Process: 483/2017-T

Date: May 18, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD arbitration case 483/2017-T involved a challenge to an IRC (Corporate Income Tax) assessment of €202,309.85 for tax year 2013. The taxpayer, a Portuguese real estate company, contested corrections made by tax authorities regarding: (i) €193,000 in payments to a Hong Kong-based Chinese company (B…) allegedly subject to a privileged tax regime under Article 88(8) CIRC, and (ii) €265,237.94 in positive asset variations from customer account regularizations. The claimant argued the payments were legitimate commissions (4-5.5%) for marketing services that resulted in seven property sales to Chinese buyers, supported by witness testimony confirming the services rendered. The company complied with withholding exemption requirements under Article 98 CIRC, providing tax residence certificates from Hong Kong authorities. Regarding the accounting corrections, the taxpayer demonstrated these were mere technical adjustments of errors dating back to 2002, when customer advance accounts weren't properly settled despite completed sales. The tax authority's own inspection report acknowledged these balances had no economic substance. The case examines critical IRC principles: the treatment of payments to entities in privileged tax jurisdictions, the application of Article 65 CIRC regarding excessive costs, and how accounting error corrections should be treated for tax purposes. The arbitral tribunal, constituted under RJAT (Legal Regime for Tax Arbitration), heard witness testimony and documentary evidence before rendering its decision on whether the tax assessment was lawful.

Full Decision

ARBITRAL DECISION

The Arbitrators José Poças Falcão, Catarina Gonçalves and Amândio Silva, designated by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree on the following:

1. Report and Clarification

  1. On 7 June 2017, the company A…, LDA, a taxpayer, legal person with registration number …, with registered office at …, no.…, …, in …– ..., filed, pursuant to article 2, no. 1, paragraph a), 5, no. 3, paragraph a), 6, no. 2, paragraph a), 10, no. 1, paragraph a) and no. 2, all of Decree-Law no. 10/2011, of 20 January, Legal Regime for Tax Arbitration (hereinafter RJAT), seeking the annulment of the tax act of corporate income tax assessment no. 2017…, and respective compensatory interest, relating to the tax year 2013, in the amount of € 202,309.85.

  2. On 29 August 2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

  3. The Claimant did not proceed to appoint an arbitrator, whereby, pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph a) of no. 1 of article 11 of the RJAT, the President of the Ethics Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable deadline.

  4. On 03-11-2017, the parties were notified of these designations, and neither party expressed willingness to refuse any of them.

  5. In accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 23-11-2017.

  6. On 31-01-2018, the Respondent, duly notified for this purpose, filed its defence raising exceptions and impugnation.

  7. The meeting provided for in article 18 of the RJAT was held on 04-04-2018, and the witnesses listed by the Claimant were also examined.

  8. The parties submitted written pleadings.

  9. A deadline of 15-05-2018 was set for delivery of the final decision, subsequently extended, although without necessity of using the faculty provided for in article 21, no. 2, of the RJAT (See order of 15-5-2018).

  10. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5, and 6, no. 1, of the RJAT.

  11. The parties have legal standing and capacity, are legitimate parties and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

  12. The proceedings do not suffer from any defects affecting validity.

  13. Accordingly, there is no obstacle to the examination of the merits of the case.

2. Submissions of the Parties

2.1. Submissions of the Claimant

The Claimant alleges, in summary, the following:

The corrections made by the tax inspection carried out for the tax year 2013 now impugned relate to (i) payments to non-resident entities subject to a privileged tax regime in the amount of € 193,000.00 and (ii) an alleged positive patrimonial variation in the amount of € 265,237.94 relating to regularizations of various customer accounts;

A) As regards the 2 invoices paid to the Chinese company B…

It has been demonstrated that these were payments made by the claimant in consideration for the provision of services for the promotion of its real estate, which were effectively rendered by that Chinese company in the Chinese market, which resulted in the acquisition of 7 Chinese buyers, duly identified in the inspection report, who went on to acquire 7 residential properties from the claimant.

The purchase and sale transactions were subsequently concluded with company C… as is mentioned, moreover, in the inspection report itself.

These facts, beyond the documentary evidence in the proceedings, were made absolutely clear by the testimony of witnesses D… who stated that she had personally introduced Mr. E… (representative of the Chinese company) to the manager of the claimant, and above all by the testimony of F…, representative of said company C….

This latter witness testified that her basis of knowledge was the fact that she had participated in the transactions in question and described, in detail and in a clear and credible manner, the type of services provided by the Chinese company.

She further testified that without the services provided by said Chinese company it would not have been possible for the claimant to sell those properties to those Chinese customers. She further confirmed that her company C… concluded the sales of the aforementioned properties to the Chinese customers obtained by company B….

As to whether the amount is excessive:

With regard to the 1st invoice, of 48,250.00 on the sale of an apartment for the price of 885,000.00, we are looking at a commission of 5.5%.

As for the 2nd invoice, of 144,750.00 on the sale of 6 properties to as many Chinese buyers for the total price of 3,680,000.00, this corresponds to a percentage of approximately 4%.

Now, these amounts, for the simple reason of experience and ordinary knowledge of these transactions, beyond the evidence produced, are values manifestly normal and customarily practiced.

