Process: 491/2017-T

Date: April 16, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision addresses the application of autonomous taxation (tributação autónoma) on bonuses and variable remuneration paid to managers of a Portuguese permanent establishment of a Luxembourg credit institution for fiscal year 2013. The case examined four key issues: (1) whether the three-year deferral exemption under Article 88(13)(b) of the IRC Code was correctly applied by the Tax Authority; (2) whether bonuses paid to managers of permanent establishments are subject to autonomous taxation despite the absence of explicit reference to such entities in the law; (3) the timing of autonomous taxation - whether it applies at accounting accrual or actual payment; and (4) whether provisions for bonuses can be subject to autonomous taxation. The Claimant argued that the Tax Authority's interpretation violated statutory interpretation principles and the principle of tax legality, contending that only 17% of bonuses were paid after three years, not the required 50%. The tribunal had to determine whether autonomous taxation applies to permanent establishment managers (not explicitly mentioned in Article 88(13)(b) which refers to 'members of governing or supervisory bodies'), and whether the deferral calculation should be based on when bonuses are paid versus when they are accrued. The decision clarifies important principles regarding the temporal application of autonomous taxation on variable remuneration, the interpretation of deferral requirements for exemption purposes, and the extension of tax rules to permanent establishments in the absence of explicit legislative provisions.

Full Decision

ARBITRAL DECISION

I – REPORT

On 1 September 2017, A… – Branch in Portugal, taxpayer no. …, with registered office at Rua …, …-… Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Tax Arbitration, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking a declaration of illegality of the Corporate Income Tax (IRC) assessment no. 2017…, relating to the fiscal year 2013, and respective compensatory interest, in the total amount of € 147,118.96.

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

  • The interpretation of the expression "deferral (…) for a minimum period of three years" as effected by the Tax Authority is illegal as it violates Article 88, no. 13, paragraph b) of the IRC Code, as well as Article 11, no. 1 of the General Tax Code (LGT) and other legal norms relating to statutory interpretation;

  • The bonuses and other variable remuneration paid to the two persons responsible for the permanent establishment are not subject to autonomous taxation by reason of the absence of a rule of incidence expressly providing for the taxation of persons responsible for permanent establishments, thus violating the prohibition on analogical integration provided for in Article 11, no. 4 of the LGT and the principle of tax legality provided for in Article 103, no. 2 of the Constitutional Republic (CRP) and Article 8, no. 2 of the LGT;

  • Autonomous taxation is not due in the period of 2013, since autonomous taxation is levied on the payment of remuneration and not on its accounting entry;

  • In the concept of charges accounted for with variable remuneration, there is no place for a provision established in 2013, not fiscally deductible, for bonuses to be paid in 2014, as is the case in question, likewise violating Article 88, no. 13, paragraph b) of the IRC Code.

On 1-09-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, wherefore, 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 Deontological Council of the CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable deadline.

On 03-11-2017, the parties were notified of these appointments and did not express any intention to refuse any of them.

In accordance with the provision in paragraph c) of no. 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 23-11-2017.

On 10-01-2017, the Respondent, duly notified to this effect, presented its response defending itself solely by challenge.

Pursuant to the provisions of paragraphs c) and e) of Article 16, and no. 2 of Article 29, both of the RJAT, the holding of the meeting alluded to in Article 18 of the RJAT was dispensed with.

Having been granted a deadline for the presentation of written submissions, these were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was fixed for the rendering of final decision, after the presentation of submissions by the Tax Authority, this deadline being extended until the expiry of the deadline referred to in Article 21/1 of the RJAT.

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.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Order no. 112-A/2011, of 22 March.

The proceedings do not suffer from nullities.

Thus, there is no obstacle to the consideration of the merits of the case.

All things considered, it is necessary to render

II. DECISION

A. MATTER OF FACT

A.1. Facts Established as Proven

The Claimant is a permanent establishment in Portugal of a credit institution with registered office in Luxembourg, B…, S.A., which in turn is held 100% by C… (Suisse), S.A..

For tax purposes, the Claimant is subject to the payment of IRC and is taxed on actual profit.

The Claimant is obliged to maintain accounting organized in accordance with commercial and tax law, being classified under the general regime for determination of taxable profit.

The Claimant filed the Model 22 income declaration, provided for in paragraph b) of no. 1 of Article 117 and 120 of the IRC Code, relating to the fiscal year 2013.

