the administrative tax proceedings attached to the case file.

without prejudice, responds that as to the alleged preterition of the Claimant's right to be heard in the context of inspection procedures, as can be seen from the administrative tax proceedings, in particular from the response to the Gracious Claim, the Claimant was notified. However, even if this were not the case, such irregularity would necessarily have been cured, as the Claimant had the opportunity to be heard in the context of the Gracious Claim, regarding the matter in question.

With regard to the invoice "... in China", the Respondent responds that the Claimant did not prove in the context of inspection procedures (and continues not to prove) that the invoiced amount corresponds to operations effectively carried out (not having proven the real existence of the alleged service provider, since the said model is not certified by the national authorities, the payment was not made to any account belonging to it and therefore identifying it, and the mere existence of papers such as the contract and the invoice do not permit such a conclusion) or that, having occurred, assuming intermediation services, these are normal and not of excessive value (namely, by providing proof that other operators charge a value approximately equal to what was invoiced to them, for the provision of similar services).

Therefore, the correction carried out by the tax inspection services does not suffer from any defect, and thus the arbitral request should be judged as unfounded.

II. PROCEDURAL ISSUES

1. The Arbitral Tribunal was regularly constituted, in accordance with articles 2, no. 1, subsection a), 5 and 6, all of the RJAT, and is competent.

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

3. No exceptions were raised that require consideration.

4. The proceedings do not suffer from defects that would invalidate them.

Having examined all matters, the following must be decided:

III. DECISION

III.1. Facts Established as Proven

a) The Claimant is a commercial company, in the form of a corporation, which had as its purpose "Administration of property and assets, in particular, personal property held as reserve or for enjoyment, including management of own real property, purchase of properties for housing of its shareholders and also construction of real property, conclusion of business transactions of purchase, purchase for resale and sale of real property, as well as provision of real estate administration and consulting services, financial consulting and management."

b) The Claimant uses a set of real properties, infrastructure and other assets that comprise a business unit designated as "Quinta...", in which it develops the activity of local accommodation.

c) The Claimant holds a local accommodation license, of 12 October 2010, issued by the Municipal Chamber of....

d) The Claimant did not effect any registration of local accommodation with the Municipal Chamber of....

e) On 19 November 2013, the Claimant concluded a contract for provision of "marketing research" services with F..., a company with headquarters in Hong Kong.

f) On 11 April 2014, the Claimant sold to a Chinese national a real property of which it was the owner, located in the parish of..., municipality of Cascais, for the price of €515,000.00.

g) By virtue of the sale referred to in the preceding fact, the Claimant proceeded to payment to F... of a commission in the amount of €128,750.00.

h) The payment of the commission was made by delivery of a cheque in favor of G... Law Firm, by indication of F....

i) The TA carried out an inspection action against the Claimant, pursuant to Service Orders OI2015... and OI2016....

j) By office no...., of 08-08-2016, the draft inspection report was sent to the Claimant, for the exercise of the right to prior hearing, issued on the same date, by registered mail, addressed to the address located at Rua..., no.... – Quinta..., ..., ...-.... ..., with the registered mail number RF...PT.

k) By office no...., of 20-09-2016, the tax inspection report was sent to the Claimant, issued on the same date, by registered mail, addressed to the address located at Rua..., no.... – Quinta..., ..., ...-.... ..., with the registered mail number RF...PT.

l) The Tax Inspection Report, whose content is taken as reproduced, states, inter alia, the following:

III.1.3 – Global Analysis of Declared Values

(…)

• Year 2014

In relation to the provision of accommodation services for the tax period 2014, they are itemized in the table below:

(…)

From the analysis carried out it can be concluded that approximately 79% of billing (€41,100 of the total €52,300, without VAT) of accommodation/lodging is issued in the name of:

• E..., NIF..., Chairman of the Board of Administration of the taxpayer;
• H..., NIF..., wife of Eng. E...;
• I..., NIF..., son of the aforementioned couple;
• J..., NIF..., daughter of the aforementioned couple;
• K..., NIF..., son of the aforementioned couple; and
• L..., NIF..., daughter of the aforementioned couple.

(…)

In the year 2014, and from the analysis carried out during the action, it was verified that regardless of the name in which the accommodation/lodging invoice is issued, all invoices relating to this part of the taxpayer's activity are entered in account 21111872425 – E..., Chairman of the board of administration of the taxpayer, which means that the entirety (100%) of accommodations invoiced are directly linked to the use of the family and network of contacts of the owners of B... as is admitted in the response to the notification.

With regard to receipts, it was verified that the taxpayer did not use account 11 – Cash, with all receipts and payments being made and recorded through account 12-Banks.

(…)

In relation to accommodation invoices issued in the year 2014, no payment was made during that period, although in account 21111872425 – E..., there is a payment of €3,000.00 (recorded in the accounting by internal document 30005 of the bank journal for March 2014), whose description in the bank statement is "shareholder loan E...".

The Municipal Chamber of..., was notified by office no.... of 02/06/2015, with a view to sending the following information:

• Indication of the date of the communication provided for in no. 1 of article 5 of Decree Law no. 128/2014 of 29/08 for registration as a local accommodation establishment made by subject B..., S.A, NIPC....

• Indication of the date of the inspection provided for in no. 1 of article 8 of Decree Law no. 128/2014 of 29/08, as well as the documents related to it.

• Copy of the document issued by the Single Window issued under article 7 of Decree Law no. 128/2014 of 29/08.

• Indication of the registration number assigned to the aforementioned taxpayer in the capacity of local accommodation.

