Summary
Full Decision
ARBITRAL DECISION
The arbiters Alexandra Coelho Martins (presiding arbiter), Mariana Vargas and Francisco Nicolau Domingos (member arbiters), appointed by the Deontological Council of the Centre for Administrative Arbitration (CAAD) to form the Arbitral Tribunal, agree as follows:
I. Report
A..., hereinafter "Claimant", taxpayer no. ..., with registered office at ...-..., ..., ..., ..., ...-... ..., hereinafter referred to as Claimant, filed on 22/10/2018 a request for constitution of Tribunal and arbitral pronouncement, following the express dismissal of hierarchical appeal no. ...2016..., filed in relation to the decision dismissing the administrative complaint no. ...2016..., lodged against Corporate Income Tax (IRC) assessments nos. 2015 ... and 2015 ... and inherent compensatory interest relating to the fiscal years 2011 and 2012, in the total amount of 67,617.43 euros, on the grounds that they suffer from the defect of violation of law due to error in the premises, given that no withholding tax was due in relation to payments made to a non-resident entity arising from a contract for the assignment of exploitation rights of a professional football player's image.
The Tax and Customs Authority is the Respondent, hereinafter referred to as "AT" or "Respondent".
In accordance with article 6, paragraph 2, subparagraph a) and article 11, paragraph 1, subparagraph b) of Decree-Law no. 10/2011, of 20/01 (RJAT), the Esteemed President of the Deontological Council of CAAD appointed the arbiters of the Collective Arbitral Tribunal, who communicated their acceptance of the assignment within the applicable period. The Parties were notified and raised no objection.
On 03/01/2019 the arbitral Tribunal was constituted.
In compliance with the provision of article 17, paragraphs 1 and 2 of RJAT, on 04/01/2019 the Respondent was notified to, if it so wished, file a Response and request the production of additional evidence.
On 06/02/2019 the Respondent filed its Response and attached the administrative case file ("PA"). It defends the lack of merit of the arbitral pronouncement request based on the legality of the IRC assessments in question.
On 28/03/2019 the hearing referred to in article 18 of RJAT was held, with witness evidence being produced as requested by the Claimant, with examination of the following witnesses: a) B... and b) C... . At the end of the hearing, the Parties were notified to submit successive written submissions, the date for pronouncement of the arbitral decision was set for 02/07/2019 and the Claimant was warned to proceed with payment of the subsequent arbitral fee by that date.
The Claimant chose not to submit arguments.
The Respondent submitted its final written arguments on 06/05/2019, maintaining its initial position.
By arbitral order of 14/06/2019 the deadline for pronouncement of the Arbitral Decision was extended by two months.
1. Position of the Claimant
The Claimant begins by invoking the subsequent futility of the dispute, as there are several arbitral decisions that have become final in actions brought by the Claimant (IRC, withholding taxes and IVA), relating to the assignment of image rights of the professional athlete D..., entirely favorable to its claim.
Specifically, it highlights arbitral case no. 331/2017-T, relating to the non-acceptance of IVA deduction in payments for image rights of the Claimant's players, within which the additional IVA assessment acts were "revoked" in the part of the tax borne with the acquisition of image rights of the players, with reference to years 2011 and 2012, precisely the same ones at issue in the present case. According to the Claimant, there ceased to exist any procedural object and interest to act, whereby in that case [331/2017-T] it was the Respondent itself that invoked the subsequent futility of the dispute which the Tribunal accepted.
It acknowledges that although we are faced with two distinct taxes – IVA and Withholding Taxes (IRC) – the issue discussed in that other case is interlinked and has repercussions on IRC matters, and the assessments now being challenged should equally be annulled, the same taxpayer, the same player and the same periods being at issue and, consequently, "the instance should be declared extinct", in accordance with article 277, subparagraph e) of the Code of Civil Procedure (CPC), by virtue of article 29, paragraph 1, subparagraph e) of RJAT, and in homage to the principles of legality, equality and justice provided for in article 55 of the General Tax Law (LGT).
In the second place, it argues that the AT must comply with arbitral decisions that have become final. Given that the arbitral decision issued in case no. 346/2016-T determined the annulment of additional withholding tax assessments for image rights of player D..., also analyzed in this case, and that in the present case the same and exact issue is discussed, in relation to the same player, entity and contract, that is, presenting identity of subjects, claim and cause of action, differing only in the corrected periods – fiscal year 2011 and distinct monthly periods of fiscal year 2012 – it considers that the case judgment formed in that case – formal and material (cf. articles 619, paragraph 1 and 581 of CPC, by reference to article 29, paragraph 1, subparagraphs a) and e) of RJAT) – implies the immediate annulment of the assessments now under consideration, on pain of contradiction or reproduction of judgments.
It equally invokes the positive effect of the authority of the case judgment of the aforementioned case no. 346/2016-T, an effect which is recognized by arbitral jurisprudence in case no. 331/2017-T, by reference to Arbitral Case no. 345/2016. If this is not understood in this way, it advocates the annulment of the assessments for violation of the principles of legality, justice, impartiality and protection of legitimate expectations with support in articles 55 of LGT and 2 of the Constitution.
