Process: 515/2018-T

Date: June 25, 2019

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 515/2018-T) addresses the Corporate Income Tax (IRC) assessment of A... SA for the 2013 tax period, involving €900,564.45 in disputed amounts. The case centers on two core issues: the annulment of impairment loss reinforcement (€735,774.87) and reversal of previously taxed provisions (€1,818,646.94), totaling €2,554,421.81. The taxpayer, a Spanish credit institution operating in Portugal through asset transfer from previous branches, ceased Portuguese operations in December 2013. Following a tax inspection (OI2016...), the Portuguese Tax Authority (AT) made corrections challenging the taxpayer's treatment of impairment losses on a credit granted to customer 'E...'. The taxpayer argued these corrections violated the fiscal year specialization principle (especialização de exercícios) and that the AT failed to meet its substantiation duty (dever de fundamentação). The case illustrates critical issues in Portuguese IRC concerning the treatment of non-taxed provisions carried forward from previous fiscal years, particularly in cross-border restructuring contexts involving tax neutrality regimes. The taxpayer initially filed a gracious appeal (reclamação graciosa) which was denied, subsequently seeking arbitration at CAAD. Key evidentiary disputes concerned whether amounts declared in field 752 of the 2011 tax return related to general credit risk provisions accepted in previous years. The tribunal addressed the legal framework for impairment loss deductibility under IRC, the proper application of matching principles across fiscal periods, and procedural requirements for tax assessment validity, including adequate reasoning by tax authorities in correction notices.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

1. On 15 October 2018, A... SA, Tax ID..., with registered office in ..., ... Madrid, represented by B... Lda., with tax identification number..., with registered office at... – Rua ... no...., ..., ...-..., Lisbon, filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2nd and 10th of Decree-Law no. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228th of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the Corporate Income Tax (IRC) assessment act no. 2017... for the tax period of 2013 and statement of account adjustment no. 2017..., in the amount of € 900,564.45, as well as the decision denying the gracious appeal that had this as its object.

2. To substantiate its request, the Applicant alleges, in summary, that the annulment of the reinforcement of an impairment loss, in the amount of € 735,774.87, and the reversal of impairment losses (provisions) taxed, in the amount of € 1,818,646.94, totalling € 2,554,421.81, are illegal, as well as the violation of the duty to provide reasoning by the TA.

3. On 16-10-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the TA.

4. The Applicant did not proceed to nominate an arbitrator, so, pursuant to the provisions of subparagraph a) of article 6th, paragraph 2, and subparagraph a) of article 11th, paragraph 1, of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable timeframe.

5. On 06-12-2018, the parties were notified of these designations and did not express any will to refuse any of them.

6. In compliance with the provision of subparagraph c) of article 11th, paragraph 1, of the RJAT, the collective Arbitral Tribunal was constituted on 27-12-2018.

7. On 04-02-2019, the Respondent, duly notified for this purpose, submitted its reply defending itself through contestation.

8. Pursuant to the provisions of subparagraphs c) and e) of article 16th, and paragraph 2 of article 29th, both of the RJAT, the holding of the meeting referred to in article 18th of the RJAT was waived.

9. Having been granted a deadline for the submission of written pleadings, these were submitted by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

10. It was indicated that the final decision would be notified by the end of the deadline provided for in article 21st, paragraph 1, of the RJAT.

11. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2nd, paragraph 1, subparagraph a), 5th and 6th, paragraph 2, subparagraph a), of the RJAT.

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

The proceedings do not suffer from any nullities.

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

All considered, it is necessary to decide:

II. DECISION

A. MATTER OF FACT

A.1. Facts established as proven

1. The Applicant's purpose was to carry out typical operations of credit institutions, namely, the granting of credit and provision of autonomous bank guarantees.

2. A... SA was established in 2011, through a concentrative operation planned in Spain between C..., S.A., D..., S.A. and five other financial institutions resident in Spain.

3. C... and D... were represented by branches in Portugal until that date.

4. The Applicant arose through the transfer of assets and liabilities ("asset entry") of both branches, having benefited from the tax neutrality regime.

5. On 30 December 2013, the Applicant ceased its activities in Portugal.

6. Following the aforementioned cessation of activity, on 17 April 2014, the Applicant submitted the periodic income statement Form 22 for the tax period of 2013.

7. Following an internal inspection action carried out pursuant to service order no. OI2016..., the Applicant was notified, on 9 April 2017, of the draft corrections of the inspection report.

8. On 9 May 2017, the Applicant received notification of the final report of the tax inspection identified above, which confirmed the total of corrections in the amount of € 2,554,421.81.