In response to this notification, the Municipal Chamber of... informed:

"In response to the office of the Authority no.... of 02/06/2015, case OI2015.../OI2016..., registered in our services under no.... of 03/06/2016, on the above subject, I bring to your attention that, after consultation of the Municipality's database, it was found that the company B..., SA, with NIPC... did not effect any registration of local accommodation, to the present date."

Turismo de Portugal, IP, was also notified through office.... of 06/06/2016, to provide the following clarifications:

"Information on the existence or non-existence of a local accommodation establishment in the municipality of..., district of Santarém, whose name of the operating holder is B... Lda, NIPC..., with the indication of the date and registration no."

In response to this notification, Turismo de Portugal informed that:

"With reference to the subject in question, it is informed that, upon consultation of the National Registry of Local Accommodation (RNAL), it was not possible to locate any local accommodation establishment in..., whose operating holder is B... Lda, NIPC....

Upon telephone contact with the Municipal Chamber of..., we were confirmed that there is no record of the said accommodation in that local authority, nor is there any pending application related to the company on the present date."

It is concluded, therefore, that although the taxpayer issues invoices in the years under analysis relating to accommodation/lodging, the same is not legally authorized and registered to carry out that activity, nor was there any application in that regard in the Municipality of..., as provided for in Decree-Law 128/2014 of 29/08, nor previously under other legislation regulating this activity.

Moreover, we can reinforce the fact that the taxpayer is registered with the TA for the performance of the following activities:

• Leasing of real property, CAE 68200, as the principal activity;
• Other activities of consulting for business and management, CAE 70200, as secondary activity 1; and
• Purchase and sale of real property, CAE 68100, as secondary activity 2.

None of these CAE is suited to the performance of local accommodation activity, and to the present date no changes have been made.

At point 4 of the notification referred to in Item II.3.3 of this inspection report, the taxpayer was requested to indicate the maximum capacity for occupancy and how the advertising of these accommodations was done. In response, the taxpayer stated that the maximum accommodation capacity at Quinta... is 20 guests per day and that the publicizing of these services was initially carried out through targeted advertising to target clients and the network of contacts of the owners of B..., and that today most publicizing is done by the satisfied clients themselves who have had the experience as guests at Quinta.... Furthermore, publicizing is carried out through the website of the property (http://...)

With regard to the website, it is important to note the following:

• when conducting a search on the most used search engine in the world (www.google.com), it is found that there is no reference to this local accommodation property as can be seen from the following images.

(…)

• If we place the address provided by the taxpayer in the same search engine, we are not returned any results, as can be seen from the following image.

(…)

• only if we place the address provided by the taxpayer in the address bar are we able to access this page, as can be seen from the following image.

(…)

This is another fact that leads us to believe that the taxpayer does not intend for the accommodation to be publicized and accessible to the general public, but only for people in the network of contacts of the owners of B....

In summary, with regard to the amounts recorded in the accounting of the taxpayer in the years 2013 and 2014 relating to the provision of accommodation services, it is important to note the following:

• none of the CAE with which the taxpayer is registered is suited to the performance of local accommodation activity, and to the present date no changes have been verified;

• the Municipality of... stated that the company B... SA, did not effect any registration of local accommodation to the present date;

• Turismo de Portugal informed that upon consultation of the national registry of local accommodation (RNAL) it was not possible to locate any local accommodation establishment in... whose operating holder is B... SA;

• Turismo de Portugal further stated that when contacted by the Municipal Chamber of... they were confirmed the non-existence in that local authority of this accommodation registration, nor is there any pending application relating to this company;

• the "guests" of the accommodation have been the family and network of contacts of the taxpayer, as is admitted by the taxpayer itself in the response to the notification mentioned above;

• the payments existing relating to the accommodation part are for the most part made by transfers ordered by Mr. Eng. E...;

• the majority of invoices issued in 2013 and the totality in 2014 relating to "accommodation/lodging", regardless of the name they were issued under, are recorded in account 21 – Clients of Mr. Eng. E...;

• with regard to the form of publicizing of this space of "local accommodation" on the internet, it is verified that the same does not appear in any search that is made, and that even placing the address provided by the taxpayer in the response to the notification in the "Google" search engine, it does not return any results, that is, only by writing in the address bar the address provided by the taxpayer do we manage to reach the referred website, which suggests that there is no interest that the said space be known and accessible to the general public.

Having regard to the above, we are led to conclude that the "accommodation" part exists solely with the intent of being used by the family and network of contacts of the administrator of the company Eng. E..., and does not therefore constitute an economic activity in the true sense of the expression.

III.2.2 - Specific Analysis – Defects Detected – Year 2014

III.2.2.1 – In the Context of CIT

III.2.2.1.1 – Expenses with Garden

The taxpayer has recorded in its accounting receipt invoice C11/3661 of 24/05/2014, issued by M..., Lda, a copy of which is attached in annex 17 – 1 page, which is recorded in the accounting as follows:

(…)

Given that this is the acquisition of various plants, the taxpayer was notified (…) to clarify what was the destination of these plants; in response, it informed that this invoice refers to the acquisition of various plants and shrubs for the gardens of B..., which need some renovation from time to time, attaching a photo. (…)

Now, the guests of the accommodation (…) have only been family and network of contacts of the owners of B... as is admitted in the response to the notification, and furthermore the fact, confirmed by the Municipal Chamber of... and Turismo de Portugal, of the non-existence of any local accommodation in the name of the taxpayer under analysis, also described in that item of the report, means that this expense is not considered as indispensable for the realization of revenues subject to tax or for maintenance of the income-generating source, and therefore are not accepted under article 23 of the Code of Corporate Income Tax, having regard to the reasoning mentioned in Item III.2.1.1 of this inspection report.