In the third place, it alleges error in the premises, both as to the appreciation of the facts and as to the application of law. It argues that business income of non-resident entities without a permanent establishment in Portugal is not taxed in Portugal, in accordance with article 4, paragraph 2 of the IRC Code, and only otherwise when there is a legally relevant connection with Portuguese territory. Examples of this are "income derived from the exercise in Portuguese territory of the activity of entertainment professionals or sportspeople" (article 4, paragraph 3, subparagraph d) of the IRC Code). In this case, the taxation of the non-resident occurs through withholding tax as a final tax by the paying agent resident in Portugal (articles 94, paragraph 1, subparagraph f) and 98, both of the IRC Code).
It further argues that the Convention to Eliminate Double Taxation between Portugal and Brazil (hereinafter, Convention or DTT Portugal-Brazil) – the country of residence of the income beneficiary – provides that: "income obtained by a resident of a Contracting State in the capacity of […] sportsperson, from their personal activities exercised, in that capacity, in the other Contracting State, may be taxed in that other State" and "[…] income from the activity exercised personally by […] sportspeople, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities of the […] sportspeople are exercised" (cf. article 17, paragraphs 1 and 2 of the Convention).
If not, the income in question can only be taxed in the State of residence of the beneficiary [Brazil] and never in Portugal, whether those are qualified as business income (profits from business – article 7 of the Convention) or with another classification (article 22, paragraph 1 of the Convention).
Along these lines, it argues that image rights constitute an autonomous legal right – as a personality right – which athletes can exploit or assign to a third party. Thus, the assignment of the economic and sporting rights of players, when contracted by a Football Club, does not necessarily involve the assignment of personal image rights.
Furthermore, the player had previously assigned his image right to a non-resident company, which resold it to the Claimant.
In the perspective of the Claimant, the reasoning of the corrections underlying the additional assessments does not prove that:
- the income paid by the Claimant and obtained by the non-resident company was subsequently delivered to the player, in whole or in part, as a prize or other designation;
- that non-resident company acted in the name and on account of the athlete;
- that non-resident company is a mere fictitious intermediary between the Football Club and the player; and
- the Claimant knew, or could not have ignored, that that company was a mere façade and that it acted in the name and on account of the athlete.
For this reason, it argues that the aforementioned conclusions are illegal, because they have no coherence with the legal incidence, nor with the reality proven in the case.
It considers without legal support and without adherence to reality the AT's position that image rights would follow the regime of the sportsperson, due to their interconnection, temporal coincidence and derivation of one from the other.
In summary, the income in question, not being obtained by the football player, does not derive from his activity as a sportsperson and, therefore, is not taxed in Portugal, as it does not fall within article 4, paragraph 3, subparagraph d) of the IRC Code, nor in article 17, paragraph 1 of the Convention.
It further rejects the accessory nature of image rights and the inference that it should follow the regime of the principal (professional athlete employment contract), reiterating that the individual image rights assignment contract is autonomous from the sporting employment contract and that, in the present case, the assignor of image rights was no longer the player, as those had been sold to an institutional investor – a Brazilian company that assumed the risk of exploitation of that asset and of attempting to make it profitable by obtaining benefits at a price higher than the cost of acquisition.
The Claimant emphasizes that the consideration for payment of image rights did not aim at the promotion of the Claimant, but of its sponsors and does not account for the value of the athlete in Portugal, but for the prestige he already had before coming to Portugal. These income do not derive from the exercise of a sporting activity in Portugal. It cites various arbitral jurisprudence (cases 597/2017-T, 346/2016-T, cited above, 108/2015-T, 501/2014-T).
As also, should the Tribunal be in doubt as to whether the amount paid relates or not to the consideration for the sporting activity of the player, article 100 of the Code of Tax Procedure and Process (CPPT) would be applicable, which provides for the annulment of the challenged assessments.
It argues that the income in question does not fall within article 17, paragraph 2 of the Convention, because its nature is not that of income relating to taxation of sportspeople, but of business income or, possibly, of capital gains from the assignment of image rights (when the transferor is not its original holder), in any case, not taxable in Portugal (articles 7, 13, paragraph 4 and 22 of the Convention). In addition, the aforementioned article 17, paragraph 2 can only be applied to individuals and never to legal entities.
It concludes by arguing that the assessment of compensatory interest is also illegal, as a consequence of the illegality of the tax assessments, and even in case of lack of merit, as there is no intentional and culpable behavior in the interpretation and application (plausible) of tax law that would deserve censure, and the requirements of article 35 of LGT are not met.
2. Position of the Respondent
The Respondent maintains the understanding that the contested assessment constitutes a correct application of the Law, does not suffer from any defect, and argues for the maintenance in the legal order of the contested assessments.
Regarding the alleged subsequent futility of the dispute
The Respondent states that the revocation of another tax act, challenged under arbitral case no. 331/2017-T, does not constitute a subsequent fact for purposes of declaring the subsequent futility of the dispute, especially since the Claimant requests that the Respondent execute a revocation. Thus, it considers that the extinction of the instance cannot be declared due to subsequent futility of the dispute.