9. The aforementioned report contains, among other things, the following:

10. The Applicant was notified, through the statement of account adjustment no. 2017..., of the total amount payable of € 900,564.40, corresponding to € 342,697.49 to the return of tax received when submitting the model 22 declaration for 2013, € 461,945.37 of the tax adjustment to be paid, and € 95,921.59 of compensatory interest.

11. On 9 November 2017, the Applicant submitted a gracious appeal of the aforementioned IRC assessment.

12. On 7 May 2018, the Applicant was notified of the draft decision of the gracious appeal it had submitted.

13. The Applicant did not exercise the right to be heard regarding the aforementioned draft decision, so it became final, as notified on 17 July 2018.

14. The impairment loss cancelled by the corrections made by the TA, following the tax inspection procedure previously referred to, was constituted to address a credit with personal guarantee granted to the Applicant's customer "E...".

15. In the 2013 fiscal year, in addition to the reinforcement mentioned, the use of the impairment loss in its full amount was also effected.

16. The amount of impairments recorded on the books in 2012 and 2013 by the Applicant, relating to the aforementioned credit, was as follows:

17. When C... ceased its Branch in Portugal in 2011, the amount of € 2,263,452.37 € was entered in field 752 (blank field) of the model 22 declaration for 2011.

A.2. Facts established as not proven

1. That the amount entered in field 752 (blank field) of the model 22 declaration for 2011 of C..., was related to the balance accepted in previous years relating to the general credit risk provision.

2. That the Applicant has paid the Corporate Income Tax (IRC) assessment no. 2017... for the tax period of 2013 and the corresponding statement of account adjustment no. 2017...

A.3. Reasoning for the facts established as proven and not proven

Regarding the matter of fact, the Tribunal is not required to pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven from the unproven matters (cf. article 123rd, paragraph 2, of the CPPT and article 607th, paragraph 3, of the CPC, applicable by virtue of article 29th, paragraph 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and determined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (cf. former article 511th, paragraph 1, of the CPC, corresponding to current article 596th, applicable by virtue of article 29th, paragraph 1, subparagraph e), of the RJAT).

Thus, taking into account the positions taken by the parties, in light of article 110th/7 of the CPPT, the documentary evidence and the administrative proceedings attached to the file, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the judgment of the TCA-South of 26-06-2014, issued in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained in it are not contested".

The facts established as not proven are due to the absence of proof regarding them.

Indeed, regarding the first unproven fact, despite the Applicant's allegation, the TA disputes it, stating that "it is unknown what reason underlies the entry of the amount of €2,263,452.37 in a blank line [field 752] of the income statement Form 22, and what items the amount added to taxable income relates to, so much so that it was not identified as relating to provisions/impairment losses".

The Applicant presented no evidence to clarify the reason for the entry in question (limiting itself to alleging it), when it could and should have done so, since, moreover, according to the Instructions for Completing the Income Statement, Form 22, Table 07, of the fiscal year in question, whenever field 752 was used, an explanatory note should be attached to the tax documentation process – tax file, as provided for in article 130th.

In this way, easily, by attaching the aforementioned explanatory note, the Applicant could have demonstrated that the entry in question related to the balance accepted in previous years relating to the general credit risk provision, as it alleged.

Regarding the second fact established as not proven, the Applicant presented no proof of payment of the assessed tax.

The allegations made by the parties and presented as facts, consisting of strictly conclusive statements, incapable of proof, and whose truthfulness is to be determined in relation to the concrete matter of fact consolidated above, were neither established as proven nor as not proven.

B. LAW

At issue in the present tax arbitration proceedings is essentially the verification of the legality of the following corrections made by the TA and contested by the Applicant:

- the annulment of the reinforcement of an impairment loss, in the amount of € 735,774.87;
- the reversal of impairment losses (provisions) taxed, in the amount of € 1,818,646.94.

Furthermore, the Applicant also argues the lack of reasoning of the decision of the gracious appeal it submitted.

Let us examine each of these questions.

*

i. Annulment of the reinforcement of the impairment loss

As expressly results from the RIT, the correction at issue is based, in short, on the understanding that "the objective conditions for recognition of the 100% impairment were already met in previous fiscal years", thus verifying the violation of the economic periodization regime, provided for in paragraph 1 of article 18th of the CIRC applicable.

Regarding this matter, moreover, the Applicant invokes jurisprudence of the STA on the subject, as well as the circumstance – not contested by the TA – that the Applicant's procedure caused no damage to the State; on the contrary, it resulted in the early payment of IRC given that the Applicant showed taxable profit in both fiscal years at issue.