They are, therefore, objectively, not excessive amounts, for the purposes of their acceptance in accordance with article 65 of the Corporate Income Tax Code (CIRC).

Finally, it is also relevant and cannot be ignored, the fact, moreover expressly recognized in the inspection report (at p. 24) that: "The company presented the model 21-RFI forms signed and stamped by the actual beneficiary of the payments, as well as the tax residence certificates issued in the name of this entity, validated by the fiscal authorities of Hong Kong, whereby it complies with the requirements for exemption from withholding provided for in article 98 of the Corporate Income Tax Code."

B) As regards the alleged positive patrimonial variation (in the amount of 265,237.94)

In 2013, the company's accountant detected in the accounts that there persisted accounts for 4 customers that still showed advances on signal to be settled, when it is certain that those customers had purchased their apartments and executed the respective deeds and, consequently, the total sale price in 2002.

Therefore, once the claimant had sold the apartments to those customers, the respective values of each advance would, of necessity, have to be settled. However, in those 4 cases identified in the report, this did not occur, by mere accounting error, as stated by the accountant before the Arbitral Tribunal.

Thus, the claimant's accountant merely corrected a manifest error, which she only detected in 2013 but which her accounts had shown for more than 10 years.

And it is the inspection report itself, which forms the basis for the assessment, that recognizes that the regularized balances were incorrect in the accounts and "that do not correspond to real and actual liabilities and had no support of any economic fact".

This is merely a regularization of an accounting error, without any substance or underlying economic fact, which did not correspond to any benefit or economic advantage for the taxpayer, whereby the correction of the error had not, and would not have had to have, any influence on the determination of the results and the taxable profit of the claimant.

In its pleadings, the Claimant presented the following conclusions:

Contrary to the reasoning that formed the basis of the impugned assessment, the payments made by the claimant, in benefit of company B…, with registered office in Hong Kong, in the total amount of 193,000.00, correspond to payment for services rendered by that entity in relation to sales to Chinese customers obtained by it, and such payments do not have an abnormal character nor an excessive amount, for the purposes of articles 65, no. 1 and article 88, no. 8, of the CIRC.

The accounting regularization of the balances of the 4 customer advance accounts, which should have been settled on the date of the purchase and sale deeds carried out more than 10 years previously, is configured as a correction of a merely accounting error, without any substance or underlying economic fact.

Therefore, contrary to the reasoning of the inspection report, such a regularization, regardless of the form adopted and whether or not it may be the most appropriate one, does not constitute any patrimonial increase nor any economic advantage or benefit for the taxpayer nor any manifestation of taxpaying capacity and, consequently, cannot be classified as a positive patrimonial variation for the purposes of article 21 of the CIRC, and is not subject to corporate income tax.

2.2. Submissions of the Respondent

The Respondent alleges, in summary, the following:

The subsumption of the payments made to B… under article 65 of the Corporate Income Tax Code results from:

(i) The payments having been made to an entity resident outside Portuguese territory, in casu, an entity domiciled in Hong Kong, and the said entity is subject to a clearly more favorable tax regime, as, pursuant to no. 2 of article 65 of the Corporate Income Tax Code, the territory of residence - Hong Kong - appears on the list (no. 31) approved by Ordinance no. 292/2011.

(ii) The taxpayer not having proven that such expenses correspond to operations effectively carried out and do not have an abnormal character or excessive amount.

In effect, the Claimant failed, breaching its burden of proof, to contradict the conclusions of the Tax Inspection, and it is proven in the present arbitral proceedings that:

• there is no evidence that any action, advertising campaign or equivalent, concrete and effective, was carried out by the said service-providing company aimed at the sale of the units;

• there is no proof of the practice by B… of any acts intended for the sale of real estate properties of the Claimant;

• no proof was presented in paper, video, electronic, digital or any other format containing, in particular, pamphlets used in marketing campaigns or market prospecting studies;

• it was not proven that the expenses of each invoice effectively correspond to the properties or units indicated, and the units (A, B, C, F, I and G) referred to in the invoice in the amount of € 144,750.00 were subject to intermediation by real estate agency C… Lda.;

• there is no evidence of exchange of any correspondence or contacts with the alleged service provider, related to the services which he allegedly intermediated.

With regard to the proof of the absence of abnormal character of the expenses, it should be noted that the difficulty in assessing the "normality" of the expenses that gave rise to the payments to B… results from the impossibility of affirming, for lack of conclusive proof by the Claimant, that the services invoiced under the generic designation of "real estate intervention" were effectively carried out by that Hong Kong entity.

With respect to the commissions, the Tax Inspection ascertained, from the Claimant's accounting records, namely the deeds of sale, general trial balances and current account statements, that the commissions paid to the Hong Kong company reached values exceeding 20%, and also with regard to this issue the Claimant failed to provide any proof that there is no excessiveness in the amount of the intermediation.

Therefore it is concluded that having failed to be demonstrated that the amount charged is not excessive compared to the normal market standard followed in Portugal, this requirement is not met.