Regarding the alleged material case judgment
The ground of material case judgment based on the Decision issued in case no. 346/2016-T cannot succeed, as there is no identity of claim and cause of action in relation to the present arbitral case. It considers, in this regard, that the material relationship at issue is distinct, involving other assessments, originating from another inspection action.
Error regarding the premises of law
The Respondent begins by stating that when a football player assigns to a third non-sporting entity the benefits of the use of his image right and this entity, in turn, carries out the assignment of exploitation of those rights to a Club or SAD with whom the player entered into an employment contract, the object of the assignment contract is interlinked and refers back to the rights inherent in the contract he entered into as a footballer, from which his image derives.
Therefore, what is transferred to a non-resident entity will be the image rights that the athletes hold, as players performing the activity of professional football in Portuguese territory and, consequently, the income obtained from the assignment of image rights constitute income from the exercise in Portuguese territory of their activity as sportspeople, subject to IRC, in accordance with article 4, paragraph 3, subparagraph d) of the Code of this tax.
Secondly, it argues that the income referred to in article 4, paragraph 3, subparagraph d), of the IRC Code, are subject to withholding tax at a rate of 25%, as they apply to income paid to non-residents without a permanent establishment, always provided that the income results from the exercise in Portuguese territory of the activity of sportspeople – articles 5, paragraph 3, subparagraph b); 87, paragraph 4 and 94, paragraph 5, all of the IRC Code.
Thirdly, it observes that in the Comments to article 17, paragraph 2 of the Model Convention of the Organisation for Economic Co-operation and Development (OECD) on Income and Property Taxes, it is concluded that the State where the activities of sportspeople are exercised is authorized to tax the income obtained from those activities and attributed to another person, regardless of other provisions of the Convention which would otherwise be applicable.
When we are in the presence of income arising from the activity of sportsperson, even if there is a Convention entered into with the country of residence of the non-resident entity beneficiary, in the present case Brazil, the State of source of the income (here Portugal) is enabled to exercise its taxation rights, without any limitation, over the amounts attributed to entities interposed between the sporting entity and the Club or SAD paying the income.
Thus, with its taxation provided for in Portuguese territory, in accordance with article 4, paragraph 3, subparagraph d) of the IRC Code, even if the model form RFI were to be presented, duly completed and certified by the Brazilian tax authorities, the income was not exempt from taxation in IRC and, consequently, from withholding tax as final tax (article 98, paragraph 5 of the IRC Code).
Finally, transfers abroad of income subject to IRC, obtained in national territory, by non-resident entities, may not be effected without showing that the tax that is due has been paid or secured, in accordance with article 132 of the aforementioned tax code.
Compensatory interest
In this regard, it argues that compensatory interest is due when there is a delay in the assessment of tax attributable to the taxpayer, a circumstance which it understands to be verified in the present case, as the taxpayer failed to carry out the withholding tax that was due which resulted from failure to act with normal diligence in compliance with its tax obligations.
3. Issues to be Examined
In light of the foregoing, it is important to delimit the main issues for decision:
- First, it is necessary to examine and decide on the alleged violation of the exception of subsequent futility of the dispute raised by the Claimant – article 277, subparagraph e) of CPC;
- Next, it is important to assess the violation of material case judgment or the authority of case judgment – cf. article 100 of LGT and articles 581 and 619 of CPC;
- In addition, the analysis of the central merit issue that concerns the alleged error in the premises, of fact and of law, and consequent violation of articles 4, paragraph 3, subparagraph d), 94, paragraph 3 and 87, all of the IRC Code and of the Convention with Brazil (articles 13, 17 and 22). Within this scope, it is under discussion whether the remuneration of the assignment of the player's image rights of the Club constitutes income derived from the exercise in Portuguese territory of his activity as a sportsperson;
- Additionally, in case of well-founded doubt, the application of article 100 of CPPT is raised; and,
- Finally, it is necessary to decide on the assessments of compensatory interest and on the request for indemnificatory interest.
II. Procedural Proceedings
The Tribunal was regularly constituted and has jurisdiction, ratione materiae, to hear the IRC assessment acts and inherent compensatory interest challenged and, incidentally, the second and third degree acts that confirmed them, in accordance with articles 2, paragraph 1, subparagraph a), 5, paragraph 3, subparagraph a), 6, paragraph 2, subparagraph a) and 11, paragraph 1, all of RJAT.
The cumulation of claims is admissible, in accordance with article 3, paragraph 1 of RJAT, given that, although the tax acts relate to two distinct fiscal years (2011 and 2012), there is an issue of identical factual circumstances and the same legal regime, specifically article 4, paragraph 3, subparagraph d) of the IRC Code.
The Parties have standing and legal capacity and have legitimacy, in accordance with articles 4 and 10, paragraph 2, of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.
The AT proceeded with the appointment of its representatives in the case and the Claimant attached a power of attorney, with the Parties thus being properly represented.
The request for arbitral pronouncement is timely, as it was filed within the period provided for in article 10, paragraph 1, subparagraph a) of RJAT, counted from the fact provided for in article 102, paragraph 1, subparagraph a) of CPPT.
1. Regarding the Exception of Subsequent Futility of the Dispute
Article 277, subparagraph e), of CPC, applicable by virtue of article 29, paragraph 1, subparagraph e), of RJAT, provides that the instance is extinguished with the impossibility or subsequent futility of the dispute.