Thus, the amount of €67.93 is not accepted as an expense, as it infringes the provision of article 23 of the Code of Corporate Income Tax, punishable under no. 1 of article 119 of the General Regime of Tax Violations.

(…)

III.2.2.1.3 – Expenses with Boat

The taxpayer has recorded in its accounting receipt invoice A1938 of 05/09/2014, issued by N..., O... Lda, a copy of which is attached in annex 19 – 1 page, which is recorded in the accounting as follows:

(…)

At point 1.26 of the notification mentioned above, given that this document refers to gasoline for a boat, the taxpayer was requested to clarify what was the destination of this gasoline.

In response, the taxpayer clarified that this invoice refers to the purchase of gasoline for the boat acquired by B... in 2012 and which the clients of Quinta... enjoy.

Now, given that the clients of B..., in the part relating to accommodation, are the family and network of contacts of the owners of B... as is admitted in the response to the notification, and furthermore the fact, confirmed by the Municipal Chamber of... and Turismo de Portugal, of the non-existence of any local accommodation in the name of the taxpayer under analysis, also described in that item of the report, this expense is not considered as indispensable for the realization of revenues subject to tax or for maintenance of the income-generating source, and therefore are not accepted under article 23 of the Code of Corporate Income Tax, having regard to the reasoning mentioned in Item III.2.1.1 of this inspection report.

Thus, the amount of €1,322.45 is not accepted as an expense, as it infringes the provision of article 23 of the Code of Corporate Income Tax, punishable under no. 1 of article 119 of the General Regime of Tax Violations.

III.2.2.1.5 – Expenses with Meals

The taxpayer has recorded in its accounting receipt invoice FT 002/11017 of 16/11/2014, issued by restaurant P... Lda, a copy of which is attached in annex 21 – 1 page, referring to 18 meals, as itemized in the following table:

(…)

At point 1.28 of the notification already mentioned several times, the taxpayer was requested to clarify what was the objective of this acquisition, proving documentarily the indispensability of the expenses.

In response, the taxpayer indicates that this invoice refers to a dinner offered to clients of B..., presenting no documentary proof of this assertion, nor indicating which clients and presenting nothing that proved the indispensability of these expenses; this expense is not considered as indispensable for the realization of revenues subject to tax or for maintenance of the income-generating source, and therefore are not accepted under article 23 of the Code of Corporate Income Tax, having regard to the reasoning mentioned in Item III.2.1.1 of this inspection report.

Thus, the amount of €394.30 is not accepted as an expense, as it infringes the provision of article 23 of the Code of Corporate Income Tax, punishable under no. 1 of article 119 of the General Regime of Tax Violations.

III.2.2.1.7 – Expenses with "... in China"

As already mentioned at point III.1 of this inspection report, in the year 2014 the taxpayer sold two real properties, one of which was sold to a Chinese national, Q..., NIF..., for the amount of €515,000.00. (…) This sale was carried out on 11/04/2014.

With regard to this real property, it is important to note that it was acquired by B... Sa on 07/04/2014 from the company R... Sa, NIPC... for the amount of €235,000.00.

Attached in annex 23 – 2 pages is the extract of accounts 32112 - Travessa... no.... ... and 6111 – Goods COGS. From the analysis of the same, it is verified that the determination of the expense of goods sold and materials consumed amounts to €387,286.07 and includes, in addition to the purchase value, other expenses, as itemized in the following table:

Regarding the amount of €128,750.00, this is an invoice with number 0010/2014 dated 14/04/2014, issued by F..., with registered office in Hong Kong.

This territory is listed in Portaria no. 150/2004 of 13/02, as amended by Portaria 292/2011 of 08/11, as a country or territory with a clearly more favorable preferential tax regime.

Under subsection r) of no. 1 of article 23-A of the Code of Corporate Income Tax, the following are not deductible for purposes of determining taxable profit, even when recorded as period expenses: amounts paid or owed, on any basis, to natural or legal persons resident outside the territory of Portugal and subject there to a clearly more favorable tax regime, unless the taxpayer proves that such expenses correspond to operations effectively carried out and do not have an abnormal character or an excessive amount.

Thus, under no. 8 of article 23-A of the Code of Corporate Income Tax, the taxpayer was notified to:

"(…)

1 – Proceed with the production of the proof referred to above, that is, to demonstrate that such expenses correspond to operations effectively carried out and do not have an abnormal character or excessive amount.

2 – With regard to the operation evidenced by the above-identified invoice, submit a copy of the means of payment used for settlement of the same with clear and unequivocal identification of the beneficiary of that payment and, in case of a cheque, photocopy of the same cheque front and back.

3 – Attach a copy of form 21-RFI submitted by the beneficiary of that payment with a view to dispensing withholding at source on income earned by non-resident entities, as provided for in article 98 of the Code of Corporate Income Tax.

(…)

On 05/05/2016, the following response was received by these services:

"…

B... Sa (designated briefly as B...), legal entity no...., notified for this purpose, hereby presents the clarifications and documents requested with regard to the questions raised in the notification of 5 April 2016.

1 – Proceed with the production of the proof referred to above, that is, to demonstrate that such expenses correspond to operations effectively carried out and do not have an abnormal character or excessive amount.

The invoice issued by "F... (designated briefly as F...) refers to the payment of a commission for intermediation services provided by this entity in the context of the sale of a real property belonging to B... (invoice attached as doc. no. 1).

In fact, in the context of its real estate activity, B... entered into a consulting and marketing contract with F... to promote the properties it had in its portfolio to Chinese investors (cf. contract attached as doc. no. 2).

In this context, F... promoted/intermediated the purchase/sale of the urban property called lot 12, located in..., Travessa..., no...., ..., and for that service earned €128,750.00 (corresponding to 25% of the sale value) as can be confirmed by the deed of purchase and sale concluded on 11 April 2014 (attached as doc. no. 3).