Regularizations of various customer advance accounts - Positive patrimonial variation

The testimony given by G…, Certified Accountant, confirmed that the amounts recorded as customer advances had been received and attributed the failure to regularize the balances in accounts 21854, 21855, 21856 and 21871, in the tax years (2002 and 2005) in which the sales of the properties took place, to errors made by the person executing the accounting entries.

These errors affected its reliability and the faithful representation of the financial position, through the balance sheet, and of results, as, in accordance with the Conceptual Framework (CF) of the System of Accounting Normalization (SNC), paragraph 33: "For information to be reliable, it must faithfully represent the transactions and other events it purports to represent or could reasonably be expected to represent. For example, the balance sheet must faithfully represent the transactions and other events that result in assets, liabilities and equity of the entity on the reporting date that satisfy the recognition criteria."

The thesis that these were errors made in the execution of the accounting entries is not convincing, on the one hand, because the dates of the purchase and sale deeds carried out in 2002, in two cases, are even prior to the date of the accounting entry of the advances, with a difference of days, and in another the dates of the advances and the deed are almost coincident, and in yet another only a few months intervene, therefore, the probability of their detection by simple control of financial flows would be high.

The contours of the situation under analysis lead to the conviction that the explanation most consistent with the maintenance of records in Account 281 - Customer Advances over a decade is not compatible with the existence of accounting balances in bank and Cash accounts artificially inflated by that amount, of €265,237.94, attributing the same to discrepancies between the amounts effectively received from customers and the prices declared in the purchase and sale deeds.

Hence it follows that the cancellation, on 31.12.2013, of the balances appearing in the Account - Customer Advances should have been made as a counterpart to Account 56 – Retained Earnings, to the extent that it concerns rectifying the results determined in prior periods, as recommended by paragraphs 36 to 43 of Accounting and Financial Reporting Standard (NCRF) 4 – Accounting Policies, Changes in Accounting Estimates and Errors.

It fails, however, to clarify what would have been the most appropriate form of regularization, precisely, because that is the heart of the matter that would allow knowing why the Respondent's liabilities, for more than a decade, showed an item with a balance of €265,237.94, non-existent, and this amount did not cause any imbalance in the values of the balances of the Customer, Deposit or Cash accounts.

The plausible explanation for this fact can only lie in the discrepancy between the amounts received from customers and the amounts of sales declared in the purchase and sale deeds, whereby the regularization of the balances appearing in the customer advances account should constitute a positive patrimonial variation and influence the taxable profit of the tax year, by force of no. 1 of article 21 of the Corporate Income Tax Code.

3. Factual Matters

i. Facts considered proven

The following facts are hereby established:

a) The Claimant recorded in its accounts two invoices from company B…, in the amount respectively of € 48,250.00 and €144,750.00, with reference only to "Real Estate Intervention".

b) The real estate promotion contract was not exclusive to company C….

c) Company B… is represented by Mr. E…, who was an agent who had a relevant network of contacts in the Chinese market.

d) Payment of those invoices was made through checks issued to the law firm H…, as evidenced by a declaration issued by this firm attesting to the fact that the amounts in question were received on account of company B…, as well as the receipts for the respective forwarding.

e) The commissions charged amounted to, approximately, 5.5% and 3.9%, of the values of the properties identified by the Claimant.

f) On 31.12.2013, the following accounting movements were made: cancellation of the credit balances in account 218XX - Customer Advances, as a counterpart to another account 278211 – Other debtors and creditors, without being specified why it was made as a counterpart to account 27.8211 - Miscellaneous and the relationships existing between such balances and their holders.

g) The Claimant was subject to an external inspection carried out by the tax inspection services, pursuant to service order no. OI2016….

h) As a consequence of the final inspection report, an additional assessment no. 2017…, relating to the tax year 2013, was issued.

ii. Facts considered not proven

None.

iii. Grounds for the factual matters.

Regarding the factual matters, the Tribunal has no obligation to rule on everything alleged by the parties; rather, it has a duty to select the facts that matter for the decision and distinguish proven from unproven matters (see article 123, no. 2, of the Code of Tax Procedure and Process (CPPT) and article 607, no. 3 of the Code of Civil Procedure (CPC), applicable pursuant to article 29, no. 1, paragraphs a) and e), of the RJAT).

In this manner, the facts relevant to the judgment of the case are selected and delimited according to their legal relevance, which is established with regard to the various plausible solutions to the question(s) of law (see former article 511, no. 1, of the CPC, corresponding to current article 596, applicable pursuant to article 29, no. 1, paragraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary and testimonial evidence and the administrative files joined to the proceedings, the facts listed above were considered proven as having relevance to the decision.

B. ON THE LAW

1. Payments to non-resident entities subject to a privileged tax regime

The question to be decided is whether the amounts paid by the Claimant to company B…, with tax residence in Hong Kong, should be considered as deductible expenses for the purposes of determining the taxable profit of the Claimant, in light of what is provided in article 65 [current article 23-A, no. 1 paragraph r), of the CIRC].

1.1 Legal-fiscal framework

First of all, it should be noted that the doctrine already widely discussed will be followed, namely in the CAAD Decision relating to Case no. 198/2017-T, since not only is the legal question the same, but the underlying facts also present many points in common.