The impossibility of the dispute occurs in case of death or extinction of one of the parties, by disappearance or destruction of the object of the case or by extinction of one of the interests in conflict.
The subsequent futility of the dispute takes place when, by virtue of new facts occurring during the pendency of the case, the decision to be rendered no longer has any useful effect, either because it is not possible to satisfy the claim that the plaintiff wishes to assert in the case, or because the objective sought by the action was achieved by other means.
According to José Lebre de Freitas, Rui Pinto and João Redinha (Annotated Code of Civil Procedure, Volume 1, 2nd edition, Coimbra Editor, Coimbra, 2008, page 555), "the impossibility or subsequent futility of the dispute occurs when, by fact occurring during the pendency of the instance, the plaintiff's claim cannot be maintained, by virtue of the disappearance of the subjects or of the object of the case, or finds satisfaction outside the scheme of the relief sought. In either case, the resolution of the dispute ceases to be of interest – in the former, by impossibility of achieving the intended result; in the latter, because it has already been achieved by other means".
In the specific case, the AT did not proceed with the administrative annulment of the contested tax acts (previously called "revocation", under the 1991 Administrative Procedure Code), and the object of the case is maintained, whereby the possibility of impossibility of the dispute due to extinction of the object is immediately ruled out. It remains to determine whether the result sought by the Claimant has already been achieved by other means.
The Claimant invokes the subsequent futility of the dispute, as there are several arbitral decisions that have become final in actions brought by the Claimant, relating to the assignment of image rights of the same athlete, entirely favorable to its claim, highlighting for this purpose arbitral case no. 331/2017-T, on the subject of IVA, which concerned the same period (years 2011 and 2012).
It appears, however, that the reasoning achieved on IVA is not directly transposable to the situation in question, which concerns a different question, of withholding taxes on income tax. In addition to being structurally distinct taxes, the scope of their respective rules of incidence [the right to IVA deduction (article 20 of the IVA Code) and the qualification of income for IRC purposes (article 4, paragraph 3, subparagraph d) of the IRC Code)] – is not comparable or susceptible to linear assimilation, whereby the analysis and judgment of the IVA matter does not dispense with the autonomous and individualized examination of the distinct issue, relating to IRC withholding taxes.
As the assessment acts have not been eliminated, and there being no specific pronouncement on them, it cannot be concluded, as the Claimant does, that the result it sought – a declaration of illegality of the tax acts and their consequent annulment – has already been achieved by other means, whereby the request for declaration of extinction of the instance filed by the Claimant on that ground is without merit.
2. Regarding the Exception of Case Judgment (Material) or the Positive Effect of the Authority of Case Judgment
The exception of case judgment presupposes, in accordance with article 580 of CPC, the repetition of a cause. It is a procedural requirement which aims to prevent the repetition of a prior cause that is ongoing and to avoid, in this way, that the court is placed in the alternative of contradicting or reproducing a prior decision. For this requirement to be established, three conditions are required, which imply a triple identity: of subjects, of claim and of cause of action (cf. articles 89 of the Code of Administrative Court Procedure (CPTA), 577, subparagraph i), 580 and 581 of CPC, applicable by reference to article 29, paragraph 1, subparagraphs c) and e) of RJAT and article 1 of CPTA).
The jurisdictional decisions brought by the Claimant either concern another tax (Arbitral Decision no. 331/2017-T examined above) or distinct periods of tax and distinct assessment acts (Arbitral Decision no. 346/2016-T). In this way, there is no identity of claims which is fundamental for the verification of the exception of case judgment.
It should be noted, as to the effects of case judgment, that the grounds of the operative part, taken by themselves, in principle do not bind. Therefore, case judgment does not have as its object the grounds, of fact or of law, of the decision, and only its operative part.
It should further be noted that, as the exception of case judgment is not established, the existence of a jurisdictional pronouncement, even if final, on the same legal issue, does not bind the Courts to a decision in the same sense, as the legal system in force in Portugal does not adopt the principle of precedent that characterizes Anglo-Saxon systems.
With regard to the positive external effect of case judgment, also called "authority of case judgment", it should be noted that it presupposes a non-repetition of causes, in other words, it has as a condition that the exception of case judgment is not established, whereby the Court can examine the merits. The authority of case judgment is projected in the direction of the merit decision, and can determine the grounds of the "second" decision if there is a relationship of prejudiciality or of concurrence, but does not constitute an exception that prevents the court from examining the subject matter of the case.
In this manner, the exception of case judgment and/or authority of case judgment raised by the Claimant is without merit.
III. Reasoning
Matters of Fact
1. Facts with Relevance to the Decision Considered Proven
1.1. The Claimant is a sporting society that encompasses the professional football activity of E... and is governed by the special legal regime established in Decree-Law no. 67/97, of 3 April, in accordance with the amendments introduced by Law no. 107/97, of 16 September (Tax inspection report contained in PA).
1.2. On 21/06/2011, the Claimant entered into a contract for the assignment of exploitation of image rights of the professional player D... with the Brazilian company: F..., Lda. – a non-resident entity without a permanent establishment in Portugal that held the ownership of those rights (Tax inspection report contained in PA).