That is, the services provided by F... allowed the sale of the property to be effectively completed with a Chinese investor.

It should be noted that F... is an entity independent of B..., so the amount of the commission earned is in accordance with market value and with the added value generated by this entity in the context of the said transaction. In fact, in the context of the services that F... provided to B..., F... not only identified the investors interested in the property but also made it possible to complete the transaction at a value higher than what was the expectation of B..., given the specificities of the Chinese market.

As described, B... understands that it has demonstrated that (i) the expenses paid to F... correspond to operations effectively carried out – see the contract concluded between B... and F... and the deed of purchase and sale of the property concluded between B... and Mr. Q...; and (ii) that its value does not have an abnormal character or excessive nature.

2 – With regard to the operation evidenced by the above-identified invoice, submit a copy of the means of payment used for settlement of the same with clear and unequivocal identification of the beneficiary of that payment and, in case of a cheque, photocopy of the same cheque front and back.

The F... invoice was paid by means of a cheque issued to the order of G... – Law Firm, as can be verified from the copy of the bank statement, the cheque issue request document and the debit note (attached as docs. nos. 4, 5 and 6).

Although F... is the beneficiary entity of this payment, it was paid, at the request of the latter, by cheque issued to the order of G... – Law Firm.

3 – Attach a copy of form 21-RFI submitted by the beneficiary of that payment with a view to dispensing withholding at source on income earned by non-resident entities, as provided for in article 98 of the Code of Corporate Income Tax.

Under the provision of article 98 of the CIT Code, in order to dispense with withholding at source in Portugal under the DTT concluded with Hong Kong, the beneficiary of the income must provide evidence of compliance with the prerequisites resulting from the convention intended to prevent double taxation to the entity obligated to effect the withholding at source by means of submission of a form of a model approved by the person responsible for the area of finances (i) certified by the competent authorities of its state of residence or (ii) accompanied by a document issued by the competent authorities that attests to its tax residence for purposes in the period in question and its respective subjection to tax.

In this way, B... attaches in annex as docs. nos. 7 and 8 the form 21-RFI duly completed and the certificate of tax residence of F... issued by the competent authorities of Hong Kong.

…"

We shall now proceed to the analysis of the response:

Invoice 010/2014 of 14/04/2014 issued by F... in the amount of €128,750.00 is recorded in the accounting of the taxpayer as follows:

The taxpayer states that this amount is the payment of commission for intermediation services provided in the context of the sale of the real property located at Travessa..., no...., ..., Cascais, registered in the property tax registry through the article... of the parish of..., municipality of Cascais. This property was sold on 11/04/2014 for the value of €515,000.00, that is, this commission corresponds to 25% of the sale value.

The taxpayer attaches as document no. 2 a consulting and marketing contract written in English between F... and B... SA. This contract was signed on 19/11/2013, with the premise (see B of the contract in annex 20) that by 18 January 2014 B... Sa would become the owner of article... of the parish of.... This article gave rise to the urban article... of the same parish.

Now, this article only passed to the property of the taxpayer on 07/04/2014 (5 days before the date of the sale).

It is also important to note that in addition to this commission on the sale of the property, the taxpayer paid another commission relating to the sale of this same property, as per the document attached in annex 25 – 1 page, in the amount of €21,656.07, which corresponds to a commission of approximately 4% on the amount of the sale, an amount that is in line with the market values practiced in this activity.

This means that only in commissions for the sale of this property were paid by the taxpayer €150,406.07 (€21,656.07 + €128,750.00), which amounts to a percentage of 29% of the sale value and 64% of the purchase value.

As to the payment of the invoice issued by F... Ltd in the amount of €128,750.00, it is verified, through the elements sent, that the same was made by means of issuance of a bank cheque whose beneficiary is G... Law Firm, and not the issuer company. The taxpayer justified this situation by alleging that payment was made in this way at the request of the issuer of that invoice.

The taxpayer also attached the residence certificate of the issuer of the invoice issued by the competent entities.

As to the 21-RFI model submitted by the taxpayer, it is verified that in table I the beneficiary identified is F... Ltd. In table III of that same model there is no certification by competent entities, and in table VIII the date that appears is 03/05/2016, that is, a date considerably subsequent to the completion of this business and already in the course of this inspection procedure.

It is important to note that in this same tax period, the taxpayer under analysis sold another property (article... H of the parish...) whose sale value was €130,000.00, and it was verified that in this case a sales commission was paid to the company S..., Lda, in the amount of €3,075.00, recorded in the accounting through internal document 2003 of the supplier journal for February, an amount that corresponds to approximately 2% of the sale value, that is, considerably lower than the 25% paid in this case under analysis.

Under subsection r) of no. 1 of article 23-A of the Code of Corporate Income Tax, the following are not deductible for purposes of determining taxable profit, even when recorded as period expenses: amounts paid or owed, on any basis, to natural or legal persons resident outside the territory of Portugal and subject there to a tax regime identified by portaria of the member of Government responsible for the area of finances as a clearly more favorable tax regime, unless the taxpayer proves that such expenses correspond to operations effectively carried out and do not have an abnormal character or an excessive amount.

Now, after the period provided for in no. 8 of the same article was granted, the taxpayer, through the elements sent and previously already analyzed and all that has been stated throughout this point of the report, we consider that it has not proved that the amount is not excessive (corresponds to 25% of the sale value) and does not have an abnormal character, conditions essential for the amount of €128,750.00 to be accepted as an expense. In addition, there is still a record of payment of a national real estate commission, as already mentioned above.