Thus,

"Article 23 no. 1 of the Corporate Income Tax Code, in the version applicable in 2013, establishes the general conditions to which expenses must comply in order to be tax-deductible:

'Article 23. Expenses

1 — Expenses are those which are proven to be indispensable for the realization of income subject to tax or for the maintenance of the source of income, in particular:'

Three essential requirements are thus required in order for expenses incurred to be valued and accepted tax-wise: proof (justification), indispensability, and the connection to gains subject to tax.

The first requirement concerns the effectiveness of the realization of the expenses, which consists of various forms of written support for the accounting entries, that is, their documentary proof.

The second requirement makes the tax-deductibility of the expense dependent on a justified relationship with the company's productive activity, and this indispensability is verified as long as such expenses are connected with the obtaining of profit.

The third requirement that makes up the general clause of deductibility of expenses, in the legal formulation introduced by the Corporate Income Tax Code, is the requirement of connection to "income subject to tax or to the maintenance of the source of income". It follows from the general principle of article 23 of the Corporate Income Tax Code that the expenses incurred by the taxpayer, in order to be tax-deductible, must be restricted either to the obtaining of gains subject to tax, or to the maintenance of the source of income.

The requirement of proof is satisfied if it is based on a documentary foundation such as, for example, invoices or contracts;

However, the general principle of the deductibility of expenses is subject to a derogation in the case of payments to non-resident entities located in jurisdictions with privileged tax status, as a way to prevent the erosion of the tax base.

Thus and in order to combat international tax evasion and fraud and in order to restrict the use of tax havens, the Portuguese legislator opted to introduce into our legal system measures generically referred to as anti-abuse measures, through specific clauses in the law."

This is the case of article 65 of the CIRC, which at the time provided:

"Article 65

Payments to non-resident entities subject to a privileged tax regime

1 – Amounts paid or owing, in whatever form, to natural or legal persons resident outside Portuguese territory and subject therein to a clearly more favorable tax regime are not deductible for the purposes of determining taxable profit, except if the taxpayer can prove that such expenses correspond to operations effectively carried out and do not have an abnormal character or an excessive amount.

2 – A natural or legal person is considered to be subject to a clearly more favorable tax regime when the territory of residence thereof appears on the list approved by ordinance of the Minister for Finance or when such person is not taxed therein on income tax identical or similar to IRS or to the IRC, or when, with respect to the amounts paid or owing mentioned in the preceding number, the amount of tax paid is equal to or less than 60% of the tax that would be due if the said entity were considered resident in Portuguese territory.

3 – For the purposes of the preceding number, taxpayers must possess and, when requested by the Tax and Customs Authority, provide the supporting elements of the tax paid by the non-resident entity and of the calculations made to determine the tax that would be due if the entity were resident in Portuguese territory, in cases where the territory of residence thereof does not appear on the list approved by ordinance of the Minister for Finance.

4 – The proof referred to in no. 1 must take place after notification of the taxpayer, made with a minimum advance notice of 30 days."

(…)

1.1.1 Characterization of the provision in abstract

As already discussed in this tribunal, namely in Case no. 10/2012 T,

"This provision is one of those normative dispositions that are normally referred to as special anti-abuse norms, to the extent that it prevents taxpayers, in a specific situation, from using a particular conduct to obtain a tax advantage. It deals with payments or amounts owing to entities resident outside Portuguese territory and subject therein to a more favorable tax regime, disregarding them for the purposes of determining taxable profit, unless the taxpayer proves that such expenses correspond to operations effectively carried out and do not have an abnormal character or an excessive amount.

This provision, despite its affinities with the dynamics of presumptions, and having similar effects, insofar as it relieves the Tax Authority of making proof of certain facts, is not strictly a presumption, as it does not involve believing a reality based on another different fact, but merely discharging from the burden of proof of certain facts, in relation to which mere allegation will trigger the effects that are proper thereto, except when other facts are proven that are incompatible with those. Thus, when a particular taxpayer makes payments to a non-resident entity subject to a privileged tax regime, it must prove that the payment effectively took place and that it has a normal character or else that it is not excessive."

As already widely discussed in the Decision relating to Case no. 198/2017-T,

"This is a dual burden of proof that will fall upon the taxpayer to produce, which, in the first place, must demonstrate that the expenses materialized in actual acts, and it is not sufficient that there merely formal existence such as contracts, invoices and bank transfers, and, in the second place, that such expenses are not abnormal or excessive, which can be determined by comparison with comparable market situations in a context of full competition.

In this regard, part of the decision rendered on 19/02/2015, in Case no. 08126/14 in the Central Administrative Court of the South (TCAS), which decided a case of payment to non-resident entities subject to a privileged tax regime, is quoted, highlighting the importance of demonstrating proof, to the detriment of form, whose summary is transcribed:

With regard to proof of the veracity of the operation, it will not be sufficient to exhibit written documents, namely contracts entered into between the parties, since these are presumed to be simulated, nor the demonstration of the payment of the price, for such is not at issue. What must be subject to proof is rather the effective provision of services, or the receipt of a loan, that is, the commercial fact that gave rise to the payment of the same price that appears as a cost to be deducted in corporate income tax. As for proof of the absence of abnormal or excessive character of the expenses, this must consist of the demonstration that the contract, whose veracity has been proven, is presented as balanced. For this purpose, the taxpayer should demonstrate what the real importance of the advantages obtained from the contract in question is, as well as prove that the charges established constitute the just remuneration of those advantages, in particular by comparison with the costs of similar services in the market.''

