Process: 469/2017-T

Date: May 15, 2018

Tax Type: IRC IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration (Process 469/2017-T) addressed two core IRC and IRS issues arising from a 2013 property acquisition. The taxpayer company (A... S.A.) challenged IRC assessments treating land acquisition payments made by a related group company (B... S.A.) as gratuitous positive equity variations under Article 21 CIRC, as well as IRS withholding tax on shareholder account movements classified as profit advances under Article 6(4) CIRS. The inspection found that €1,163,362.50 in acquisition payments were made by B... S.A., not by the acquiring company, creating an apparent patrimonial increase. The Tax Authority characterized €856,962.50 recorded as shareholder capital contributions and €130,000.00 in account movements as taxable profit advances subject to 28% withholding. The taxpayer argued these represented legitimate loans (suprimentos) requiring refund, and raised procedural objections regarding territorial competence violations under RCPITA Article 17, since the Finance Department outside the registered office location conducted inspections without proper prior authorization. The Tax Authority defended that subsequent ratification by the competent Lisbon authority cured procedural defects, and that lack of documentary evidence supporting genuine loan arrangements justified both the IRC positive variation treatment and IRS withholding presumption. The case illustrates critical distinctions between capital contributions, shareholder loans, and gratuitous transfers in determining corporate tax base, plus the evidentiary burden for rebutting statutory presumptions of profit distributions in related-party transactions.

Full Decision

ARBITRAL DECISION

The arbitral tribunal agrees as follows:

I - Report

  1. A..., S.A., with registered office at ..., no. ..., ..., in Lisbon, filed a request for the constitution of an arbitral tribunal, pursuant to the provisions of articles 2, no. 1, paragraph a), and 10 of Decree-Law no. 10/2011, of 20 January, seeking the annulment of the tax assessment acts relating to the assessment of Corporate Income Tax (IRC) for the fiscal year 2013, the respective assessment of compensatory interest, and also the assessment act for withholding tax on personal income tax (IRS), under the following grounds.

The disputed assessments resulted from inspection acts carried out by the Finance Department of ... following a request for authorization from the Finance Department of Lisbon, where the company's registered office is located.

In accordance with article 17 of the Supplementary Regime for Tax and Customs Inspection Procedures (RCPITA), the authorization for extension of competence shall be initiated by the entity territorially competent to carry out the inspection acts, and such authorization must necessarily be subsequent to the initiation of the inspection action itself.

The breach of the rules of territorial competence within the scope of tax inspection generates the illegality of the tax assessment acts that have been practiced in the sequence of and based upon the inspection actions.

The corrections to the IRC assessment resulted from the characterization, under article 21 of the Corporate Income Tax Code (CIRC), of the acquisition of a plot of land for industrial construction on 25 January 2013 as a positive patrimonial variation, due to the fact that partial payments of the acquisition price in the amounts of €306,400.00, as earnest money and partial payment, and €856,962.50, as a price adjustment, were borne by B..., S.A., a company that was named in the promise to sell contract as the purchaser and which was part of the business group of which the Applicant is a member.

However, the amount of €306,400.00 was refunded to the paying entity in four installments in the amounts of €90,000.00, €90,000.00, €90,000.00, and €96,400.00, during the month of December 2014, and the amount of €856,962.50 was recorded by the Applicant as a countervailing entry for shareholder capital contributions, wherefore the acquisition cannot be understood as a patrimonial increase obtained gratuitously for purposes of determining taxable income.

The Tax Authority further considered that the movements in the account of shareholder C..., in the amounts of €856,962.50 and €130,000.00, should be considered as profit advances under the provisions of article 6, no. 4, of the Personal Income Tax Code (CIRS), implying the application of a withholding rate of 28% and the determination of withholding taxes in the amount of €276,349.50.

These amounts, however, were credited in favor of the shareholder as capital contributions to the company, embodying a loan agreement, and taxation under IRS based on the legal presumption of article 6, no. 4, of the CIRS could only have taken place if the Tax Authority had demonstrated that these entries did not result from loans, as this is the fact that forms the basis of the presumption.

The Applicant concludes that the correction to the IRC assessment made based on the verification of a positive patrimonial variation is illegal, as well as the correction to the IRS assessment based on the presumption that the entries in the shareholder's current account were made as profit advances, and consequently requests the annulment of the additional assessments and compensatory interest.

The Tax Authority replied, in summary, in the following terms.

The Finance Department of ... carried out the inspection actions in the sequence of previous inspection procedures, and when the Applicant's registered office location changed, it notified the Finance Department of Lisbon so that it would analyze the situation or grant authorization for extension of competence.