In 2013, the Claimant recorded a provision for bonuses for persons responsible for the permanent establishment in Portugal, in the amount of € 377,631.37, relating to the fiscal year 2013, these bonuses being intended to be paid in subsequent years, as follows:

[Table with bonus payments schedule]

The annual remuneration paid to the said persons responsible in the year 2013 was as follows:

[Table with annual remuneration]

In field 365 of Table 10 of the Model 22 referred to in point 4, the said amount of € 377,631.37 was not subject to autonomous taxation.

The said amount was not recognized as a tax cost in the year 2013, having been increased in the 2013 Model 22 declaration.

Pursuant to Service Order no. OI2016…, the Claimant was subject to an internal inspection action, of partial scope in the context of IRC, covering the period of 2013.

By email of 3 February 2017, the Claimant provided the following explanation to the Tax Authority services:

"The amount relating to the increase in costs/provision for bonuses relating to the fiscal year 2013, recorded accounting-wise in the account NCA #701, and respective social security charges recorded in the account NCA #7020, as per accounting extracts attached, relate to a provision for bonuses to be paid in subsequent years, with no breakdown of this amount by employee, namely the amounts relating to the managers/persons responsible for the Branch.

As referred to in the first communication of 23/09/16 on this matter, at the end of each fiscal year the Bank does not yet know the criteria for determining the bonus to be allocated to employees relating to the fiscal year, since these are defined annually in a more or less discretionary manner by the group. However, an estimate/provision is entered in the accounting for the global amount that can be estimated, which is disregarded fiscally as a cost in the year of its accounting entry, being deducted only at the time of the respective payment.

In this sense, the amount entered in field 752 of table 07 of the 2013 model 22 declaration refers to the increase in costs/provision for bonuses to be paid in subsequent years and the respective social security charges, recognized accounting-wise in the balance sheet account NCA #5285 in 2013, as can be verified through the accounting extracts attached."

From the Tax Inspection Report (RIT) it appears, among other things, that:

  • "Regarding the global amount of bonuses/variable remuneration allocated in 2013, as shown in table 2, the taxpayer made payment of € 185,039.37 (€ 117,600.00 + € 67,439.37) in 2014 having deferred the payment of approximately 51% of this remuneration, in the amount of € 192,591.99, in equal parts, for the years 2015, 2016 and 2017. Now from the foregoing it does not appear that the requirement of negative delimitation of incidence provided for at the end of paragraph b) of no. 13 of Article 88 of the IRC Code is met «... except if its payment is subject to deferral of a part not less than 50% for a minimum period of 3 years...» since only the amount of € 64,197.33 (to be paid in 2017 and which corresponds to approximately 17% of the amount of bonuses allocated in 2013), was paid after the elapse of the 3-year period";

  • "since the taxpayer did not meet the requirement set out above of the negative delimitation of incidence provided for at the end of paragraph b) of no. 13 of Article 88 of the IRC Code, which would have allowed him to benefit from the exclusion of autonomous taxation, the variable remuneration allocated in 2013 is subject to taxation at the rate of 35%, totaling € 132,170.98 (€ 377,631.37 x 35%)";

  • "the taxpayer recognized accounting-wise in 2013, in account #7020 – Employee Remuneration, the amount of € 1,089,100.00, relating to provisions for bonuses to be paid in subsequent years, of which, according to information provided by the taxpayer, the amount of € 377,631.37 (Annex 1) corresponds to bonuses allocated to the managers/persons responsible for the permanent establishment";

  • "since autonomous taxation operates on expenses or charges and not on payments, it should be applied in the period to which the charge relates and not in the period in which payment occurs".

Following the said inspection, the Claimant was notified of the Tax Inspection Report, in which the Tax Authority and Customs Authority (Tax Authority) understood that there was IRC outstanding in the amount of € 132,170.98 "due to the lack of autonomous taxation on variable remuneration allocated in 2013 to the managers/persons responsible for the permanent establishment, in view of the provisions of paragraph b) of no. 13 of Article 88 of the IRC Code".

Following the Tax Inspection Report mentioned above, the Claimant was subsequently notified of assessment no. 2017…, in the total amount of € 147,118.96, corresponding to the amount of IRC considered outstanding (€ 132,170.98), plus compensatory interest in the amount of € 14,947.99.