Indeed, it has been recurring jurisprudence of the STA that:

"III - The principle of specialization of fiscal years aims to tax the wealth generated in each fiscal year and therefore the respective income and expenses are accounted for as they are earned and incurred, and not as their collection or payment occurs.

IV - However, this principle should tend to conform and be interpreted in accordance with the principle of justice, with constitutional and legal conformity (articles 266th, paragraph 2, of the CRP and 55th of the LGT), in order to allow the imputation to a fiscal year of expenses relating to previous fiscal years, provided that it does not result from voluntary and intentional omissions, in order to effect the transfer of results between fiscal years."

As stated in the judgment of the STA of 09-05-2012, issued in case 0269/12:

"It is equally settled jurisprudence of this Supreme Court that the rigidity of this principle must be filled or tempered by the invocation of the principle of justice, in situations where, all revision periods for the tax act having already been surpassed and there being no prejudice to the State, one should avoid falling into an unjustified injustice for the taxpayer."

Synthesizing, the Judgment of 02-03-2016, issued in case 01204/13, also of the STA, states that:

"It is important to understand that:

1) the imputation of income or expense to a given fiscal year obeys an economic criterion and not a financial criterion.

and

2) that the principle of specialization of fiscal years is not rigid but should tend to conform and be interpreted in accordance with the constitutional principle of justice."

It is thus settled that the principle of periodization of taxable income, contained in article 18th of the CIRC, should tend to conform and be interpreted in accordance with the principle of justice, with constitutional and legal conformity (articles 266th, paragraph 2, of the CRP and 5th/2 of the LGT), in order to allow the imputation to a fiscal year of expenses relating to previous fiscal years, provided that it does not result from voluntary and intentional omissions, in order to effect the transfer of results between fiscal years.

Furthermore, the courts in general, and also arbitral tribunals, it is held, are bound by the duty to "take into consideration all cases that deserve analogous treatment, in order to obtain a uniform interpretation and application of the law." (article 8th/3 of the Civil Code).

On the other hand, and pursuant to article 25th/2 of the RJAT, "The arbitral decision on the merits of the claim filed that puts an end to arbitration is still subject to appeal to the Supreme Administrative Court when it is in opposition, regarding the same fundamental question of law, with judgment issued by the Central Administrative Court or the Supreme Administrative Court."

Thus, a decision, on the matter sub iudice, that goes against the jurisprudence established by the STA on the matter, with the identity of facts and applicable law to these being verified, between the present case and those already judged either by the STA or by the Central Administrative Courts, would be not only subject to appeal under the aforementioned article 25th/2 of the RJAT, but, with a high degree of probability, liable to be overturned by that High Court.

Indeed, since there are no voluntary and intentional omissions at issue, in order to effect the transfer of results between fiscal years, it must be concluded that the correction at issue was made in violation of the provisions of article 18th of the IRC, interpreted according to the jurisprudence cited.

Thus, and in summary, it is not believed that it would be of any use, on the contrary (it would give rise to unnecessary and unnecessary additional procedural processing), for this Court to conclude otherwise, regarding the corrections at issue, relating to the 2013 fiscal year, than the one repeatedly reaffirmed by the superior state courts in the cited jurisprudence, and therefore the correction at issue should be annulled, with the arbitral request proceeding in this respect.

*

b. Reversal of impairment losses (provisions) taxed

Regarding this matter, and as results from the RIT, it is based on the failure to demonstrate that the provisions in question were effectively taxed in previous periods.

The Applicant reiterates what was alleged in its gracious appeal, that is, and in summary, that the difference is justified in that when C... ceased its Branch in Portugal in 2011, the amount of € 2,263,452.37 was entered in field 752 (blank field) of the model 22 declaration for 2011, referring to the balance accepted in previous years relating to the general credit risk provision, and that the difference between that amount and the amount corrected by the TA (€ 1,818,646.94), in the amount of € 496,831.82, should be due to a reversal of provisions taxed occurring in 2005 that should have been deducted and was not, due to an oversight by the Applicant but to its detriment.

Now, examining the facts established as proven and not proven, it is verified that the Applicant failed to prove the circumstance on which it bases its opposition to the corrections made by the TA and now reviewed.

The factual foundations of what is alleged by the Applicant in this respect failing, the legal foundations necessarily fail, including the unconstitutionalities alleged by it on the same matter.

Thus, it cannot be concluded otherwise than that the arbitral request is unfounded in this respect.

