Process: 524/2017-T

Date: May 30, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 524/2017-T) concerns the denial of the Extraordinary Fiscal Credit for Investment (CFEI) under Law 49/2013 for a company managing commercial properties. The taxpayer claimed €185,116.69 in CFEI for 2013 investments in property improvements, arguing these constituted eligible investment assets. The Tax Authority rejected the claim, and the subsequent administrative appeal (reclamação graciosa) was denied regarding CFEI, though partially granted for employment tax credits. The core legal issue centered on whether properties classified as investment properties under NCRF 11 accounting standards qualified for CFEI benefits. The tribunal examined whether the taxpayer's primary business activity—property administration and service provision to commercial tenants—meant the investments should be considered productive assets rather than mere rental properties. The taxpayer argued that since it provided extensive services beyond simple leasing, the properties were operational assets eligible for investment tax credits. However, the tribunal found insufficient evidence demonstrating that service revenues substantially exceeded rental income. The decision establishes important precedents regarding CFEI eligibility criteria, particularly the distinction between investment properties held primarily for rental appreciation versus operational assets used in active business operations. This case highlights the evidentiary burden on taxpayers to demonstrate that property investments serve operational rather than passive investment purposes when claiming investment tax credits under Portuguese IRC law.

Full Decision

ARBITRAL DECISION

I – REPORT

On 27 September 2017, A..., S.A., NIPC..., with registered office at ... - ... - ... ..., 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 Regime for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), seeking the declaration of partial illegality of the Extraordinary Corporate Income Tax (IRC) Self-Assessment Act of 2013, and of the decision of the administrative appeal procedure concerning same, in the amount of €185,116.69.

To substantiate its request, the Claimant alleges, in summary, that the non-acceptance by the Tax Authority (AT) of the claim to invoke, in the periodic income return form model 22, relating to 2013, the right to the fiscal incentive for investment, designated as Extraordinary Fiscal Credit for Investment (CFEI), approved by Law No. 49/2013, of 16/07, amounting to €185,116.65, is illegal, as it does not correspond to a correct interpretation and application of the law to the concrete facts.

On 27-09-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Claimant did not proceed with the appointment of an arbitrator, wherefore, pursuant to the provisions of subparagraph a) of article 6, paragraph 2, and subparagraph a) of article 11, paragraph 1, of the LRAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the applicable time period.

On 15-11-2017, the parties were notified of such appointments and did not manifest any intention to challenge any of them.

In accordance with the provisions of subparagraph c) of article 11, paragraph 1, of the LRAT, the collective Arbitral Tribunal was constituted on 06-12-2017.

On 24-01-2018, the Respondent, duly notified for such purpose, presented its response defending itself solely by way of objection.

Pursuant to the provisions of subparagraphs c) and e) of article 16, and paragraph 2 of article 29, both of the LRAT, the convening of the meeting referred to in article 18 of the LRAT was dispensed with.

Having been granted a time period 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.

Pursuant to article 18 of the LRAT, the parties were informed that the rendering of the final decision would occur by the deadline set out in article 21, paragraph 1, of the LRAT.

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

The parties have legal personality and capacity, are legitimate, and are legally represented, pursuant to articles 4 and 10 of the LRAT and article 1 of Order No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

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

All considered, it behoves us to render

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proved

On 28-05-2014, the Claimant filed its income return Model 22, relating to IRC for the fiscal year 2013.

In said return, the Claimant determined a tax loss of €705,459.31 and a tax to be recovered of €341,594.22.

Subsequently, the Claimant filed an administrative appeal concerning said self-assessment, as it understood that at the time of filing the Model 22 return relating to the tax period 2013, an error was made in its completion, in field 774 of Schedule 07 and field 355 of Schedule 10 of the Income Return Model 22, where was not declared, in field 774 of Schedule 07, the tax benefit relating to Net Creation of Jobs (CLPT), in the amount of €36,721.81, as well as, in field 355 of Schedule 10, the amount of €185,116.69 relating to the Extraordinary Fiscal Credit for Investment (CFEI).

By Order of 26-06-2017, from the Head of Division of the Finance Directorate of Porto, the administrative appeal was partially granted, concluding that:

  • The Claimant was entitled to deduct the amount of €35,866.08, relating to the tax benefit of CLPT; and
  • The legal requirements for the application of CFEI were not met.

In the year 2013, the Claimant incurred expenses relating to works carried out between July and October 2013 on the roof of the shopping centre ... and partly relating to the construction of B..., in Loulé (...), in the amount of €925,513.44.

Said properties were recorded by the Claimant in accounting terms, in accordance with NCRF 11, as investment properties.