In the absence of proof of these requirements, it is concluded that the expenses in question are not deductible and the consequent increase of their amounts in the tax result.

This proof must be produced by the taxpayer before the Tax Authority. presenting to it the means of proof of the effectiveness of the expense and of the normal and non-excessive character, to which it shall fall to its appreciation with a view to forming an administrative judgment on the validity of the payments.

It is, therefore, a legislative solution in which the "burden of proof" is reverted to the taxpayer whereby, by force of the provisions of these norms, in the domain of payments to entities domiciled in territories of low taxation, the presumption of veracity of the taxpayer's statements contained in no. 1 of article 75 of the General Tax Law (LGT) is set aside, whereby the declarations of taxpayers submitted in accordance with the law, as well as the data and calculations entered in their accounts, when organized in accordance with commercial and tax legislation, are true and made in good faith. And if the taxpayer fails to produce such proof, the expense is not tax-accepted, and the taxable amount is increased for taxation purposes."

1.1.2 Analysis of the concrete situation

Having said this, it is for this tribunal to analyze whether this provision is applicable to the case and, if so, to assess whether the proof presented by the Claimant justifies the deductibility of the expenses for corporate income tax purposes:

i) As to the existence of a more favorable tax regime

The territory of Hong Kong was already in 2013 on the list referred to in no. 2 of the aforesaid article, approved by Ordinance no. 292/2011, of 8 November, which amended Ordinance no. 150/2004, of 13 February.

Thus, as the amounts in question were paid, albeit indirectly (through law firm H…), to an entity resident in a territory appearing on the said list, there is no doubt that the provisions of article 65 of the CIRC should apply, thus reversing the burden of proof to the Claimant.

ii) As to the requirement of actual completion of operations

To set aside the disregard of the payments made, these must first correspond to operations effectively carried out.

As already discussed herein (Decision 10/2012 – T),

"The meaning of operations effectively carried out should be determined in opposition to operations that were not carried out, or that only occurred in simulated form. Interestingly, there exists in French Law a very similar provision introduced in 1974 – article 238 A of the General Tax Code – which may have served as inspiration to our legislator and which uses the term 'real' instead of 'effective', but which, to some extent, helps to clarify the meaning of our provision.

From the comparison of the two provisions, it appears that the meaning of the provision is that payments correspond to effective, real operations, and not merely simulated operations, purely and simply, so that the taxpayer can benefit from the deduction of certain costs."

Now, this is the proof produced regarding the effectiveness of the operation.

Let us see:

a) Documentary evidence

The taxpayer presented the following documentation:

• the invoices issued by the Hong Kong company (whose description only refers to "real estate intervention", without any reference to the specific properties that were to be publicized and/or subject to actions to identify potential buyers);

• checks issued to law firm H…, a declaration issued by this firm attesting to the fact that the amounts in question were received on account of the Hong Kong company and receipts for the forwarding of the amounts received by the first to the second.

b) Testimonial evidence

It was confirmed by the witnesses listed that:

• company B… is represented by Mr. E…, who was an agent who had a relevant network of contacts in the Chinese market, where he promoted the Gold Visa regime;

• through this company, buyers for properties of A… were identified;

• the real estate promotion contract was not exclusive to company C…, and moreover, even if the buyer was identified by B…, the former was always called to carry out real estate intermediation, since the function performed by B… was only customer acquisition.

iii) As to the normal character

As results from the statements of the witnesses:

• this modus operandi was widely used at a time when the real estate market in Portugal was in recession;

• the Chinese market has many specificities and without local contact it is not possible to penetrate the same, nor identify potential customers;

• joint action with real estate developers resident in Portugal was necessary for the latter to conclude the sale.

iv) As to excessive amount

As results from the documentary evidence and the statements of the witnesses:

• the commissions charged by the Hong Kong company amounted to no more than 5.5% of the sale value of the properties (it was even only 3.49% in the sale of the apartment);

• traditionally, the commissions charged by these operators can reach as much as 15%.

All things considered, in summary, it is clear to the Tribunal the customer acquisition activity developed, which materialized in the sale of 7 properties, without which "it is not apparent how Chinese citizens, in China, could have knowledge that the Claimant had properties for sale in Portugal, if it did not directly carry out any advertising for such purpose".

Given the modus operandi described underlying these operations, we thus consider unjustified the requirement of the Tax Authority (at page 20 of the Inspection Report) that:

"the taxpayer should possess in its files elements that would allow judging the adequacy of the amount to the purpose and enable the assessment of any excessiveness, in particular:

• identification of the human resources involved, hours applied and hourly rates per consultant;

• evidence of meetings, "surveys";

• travel;

• whether the person who carried it out has professional experience;

• whether budgets were requested from the national or international market for comparative purposes and, if so, why was the one from an entity resident in a jurisdiction of privileged taxation preferred to the detriment of others with other locations."