The Assistant Director of Finance of Lisbon, by order of 14 February 2017, gave approval to the final report of the inspection action, whereby any irregularity that could be attributed to the inspection procedure is remedied by the effect of the subsequent ratification by the organ territorially competent to carry out the inspection act.

With regard to the additional IRC assessment, the Tax Authority considers that the Applicant, by acquiring the land, increased the company's assets in the total amount of €2,633,343.70, corresponding to the acquisition value, having only spent, on the date of execution of the deed, the sum of €129,262.50, and having assumed the debt to the seller in the amount of €1,340,718.70.

The remaining amount of €1,163,362.50, corresponding to the sum of the partial payments made prior to the date of the deed in the amounts of €306,400.00 and €856,962.50, was paid entirely in two distinct moments by B..., and not by the common shareholder of the two companies.

The alleged refund to B... of the amount of €306,400.00 in four different installments could only be considered if these amounts could be recognized as a gain, a situation that cannot be proven within the scope of the inspection procedure.

Furthermore, the Applicant gave accounting treatment to the payment made by B..., in the amount of €856,962.50, as if it were a capital contribution from a shareholder, as occurred with check no. ... from F... in the amount of €130,000.00, issued by D..., SGPS, S.A., on the date of the deed, without there being any documentary evidence of the existence of a loan.

And, in that sense, the correction to the IRS assessment is based on the fact that amounts paid by another entity (B...) were recognized as shareholder capital contributions, and these do not correspond to the shareholder's own funds.

It is concluded that the request is without merit.

  1. In the course of the proceedings, the meeting referred to in article 18 of the Arbitration Rules (RJAT) was waived, as well as the production of witness testimony. In closing arguments, the parties reiterated their previous positions.

  2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority in accordance with the applicable regulations. In accordance with the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated their acceptance of the appointment within the applicable period.

The parties were duly and timely notified of this designation and did not express their refusal thereof, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b), of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 21 November 2017.

The arbitral tribunal was regularly constituted and is materially competent, in accordance with the provisions of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimized and are represented (articles 4 and 10, no. 2, of the same decree and 1 of Administrative Order no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities and no exceptions have been raised.

We may proceed to hear and decide the case.

II - Reasoning

  1. The matters of fact relevant to the decision of the case are as follows:

a) The Finance Department of ... carried out a tax inspection procedure, covered by the internal service order issued on 31 July 2015, with reference to the years 2009 and 2013, to ascertain the accounting and tax treatment relating to the industrial investment involving the purchase of a plot of land in ..., made by A..., S.A..

b) On 6 July 2015, the Finance Department of ..., by virtue of the taxpayer having transferred its registered office to Lisbon, requested the organizational unit territorially competent to carry out the inspection action in ...

c) By order of 24 July 2015, the Assistant Director of Finance of Lisbon granted the Finance Department of ... authorization for extension of competence with respect to an inspection procedure concerning IRC for the period of 2013.

d) On 18 March 2016, the Finance Department of ... presented a proposal to broaden the inspection action, relating to withholding tax on IRS, which obtained the approval of the Assistant Director of Finance of Lisbon, by order of 30 March 2016.

e) On 21 January 2009, an investment agreement and promise to buy and sell contract was executed between the Municipality of ... and B..., S.A., whereby the Municipality promises to sell to the second party or to the company that the latter may designate a plot of land consisting of various rural properties for the price of €1,532,000.00, the second party delivering, as earnest money and partial payment, the sum of €306,400.00.

f) Under the sole paragraph of the second clause of the said agreement, the sale is effected in conditional ownership regime.

g) By deed executed on 16 December 2010, the Municipality of ... transferred possession of the plot of land referred to in the preceding e) to A..., S.A., based on the contractual clause that allowed the promised sale to be effected with the second party or the company that the latter might designate.

h) On 12 November 2012, an amendment to the investment agreement and promise to buy and sell contract was executed between the Municipality of ... and B..., whereby the second party opts for the acquisition of the plot of land in full ownership regime, by means of payment of the total value of €2,633,343.70.

i) On that date, B... paid to the municipality of ... the amount of €856,962.50 as a price adjustment payment.

j) Through the same instrument, B... committed to execute the deed on 24 January 2013, paying on that date the amount of €129,262.50 as a complementary payment, and the remaining amount owed, in the amount of €1,340,718.70, until 24 January 2017.

k) On 25 January 2013, a deed of sale of the property in question was executed between the municipality of ... and A..., S.A., the latter as second party, for the total value of €2,633,343.70.

l) In accordance with the fifth clause of the contract, the payment of the price is made as follows: the sum of €306,400.00 at the time of signing the promise to buy and sell contract, the sum of €856,962.50 when the amendment to the promise contract is executed, the sum of €129,262.50 at the time of execution of the deed of purchase and sale, the sum of €1,340,718.70 until 24 January 2017.