*

c. Defects relating to the decision of the gracious appeal

Finally, the Applicant alleges various circumstances relating to formal deficiencies in the decision of the gracious appeal, namely regarding the disregard of arguments and new elements it raised therein, framing them as violation of the duty to provide reasoning by the TA, imposed by article 77th of the LGT.

However, the decision of the gracious appeal is only part of the object of the present arbitration proceedings insofar as it concerns the legality of the tax assessment that was its object, and not insofar as it concerns defects inherent to such acts.

As explained by Carla Castelo Trindade, "This is the first issue that must be made clear: the object of arbitration proceedings is the assessment act (...)".

The same Author continues, clarifying that "acts of second or third degree may always be arbitrable, insofar as they themselves involve, and only to that extent, the (il)legality of the assessment acts at issue".

A consequence of what has been stated is that "the inherent defects of acts denying gracious appeals, hierarchical appeals or requests for revision of the tax act are not arbitrable because they fall outside the substantive scope of tax arbitration."

As the same Author further illustrates, these inherent defects of acts of second and third degree include the formal defects that vitiate them, including their lack of reasoning.

That is, and in summary, article 2nd of the RJAT takes as the object of the jurisdiction of arbitral tribunals, primary acts ("assessment acts of taxes, self-assessment, withholding at source and payment on account"), with secondary acts being relevant only as elements providing timeliness of the objection claim, as results from article 10th, paragraph 1, subparagraph a) of that Framework, where it is required that requests for constitution of an arbitral tribunal be presented within 90 days, counted from the facts provided for in paragraphs 1 and 2 of article 102nd of the Code of Procedure and Tax Process.

Thus, in the first place, in this case the legality of the Applicant's IRC assessment act is being reviewed (direct object of the jurisdiction of arbitral tribunals), with the legality of the secondary act of decision of the gracious appeal – whose main function in tax arbitration proceedings is to ensure the timeliness of arbitration objection of the primary act – being merely reflexive or derivative of the legality of that first act.

Thus, and for the foregoing reasons, the object of the present arbitration proceedings being the IRC assessment act, and the act of decision of the gracious appeal only insofar as it incorporates the (il)legality of that first act, not including therein the defects inherent to such acts, including their lack of reasoning, this Court cannot pronounce itself on this defect alleged by the Applicant, and therefore the arbitral request is unfounded in that respect.

*

Regarding the request for compensatory interest formulated by the Applicants, article 43rd, paragraph 1, of the LGT establishes that compensatory interest is due when it is determined that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due.

In this case, it was not proven that the Applicant proceeded to pay the amount of assessed tax (which is different, it should be noted, from proving that it did not pay).

Thus, the ancillary request for condemning the Respondent to refund unduly paid tax and the corresponding compensatory interest cannot proceed, without prejudice, obviously, to the obligation thereof to effect such refund and payment of due interest, should the Applicant demonstrate payment of unduly assessed tax, an obligation that the Applicant may assert, if necessary, in execution of this judgment.

*

C. DECISION

Terms in which this Arbitral Tribunal decides to partially uphold the arbitral claim filed and, consequently:

a) Partially annul the Corporate Income Tax (IRC) assessment act no. 2017... for the tax period of 2013 and statement of account adjustment no. 2017..., insofar as it assessed tax on the reinforcement of the impairment loss, in the amount of € 735,774.87;

b) Render unfounded the remaining arbitral claims;

c) Condemn the parties in the costs of the proceedings, in proportion to their respective non-success, fixing the amount of € 9,150.00, to be borne by the Applicant, and the amount of € 3,702.00 to be borne by the Respondent.

D. Case value

The case value is fixed at € 900,564.45, pursuant to article 97th-A, paragraph 1, a), of the Code of Procedure and Tax Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29th of the RJAT and paragraph 3 of article 3rd of the Regulations for Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €12,852.00, pursuant to Table I of the Regulations for Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective non-success, under the terms fixed above, since the claim was partially upheld, pursuant to articles 12th, paragraph 2, and 22nd, paragraph 4, both of the RJAT, and article 4th, paragraph 5, of the aforementioned Regulations.

Notify.