With respect to the abnormal character of the aforesaid expenses or their excessive amount, the defect imputed to the Tax Authority, it is important here to cite what was already decided in Decision no. 419/2017:

"The provisions in question (identified above) are, in their essence, normative dispositions that are normally referred to as special anti-abuse norms, to the extent that they prevent taxpayers, in a specific situation, from using a particular conduct to obtain a tax advantage. They are related to payments or amounts owing to entities resident outside Portuguese territory and subject therein to a clearly more favorable tax regime, disregarding them for the purposes of determining taxable profit, unless the taxpayer proves that such expenses correspond to operations effectively carried out and do not have an abnormal character or an excessive amount.

This provision, despite its affinities with the dynamics of presumptions, and having similar effects, insofar as it relieves the Tax Authority of making proof of certain facts, is not strictly a presumption, as it does not involve believing a reality based on another different fact, but merely discharging from the burden of proof of certain facts, in relation to which mere allegation will trigger the effects that are proper thereto, except when other facts are proven that are incompatible with those.

Thus, when a particular taxpayer makes payments to a non-resident entity subject to a privileged tax regime, it must prove that the payment effectively took place and that it has a normal character or else that it is not excessive.

As to the burden of proof inherent in this provision, it must be said that this, despite falling essentially upon the taxpayer, does not dispense the Tax Authority from collaborating in the evidential effort, given that proof in tax proceedings has some specificities.

Having made this brief introduction on the nature of this type of provision, we equally adhere to the position expressed by the Arbitral Tribunal, in the already referred Case no. 198/2017-T, which examined a case entirely similar to that of the present proceedings and of which the relevant excerpt is now transcribed:

'Concerning the normality of payments for the provision of customer acquisition services for the purchase of real estate, it is evident, as this is an activity of provision of services regulated, precisely as regards real estate (Decree-Law no. 69/2011, of 15 June) and, like any activity of a professional nature, it is remunerated. What would constitute abnormality would be the provision of services free of charge to the Claimant, with (....) bearing the expenses of the activity.

As for the amount of the commissions, it has to do with the requirement of 'non-excessiveness' and not with that of 'non-abnormality' for the purposes of those articles 65 and 23-A of the CIRC.

To decide whether or not there is excessiveness, one cannot use as terms of comparison the percentages of commissions that the Tax Authority says are customarily charged by real estate companies, between 3% and 5%, as the activity developed by (...) does not limit itself to what is normally carried out in real estate intermediation, which does not involve expenses of the order of those proven to be incurred by (...) (payment of trips, accommodation, food, transportation, interpreters, etc.).

On the other hand, the assessment of the requirement of non-excessiveness should be carried out taking into account the situation of the taxpayer, seeking to ascertain whether the payment should be considered excessive, from its perspective, in the context in which it has to decide to pay for the services. From this perspective, payment will be excessive when it is demonstrated that the taxpayer could obtain the same service for a lower amount.

(...)

Under these circumstances, the payment cannot be considered excessive, as it is justified by the necessity of obtaining the customer acquisition services and there being no alternative at a lower price. The reasonableness of the payments made to (...) is further reinforced by the fact that the Claimant was not adversely affected by the payments it made, as it only paid when it concluded the sale of the properties and what it paid to (...) was added to the sale price that the Claimant itself fixed and intended to obtain for itself.'.

It results from the proof produced that the case does not concern the provision of real estate intermediation services, but rather the provision of a much broader service than this, which included the provision of a customer acquisition service (...) in the Chinese territory of Chinese customers and the promotion of the Claimant's property inventory, and without the Claimant incurring expenses for this, only doing so when the transactions for the acquisition of its properties were concluded, thus bearing no business risk.

(...)

As the case does not concern the provision of a real estate intermediation service, as was proven, one cannot make comparisons with the same, as was done by the Tax Authority, as these are different and much broader services than a mere real estate intermediation.

Under these circumstances, the payment cannot be considered excessive, as it is justified by the necessity of obtaining the customer acquisition services (...) The reasonableness of the payments made to company H... is further reinforced by the fact that the Claimant was not adversely affected by the payments it made, as it only paid when it concluded the sale of the properties and what it paid to company H..., as stated, was added to the sale price that the Claimant itself fixed and intended to obtain for itself.

For the foregoing, it is concluded that the Claimant proved that the payments made to company H... were not abnormal nor excessive, complying with the tax legislation in force."

The factuality in casu is in all respects identical to that referred to above, and this tribunal cannot but agree with the arguments set out above.

It is thus concluded that the additional assessment act in issue in the proceedings suffers from the vice of violation of law by error in the factual and legal presuppositions, and therefore cannot subsist in the legal order.

2. The alleged positive patrimonial variation

The question to be decided is whether the regularizations of balances of customer accounts carried out by the Claimant should be considered positive patrimonial variations, subject to tax, as not excluded by article 21 of the CIRC.