Thus, the amount of €128,750.00 is not accepted as an expense under subsection r) of no. 1 of article 23-A of the Code of Corporate Income Tax, punishable under no. 1 of article 119 of the General Regime of Tax Violations.

III.2.2.1.8 – Expenses Incurred with Depreciation of Buildings and Other Constructions

The taxpayer has recorded in account 432111 – Other Fractions the article... of the parish... in the amount of €759,825.99, which corresponds to the article where the constructions related to the part of local accommodation are located. With regard to which the taxpayer depreciated at the rate of 2%, in accordance with code 2010 provided for in Regulatory Decree 25/2009 of 14 September. Thus, recorded in account 642121 – Depreciation – Buildings and Other Constructions is the amount of €15,196.52 relating to the depreciation of this property.

(…)

Now, the guests of the accommodation, as already mentioned in Item III.1 of this inspection report, have only been family and network of contacts of the owners of B... as is admitted in the response to the notification, and furthermore the fact, confirmed by the Municipal Chamber of... and Turismo de Portugal, of the non-existence of any local accommodation in the name of the taxpayer under analysis, also described in that item of the report, means that this expense is not considered as indispensable for the realization of revenues subject to tax or for maintenance of the income-generating source, and therefore are not accepted under article 23 of the Code of Corporate Income Tax, having regard to the reasoning mentioned in Item III.2.1.1 of this inspection report.

Thus, the amount of €15,196.52 is not accepted as an expense, as it infringes the provision of article 23 of the Code of Corporate Income Tax, punishable under no. 1 of article 119 of the General Regime of Tax Violations.

III.2.2.2 – Autonomous Taxation of Expenses with "... in China"

Under no. 8 of article 88 of the Code of Corporate Income Tax, the following are subject to autonomous taxation at the rate of 35%: expenses corresponding to amounts paid or owed, on any basis, to natural or legal persons resident outside the territory of Portugal and subject there to a clearly more favorable tax regime, as defined under the Code, unless the taxpayer can prove that they correspond to operations effectively carried out and do not have an abnormal character or excessive amount.

Now, as set out in point III.2.2.1.7 of this report, the taxpayer, although notified to provide such proof, did not do so, so the amount of €128,750.00 should be subject to autonomous taxation at the rate of 35% as provided for in the legal provision mentioned in the preceding paragraph, so there is an amount of autonomous taxation lacking in the amount of €45,062.50 (€128,750 × 35% = €45,062.50).

(…)

III.2.2.4 – Summary of Corrections in the Context of CIT, Taxable Matter, Autonomous Taxation Corrections and Missing CIT Withholdings

(…)

IX – Right to be Heard – Reasoning

The taxpayer was notified by office no.... of 08/08/2016 to exercise the right to be heard in accordance with article 60 of the General Tax Law and article 60 of the Supplementary Regime of Tax and Customs Inspection Procedures. This notification was sent by means of registered mail whose registration number is RF... PT. The notification came back with the indication of "item not claimed." Under no. 1 of article 39 of the Code of Tax Procedures and Proceedings, the taxpayer is considered notified.

On 5 September 2016, the following email was received by these services:

"Messrs.

(…)

Regarding the ongoing inspection carried out on B... SA, we believe it is important to clarify some issues related to Local Accommodation at this company's facilities.

1. B... has a Local Accommodation license issued by the Municipal Chamber of... (CM...) on 12-10-2010 (copy attached).

2. The legislation in force at that time consisted of DL 39/2008, amended and republished by DL 228/2009, which stated that Local Accommodation Establishments should be registered with the respective Municipal Chamber.

3. It was stated at the time to B... that the mere issuance of the license by the CM... implicitly meant that such registration was done, so it immediately began to operate in that activity.

4. In fact, the accommodation activity at B... began already in 2009, when the process with the CM... began (process 01/114/2009), with the first invoices issued to clients dating from that date.

5. There was not, at that date, for Local Accommodation, any need for notification to Turismo de Portugal, which only had to intervene in other types of more elaborate tourist establishments (villages, hotels, etc.). It was the Municipal Chambers' responsibility to provide Turismo de Portugal with computer access to the AL registry.

6. Only in 2014, DL 15/2014, of 23 January, adds that AL establishments are subject to registration at the respective CM, following mere prior communication, with this requirement being mentioned for the 1st time here.

7. DL 128/2014, of 29 August, results from the need to make the figure of local accommodation autonomous in its own decree. Here it is stated that the registration of AL establishment is made by means of prior communication addressed to the president of the respective CM, being that this communication is made solely at the Electronic Single Window, which assigns to each application a local accommodation establishment registration number and which automatically remits the communication to Turismo de Portugal.

8. DL 63/2015, of 23 April, makes some further amendments, but more for the case of hostels, so it seems to us that nothing substantial changes for the case of B....

9. It was B...'s understanding that there would be no need to carry out a new registration, which is supported by the information made available by Turismo de Portugal on its website, in the document "Frequently asked questions on local accommodation legislation" (document attached) where it states, on page 9:

"I have a local accommodation already registered, do I have to register now at the electronic single window?

No, local accommodation establishments registered before the entry into force of Decree-Law no. 128/2014, of 29 August, that is, before 27 November 2014, are registered by the municipal chambers, with a new registration number then being made available to the respective holders."

1. For reasons we are unaware of, but which are beyond our control, the CM... did not effect the electronic registration of B...'s local accommodation on the Turismo de Portugal portal.

2. Once this failure was detected, we went to the services of the CM... where, with the technicians of the local authority, this prior communication was made on the portal of the AMA (Administrative Modernization Agency), whose registration is attached. The date of commencement of B...'s AL activity was registered as 1 January 2009.