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Proven and Not Proven Matter of Fact

Regarding the matter of fact, the Tribunal need not pronounce on everything that was alleged by the parties, but rather it has the duty to select the facts that matter for the decision and to distinguish the proven from the not proven facts (cfr. 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 ex vi Article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and delimited based on their legal relevance, which is established in view of the various plausible solutions to the question(s) of Law (cfr. former Article 511, no. 1, of the CPC, corresponding to the current Article 596, applicable ex vi 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 evidence and the administrative procedure files joined to the case, the facts listed above were considered proven with relevance to the decision.

In particular, the fact referred to in point 8 of the facts established as proven takes into account the communication alluded to in point 10, and the documentation joined with that, as well as the position of the Tax Authority in inspection proceedings and in arbitral proceedings which never substantively contested that fact.

The following were not considered proven or not proven: submissions made by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truthfulness must be assessed in relation to the specific matter of fact consolidated above.

B. THE LAW

At issue in the present arbitral proceeding is the application of autonomous taxation provided for in Article 88/13/b) of the applicable IRC Code, the text of which is as follows:

"Are taxed autonomously, at the rate of 35%: (...)

b) Expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors when these represent a portion exceeding 25% of annual remuneration and have a value exceeding € 27,500, except if its payment is subject to deferral of a part not less than 50% for a minimum period of three years and conditioned to the positive performance of the company over that period."

The provision in question was introduced in the IRC Code by Law no. 3-B/2010, of 28-04, which added to Article 88 of that Code the no. 13 in question, which introduced a new autonomous taxation, this time on expenses or charges relating to indemnifications or compensations, when there is cessation of functions or termination of a contract of a manager, administrator or director, or relating to bonuses and other variable remuneration paid to these, in the circumstances defined there.

This autonomous taxation is not deemed to identify directly with any of the types of such taxation that existed at the time.

Thus, there is no question of any type of potentially fraudulent conduct, as happens with autonomous taxation on confidential expenses and, to some extent, with autonomous taxation relating to payments to entities subject to a more favorable tax regime, nor is there a question of taxation of fringe benefits not taxed in the sphere of the beneficiary as happens in autonomous taxation on representation expenses, vehicle charges and travel allowances, since the expenses or charges covered by the new autonomous taxation will be taxed again in the sphere of the beneficiary, there being no question either of any potentially fraudulent or abusive conduct.

The autonomous taxation in question might find some precedent in the taxation created by Law no. 32-B/2002, of 30/12, on the acquisition of light passenger vehicles or mixed vehicles of value considered high, by taxpayers who presented tax losses in the two fiscal years prior to that to which the charges relate, to the extent that it may be considered that such taxation incorporated a dimension of discouragement toward expenses deemed sumptuary.

Indeed, the autonomous taxation now in question, in a scenario of full economic and financial crisis, aimed, admittedly, in the first place, to moralize in some way the allocation of indemnifications, compensations, bonuses and other variable remuneration to managers, administrators or directors, deemed disproportionate, discouraging companies from incurring those expenses or charges, by way of their autonomous taxation.

The Constitutional Court had the opportunity to pronounce itself on the constitutionality of the autonomous taxation in question, ultimately issuing a positive judgment, essentially based on the following reasoning:

  • "these are, in this case, mechanisms of autonomous taxation that depart from the initial aim of combating tax fraud and evasion – as was the case with undocumented expenses – but which may still fit within the objective of limiting expenses that may be reflected in the taxable income of companies";

  • "in no. 13 of Article 88, the question is not one of indeterminacy of beneficiaries or the risk of escape from payment of the tax due by the receipt of amounts expended by companies, since the beneficiaries are identifiable and the sums are subject to the corresponding taxation in Personal Income Tax (IRS). These are not therefore measures directly aimed at combating tax fraud and evasion, but rather seeking to reduce, through the imposition of tax, the tax advantage resulting for companies from the realization of expenses that are deductible but do not have a business purpose";

  • "the objective of the legislator – as was mentioned – is to discourage the realization of expenses that may negatively impact the tax revenue and artificially reduce the company's own tax capacity";

  • "The logic of the autonomous taxation to which the provisions of no. 13 of Article 88 refer seems to be this. The company demonstrates financial availability to allocate to its managers excessive indemnifications not contractually provided and which do not directly relate to individual performance in obtaining positive economic results. In that circumstance, the taxpayer should be in a position to bear an additional tax burden in relation to those same expenses (which could be avoided) and which is intended to compensate for the tax advantage resulting from the reduction in taxable matter due to the realization of these expenses";