In fact, the Tax Authority made a correction to the taxable matter of the Claimant relating to the tax year 2013, in the amount of € 265,237.94, on the grounds that "the movements made on 31.12.2013, which consisted of the cancellation of the credit balances in account 218XX - Customer Advances, as a counterpart to another account 278211 – Other debtors and creditors, without being specified why it was made as a counterpart to account 27.8211 - Miscellaneous and the relationships existing between such balances and their holders, as well as the operations transferred in the context of that account, represents a positive patrimonial variation that, by force of no. 1 of article 21 of the Corporate Income Tax Code, must contribute to the formation of the taxable profit of the period in which the correction was made".

The Tax Authority alleges that "if a credit balance, of the liabilities, is cancelled, that liability ceases to exist, the company owes less, which is equivalent to a patrimonial increase, which should be correctly reported as such. That is, its regularization or cancellation has as a consequence the decrease of the liabilities, which corresponds to an increase in assets".

The Tax Authority continues, already in its pleadings:

"Well then, the contours of the situation under analysis lead to the conviction that the explanation most consistent with the maintenance of records in Account 281 - Customer Advances over a decade is not compatible with the existence of accounting balances in bank and Cash accounts artificially inflated by that amount, of €265,237.94, attributing the same to discrepancies between the amounts effectively received from customers and the prices declared in the purchase and sale deeds".

2.1 Legal-fiscal framework

As well explained by the Supreme Administrative Court in its Decision no. 1314/12,

"Facing the new concept of income adopted by this Corporate Income Tax Code, income accrual – positive patrimonial variations not reflected in the net result of the period are subject to taxation in corporate income tax, immediately by force of no. 2 of the said provision, although with some exceptions, regulated therein.

As is known, the assets of a company are subject to variations as a consequence of the operations carried out. If some of these operations alter the composition of assets – qualitative variations, others exist that, beyond the composition, alter its value – quantitative variations, which will be positive or negative depending on whether they imply the increase or decrease of the value of the assets, or of the net equity.

It should be added, however, that as the net result of the period is only one of the components of the net equity, not all quantitative patrimonial variations are accounted for in this account. It is precisely these variations that fall within the scope of this article, in particular positive variations.

Thus, in accordance with this provision, patrimonial variations that increase the net equity and that are not reflected in the account "Net Results" are included in the taxable profit – added to the accounting result in Table 17 of the tax return, model 22 – with some exceptions".

Article 21 of the CIRC provides:

Article 21

Positive patrimonial variations

1 - Positive patrimonial variations not reflected in the net result of the period also contribute to the formation of taxable profit, except:

a) Capital contributions, including share issuance premiums, coverage of losses, in whatever form, made by holders of capital, as well as other positive patrimonial variations resulting from operations on equity instruments of the issuing entity, including those resulting from the assignment of financial derivative instruments that must be recognized as equity instruments;

b) Potential or latent gains, although expressed in the accounts, including revaluation reserves under tax legislation;

c) Contributions, including participation in losses from the associate to the associant, within the scope of the partnership agreement and the quota partnership;

d) Those relating to income taxes.

2 – (…)

Now, in the case at issue, this tribunal considers that the Tax Authority has failed to prove the increase in the patrimonial situation of the Claimant.

And even less, prove the said discrepancies between the amounts effectively received from customers and the prices declared in the purchase and sale deeds. In fact, this matter does not appear to have even been discussed at the inspection stage, as the Inspection Report does not mention it, only referring to the fact that "the balances do not correspond to real and actual liabilities".

Although the accounting movements underlying the regularization of the balance could be questioned, it was not proven that the regularization corresponded to a patrimonial increase (e.g. forgiveness of some debt), nor that these advances corresponded to amounts received by the claimant that were not subject to taxation at the time of the sale.

Thus, it cannot be concluded that this regularization constitutes a positive patrimonial variation.

It is thus concluded that the additional assessment act in issue in the proceedings suffers from the vice of violation of law by error in the factual and legal presuppositions, and therefore cannot subsist in the legal order.

3. The right to compensatory interest

With respect to the request for payment of compensatory interest filed by the Claimants, it will be stated, first of all, that the tax arbitral process was conceived as an alternative means to the process of judicial impugnation (see the legislative authorization granted to the Government by article 124, no. 2 (first part) of Law no. 3-B/2010, of 28 April – State Budget Law for 2010).

Thus, although article 2, no. 1, paragraph a), of the RJAT, uses the expression "declaration of illegality" as delimiting the competence of the arbitral tribunals that function with the CAAD, it should be understood that this competence comprises the powers that in the process of judicial impugnation are attributed to the tax courts, such as the power to assess the error imputable to the services, as a source of the obligation to indemnify.

One of the presuppositions of the duty to indemnify through the payment of compensatory interest, pursuant to no. 1 of article 43 of the General Tax Law (LGT), is that the annulment, in gracious reclamation or judicial impugnation, of the assessment act that has resulted in payment of the tax debt in an amount greater than legally due, must be attributable to error, of fact or of law, of the Tax Authority.

The error imputable to the services may consist of error as to the factual presuppositions, or error as to the legal presuppositions, the latter being verified when "in the performance of the act there was incorrect interpretation or application of the legal norms, such as the norms of objective and subjective tax incidence (…)" and "it is demonstrated when they proceed to gracious reclamation or judicial impugnation of that same assessment and the error is not imputable to the taxpayer".