3. Secondary CAE codes were also created for B... at the Finance Office of..., as follows:

Secondary CAE 1 – 55201: Furnished Accommodation for Tourists and

Secondary CAE 2 – 55204: Other Short-Stay Accommodation Locations

A copy of this registration is also attached.

1. The services of the CM... were contacted for validation that B... complies, at its facilities, with all standards relating to habitability conditions, hygiene and safety, required by local accommodation establishments.

(…)

It is important to note that the office mentioned by the taxpayer (office... of 29/07/2016) is an office that was intended solely and exclusively to notify the taxpayer of the extension of the inspection action, in accordance with articles 36, no. 4, 37, 38, no. 1, and 42, all of the Supplementary Regime of Tax and Customs Inspection Procedures, to which no response would be expected. However, and given that the taxpayer makes in that response allegations of matters that appear in this inspection report, we shall proceed to analyze that response.

The subject claims at point 1 to possess a local accommodation license issued by the Municipal Chamber of..., sending a copy of a document dated 12/10/2010. Now, in the context of these inspection procedures, we notified the Municipality of..., by office no.... of 02/06/2015, with a view to sending the following information:

"

• Indication of the date of the communication provided for in no. 1 of article 5 of Decree Law no. 128/2014 of 29/08 for registration as a local accommodation establishment made by subject B..., S.A, NIPC....

• Indication of the date of the inspection provided for in no. 1 of article 8 of Decree-Law 128/2014 of 29/08, as well as the documents related to it.

• Copy of the document issued by the Single Window issued under article 7 of Decree-Law 128/2014 of 29/08.

• Indication of the registration number assigned to the aforementioned taxpayer in the capacity of local accommodation."

In response to this notification, the Municipal Chamber of... informed:

"In response to the office of the Authority no.... of 02/06/2015, case OI2015.../OI2016..., registered in our services under no.... of 03/06/2016, on the above subject, I bring to your attention that, after consultation of the Municipality's database, it was found that the company B..., SA, with NIPC... did not effect any registration of local accommodation, to the date."

Now, having regard to the above, we verify the existence of a contradiction between what the taxpayer claims and the response obtained by us through official channels.

The taxpayer claims in points 2 to 9 to make reference to local accommodation legislation (prior to the date of the facts and current). The legislation in 2010 provided for registration of accommodation with the respective Municipal Chamber, and the information that the Municipal Chamber of... gave was in the sense of the non-existence of such registration.

From 2014 onwards, with the entry into force of Decree-Law 128/2014, registration with Turismo de Portugal became mandatory. In the course of these inspection actions, Turismo de Portugal, IP, was also notified, by office.... of 06/06/2016, to provide the following clarifications:

"Information on the existence or non-existence of a local accommodation establishment in the municipality of..., district of Santarém, whose name of the operating holder is B... Lda, NIPC..., with the indication of the date and registration no."

In response to this notification, Turismo de Portugal informed that:

"With reference to the subject in question, it is informed that, upon consultation of the National Registry of Local Accommodation (RNAL), it was not possible to locate any local accommodation establishment in..., whose operating holder is B... Lda, NIPC....

Upon telephone contact with the Municipal Chamber of..., we were confirmed that there is no record of the said accommodation in that local authority, nor is there any pending application related to the company on the present date."

The taxpayer also states at point 10 that it is unaware of the reason why electronic registration with Turismo de Portugal was not carried out by the Municipal Chamber of.... This justification may lie in the fact that there is no registration of any local accommodation in the name of the taxpayer at that Chamber, as we were informed by that entity during the inspection procedure.

At points 11 and 12, the taxpayer claims that it carried out the registration on the portal of the Administrative Modernization Agency and also delivered at the Finance Service of... a statement of alterations with a view to the insertion of secondary CAE codes 55201 – Furnished Accommodation for Tourists and 55204 – Other Short-Stay Accommodation Locations. It should be noted that all these alterations were made at a date subsequent to that of this report and the signature of the diligence note (18/08/2016 and 24/08/2016 respectively). At the date of the facts, the situation was different, and there was no registration of the taxpayer as a local accommodation establishment in any of the official entities competent to do so.

(…).

m) On 20-09-2016, the TA notified the Claimant of the Tax Inspection Report.

n) Sequentially, the Claimant was notified of additional CIT assessment no. 2016..., relating to the 2014 tax year with the amount payable of €58,885.38, notification of compensatory interest assessment no. 2016..., in the total amount of €2,884.43, and statement of account settlement no. 2016..., in the total amount payable of €58,885.38, with payment deadline of 2016-12-05 [cf. document no. 2 attached to the arbitral request].

o) On 12-12-2016, the Claimant proceeded with payment of the assessed tax, in the amount of €56,000.95.

p) On 24-03-2017, the Claimant filed a gracious claim.

q) On 26 June 2018, the Claimant was notified of the decision rejecting gracious claim no...2017..., by order of 19 June 2018, issued by the Administrative Law Division of the Directorate of Finance of Lisbon.

r) On 20 September 2018, the application for constitution of an arbitral tribunal was filed, which gave rise to the present proceedings [cf. computer system of case management of CAAD].

III.2. Facts Established as Not Proven

1. It was not proved that notification of the draft inspection report had been returned with the indication of "item not claimed."

III.3. Reasoning of the Established and Not Established Factual Matter

1. Regarding the factual matter, the Tribunal does not have the duty to rule on all matters alleged, but rather has the duty to select those that matter for the decision, taking into account the cause (or causes) of action that supports the request presented by the Claimants.

2. With regard to the assessment of evidence, the Tribunal forms its judgment, in light of the principle of free assessment, based on examination and evaluation of the means of evidence brought to the proceedings and in accordance with its experience.