m) The municipality of ... gave receipt for the partial payments of €306,400.00 and €856,962.50, upon execution of the promise contract and its amendment, and for the payment of €129,262.50, at the time of execution of the deed of purchase and sale.

n) In the accounting record of the taxpayer, the partial payments of the price were recorded as follows: €306,400.00 as a discount obtained on purchases; €856,962.50 as current liability corresponding to a shareholder capital contribution; €129,262.50 as a bank payment; €1,340,718.70 as non-current liability.

o) The Applicant made bank transfers in favor of B..., on 30 December 2014, in the amounts of €90,000.00, €90,000.00, and €30,000.00, and on 31 December 2014, in the amount of €96,400.00, totaling €306,400.00.

p) These movements were recorded in the accounting books of the Applicant.

q) In the accounting record of B... an entry was made at the debit of €856,962.50, resulting from a check of that amount issued for the acquisition of the land, and a credit entry of the same amount against D... - SGPS as a loan.

r) In the accounting record of D... a reimbursement to the shareholder in the amount of €856,962.50 was recorded.

s) In the accounting record of A... a debit entry of the same amount of €856,962.50 was recorded, as a capital contribution from the shareholder.

t) D... issued a bearer check in the amount of €130,000.00 on 25 January 2013.

u) This amount appears in the accounting records of D... as a reimbursement to the shareholder and was recorded as a credit to A... as a capital contribution.

Unproven Facts

The means of payment that support the accounting entries referred to in the preceding q), r), s), and u) are not documented.

The Tribunal formed its conviction regarding the proven facts based on the documents attached to the petition and those contained in the administrative file presented by the Tax Authority with its response.

Legal Questions

Territorial Competence of the Inspection Service

  1. The Applicant initially invokes the territorial incompetence of the Finance Department of ... to carry out the inspection action on the grounds that the territorially competent organizational unit was the Finance Department of Lisbon, as the entity for the tax domicile of the taxpayer, in accordance with the provisions of article 16, no. 1, paragraph c), of the RCPITA, further stating that the extension of competence to a different territorial area, under the provisions of article 17 of that regulation, can only take place upon the initiative of the entity originally competent, and not at the behest of the delegated entity.

In accordance with the said provision, the units of the decentralized administration are competent to carry out tax inspection acts "with respect to taxpayers and other tax-obligated entities with domicile or tax residence in their territorial area". The subsequent provision of article 17, under the heading "Extension of competence", further permits inspection acts to extend to areas other than the territorially competent one or to be carried out by another service, "by reasoned decision of the entity that ordered them".

The Applicant interprets the final segment of this provision to mean that a relationship of precedence is required between the initiative of the inspection procedure, which must be the responsibility of the territorially competent entity, and the extension of competence to the organizational unit of another territorial area, which should only occur in the course of the procedure.

In the case at hand, nothing permits the conclusion that the inspection action was initiated by the Finance Department of ... before authorization for the carrying out of the formalities by the territorially competent entity had been obtained, since the procedure was initiated following an internal service order dated 31 July 2015, at a time when authorization had already been granted, with respect to the initial scope of the inspection, by the Finance Department of Lisbon through the order of its assistant director of 24 July 2015. Furthermore, the broadening of the inspection action, already in the course of the procedure, to aspects concerning withholding tax on IRS was likewise preceded by a decision, embodied in the order of 30 March 2016, which authorizes the extension of competence.

The defect that may be attributed to the inspection procedure is limited to the fact that the authorizing request for extension of competence was initiated by the delegated entity and not by the territorially competent entity, which was responsible for taking the initiative to carry out the inspection action.

It cannot, in any case, be denied that the purpose aimed at by the formal requirement contained in article 17 of the RCPITA was achieved through the granting of authorization for extension of competence, regardless of whether the initiative came from one or the other of the entities involved. This formality has, by its nature, a merely instrumental function in relation to the purpose of the inspection procedure, and what is relevant is that the entity with competence has intervened in the procedure.

The breach of the rule of precedence regarding the initiative for authorization did not affect or restrict the procedural safeguards intended to be protected, which are precisely those intended to ensure that the entity with previously defined competence intervenes in the practice of inspection acts.

As everything indicates, the situation is covered by the provision of article 163, no. 5, paragraph b), of the Administrative Procedure Code, which, giving normative expression to a jurisprudential criterion that had already been applied, enshrines the principle of benefit of the administrative act, namely in the case where formal or procedural defects are reduced to non-essential formality because the purpose aimed at by the legal provision has been achieved.

And in this conditioning, it becomes unnecessary to comply with the formal requirement that was breached, given that, in the concrete circumstances, the defect is transformed into mere irregularity incapable of affecting the legal definition of the case.