The activity of the Claimant, according to the CAE Rev.3 classification, consists of "Administration of property on behalf of others," code 68321, which is classified as a real estate activity.

According to its Articles of Association, the Claimant's principal purpose is the operation and management of commercial zones, whereby, in addition to the exploitation of the shopping centre with the objective of obtaining rents, it provides various services supporting commercial activity, and also possesses the administrative services centre in the shopping centre.

The services referred to in the preceding paragraph comprise maintenance and conservation services of common use areas and equipment, supply of water, electricity and telephone, and cleaning services.

A.2. Facts Established as Not Proved

The Claimant's objective in holding the properties is not primarily to obtain profit through rents, but rather to obtain profit through the services it is legally obliged to provide to commercial lessees, which represent a very significant part of its activity.

A.3. Reasoning for the Proved and Not Proved Factual Matters

With regard to factual matters, the Tribunal does not need to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proved from the unproved matters (see article 123, paragraph 2, of the Code of Tax Procedure and Process, and article 607, paragraph 3, of the Code of Civil Procedure, applicable pursuant to article 29, paragraph 1, subparagraphs a) and e), of the LRAT).

Thus, the facts relevant for the judgment of the case are selected and defined according to their legal relevance, which is established having regard to the various plausible solutions of the question(s) of Law (see former article 511, paragraph 1, of the Code of Civil Procedure, corresponding to current article 596, applicable pursuant to article 29, paragraph 1, subparagraph e), of the LRAT).

Thus, having regard to the positions taken by the parties, in light of article 110, paragraph 7, of the Code of Tax Procedure and Process, the documentary evidence and the administrative file attached to the record, the facts listed above were considered proved, having relevance for the decision, taking into account that, as was written in the Decision of the Administrative Court of First Instance-South of 26-06-2014, rendered in case 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not impugned."

The fact established as not proved is due to the absence of evidence in that regard.

Indeed, although the Claimant maintains that the properties held by it are, principally, means for obtaining income through the provision of services to its clients, no substantial evidentiary elements were presented to support such assertion.

Were the Claimant's claims to correspond to reality, it could easily demonstrate this by presenting data concerning the cost of the properties in question and their market value, both in terms of sale and rental, as well as the costs relating to the services it provides and the income it obtains, so that it could be reasonably concluded whether these derive essentially from the services it provides, or from the value of the properties whose use it makes available to its clients through shopping centre store lease contracts.

Given the absence of concrete data in that sense, a situation of reasonable doubt inevitably emerges as to whether or not the fact in question is verified, and such doubt, by operation of the rules governing the distribution of the burden of proof, must be resolved unfavourably to the Claimant.

Neither proved nor unproved were allegations made by the parties and presented as facts, consisting of strictly conclusive assertions, incapable of proof, and the truthfulness of which must be assessed in relation to the concrete factual matters consolidated above.

B. ON THE LAW

The Claimant alleges, in sum, that the principle of substance should prevail over form, especially given the specificities of the concrete case, and also the objectives underlying the incentive in question.

For the Claimant, more important than ascertaining which accounting classification was used is understanding the activity carried out by the Claimant, which consists not only of the operation and management of commercial zones with the objective of obtaining rents, but also the provision of services supporting commercial activity, and also possessing the administrative services centre in the shopping centre.

In developing such reasoning, considering that the Claimant believes that a substantial part of income derives precisely from those services provided to commercial lessees, and not properly from "rents," and that the CFEI does not distinguish between sectors of activity, and given the indispensability of the assets in the pursuit of the Claimant's activity, it contends that there can be no logical conclusion other than the eligibility of its investment for purposes of CFEI, as it satisfies the basic requirements that were at the origin of the creation of the tax benefit.

Now, paragraph 1 of article 3 of Law No. 49/2013 provides:

"1 - The tax benefit to be granted to taxpayers referred to in the preceding article corresponds to a deduction from the IRC tax in the amount of 20% of investment expenses in assets allocated to business operations, incurred between 1 June 2013 and 31 December 2013."

And paragraph 1 of article 4 of Law No. 49/2013 provides:

"For purposes of this regime, investment expenses in assets allocated to business operations shall be understood as those relating to tangible fixed assets and non-consumable biological assets, acquired in new condition and that come into operation or use by the end of the tax period that begins on or after 1 January 2014."

Paragraph 5 of the same article 4 further provides, inter alia, that:

"5 - For purposes of paragraph 1, investment expenses in assets susceptible to use in the personal sphere are excluded, being understood as such: (...)

c) Those incurred with the construction, acquisition, repair and expansion of any buildings, save when allocated to productive or administrative activities."