  • "the higher percentage rate that is applicable to the realization of expenses (and which is capable of being increased in the case of companies with tax loss) is justified precisely because it is a fiscal measure penalizing the taxpayer and intended to prevent the realization of excessive and unnecessary expenses from the point of view of business interest";

  • "the measure is not arbitrary and is sufficiently grounded materially in the purpose of discouraging companies from carrying out expenses relating to indemnifications or variable remuneration which, being excessive and unjustified from the point of view of business interest, have unfavorable effects on obtaining tax revenue".

That is, and in summary, the Constitutional Court found material grounds for the autonomous taxation in question in the following circumstances:

  • that taxation has the objective of limiting expenses that may be reflected in the taxable income of companies, that is, discouraging the realization of excessive and unjustified expenses from the point of view of business interest, with unfavorable effects on obtaining tax revenue into which they negatively impact, and artificially reducing the company's own tax capacity;

  • the intention is to reduce the tax advantage resulting for companies from the realization of expenses that are deductible but do not have a business purpose, intended to compensate for the tax advantage resulting from the reduction in taxable matter due to the realization of these expenses;

  • it is a fiscal measure penalizing the taxpayer and intended to prevent the realization of excessive and unnecessary expenses from the point of view of business interest.

The Constitutional Court further recognized that this case of autonomous taxation departs from the initial aim of combating tax fraud and evasion.

While due respect is owed to the said high court, it is believed that the cited Judgment will not have given consideration to all legally relevant factors for the making of the decision.

Indeed, and first of all, in detriment of legislative coherence, the legislator did not proceed to consecrate the charges in question as non-deductible, in Article 45 of the IRC Code, then in force, or in any other provision.

Hence, without prejudice to better opinion, one cannot validate the conclusion that what is at issue is, a priori, expenses unnecessary from the point of view of business interest or that do not have a business purpose, since if that were the case, their deductibility would – at the outset – be excluded, pursuant to the current Articles 23 and 23-A of the IRC Code, or the corresponding provisions in prior versions.

It should be noted, moreover, and while due respect is always maintained, that the Constitutional Court ultimately grounds its judgment partly on a contradiction, which is to consider that what is in question is "expenses that are deductible but do not have a business purpose", since, by definition, and in accordance with settled doctrine and jurisprudence, expenses that do not have a business purpose are, by that very fact, not deductible.

On the other hand, nor does the judgment seem capable of validation, likewise grounding the decision in question, according to which the intention is to "reduce the tax advantage resulting for companies from the realization of expenses (…) intended to compensate for the tax advantage resulting from the reduction in taxable matter due to the realization of such expenses".

Indeed, the very base rate instituted (35%) not only did not limit itself to reducing, or even neutralizing, the deduction of the charge (which corresponded, at the time, to 25% – the normal IRC rate), but additionally penalized its realization by 10%.

Thus it will be clearly demonstrated, it is believed, that what is not at issue is an intention to reduce or neutralize the tax advantage resulting from the deduction of the expense, but, genuinely and exclusively, as the Constitutional Court solidly concludes there, to penalize the taxpayer with a view to preventing the realization of the expenses in question.

Now, this would indeed be the ground whose constitutionality the Constitutional Court would have been incumbent upon to assess, that is, the question of whether it is lawful for the legislator to discourage the realization of expenses substantiated from a business perspective (and as such deductible), by taxing them at a higher rate than the normal tax rate, and the judgment to be formed should be purged of the consideration that what is at issue is expenses excessive and unnecessary from the point of view of business interest, as was seen.

Indeed, were it not for the circumstance that the rate of autonomous taxation in question exceeds the normal maximum IRC rate, one could say that that autonomous taxation still shared some of the grounds of autonomous taxation on deductible charges (representation expenses, vehicle charges and travel allowances), namely by having underlying the judgment that, although the charges now taxed may in part have a business justification, this is more questionable in its entirety in the situations in which the new autonomous taxation was established.

Put another way, by granting that the expenses for indemnifications, compensations, bonuses and other variable remuneration to managers, administrators or directors are necessary for the maintenance of the productive source, the legislator would consider that, in the circumstances it determined, such business necessity was not complete.