It cannot, therefore, be attributed to the said irregularity an annulling effect on the tax assessment acts, wherefore the invoked breach of the rules of territorial competence is without merit.

Positive Patrimonial Variation

  1. The Tax Authority made an additional IRC assessment with respect to the fiscal year 2013, on the grounds that the Applicant enhanced its assets in the total amount of €2,633,343.70 by acquiring a plot of land from the municipality of ..., in the industrial zone of the city, without having disbursed the partial amounts of €306,400.00 and €856,962.50, thus incurring a patrimonial enhancement that had no negative reflection in the company's equity.

The Respondent argues that the said amounts were paid by a third entity, although belonging to the same business group, as earnest money upon execution of the promise to buy and sell contract of the land, and as a price adjustment when the amendment to the contract was executed, which permitted the promising buyer to acquire the plot of land in full ownership regime.

The documents attached to the proceedings demonstrate, however, that the Applicant made bank transfers in favor of the creditor on 30 and 31 December 2014, totaling the amount of €306,400.00, the movements of which are reflected in the accounting records, having thus proceeded to the reimbursement of that amount.

Also with respect to the amount of €856,962.50, the accounting data reveal that B... made a loan of that amount to D..., which, in turn, proceeded to the reimbursement in that same amount to the shareholder, as a capital contribution, and that this amount came to constitute a capital contribution from the shareholder in favor of the Applicant. From which it is evident that the Applicant currently bears a debt in relation to the shareholder in the same amount corresponding to the payment that had been assumed by B... to be imputed to the payment of the price of the land.

The Tax Authority alleges that the transfers made in 2014 could not be considered within the scope of the inspection action - which referred to the fiscal year 2013 - and could only be relevant if they could be recognized as a gain, further invoking that the payment of the amount of €856,962.50 by B... is only justified by reason of the special relationship existing between the intervening entities which belonged to the same business group and had a common shareholder.

The fact is that the inspection procedure is subject to the principle of material truth, the Tax Administration being obligated to adopt officially all appropriate diligences to that end (article 6 of the Supplementary Regime for Tax Procedure), and this principle is equally applicable, in general terms, to the tax procedure (article 72 of the Tax Procedural Code). Given that the inspection action was initiated in 2015, extending until 2017, nothing justified that the accounting data and bank movements made at an earlier moment that could have relevance to the investigation of the tax facts should not be taken into account.

Furthermore, what becomes relevant, in light of the concept of taxable income contained in article 17, no. 1, of the CIRC, is to detect a patrimonial increase that is not reflected in the net result of the taxation period. Now, if in light of the facts known it is demonstrated that the Applicant proceeded to the reimbursement of the payment initially made by B..., as earnest money, and if the amount corresponding to the second payment also made by that entity is now part of the liability of the Applicant, the positive patrimonial variation cannot be found to have occurred.

It is further important to have regard, in the assessment of the case, to the rules of substantive evidence law resulting from articles 74 and 75 of the General Tax Law (LGT). The Tax Administration has the burden of proof of the facts constituting the existence of a positive patrimonial variation (article 74, no. 1). Furthermore, the data and determinations recorded in the accounting books of the taxpayer are presumed to be true, and only when the accounting books contain omissions, errors, inaccuracies, or well-founded indications that do not reflect or prevent knowledge of the taxable matter does this presumption cease, resulting in the burden of proof of the facts recorded in the books falling upon the taxpayer (article 75, no. 1, and no. 2, paragraph a)).

Without any of the situations justifying the cessation of the presumption having been invoked, and the Tax Administration basing itself solely on the fact that the taxpayer did not assume part of the payment of the price of the land, the accounting entries recorded in the books must be considered as true. The demonstration of these entries evidences the non-existence of a positive patrimonial variation and, in any case, it was the burden of the Tax Administration to prove that such variation occurred.

Profit Advance

  1. The Tax Administration further concluded that the accounting recognition of shareholder capital contributions to the Applicant, without any documentation proving that it resulted from a loan, provision of work, or exercise of corporate offices, should be deemed as advance on account of profits as it involves income placed at the disposal of the shareholder without the latter having expended its value, the presumption of article 6, no. 4, of the CIRS functioning here.

According to that provision, as then worded, "entries in any current accounts of shareholders, recorded in commercial or civil companies in commercial form, when they do not result from loans, provision of work, or exercise of corporate offices, are presumed to be made on account of profits or advance of profits".

By effect of this rule of substantive evidence law, the burden lies on the Tax Administration to prove the basis of the presumption, that is, the proof of the existence of the entries, whereas the taxpayer bears the burden of proof of the facts that rebut the presumption, and therefore, the demonstration that the entries result from loans, provision of work, or exercise of corporate offices.