Concluding that the Tax Authority erred in issuing the additional corporate income tax assessment for the year 2013, for the reasons pointed out above, the right of the Claimants to compensatory interest must be recognized, pursuant to article 43, no. 1, of the LGT.

Thus being, by force of what is established in article 61 of the CPPT, verified the existence of error imputable to the services of the Tax Administration, from which resulted payment of the tax debt in an amount greater than legally due (see article 43/1 of the LGT), the Claimant has the right to compensatory interest at the legal rate, which shall be calculated from the date of payment of that amount, until complete reimbursement of that same amount.

C. DECISION

For the foregoing reasons, this Arbitral Tribunal decides to judge the arbitral claim filed to be well-founded and, in consequence:

a) To annul the corporate income tax assessment no. 2017…, relating to the year 2013, in the amount of € 202,309.85;

b) To condemn the Respondent to reimburse the tax unduly paid, plus compensatory interest, at the legal rate in force, calculated from the date of payment, until complete reimbursement of the said amount.

D. VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at € 202,309.85, pursuant to article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. COSTS

The arbitration fee is fixed at € 4,284.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, as the claim was entirely successful, pursuant to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the said Regulation.

Lisbon, 18 May 2018

The Collective Arbitral Tribunal

(José Poças Falcão)

(Amândio Silva)

(Catarina Gonçalves)

Frequently Asked Questions

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What are the IRC tax implications of payments made to non-resident entities subject to a privileged tax regime in Portugal?
Portuguese IRC law treats payments to non-resident entities in privileged tax regimes restrictively under Article 88(8) CIRC. Such payments may be denied deductibility unless the taxpayer proves the expenses correspond to real operations and are not excessive under Article 65 CIRC. However, exemptions from withholding tax under Article 98 CIRC may apply when proper documentation (tax residence certificates, beneficiary forms) is provided. In this case, the taxpayer presented evidence that payments to a Hong Kong company were legitimate marketing commissions (4-5.5% rates) that generated actual sales, supported by witness testimony and compliance with documentation requirements.
How does Portuguese tax law treat corrections of accounting errors in IRC assessments?
Under Portuguese IRC law, corrections of accounting errors must be analyzed to determine whether they represent actual taxable income or mere technical adjustments. The tax authorities cannot automatically treat accounting regularizations as positive asset variations subject to taxation. When an accounting error correction has no underlying economic substance—such as failing to settle customer advance accounts despite completed sales years earlier—and the tax authority's own inspection acknowledges the balances 'do not correspond to real and actual liabilities,' such corrections should not impact taxable profit. The timing and nature of the original transaction, not the correction date, determines tax treatment.
What was the outcome of CAAD arbitration process 483/2017-T regarding the IRC liquidation of €202,309.85?
The arbitration process 483/2017-T was properly constituted under RJAT provisions, with a collective arbitral tribunal designated by the CAAD Ethics Council. The taxpayer challenged the €202,309.85 IRC assessment through formal arbitration proceedings initiated in June 2017. The tribunal held hearings in April 2018, including witness examination, with both parties submitting written pleadings. The case examined whether €193,000 in payments to a Hong Kong entity were deductible and whether €265,237.94 in accounting corrections represented taxable income. While the excerpt does not include the final decision, the tribunal found no procedural defects and proceeded to examine the merits, with the taxpayer presenting substantial evidence supporting the legitimacy of both contested items.
Can taxpayers challenge IRC tax assessments involving payments to entities in privileged tax jurisdictions through CAAD arbitration?
Yes, taxpayers can challenge IRC assessments involving payments to entities in privileged tax jurisdictions through CAAD arbitration under Article 2(1)(a) of RJAT (Decree-Law 10/2011). This case demonstrates the process: the taxpayer filed for arbitration within applicable deadlines, the tribunal was constituted with three arbitrators, and the tax authority filed a defense. The arbitration provides an alternative to judicial courts for resolving IRC disputes, including complex issues regarding Article 88(8) CIRC (privileged tax regimes) and Article 65 CIRC (excessive costs). The tribunal has full jurisdiction to examine whether tax authorities properly applied IRC provisions when denying deductions for payments to non-resident entities, evaluating both legal compliance and factual evidence regarding the commercial reality of transactions.
What legal provisions under the RJAT govern the formation and jurisdiction of arbitral tribunals for IRC disputes in Portugal?
The RJAT (Legal Regime for Tax Arbitration - Decree-Law 10/2011) establishes comprehensive rules for IRC dispute arbitration. Article 2(1)(a) grants jurisdiction over corporate income tax matters. Articles 5 and 6 govern tribunal formation: taxpayers may appoint an arbitrator or the CAAD Ethics Council designates arbitrators (as occurred here under Article 6(2)(a) and Article 11(1)(a)). Article 10 addresses party standing and legal representation. Article 11(1)(c) establishes the tribunal constitution date. Article 18 requires hearings where evidence is presented. Article 21(2) allows deadline extensions for decisions. The tribunal must verify its material competence, proper constitution, party legitimacy, and absence of procedural defects before examining merits. These provisions ensure structured, legally sound resolution of IRC disputes outside traditional courts.