However, by establishing a rate of autonomous taxation that exceeds the rate of IRC applicable to the taxpayer, the legislator externalized, unequivocally, an intention to penalize fiscally the taxpayers that incur the expenses that are the object thereof.

Thus, the question which the Constitution raises in this matter is whether such penalization is or is not materially grounded in light of the principles thereof.

Setting aside here well-founded understandings that taxes should be alien to sanctionary or punitive purposes (reserved for tax infractions), it will always be said that, at the outset, that penalizing purpose could only be justified in light of violation of taxpayers' duties (as happens with confidential expenses) and to the extent necessary to satisfy well-founded requirements of combating tax fraud and evasion (as will happen with the said confidential expenses and, to some extent, with payments to entities subject to a more favorable tax regime), a situation which the constitutional judge expressly recognized is not at issue here.

In this context, it is believed that the only avenue to explore in order to sustain the legal and constitutional regularity of this new type of autonomous taxation now in question will be the framing thereof as having a strictly extra-fiscal nature, in the sense suggested by Pedro Casimiro Silva Santos, an understanding which, taking into account the said intervention of the Constitutional Court, is adopted here.

Having arrived here, it is necessary to descend to the specific case and assess the legality of the tax act sub iudice.

As set out in the Report of the present decision, the Claimant points to several defects in the tax act that it contests, generating the annulability thereof, nor does its initial request show any relationship of subsidiarity between them.

Thus, and pursuant to Article 121 of the CPPT, consideration shall be given to the alleged violation of Article 88, no. 13, paragraph b) of the applicable IRC Code, in that in the concept of charges accounted for with variable remuneration, there is no place for a provision established in 2013, not fiscally deductible nor deducted, for bonuses to be paid in the years 2014 and subsequent.

As appears from the facts established as proven, and insofar as relevant here:

In 2013, the Claimant recorded a provision for bonuses for persons responsible for its permanent establishment in Portugal, in the amount of € 377,631.37, relating to the fiscal year 2013, these bonuses being intended to be paid in subsequent years, as follows:

[Table with bonus payments schedule]

In field 365 of Table 10 of the Model 22 referred to in point 4, the said amount of € 377,631.37 was not subject to autonomous taxation;

The said amount was not recognized as a tax cost in the year 2013, having been increased in the 2013 Model 22 declaration.

It is thus established that the provision recorded, relating to bonuses to be paid to persons responsible for the Claimant's permanent establishment in Portugal, did not impact (negatively) on the determination of the taxable matter of that establishment.

The Tax Authority does not contest this circumstance, either in inspection proceedings or in arbitral proceedings, notwithstanding the fact that in the Response presented in the present case it stated that:

"the autonomous taxation of 35% applicable to variable remuneration and bonuses paid by the Claimant follows the regime of specialization of fiscal years and must occur in the year 2013, since in that year:

  • the obligation to pay and/or the right to receive the stipulated sum was established, with reference to the «achievement of main annual objectives» (Article 108 of the p.i.)

  • the expense was recorded in the accounting of 2010;

  • the expense was of relevance for tax purposes for determining the taxable profit of 2010;"

Indeed, it is believed that the quoted allegation will derive from a lapse, evidenced not only by the circumstance of referring to bonuses paid by the Claimant, when admittedly they were not, but by the circumstances of referring to Article 108 of the p.i., which has no correspondence with what was stated, and of making, in the last two points, reference to the year 2010, when the year in question is 2013.

Moreover, the position of the Respondent in this matter appears to meet that sustained by the Claimant, being able, for example, to be read in that party's response that:

  • "before a single factual reality (the recorded expense), which, in accordance with Articles 17, 18, no. 1 and 23 of the IRC Code, contributes to the formation of taxable income for a given fiscal year, there falls, furthermore, another taxation, of complementary nature, directly on the value recorded as an expense in the company's accounts";

  • "It is not the variable remuneration paid that is the target of autonomous taxation, but rather the expense or charge that was accounted for (and noted for tax purposes), so it is at the moment of that accounting entry that the rate of incidence provided for in Article 88, no. 13, b) of the IRC Code must apply";

  • "Resulting thus from an accounting entry made in a given economic year, and which is of relevance for tax purposes for determining the actual profit of companies";

  • "the tax fact associated with performance-based bonuses, to which the autonomous taxation provided for in Article 88, no. 13, paragraph b) of the IRC Code applies, occurs at the moment when it is recognized for IRC purposes";

  • "Being noted for purposes of formation/determination of the economic and tax result ascertained in that period and not when the benefits are paid";

  • "expenses that are accounted for and which are of relevance for tax purposes for determining the taxable profit (or tax loss) of a given year are the same that, after the taxable matter is ascertained, become tax facts, in light of Article 88 of the IRC Code".