The Applicant counters that the entries were made as credits to the shareholder's capital contribution account and, given that the capital contribution contract has the nature of a loan, which is distinguished from the loan regulated under civil law only by the stipulation of the repayment term and the non-dependence on special form, the presumption that the entries were made on account of profits is thereby rebutted.

However, the question cannot be viewed with this simplicity.

Shareholder capital contributions are uniformly regarded by jurisprudence as genuine loans or mutual agreements made to the company, or, at least, legal transactions equivalent to them, to which the corresponding rules are applicable (judgment of the Supreme Court of Justice of 26 October 2010, Case no. 357/1999). It is, fundamentally, a form of financing in the nature of a loan with particular characteristics and regime, and, although it may be deemed to be a named and autonomous contract, it contains elements common to the loan contract and to the social purpose of the provision: the shareholder contracts by virtue of being a shareholder and may be compensated through the distribution of profits or through the appreciation of the share (judgments of the Supreme Court of Justice of 3 October 2002, Case no. 03-A526, 13 October 2011, Case no. 5356/07, and 31 October 2017, Case no. 1374/12).

The loan is, by nature, a real contract, which implies the transfer of the thing so that it may be placed at the disposal of the borrower. The patrimonial attribution made by the lender is a constitutive and integral element of the contract, whereby the contract is not completed nor exists without delivery (PIRES DE LIMA/ANTUNES VARELA, Annotated Civil Code, vol. II, 2nd ed., Coimbra, pages 601-602). And this characteristic is equally applicable to the shareholder capital contribution contract when it assumes the form of a loan of money from the shareholder to the company (PINTO FURTADO, Course on Company Law, 4th ed., Coimbra, and judgment of the Supreme Court of Justice of 27 October 1998, Case no. 98A904).

The rebuttal of the presumption cannot, consequently, be based on the mere identification of accounting entries as a capital contribution, but requires the demonstration of financial flows supporting those movements. And this proof was not provided, since the means of payment that support the accounting entries are not apparent in the proceedings.

  1. The question may, however, be examined from a different analytical perspective.

As results from the factual matter, B... issued a check in the amount of €856,962.50 to the municipality of ..., as earnest money and partial payment for the acquisition of the land, and, in its recording, a credit entry of the same amount was made against D... as a loan. Meanwhile, this company recorded a reimbursement to the shareholder of the same value, and, in turn, in the accounting of A..., a debit entry was recorded in the same amount of €856,962.50 in the shareholder capital contribution account. Also the capital contribution of €130,000.00 recorded in favor of A... has its origin in a bearer check of that amount issued by D... and which corresponds, in the accounting record of this company, to the reimbursement of a capital contribution from the shareholder.

As may be concluded, the entries of the said amounts of €856,962.50 and €130,000.00 as capital contributions to the Applicant have their origin in the reimbursement of financing effected by the shareholder to another company in the group (D...), and relate to the credit granted by B... to D... and to the check issued by the latter company.

It is not evident, in this entire context, that the cross movements intended to reflect in the accounts of the various companies in the same group the inflows and outflows of capital may correspond to a distribution of profits.

As has been stated, the shareholder capital contribution contract is a special contractual means of financing the company by its shareholders, and capital contributions are normally the additional amounts that they provide when capital is insufficient for the expenses of operations (judgment of the Supreme Court of Justice of 18 May 1962, in Court Review no. 117, page 429).

From a tax perspective, it makes no sense to impute, as an advance on account of profits, the capital contributions made by the shareholder to a certain company, when they correspond, in the accounting records, to the reimbursement of loans of the same amount that the shareholder had granted to another company in the same group.

Otherwise, the successive entry of the same amount in different companies as a result of a capital contribution which, being reimbursed, is applied in another company would imply double taxation based on the idea that any entry not documentally proven as resulting from a loan always constitutes an advance on account of profits.

Such an interpretation leads to an unjust and disproportionate result.

The meaning of the rule of article 6, no. 4, of the CIRS is to worsen the legal position of the taxpayer by imposing on it the burden of proof of the source of the income when undocumented entries are made in the shareholder's current account. That is, if an entry in favor of the shareholder is recorded without the means of payment through which the delivery of money was made being documented, in the case of a capital contribution, it is presumed, for purposes of taxation under IRS, that it is a distribution of profits, and it is incumbent upon the taxpayer to demonstrate that the loan occurred.

However, in this case, it is the very basis of the presumption that is called into question because, given that capital contribution entries have been made, these correspond to reimbursements of other capital contributions that the shareholder held in another company, such that there is no alteration whatsoever in the shareholder's patrimonial situation. Only the shareholder came to benefit from a credit that he already held in another company, and this movement could not even have been determined by the purpose of concealing the receipt of profits, since he could have already obtained reimbursement of that capital contribution instead of using it as financing for another company.