1.3. The Claimant paid 237,754.48 euros, in the years 2011 and 2012, to the entity F..., Lda., resident in Brazil, as consideration for the acquisition of "sporting and financial rights" relating to the football player D... and which can be broken down as follows (Tax inspection report contained in PA):
Document Amount
05/08/2011 NP no. .../2011 22,754.48 euros
09/11/2011 NP no. .../2011 95,000.00 euros
24/02/2012 NP no. .../2011 60,000.00 euros
10/02/2012 NP no. .../2011 35,000.00 euros
09/05/2012 NP no. .../2011 25,000.00 euros
Total 237,754.48 euros
1.4. This income relating to the assignment of image rights of player D... was not subject to withholding tax (Tax inspection report contained in PA).
1.5. The Claimant contracted football player D... and decided also to acquire image rights to promote the Club and sponsors with his image (Tax inspection report contained in PA and testimony of witnesses B... and C...).
1.6. There are sponsors who wish to use the most media-savvy football players in promotional actions and normally a clause is included in contracts with sponsors that requires the Claimant to make some of its players available for such actions (Tax inspection report contained in PA and testimony of witnesses B... and C...).
1.7. Sponsors contribute significantly (approximately 40%) to the ordinary income of the Claimant (Report and accounts of the Claimant and fact not disputed by the Respondent).
1.8. The acquisition of image rights of players with the consequent availability of these for promotional actions of sponsor products constitutes an added value in the negotiation of sponsorships, given the interest sponsors have in being able to dispose of the most media-savvy players in promotional actions for their products (Testimony of witnesses B... and C...).
1.9. The Claimant considered that the football player D..., by virtue of his professional curriculum (internationally recognized by youth teams in Brazil), would be a fundamental asset for marketing events, maintenance and acquisition of sponsors, whereby, in addition to his hiring, it acquired his image rights (Testimony of witnesses B... and C...).
1.10. The acquisition of image rights was also carried out by the Claimant with the objective of preventing the image of the football player D... (one of the most media-savvy), from being associated with brands competing with the Claimant's sponsors, or that he would not participate in promotional campaigns for sponsor products, which could harm the maintenance and acquisition of sponsorships (Testimony of witnesses B... and C...).
1.11. The football player D... participated in promotional actions for the beer brand ..., namely, autograph sessions, in the context of the contract entered into by the Claimant with the company that commercializes it (Testimony of witnesses B... and C...).
1.12. The Claimant was the subject of a tax inspection action, titled by Service Order OI2015..., of general and multipurpose scope, for IRC purposes, relating to the period 01/07/2011 to 30/06/2012 (Tax inspection report contained in PA).
1.13. Following this inspection, the AT made the following corrections, among others, relating to payments to non-residents and IRC that it considered unduly not withheld, with the grounds of the Inspection Report that was notified to the Claimant (Tax inspection report contained in PA):
Payment date Document Amount Rate Withholding Delivery deadline
05/08/2011 NP no. .../2011 22,754.48 euros 25% 5,668.62 euros 20/09/2011
09/11/2011 NP no. .../2011 95,000.00 euros 25% 23,750.00 euros 20/12/2011
24/02/2012 NP no. .../2011 60,000.00 euros 25% 15,000.00 euros 20/03/2012
10/02/2012 NP no. .../2011 35,000.00 euros 25% 8,750.00 euros 20/03/2012
09/05/2012 NP no. .../2011 25,000.00 euros 25% 6,250.00 euros 20/06/2012
Total 237,754.48 euros 59,438.62 euros
1.14. Following the aforementioned inspection action and the corrections relating to withholding taxes, the following tax and compensatory interest assessments were issued (Documents 2 and 3 attached with the request and PA):
IRC/CI Period Amount Assessment No. Payment deadline
IRC 08/2011 and 11/2011 29,438.62 euros 2015 ... 29/05/2015
CI 09/2011 and 12/2011 4,257.17 euros 2015 ... 29/05/2015
IRC 02/2012 and 05/2012 30,000.00 euros 2015 ... 29/05/2015
CI 03/2012 and 06/2012 3,921.64 euros 2015 ... 29/05/2015
1.15. On 22/01/2016, the Claimant filed an administrative complaint of the aforementioned assessments (PA).
1.16. On 18/07/2016, a decision dismissing the administrative complaint referred to was rendered, notified to the Claimant on 21/07/2016 (PA).
1.17. On 22/08/2016, the Claimant filed a hierarchical appeal of the decision dismissing the administrative complaint (PA).
1.18. By order of 22/08/2018, the Finance Director of ... expressly dismissed the hierarchical appeal, notified to the Claimant on 24/08/2018 (PA).
1.19. It appears from information no. I2017..., of 16 November 2017, from the IRC Services Division, on which the order dismissing the hierarchical appeal referred to in the previous point was based, that the Claimant did not proceed with the payment of the IRC assessments and compensatory interest challenged within the set deadline, and adhered to an installment plan, being in the situation of "Suspension for Payment in Installments - PERES", with the amounts of 8,423.95 euros and 8,480.37 euros being regularized, in the total of 16,904.32 euros, as at the date (PA).