3. Thus, having regard to the positions assumed by the parties, in light of article 110, no. 7 of the CPPT, the documentary and testimonial evidence and the administrative proceedings attached to the case file, the above-listed facts were considered proved and not proved, with relevance to the decision.

4. All the witnesses and the party appeared to testify with impartiality and with knowledge of the facts they mentioned.

III.4 ON THE LAW

1. In the present arbitral action, the core questions to be considered and decided regarding the merits of the case, as can be understood from the procedural documents of the parties, are to determine (i) whether there was preterition of the right to be heard and (ii) whether the expenses incurred (a) with the local accommodation activity and (b) with "market research services" should be deductible, for purposes of CIT, in the Claimant's sphere.

Let us examine then, separately, each one of them.

§1. Question of Preterition of the Right to Prior Hearing

1. The Claimant attributes to the impugned assessment a defect due to preterition of the right to be heard, insofar as it was not notified of the draft Tax Inspection Report – alleging, in that regard, that it did not receive the inspection report draft by mail, nor any notice relating to the postal item in question – and thus did not have the opportunity to pronounce itself on the corrections that the TA proposed to make.

2. Article 60, no. 1 of the Supplementary Regime of Tax and Customs Inspection Procedures (RCPIT), in the version in force at the date of the facts, provided that "Once the practice of inspection acts is concluded and if the same may originate acts or matters relating to taxes that are unfavorable to the inspected entity, this entity must be notified within 10 days of the draft conclusions of the report, with the identification of these acts and their reasoning."

3. Notifications in inspection procedures follow the rules provided for in articles 37 and following of the RCPIT. That is, they may be made personally, in the place where the recipient is found, or by postal means through registered mail (cf. article 38, no. 1, in the version in force at the date of the facts).

4. And no. 1 of article 43 of the RCPIT (in the version in force at the date of the facts) provides that "Taxpayers and other tax obligors contacted by registered mail are presumed notified and where there has been return of mail sent to their tax address with indication that it was not claimed, was refused, or that the recipient is absent in an unknown location."

5. From the evidence, it appears that notification of the draft conclusions was made by registered mail to the Claimant's tax address on 08/08/2016.

6. Although the TA alleges, in the tax inspection report, that the notification came back with the indication of "item not claimed," the truth is that it did not provide proof of this, in particular by attaching to the case file the aforesaid postal item with the indication "Not claimed," and thus the presumption stated in no. 1 of article 43 of the RCPIT cannot be deemed verified.

7. However, it may be stated, in keeping with the understanding sanctioned in judgment of the Full Court of the Tax Litigation Section of the STA, of 26 September 2018 (rendered in case no. 1506/17.8BALSB, available at www.dgsi.pt) that "In the case under examination, the now Appellant filed a gracious claim against the additional assessment and in this administrative remedial means had the opportunity to pronounce itself, as it in fact did pronounce itself, on all the issues in relation to which it should have previously been given the faculty to pronounce itself prior to the assessment. For that reason, we should consider that the defect of preterition of legal formality by omission of notification for exercise of the prior right to be heard was cured.

Paraphrasing the cited Authors, we can state that the final administrative decision ends up being the second-degree act (because the gracious claim decision was decided), so it should be in relation to this act that one should assess whether or not the taxpayer had the opportunity to participate in its formation."

1. See, likewise, on this point, that rendered by the Full Court of the Tax Litigation Section of the STA, "Indeed, the case law of the Supreme Administrative Court has formed a solid orientation to the effect that defects of form do not necessarily require annulment of the act to which they relate, and that essential procedural formalities may be degraded to non-essential if, despite them, satisfaction was given to the interests that the law had in view in providing for them. Consequently, and given that prior hearing of the interested parties is not mere procedural ritual, the formality in question (essential) could only be degraded to non-essential (non-invalidating of the decision) if such hearing did not have the minimal probability of influencing the decision taken, and if it imposed, for that reason, salvaging of the act – utile per inutile non viciatur. Which requires case-by-case examination, analysis of the particular and concrete circumstances of each case" (cf. judgment of 22 January 2014, rendered in case no. 441/13, available at www.dgsi.pt).

2. That is, among the situations in which it is admitted that the annulling effect of preterition of the right to prior hearing does not occur, alongside those in which it is demonstrated that the exercise of that right could not influence in any way the decision, there are also those in which, while prior hearing was omitted in the first-instance procedure, the interested party had the opportunity to pronounce itself in a second-level procedure.

3. Thus, considering that a gracious claim was filed against the assessment, considering that in that second-level procedure the Claimant pronounced itself on the corrections made by the TA, considering also that the TA maintained the corrections made in the gracious claim decision and considering further that it is this decision that is being impugned in the present proceedings, the Tribunal concludes that the defect of preterition of legal formality by omission of notification for exercise of prior hearing should be deemed cured.

4. Therefore, in this respect, the arbitral request does not proceed.

§2. Question of Deductibility of Expenses Relating to Local Accommodation

1. In this respect, the controversial question is to determine whether the expenses incurred by the Claimant with the local accommodation activity here contested – expenses with garden, gasoline expenses for the boat, meal expenses and expenses incurred with depreciation of buildings and other constructions – are deductible fiscally under the provision of article 23 of the CIT Code.

2. Under article 23 of the CIT Code, in the wording in force at the date of the facts, "1 - For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee revenues subject to CIT are deductible.

(…)

3 - The deductible expenses under the preceding numbers must be proven by documents, regardless of the nature or support of the documents used for this purpose."