Under the said provision of the CIRS, it is incumbent on the Tax Authority to demonstrate the existence of facts leading to the presumption that the credit entries for the shareholder constitute profit advances. And what the reality expressed in the accounting evidences is that these entries are nothing more than the application in another company of a credit that the shareholder already held in another company in the same group, with nothing permitting the conclusion that it is a distribution of profits or its advance.

The only question that truly arises is that of the breach of the provision of article 63-C, no. 2, of the Accounting Law, which provides that movements relating to capital contributions, other forms of shareholder loans, and advances shall be carried out through bank accounts, and which, as a mere ancillary obligation intended to facilitate tax inspection, is sanctioned with an infraction under the terms provided in article 129 of the Tax Inspection Regulations.

There is no reason, for all the foregoing, to consider verified the taxation under IRS as an advance on profits.

III - Decision

For these reasons, the tribunal decides as follows:

a) To find the request for arbitral determination has merit and to annul the IRC assessment no. 2017..., the withholding tax assessment no. 2017..., and the compensatory interest assessment no. 2017..., all relating to the year 2013;

b) To condemn to payment of statutory interest from the date of payment of the tax until the date of issuance of the credit note, in accordance with articles 43 of the General Tax Law and 61 of the Tax Procedural Code.

Value of the Case

The Applicant stated as the value of the case the amount of €446,320.19, which was not contested by the Respondent and corresponds to the value of the assessment sought to be annulled (article 97, no. 1, paragraph a), of the Tax Procedural Code).

Let notification be made.

Lisbon, 15 May 2018

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

The Arbitrator Member

José Alberto Pinheiro Pinto

The Arbitrator Member

Américo Brás Carlos
(Dissenting, as per declaration attached)

DISSENTING OPINION

I did not vote in favor of the Decision, as I disagree with the part that determined the annulment of assessment no. 2017..., for the reasons I shall now describe.

The Decision held that "in this case, it is the very basis of the presumption that is called into question".

I hold that, to the contrary of the decision, the basis of the presumption is verified – "the known fact" (art. 349 of the Civil Code) – expressed in the first part of no. 4 of article 6 of the CIRS, as worded on the date of the facts (2013). That provision stated:

"Entries in any current accounts of shareholders, recorded in commercial or civil companies in commercial form, when they do not result from loans, provision of work, or exercise of corporate offices, are presumed to be made on account of profits or advance of profits".

In this legal presumption the known fact, which is the basis of the presumption, is "the entry in any current accounts of shareholders, recorded in commercial or civil companies in commercial form". And proof of this fact was, as the Decision acknowledges, made by the respondent by attaching to the file copies of the accounting movements that generated in the Applicant's patrimonial sphere the obligation to pay, as reimbursement of capital contributions, the amounts of €856,962.50 and €130,000.00 to its shareholder.

The Decision, however, faced with the existence of such entries as credits to the shareholder, did not proceed with the subsequent iter of, without prejudice to the admission of contrary proof, establishing "the unknown fact" which, in light of the rule, would consist of considering that such entries had been made as profits or advance of profits. And did not conclude in this manner because it considered that:

"It is incumbent on the Tax Authority to demonstrate the existence of facts leading to the presumption that the credit entries for the shareholder constitute profit advances. And what the reality expressed in the accounting evidences is that these entries are nothing more than the application in another company of a credit that the shareholder already held in another company in the same group, with nothing permitting the conclusion that it is a distribution of profits or its advance.";

"From a tax perspective, it makes no sense to impute, as an advance on account of profits, the capital contributions made by the shareholder to a certain company, when they correspond, in the accounting records, to the reimbursement of loans of the same amount that the shareholder had granted to another company in the same group."

"In this case, it is the very basis of the presumption that is called into question because, given that capital contribution entries have been made, these correspond to reimbursements of other capital contributions that the shareholder held in another company, such that there is no alteration whatsoever in the shareholder's patrimonial situation."

I do not agree with the said conclusions, which support the final decision regarding points 7 and 8 - Profit Advance - because:

What, under no. 4 of article 6 of the CIRS, is incumbent on the Tax Authority is to prove the existence of the basis of the presumption: in this case, the credit entries for the shareholder recorded by the Applicant. And, as stated above, the judgment recognizes the existence of such proof. It is not incumbent on the Tax Authority to do more than this. It is not incumbent on the Tax Authority, in particular, to "demonstrate the existence of facts leading to the presumption that the credit entries for the shareholder constitute profit advances", as the decision states. This is because, if the demonstration to necessarily be made by the Tax Authority were already directed to having the said credit entries for the shareholder be considered profit advances, there would be no need for the aforementioned presumption, or at least it would not have been legally constructed as it was on the date of the facts.