1.20. The request for arbitral pronouncement was filed on 22/10/2018.
2. Motivation of Proven and Unproven Facts
The facts relevant to the judgment of the case were selected and defined according to their legal relevance, in view of the plausible solutions to legal issues, in accordance with the combined application of articles 123, paragraph 2, of CPPT, 596, paragraph 1 and 607, paragraph 3 of CPC, applicable by virtue of article 29, paragraph 1, subparagraphs a) and e) of RJAT.
As far as proven facts are concerned, the conviction of the arbiters was based essentially on the critical analysis of the documentary evidence attached to the case and the positions assumed by the parties.
The statements of witnesses B... and C... proved to be objective and credible and allowed the factual matter described in paragraphs 1.5 to 1.11 to be established.
With relevance to the decision, there are no alleged facts that should be considered unproven.
Matters of Law
3. Error in the Premises. Non-Fulfillment of the Conditions of Article 4, Paragraph 3, Subparagraph d) of the CIRC
It is necessary to examine the merits, the central issue to be decided concerning the incidence of taxation, by way of withholding tax, at the rate of 25%, on income paid by the Claimant, in 2011 and 2012, to a non-resident company (resident in Brazil) and without a permanent establishment in Portugal, as consideration for the acquisition of image rights of a free football player who was integrated into the squad of E...
It should be noted that the examination concerns the (il)legality of the tax acts which has repercussions on the judgment of (in)validity of the acts, of second and third degree that pronounced upon them, as the true object of the challenge are those assessments, as has been repeatedly affirmed by the consolidated jurisprudence of the Supreme Administrative Court (STA), an example of which is the recent Decision of 3 July 2019, case no. 02957/16.0BELRS 070/18, according to which "the true object of the challenge is the assessment act and not the act that decided the administrative complaint, whereby it is the defects of that and not of this order that are truly at issue".
From the perspective of the Claimant, the IRC assessment by way of withholding tax constitutes a violation of articles 4, paragraph 3, subparagraph d), 94 and 87, of the IRC Code, in the wording at the time of the facts, and of articles 13 (Capital gains), 17 (Artists and sportspeople) and 22 (Other income), of the Convention between the Portuguese Republic and the Federative Republic of Brazil Intended to Prevent Double Taxation and Tax Evasion in the Matter of Income Taxes, approved for ratification by Resolution of the Assembly of the Republic no. 33/2001, of 1 March 2001, published in the Official Gazette no. 98, of 27 April 2001.
It is, therefore, in light of the norms of domestic law and international conventional law that the claim of the Parties should be examined, which requires investigation into whether the remuneration paid by the Claimant for the assignment of image rights of the player to an entity that was already commercially exploiting them, at a date prior to his arrival in Portugal, can be deemed as remuneration of this qualified as "income from a sporting activity", personally exercised by him, in national territory.
In this regard, it is important to address two preliminary points. The first is the negative function of Conventions aimed at preventing double taxation. These instruments do not contain in themselves rules of tax incidence, whose establishment and definition is the exclusive responsibility of the Contracting States. Conventions contain rules for the allocation of tax jurisdiction between States which depend on these, in their internal law rules, containing tax imposition rules. Thus, if according to the internal rules of the State there is no provision for the incidence of taxation on a given income, there is no need to invoke the Convention, as this, in matters of incidence, depends on the prior tax configuration of the States. In other words, if it is concluded that there is no incidence of IRC on the income in question, according to the Code of this tax, the Convention is not even to be applied, as there is no concurrence of tax jurisdictions between States for it to resolve.
Another point to be considered is the preeminence of the residence criterion as an element of connection (spatial) for purposes of taxation of income, with the criterion of source of income being merely complementary and not universal, in the sense that it applies only to income specifically provided for and whose criterion of connection with Portuguese territory is relevant.
With regard to the specific case, in the case of income obtained by a non-resident entity, with headquarters in Brazil, and without a permanent establishment in Portugal to which those could be attributed, the specification is contained in subparagraph f) of paragraph 3 of article 4 of the IRC Code, which provides for the extension of the tax to "income derived from the exercise in Portuguese territory of the activity of entertainment professionals or sportspeople", a category of income in which the AT framed the income paid by the Claimant to F..., Lda. (hereinafter, simply F..., Lda.), derived from the assignment of image rights of a football player with whom the Claimant entered into a sporting employment contract, and previously held by it.
The AT bases its claim to tax revenue collection on the interpretation that such image rights, whose assignment has the same duration as the sporting employment contract entered into with the athlete, are integrated into that contract, and that the respective proceeds should be considered remuneration of him, even if paid to a third party, which would not be opposed by the wording of paragraph 2 of article 17 of the DTT Portugal-Brazil, in accordance with which:
"2 – Notwithstanding the provisions of articles 7, 14 and 15, income from activities personally conducted by entertainment professionals or sportspeople, in that capacity, attributed to another person, may be taxed in the Contracting State in which such activities of entertainment professionals or sportspeople are conducted."
Thus, in the view of the Respondent, as the player carried out his sporting activity in Portugal, the income paid to third parties, in this case, to a Brazilian company, would be taxed in Portugal, by being interlinked with the sporting employment contract.