Lisbon, 25 June 2019

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Fernando Manuel dos Santos Cardoso)

The Arbitrator Member

(Marcolino Pisão Pedreiro)

Frequently Asked Questions

Automatically Created

What is the specialization of fiscal years (especialização de exercícios) principle in Portuguese IRC tax law?
The specialization of fiscal years (especialização de exercícios) is a fundamental accounting and tax principle under Portuguese IRC law, enshrined in Article 18 of the IRC Code. This principle requires that income and expenses be recognized in the fiscal year to which they economically relate, regardless of when payment occurs. Under Article 23 of the IRC Code, this principle ensures costs and losses are deductible only in the period they are incurred, while revenues must be recognized when earned. For impairment losses and provisions, this means that reversals must be treated symmetrically: if a provision was not tax-deductible when created (non-taxed provision), its subsequent reversal should not constitute taxable income. This matching principle prevents double taxation and ensures fiscal neutrality across periods, particularly relevant in restructuring operations and asset transfers between tax periods.
How are non-taxed provisions (provisões não tributadas) treated under Portuguese corporate income tax (IRC)?
Non-taxed provisions (provisões não tributadas) under Portuguese IRC are provisions that were not accepted as tax-deductible expenses when initially recorded, either because they failed to meet the strict requirements of Article 39 of the IRC Code or because they exceeded allowable limits. When such provisions are reversed in subsequent fiscal years, the reversal should not be included in taxable income, as this would violate the matching principle and the principle against double taxation. Article 23-A of the IRC Code establishes that only reversals of previously deducted provisions constitute taxable income. Taxpayers must maintain detailed records distinguishing between taxed and non-taxed provisions across fiscal years. In corporate restructurings under tax neutrality regimes (Article 74 of the IRC Code), the transferee entity assumes the tax position of the transferor, including the characterization of provisions as taxed or non-taxed, which creates particular challenges in cross-border operations.
Can impairment loss reversals be challenged through tax arbitration at CAAD in Portugal?
Yes, impairment loss reversals can be challenged through tax arbitration at CAAD (Centro de Arbitragem Administrativa) in Portugal. Under Article 2 of the RJAT (Legal Framework for Tax Arbitration - Decree-Law 10/2011), taxpayers can contest IRC assessments, including those involving impairment loss treatments, through arbitration as an alternative to judicial courts. The arbitration process typically follows a denied gracious appeal (reclamação graciosa). Grounds for challenge include: (1) incorrect application of IRC provisions on impairment deductibility (Articles 28-A, 35, and 39 of IRC Code); (2) violation of the fiscal year specialization principle; (3) improper taxation of reversals of non-taxed provisions; (4) failure by the Tax Authority to meet substantiation duties under Article 77 of the LGT (General Tax Law); and (5) errors in calculating symmetric treatment of provisions across fiscal periods. CAAD arbitration offers advantages including faster resolution (typically 6 months under Article 21 RJAT), specialized tax arbitrators, and lower costs compared to administrative courts.
What are the grounds for challenging an IRC tax assessment through reclamação graciosa and arbitration?
Grounds for challenging an IRC assessment through reclamação graciosa (gracious appeal) and subsequent arbitration include both substantive and procedural violations. Substantive grounds include: incorrect calculation of taxable income; improper disallowance of costs under Articles 23-24 of the IRC Code; misapplication of impairment loss rules (Articles 28-A, 35, 39); violation of the fiscal year specialization principle (Article 18); incorrect taxation of non-deductible provision reversals; and errors in applying tax neutrality regimes (Article 74). Procedural grounds include: insufficient substantiation by the Tax Authority violating Article 77 of the LGT; failure to provide adequate reasoning in assessment notices; denial of taxpayer participation rights during inspection; and violation of hearing rights (Article 60 LGT). The gracious appeal must be filed within 120 days of notification (Article 70 CPPT) with the entity that issued the assessment. If denied or not decided within the legal timeframe, taxpayers can proceed to CAAD arbitration under Article 10 RJAT, which must be requested within 90 days of notification of the gracious decision.
What obligations does the Portuguese Tax Authority have regarding the duty of substantiation (dever de fundamentação) in IRC assessments?
The Portuguese Tax Authority has extensive substantiation obligations (dever de fundamentação) in IRC assessments under Article 77 of the General Tax Law (LGT) and Article 268 of the Portuguese Constitution. Tax assessments must contain: (1) a clear statement of the legal basis for corrections; (2) detailed factual findings supporting each adjustment; (3) explicit reasoning connecting facts to legal conclusions; (4) reference to evidence examined during inspection; (5) calculation methodology showing how corrections affect taxable income; and (6) identification of applicable IRC Code provisions. For complex issues like impairment losses and provision reversals, the AT must explain why taxpayer's treatment was incorrect and demonstrate the correct application of matching principles across fiscal years. Substantiation deficiencies constitute grounds for annulment under Article 77(2) LGT. The duty extends to inspection reports, assessment notices, and gracious appeal decisions. In CAAD arbitration, inadequate substantiation can result in assessment annulment even if the tax calculation might theoretically be correct, as procedural guarantees are essential to taxpayer rights and the rule of law in tax matters.