In the same vein, when the Decision denies the existence of the basis of the presumption because "there is no alteration whatsoever in the shareholder's patrimonial situation", by virtue of the capital contribution entries in favor of the shareholder "corresponding to reimbursements of other capital contributions" (a fact that will subsequently also be questioned), it anticipates one of the possible conclusions of the presumption. In this case, the one that would occur if the Applicant rebutted the presumption.

The consideration of whether or not there is an alteration in the shareholder's patrimonial situation is something to which one arrives, or not, after the completion of the second moment of the functioning of the rule that establishes the presumption. The conclusion as to whether there was, or was not, patrimonial enrichment of the shareholder is, logically, a point of arrival and not the starting point of the presumption. It is not permitted for the tribunal to consider the basis of the presumption not verified based on one of the two possible solutions to which the same presumption would lead.

On the other hand, the Decision considers the basis of the presumption not verified with the argument that the accounting entry of the capital contribution in favor of the shareholder corresponds to credits of the same value that the latter held in another company in the same group. In considering the basis of the presumption not verified with the argument that it would be verified something identical to the result of the rebuttal of the same presumption - that is, that the shareholder's credit against the Applicant corresponded to an actual entry of money or fungible thing that had previously entered the shareholder's patrimonial sphere through the reimbursement of earlier loans/capital contributions – the Decision did not observe the logical moments of the said legal presumption, inverting its mode of operation.

I hold that the basis of the presumption should have been considered as existing, leaving the judgment of rebuttal of the same for the subsequent analysis of the substantive (and not merely formal) elements in the file. And this rebuttal would have had no difficulty in being made, nor would it have been disproportionate, having regard in particular to the real nature of the loan or the loan, emphasized moreover by the Decision and to the obligation that movements relating to capital contributions must also necessarily be effected through bank accounts required by article 63-C of the General Tax Law (see no. 2). Note that the capital contribution is not a unilateral act of the shareholder, whose consequences are limited to his personal sphere. Shareholder, albeit a large majority shareholder, and the company beneficiary of the capital contribution are distinct legal persons.

As the Decision also concluded, the actual existence of movements in money or fungible thing between these parties is a constitutive condition of the capital contribution and the loan. Explicitly concluded the decision (page 10): "The rebuttal of the presumption cannot, consequently, be based on the mere identification of accounting entries as a capital contribution, but requires the demonstration of financial flows supporting those movements. And this proof was not provided, since the means of payment that support the accounting entries are not apparent in the proceedings".

Notwithstanding subscribing to this conclusion, the Decision did not draw from it the consequence that I draw, and also for this reason I depart from its decision.

This is because not only are the means of payment supporting the accounting movements that generated the shareholder's credits against the Applicant for capital contributions made not evident in the file, but equally, the means of payment supporting the earlier loans/capital contributions and reimbursements, involving other companies in the group, upstream of the Applicant and the shareholder, which culminate in the accounting for the shareholder's credit against the Applicant are not evident in the file.

Note that, as the Decision points out (page 11), regarding the amount of €856,962.50, everything begins with a payment of this amount to a Municipal Council through a check issued by a company in the group. This payment is, however, recorded in this company as a loan to the SGPS company in the group (company holding lends to holding company), with this company recording a reimbursement of capital contribution of the same amount to the shareholder, natural person, who also holds the said SGPS. Finally, for the same amount, a credit is recorded in the Applicant's accounting for capital contribution in favor of the said shareholder, natural person. I emphasize that none of these movements – neither the final movement that would reflect the shareholder's credit against the Applicant, nor all the others that precede it and which in the logic of the sentence would justify it - is supported by any means of payment of reimbursements or delivery of money or fungible thing (see art. 243, no. 1 of the Commercial Code).

With respect to the amount of €130,000.00 recorded by the Applicant as a capital contribution made by the shareholder, the Decision states that it has its origin in a bearer check of that amount issued by the SGPS company in the group and corresponds, in the accounting record of this company, to the reimbursement of a capital contribution of the shareholder, natural person (page 11). Also in this case, none of the movements that, ultimately, are reflected in the accounting for the said credit for capital contribution from the shareholder to the Applicant is supported by means of payment that substantiate the accounting entries. Furthermore, although such check, without indication of payee, had the following indication printed by the issuing financial institution: "Check not transferable. Mandatory to indicate the name of the payee" (Doc. 10, fl. 1, annex to the tax inspection report); and there is no evidence in the file that it was cashed.

Wherefore, considering all the foregoing, I hold that the request for arbitral determination could not have been found to have merit in the part that ordered the annulment of assessment no. 2017....