However, it appears that it is not correct.
The right to image is a personality right which is not necessarily connected with the practice of a sporting activity in Portuguese territory.
In the specific situation, it was not demonstrated that the income derived from the assignment of the player's image rights derived from the exercise in Portuguese territory of the activity of sportsperson, a burden that rested on the AT in accordance with articles 74, paragraph 1 of LGT and 342, paragraph 1 of the Civil Code. Thus, such income does not meet the requirements of objective incidence contained in article 4, paragraph 3, subparagraph d), and therefore is not, on that ground, subject to IRC (in the form of withholding tax) in Portugal.
Similarly, article 17 of the DTT Portugal-Brazil, transcribed above, which has its source in article 17 of the Model Convention on Fiscal Matters concerning Income and Property, of the Committee of Fiscal Matters of the OECD (Model Convention), is not applicable, as a fundamental premise of its application is lacking, namely that it be income derived from the sporting activity exercised by the player in Portugal.
In this regard, reference is made to the Comments to the Model Convention, which are an important element of interpretation, as the representatives of the countries that participated in their elaboration adhered to them without reservation.
Article 17 of the Model Convention clearly distinguishes which income is to be taxed in the State of source, from those which cannot be, in providing that:
"Article 17 - Artists and sportspeople
1. Notwithstanding the provisions of Articles 7 and 15, income obtained by a resident of a Contracting State in the capacity of an entertainment professional, such as a theatre, cinema, radio or television artist, or musician, as well as a sportsperson, derived from his personal activities exercised, in that capacity, in the other Contracting State, may be taxed in that other State.
2. Notwithstanding the provisions of Articles 7 and 15, income from activities personally conducted by entertainment professionals or sportspeople, in that capacity, attributed to another person, may be taxed in the Contracting State in which such activities of entertainment professionals or sportspeople are conducted."
Comment Number 1 to paragraph 1 of article 17 of the Model Convention provides that "(…) sportspeople resident in a Contracting State may be taxed in the other Contracting State where they exercise their activities in that capacity (…)", with Comment no. 8 determining that this paragraph 1 applies "to income obtained, directly or indirectly, individually, by a (…) sportsperson (…)".
In turn, in Comment 11 to paragraph 2 of article 17 of the Model Convention, it is clarified that this "[…] deals with cases in which the income from their activities is attributed to other persons. If the income of a (…) sportsperson is realized by another person (…) the portion of income in respect of which the (…) sportsperson cannot be taxed may be taxed as income of the person who receives it. If the person receiving the income is a company, the State of source may tax that income even if it is not attributable to a permanent establishment situated in that country. However, this is not always the case".
Reverting to the situation under analysis, it was not proven that the (personal) image rights of the player, previously assigned by him to the company F..., Lda., with headquarters in Brazil and without a permanent establishment in national territory, had derived from the sporting activity exercised by him in Portugal.
To the contrary, it was established that the player had acquired considerable prominence in Brazil, at a time prior to the celebration of the sporting employment contract with the Claimant and that the acquisition of said image rights did not constitute a sine qua non condition for the celebration of the sporting employment contract. It essentially aimed to ensure compliance with obligations concerning the Claimant's sponsors – such as presence at events with advertising purposes for those brands – and to ensure that the player's image could not be used for competing brands and thereby prejudice the Claimant's sponsorship contracts which represented approximately 40% of its income.
On the other hand, it was not proven that the price of acquisition of image rights, paid by the Claimant to the company F..., Lda., constituted, in whole or in part, remuneration of the player, in any capacity; however, even if that proof had been made, it would still be necessary that such remuneration derived from an activity personally exercised by him in Portugal, for it to be taxed here, which, as seen, was not demonstrated.
As image rights are individual rights distinct from economic and sporting rights, they were also the object of distinct contracts: (i) the contract entered into between the player and F..., Lda., in accordance with which the former assigned to the latter, for remuneration, the right to commercial exploitation of his personal image; (ii) the sporting employment contract entered into between the player and the Claimant, in which the former obligated himself to the latter, in the capacity of SAD, to provide his sporting activity, under its authority and direction, for remuneration (iii) the contract entered into between the Claimant and F..., Lda., by which the former acquired from the latter the right to commercial exploitation of the image rights of the player, previously held by the latter, in exchange for the corresponding financial consideration.
Thus, as it is not possible to conclude that there is a connection between the price paid by the Claimant to F..., Lda., for the acquisition of the player's individual image rights, and the sporting activity exercised by him personally in national territory, it must be concluded that such price constitutes business income of that second entity, not subject to taxation in Portugal by the provision of article 4, paragraph 3, subparagraph b) of the IRC Code, nor being framed in article 17 of the Convention cited above, but rather in article 7 thereof. Possibly, depending on the circumstances, consideration could be given to the eventual qualification of the gain as capital gain, in which case article 13 of the DTT Portugal-Brazil would apply.
However, in either case, the income or gain is not/would not be taxable in Portugal by the application of the cited articles 7 or 13 of the Convention.
In light of the foregoing, as there is no basis for taxation of that income in Portugal, the Claimant was not obligated to carry out any IRC withholding tax, for subsequent payment to the State's coffers.