Now, it appears from the case files that the supposed expense burdened by the Tax Authority with the autonomous taxation at issue did not impact on the taxable matter of the Claimant in the fiscal year 2013.

Indeed, and as appears from the proven facts, in the course of the inspection procedure the now Claimant informed the Tax Authority, among other things, that:

"at the end of each fiscal year the Bank does not yet know the criteria for determining the bonus to be allocated to employees relating to the fiscal year, since these are defined annually in a more or less discretionary manner by the group. However, an estimate/provision is entered in the accounting for the global amount that can be estimated, which is disregarded fiscally as a cost in the year of its accounting entry, being deducted only at the time of the respective payment.

In this sense, the amount entered in field 752 of table 07 of the 2013 model 22 declaration refers to the increase in costs/provision for bonuses to be paid in subsequent years and the respective social security charges, recognized accounting-wise in the balance sheet account NCA #5285 in 2013, as can be verified through the accounting extracts attached."

Necessarily, if the information provided by the Claimant did not correspond to reality, the Tax Authority would have all the elements to demonstrate that, namely the Claimant's Model 22 Declaration, referred to by it, and the supporting accounting extracts, it being certain, as has already been noted, that neither in inspection proceedings nor in arbitral proceedings does the Tax Authority attempt any demonstration in that sense.

Verifying, therefore, that the amounts recorded as provisions by the Claimant, relating to bonuses to be allocated to persons responsible for its permanent establishment, were not relevant for purposes of determining the taxable profit thereof, and in the wake of the argument of the Respondent itself, quoted above, it must be considered that the provision of Article 88/13 of the applicable IRC Code has not been met.

It is concluded, thus, that there is verification of factual error, and consequent legal error, in the assessment act sub iudice, which should, for this reason, be annulled, the arbitral petition being successful.

There is no verification of any unconstitutionality in the application of the Law effected, contrary to what the Respondent generically raises at the end of its response, especially since such application is in conformity, as has been demonstrated, with the interpretation advocated by the Respondent itself.

C. DECISION

For these reasons, this Arbitral Tribunal hereby decides to uphold in full the arbitral petition filed and, in consequence,

  • Annul the Corporate Income Tax assessment no. 2017…, relating to the fiscal year 2013, and compensatory interest in the total amount of € 147,118.96;

  • Condemn the Respondent to pay the costs of the proceedings, in the amount fixed below.

D. Value of the Proceeding

The value of the proceeding is fixed at € 147,118.96, 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 of no. 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at € 3,060.00, pursuant to Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the petition was wholly successful, pursuant to Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the cited Regulation.

Let it be notified.

Lisbon, 16 April 2018

The Presiding Arbitrator

(José Pedro Carvalho)

Arbitrator Member

(Mariana Vargas)

Arbitrator Member

(Hélder Faustino)

[1] Cfr. Decision no. 197/2016, of 13-04-2016, available at http://www.tribunalconstitucional.pt/tc/acordaos/20160197.html.

[2] "The Role of Taxes in Combating Corruption", University of Minho, available at http://hdl.handle.net/1822/21114.

[3] The following is the text of point 108 of the initial petition: "Without conceding on the said argument, when analyzing the specific situation of the Claimant the Tax Authority states that 'the taxpayer recognized accounting-wise in 2013, in account #7020 – Employee Remuneration, the amount of € 1,089,100.00, relating to provisions for bonuses to be paid in subsequent years, of which, according to information provided by the taxpayer, the amount of € 377,631.37 (Annex 1) corresponds to bonuses allocated to the managers/persons responsible for the Branch'."

[4] Emphasized by us.

[5] Emphasized by us.