1. With the reference to all expenses and losses incurred or borne by the taxpayer to obtain or guarantee revenues subject to CIT, the legislator abandoned the concept of indispensability, the subject of constant disputes between the TA and taxpayers, which thus ceases to be the cornerstone of the regime for deduction of expenses, choosing instead to establish as a general principle that expenses related to the taxpayer's activity and incurred or borne by it are deductible, based on the idea that the connection with business activity is sufficient, regardless of actual contribution to revenues subject to tax. This promotes, therefore, increased ease for companies in deduction of expenses for tax purposes (see, inter alia, arbitral decisions rendered in Case no. 33/2018-T and Case no. 171/2018-T, available at https://caad.org.pt/tributario/decisoes/).

2. As is the understanding of the Arbitral Tribunal in the already-mentioned Case no. 171/2018-T and which this Arbitral Tribunal accompanies:

"In summary conclusion, it should be understood that the business activity that generates deductible costs must be one that translates into operations that have a purpose (and not a mandatory nexus of immediate causality) of obtaining income or the purpose of maintaining the potential of an income-generating source. In that sense, productive activity should not be understood in a restrictive sense, but rather in a broad sense, signifying activity related to an income-generating source of the entity that bears the costs. In seeking the meaning of the concept of the activity of companies, it cannot be confined to mere or simple operations of production of goods or services, but presupposes a relationship with global economic operations of exploitation or with operations or acts of management that are inserted in the interest proper of the entity that assumes the costs (cf. in this sense, the arbitral judgment rendered in Case no. 480/2016).

It is in this comprehensive scope that the new wording introduced by Law no. 2/2014 should be understood, which, aiming to implement a greater degree of certainty in the concrete application of deductibility criteria, came to establish as a general principle that expenses related to the taxpayer's activity incurred or borne by it are deductible, reinforcing the idea that connection with business activity is sufficient, regardless of actual contribution to revenues subject to tax (cf. Final Report of the Commission for Reform of Corporate Income Tax, 30 June 2013)."

1. In this line of thinking, we must conclude that the fiscal relevance of an expense depends solely on its connection with the company's activity, regardless of the merit of the business management option that has been followed in the assumption of that charge, with only expenses that have been determined by other motivations to be set aside.

2. Reverting to the case under analysis, the TA considers that, given the elements collected, "(...) the 'accommodation' part exists solely with the intent of being used by the family and network of contacts of the administrator of the company Eng. E..., and does not therefore constitute an economic activity in the true sense of the expression."

3. That is, everything will pass on the strictly personal plane and not the business plane, so that, to that extent, the expenses incurred with this activity cannot be accepted.

4. Now, it results from the evidence produced that the Claimant effectively developed the activity of local accommodation, this being manifestly an activity of a business nature, which, moreover, is in harmony with its corporate purpose (management of own real properties, of which operation of local accommodation is a subsidiary form of such management).

5. The character of the economic nature of an activity cannot, nor should, be set aside or prejudiced by the fact that it operates between related parties, which, moreover, are not prohibited, ab initio, by the CIT Code (cf. article 63 of the CIT Code).

6. The local accommodation activity carried out by the Claimant generated taxable income in its sphere, which was not questioned by the TA.

7. In fact, it would be proper that the TA, having disregarded the activity provided by the Claimant of local accommodation as "an economic activity in the true sense of the expression," in consequence not accepting the expenses incurred therein, would also proceed with an identical exercise with regard to the income declared by the Claimant with that activity, not taxing it, which did not occur.

8. The TA cannot, therefore, under penalty of incongruity and unsustainability of the result of quantification of the taxable matter, fail to consider the expenses borne that are, habitual, common, in the exercise of the type of commercial activity in question – clear is, provided that properly documented, which, in the present case, was not challenged – under penalty of establishing a result that is entirely unrealistic and lacking in adhesion with reality.

9. In the case, it is unquestionable that there exists a causal nexus between the expenses in question borne by the Claimant and the business activity developed by it.

10. The fact that the Claimant's local accommodation is not registered with the Municipal Chamber of..., notwithstanding that the Claimant possesses a valid license for the exercise of the activity which, moreover, is in harmony with its corporate purpose, is not sufficient for the TA to extrapolate, from there, summary rejection of the expenses incurred in this matter, since, as seen above, the fiscal relevance of an expense depends solely on its connection with the company's activity and, in that context, the Tribunal considers that the Claimant has exercised the activity, with a causal nexus existing between the expenses borne and the income it earned in the context thereof, subject to taxation.

11. With regard to the doubts raised by the TA as to the publicity of the local accommodation, considering there to be "no interest that the space be known and accessible to the general public," these are not justified, insofar as the form of publicity of the space is part of the typical manifestation of freedom of business management and, consequently, of freedom of tax management of companies.

12. Consequently, the act of assessment relating to the tax year 2014 suffers, in this respect, from the defect of violation of article 23 of the CIT Code, in the wording that was in force that year, and should therefore be annulled, and the arbitral request thus proceeds accordingly.

§3. Question of Deductibility of Expenses Relating to "... in China" and Its Autonomous Taxation

1. The Respondent did not accept the deductibility of the Claimant's expenses relating to payments to F..., an entity headquartered in Hong Kong, on the ground of subsection r) of no. 1 of article 23-A of the CIT Code, proceeding with the consequent autonomous taxation.

2. What is at stake is the application of articles 23-A, no. 1, subsection r) and 88, no. 8 of the CIT Code, which establish, in what matters to the case:

Article 23-A

Charges Not Deductible for Tax Purposes

1 - The following charges are not deductible for purposes of determining taxable profit, even when recorded as period expenses:

(…)

r) Amounts paid or owed, on any basis, to natural or legal persons resident outside the territory of Portugal and subject there to a tax regime identified by portaria of the member of Government responsible for the area of finances as