For the reasons set out, it is concluded that the IRC assessments challenged are illegal, by virtue of violation of articles 4, paragraph 3, subparagraph d), 87, paragraph 4 and 94, paragraph 1, subparagraph f), of the IRC Code and applicable international law (article 7 of the DTT Portugal-Brazil), resulting in their annulment, in accordance with article 163, paragraph 1 of the new Administrative Procedure Code (CPA), applicable by virtue of article 29, paragraph 1, subparagraph d) of RJAT.
The assessments of compensatory interest are also illegal, and therefore annulled, given the absence of its constitutive requirement and its accessoriness in relation to the main tax obligation, as there was no delay in the assessment of tax (IRC) that was due, as provided in article 35, paragraph 1 of LGT.
Similarly, the orders dismissing the Hierarchical Appeal and the Administrative Complaint that confirmed such IRC assessment tax acts and the corresponding compensatory interest must be annulled.
4. Regarding the Right to Indemnificatory Interest
The arbitral tax process was conceived as an alternative means to the process of judicial challenge (cfr. the legislative authorization granted to the Government by article 124, paragraph 2 (first part) of Law no. 3-B/2010, of 28 April, which approved the State Budget for 2010, it should be understood that the competence of the arbitral courts operating under the auspices of CAAD includes the same powers that, in the process of judicial challenge, are attributed to tax courts, such as the power to examine the right to indemnificatory interest.
Subparagraph b) of paragraph 1 of article 24 of RJAT provides that the arbitral decision on the merits of the claim for which there is no recourse or challenge binds the tax administration from the end of the period set for recourse or challenge, and that this administration, in the precise terms of the establishment of the arbitral decision in favor of the taxpayer and until the end of the period set for voluntary execution of sentences of tax court decisions, must "restore the situation that would have existed if the tax act which is the object of the arbitral decision had not been carried out, by adopting the acts and operations necessary for this effect".
Similarly, article 100 of LGT, applicable to the arbitral tax process by virtue of subparagraph a) of paragraph 1 of article 29 of RJAT, provides that "The tax administration is obligated, in case of full or partial establishment of administrative complaints or administrative appeals, or of judicial proceedings in favor of the taxpayer, to immediate and full restoration of the situation that would have existed if the illegality had not been committed, including the payment of indemnificatory interest, in the terms and conditions provided by law."
The regime for indemnificatory interest is contained in article 43 of LGT, and in accordance with paragraph 1 thereof, this is due: "when it is determined, in administrative complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than that legally due."
In the case at hand, it is manifest that, given the illegality declared of the IRC assessments and compensatory interest which is the object of the request for arbitral pronouncement, for the reasons set out above, the Claimant's right to indemnificatory interest on the amounts unduly paid must be recognized, as provided in article 61, paragraph 5 of CPPT.
It is important to recall that the evidence on record only showed proven payment of 16,904.32 euros, in the context of the installment plan to which the Claimant adhered, whereby, as indemnificatory interest applies to the amounts paid, this interest should only be calculated on that amount and, if applicable, on the additional amount that comes to be determined in execution of this Arbitral Decision.
* * *
Finally, it should be noted that the relevant issues submitted for examination by this Court were addressed and examined, as were not those whose decision was prejudiced by the solution given to others or whose examination would be futile, namely those relating to fictitious interposition of entity, the alleged violation of the principles of legality, justice, impartiality and protection of legitimate expectations and well-founded doubt regarding the taxable fact (article 100 of CPPT).
IV. Decision
In accordance with the foregoing, the arbiters of this Arbitral Tribunal agree to:
- Judge the request for arbitral pronouncement as established and declare the illegality of the IRC assessments no. 2015..., of fiscal year 2011, in the amount of 29,438.62 euros of tax and respective compensatory interest of 4,257.17 euros (assessments nos. 2015... and 2015...) and no. 2015..., of fiscal year 2012, in the amount of 30,000.00 euros of tax and respective compensatory interest of 3,921.64 euros (assessments nos. 2015... and 2015...), which are hereby annulled in the total amount of 67,617.43 euros and, as well, the orders dismissing the Administrative Complaint and the Hierarchical Appeal that confirmed such acts;
- Recognize the right of the Claimant to indemnificatory interest on the amounts duly paid that are determined in execution of this Decision, from the date of the respective payments, until the issuance of credit notes.
Process Value
The value of the process is set at 67,617.43 euros (sixty-seven thousand six hundred and seventeen euros and forty-three cents), in accordance with article 97-A, paragraph 1, subparagraph a) of CPPT, applicable by virtue of article 29, paragraph 1, subparagraph a) of RJAT and article 3, paragraph 2 of the Regulation of Fees in Tax Arbitration Proceedings (RCPAT).
Costs
Costs to be borne by the Tax and Customs Authority, as the action was established, in the amount of 2,448.00 euros (two thousand four hundred and forty-eight euros), cf. articles 12, paragraph 2 and 22, paragraph 4 of RJAT and Table I attached to RCPAT.
Let notice be given.
Lisbon, 22 July 2019
The Collective Arbitral Tribunal,
Alexandra Coelho Martins
Mariana Vargas
Francisco Nicolau Domingos
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