Frequently Asked Questions

Automatically Created

What is autonomous taxation on bonuses and variable remuneration under Portuguese IRC Article 88(13)?
Autonomous taxation on bonuses and variable remuneration under Portuguese IRC Article 88(13) is a special tax levied at specific rates on certain expenses, including variable remuneration paid to members of governing and supervisory bodies. Article 88(13)(b) provides that autonomous taxation applies at progressive rates (35% up to €1 million and 35% on amounts exceeding this threshold as of 2013) on variable remuneration components. This taxation applies regardless of whether the amounts are tax-deductible expenses, serving as an anti-abuse mechanism. The provision includes an exemption where at least 50% of the variable remuneration is subject to deferral for a minimum period of three years, recognizing sound remuneration practices in the financial sector that align executive compensation with long-term performance.
Does the three-year deferral requirement under Article 88(13)(b) of the IRC Code exempt variable bonuses from autonomous taxation?
The three-year deferral requirement under Article 88(13)(b) of the IRC Code provides an exemption from autonomous taxation when at least 50% of variable bonuses are subject to deferral for a minimum period of three years. This exemption was introduced to encourage sustainable remuneration practices, particularly in the financial sector. The critical interpretation issue involves calculating both the percentage deferred (minimum 50%) and the deferral period (minimum 3 years). The deferral must be genuine and binding, meaning the recipient cannot access the funds during this period. In this case, the dispute centered on whether the deferral calculation should consider the total bonus amount allocated in a given year and when payments extending beyond three years actually occur. The Tax Authority's interpretation required that the full 50% be paid only after the complete three-year period expires, rather than accepting staggered payments throughout the three years.
Are bonuses paid to managers of permanent establishments (estabelecimentos estáveis) subject to autonomous taxation under Portuguese tax law?
Bonuses paid to managers of permanent establishments (estabelecimentos estáveis) present a specific interpretive challenge under Portuguese autonomous taxation rules. Article 88(13)(b) of the IRC Code explicitly refers to 'members of corporate bodies, management or supervisory bodies' but does not expressly mention managers of permanent establishments. The Claimant argued this omission violates the principle of tax legality (Articles 103(2) of the Portuguese Constitution and 8(2) of the LGT) and the prohibition on analogical interpretation in tax law (Article 11(4) of the LGT), which prevents extending tax obligations by analogy. However, the Tax Authority's position typically extends the application to permanent establishment managers who exercise equivalent functions to corporate officers, based on teleological interpretation and the substance-over-form principle. This issue raises fundamental questions about whether permanent establishments can be assimilated to corporate entities for autonomous taxation purposes without explicit legislative authorization.
Does autonomous taxation on variable remuneration apply at the time of accounting accrual or at the time of actual payment?
The timing of autonomous taxation on variable remuneration—whether it applies at accounting accrual or actual payment—represents a fundamental interpretive issue. The Claimant argued that autonomous taxation should only apply when remuneration is actually paid to beneficiaries, not when it is merely accrued or provisioned in the accounts. This interpretation aligns with the economic reality principle, as the tax burden should correspond to when funds actually transfer. The provision recorded in 2013 for bonuses to be paid in 2014 and subsequent years would therefore not trigger autonomous taxation in 2013. Conversely, the Tax Authority typically interprets autonomous taxation as applying based on when expenses are accounted for, consistent with the accrual basis of accounting required under commercial and tax law. This approach prevents taxpayers from indefinitely deferring autonomous taxation through provisioning strategies. The interpretation has significant practical implications for financial institutions and other entities that commonly establish provisions for variable remuneration before actual payment occurs.
Can a provision for bonuses recorded in one fiscal year but paid in the following year be considered a taxable expense for autonomous taxation purposes under IRC?
A provision for bonuses recorded in one fiscal year but paid in the following year presents complex issues for autonomous taxation purposes under IRC. From an accounting perspective, provisions represent estimated liabilities for expenses relating to a particular fiscal year but not yet definitively determined or paid. In this case, the Claimant recorded a provision of €377,631.37 in 2013 for bonuses relating to that fiscal year but payable in subsequent years. Critically, this amount was not recognized as a tax-deductible cost in 2013, being added back in the tax calculation (field 752 of the Model 22 declaration). The Claimant's position was that since the provision was not fiscally deductible and represents only an estimate rather than a definitive obligation, it should not be subject to autonomous taxation until actual payment occurs and the expense becomes deductible. This raises the question of whether autonomous taxation requires a definitive, determined amount or whether it can apply to provisioned amounts. The interaction between the non-deductibility of the provision and the autonomous taxation regime is central to determining whether such provisions fall within the scope of Article 88(13)(b).