Lisbon, 15 May 2018

Américo Brás Carlos

Frequently Asked Questions

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What constitutes a positive equity variation under Article 21 of the Portuguese IRC Code?
Under Article 21 of the Portuguese IRC Code, a positive equity variation constitutes any increase in a company's net worth that is not directly attributable to taxable income categories already captured by other provisions. This includes gratuitous acquisitions, debt forgiveness, and benefits received without corresponding consideration. In this case, the Tax Authority argued that acquiring land worth €2,633,343.70 while only expending €129,262.50 directly, with €1,163,362.50 paid by a related company (B... S.A.), constituted a positive patrimonial variation because the taxpayer obtained an asset increase without corresponding outflow from its own resources. The classification depends on whether the payments by the related entity represent genuine loans requiring repayment, capital contributions, or gratuitous transfers. Without documentary evidence establishing loan obligations, such inter-company payments funding asset acquisitions may be recharacterized as taxable equity increases.
How does the presumption of advance on profits apply under Article 6(4) of the CIRS in shareholder account movements?
Article 6(4) of the CIRS creates a legal presumption that debits in shareholder current accounts constitute advances on profits (adiantamento de lucros) subject to 28% withholding tax, unless the taxpayer proves these movements represent genuine loans or other non-distribution transactions. This presumption shifts the burden of proof to the taxpayer to demonstrate the entries resulted from bona fide loan agreements with repayment obligations. In this case, the Tax Authority applied the presumption to €856,962.50 and €130,000.00 credited to shareholder C...'s account, determining €276,349.50 in withholding tax. The taxpayer contended these represented capital contributions (suprimentos), but the Tax Authority noted the amounts actually originated from another group entity (B... S.A.), not the shareholder's own funds, undermining their characterization as genuine shareholder loans and supporting application of the profit advance presumption.
Can shareholder loans (suprimentos) be reclassified as taxable advances on profits for IRS withholding tax purposes?
Yes, shareholder loans (suprimentos) can be reclassified as taxable advances on profits for IRS withholding purposes when the Tax Authority demonstrates they lack the essential characteristics of genuine loan arrangements. The key issue is substance over form—mere accounting treatment as shareholder loans is insufficient if documentary evidence (loan agreements, repayment terms, interest provisions) is absent or the purported lender lacks the economic capacity to make the loan. In this decision, amounts recorded as shareholder capital contributions were actually paid by a different group company (B... S.A.), not the shareholder himself, raising serious questions about their true nature. Article 6(4) CIRS establishes a rebuttable presumption that such account movements represent profit distributions, placing the evidentiary burden on the taxpayer to prove otherwise. Without documentation establishing loan agreements and when the purported shareholder lacked the funds being credited, reclassification as taxable profit advances subject to 28% withholding becomes legally sustainable.
What are the consequences of violating territorial competence rules in Portuguese tax inspection procedures under RCPITA?
Under Article 17 of RCPITA (Regime Complementar do Procedimento de Inspeção Tributária e Aduaneira), tax inspections must generally be conducted by the Finance Department with territorial competence over the taxpayer's registered office. Extensions of competence to other departments require specific authorization from the competent authority, and such authorization must be initiated by the territorially competent entity after the inspection action has commenced. Violations of these territorial competence rules can generate illegality in resulting tax assessments. However, Portuguese administrative law recognizes that subsequent ratification by the competent authority can cure procedural defects. In this case, the taxpayer argued the Finance Department of another region lacked authority to conduct inspections, but the Tax Authority countered that the Assistant Director of Finance of Lisbon (the territorially competent authority) subsequently approved the final inspection report on 14 February 2017, thereby validating the procedure through ratification. This ratification doctrine allows competent authorities to remedy jurisdictional irregularities through ex post facto approval.
When can a property acquisition funded by a related company be considered a gratuitous patrimonial increase for IRC purposes?
A property acquisition funded by a related company can be considered a gratuitous patrimonial increase for IRC purposes under Article 21 CIRC when the acquiring entity obtains ownership rights without corresponding outflows from its own resources and cannot demonstrate that the related party's payments constitute enforceable obligations requiring repayment. The analysis focuses on whether the funding represents: (1) a genuine inter-company loan with repayment obligations, (2) a capital contribution from the related entity as shareholder, or (3) a gratuitous transfer of value. Critical factors include documentary evidence of loan agreements, whether amounts were subsequently repaid, accounting treatment consistency, and whether the transaction reflects arm's length commercial terms. In this case, B... S.A. paid €1,163,362.50 toward A... S.A.'s land acquisition. The taxpayer claimed €306,400.00 was subsequently refunded, but could not prove these refunds represented taxable income to B... S.A. The remaining €856,962.50 was recorded as shareholder capital contributions despite originating from a different entity, suggesting gratuitous transfer treatment was appropriate absent evidence of genuine debt obligations between the companies.