As is acknowledged by both Claimant and Respondent, and clearly results from the law, only investment expenses in tangible fixed or biological assets, allocated to business operations, are admissible for purposes of the tax benefit in question, thus excluding investments in so-called investment properties, which are those held "to obtain rents or for capital appreciation, or for both purposes," in the words of NCRF 11.

As seen, the Claimant contends that it does not conduct a typical activity of property administration or property leasing, and that the principal purpose of the activity carried out consists of the operation of shopping centres with the aim of obtaining rents and the provision, in connection therewith, of various services supporting commercial activity, in addition to possessing the administrative services centre in the shopping centre.

Now, it is immediately evident that, for the exception to the exclusion provided in subparagraph c) of paragraph 5 of article 4 of Law No. 49/2013 to apply, it is not sufficient that property held for the obtaining of rents and/or capital appreciation have partial allocation to provision of services or administrative activities.

For it to be sustainable that this occurs, it is necessary to demonstrate and establish that such administrative and/or productive activity corresponds to the principal purpose of the property where the investment was made.

It is precisely because the Claimant has this awareness that it contends that "a substantial part" of income derives from those services provided to commercial lessees, and not from "rents."

However, as already noted, it was not proved in the record that it is from the provision of such services that the principal part of income generated by the Claimant's activity derives, or, put differently, that the services, and not the real estate occupation, constitute the principal component of the remuneration that the Claimant obtains in its contracts with its clients.

Thus, and this factual premise of the position sustained by the Claimant failing, one cannot conclude other than by the verification of the requirements for exclusion provided in subparagraph c) of paragraph 5 of article 4 of Law No. 49/2013, and by the consequent lawfulness of the action of the Tax Authority.

The Claimant further argues that, denied the eligibility of the Claimant's investments for purposes of CFEI, one incurs in a practice of market distortion and benefits one company to the detriment of another, without the legislative instrument itself providing for any kind of preference for companies of greater or lesser size.

Regarding this question, it should be noted from the outset that granting the tax benefit sub iudice to the Claimant's investments in question, when it is not demonstrated that the principal income derived from those assets stems from services provided relating to their use, would, on the contrary, be a practice of market distortion, benefitting the Claimant in relation to other companies that make investments in property, essentially destined to obtain rents or capital appreciation, and that are not entitled to the benefit.

In this matter, the size of the company in question is irrelevant, since what is at issue is not, as the Claimant would have it, a reduction of the question to the manner in which the Claimant recorded the properties where it invested in its accounting, but the actual demonstration that the principal part of income generated by the properties in question derives from services provided to commercial lessees, and not from "rents."

Neither is it, equally and for the same reason, at issue, also contrary to what the Claimant contends, the attribution of a tax benefit based on subjective judgments by economic agents in determining whether an asset is an investment property or property occupied by the owner.

Regarding the last question posed by the Claimant, related to the complementary ground invoked by the AT concerning the non-eligibility of its investment in ..., it is rendered moot by the lack of merit of the Claimant's objection to the previously analysed ground, which, in itself, is apt to sustain the rejection of the administrative appeal against which the Claimant objects.

C. DECISION

Having considered all the foregoing, this Arbitral Tribunal decides to find the arbitral request unfounded and, consequently:

  1. To acquit the Respondent;

  2. To condemn the Claimant to pay the costs of the proceedings, in the amount set out below, taking into account amounts already paid.

D. Value of the Proceedings

The value of the proceedings is set at €185,116.69, pursuant to article 97-A, paragraph 1, subparagraph a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of the LRAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is set at €3,672.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, since the request was unfounded, pursuant to articles 12, paragraph 2, and 22, paragraph 4, both of the LRAT, and article 4, paragraph 4, of the cited Regulation.

Notify the parties accordingly.

Lisbon, 30 May 2018

The Arbitrator President

(José Pedro Carvalho)

The Arbitrator Member

(José Ramos Alexandre)

The Arbitrator Member

(Nina Aguiar)

[1] Available at www.dgsi.pt, as is the remaining cited case law without mention of source.

Frequently Asked Questions

Automatically Created

What is the Extraordinary Tax Credit for Investment (CFEI) under Portuguese tax law (Lei n.º 49/2013)?
The Extraordinary Fiscal Credit for Investment (CFEI) was a temporary tax incentive established by Law No. 49/2013 of 16 July 2013, designed to stimulate economic recovery during the financial crisis. Under Portuguese Corporate Income Tax (IRC) law, CFEI allowed companies to claim tax credits for qualifying investments made during specific periods. The credit was calculated as a percentage of eligible investment expenditures in tangible and intangible fixed assets used in business operations. However, the incentive excluded certain asset categories, particularly investment properties held primarily for rental income or capital appreciation rather than operational use. To qualify, investments had to meet specific criteria including classification as productive business assets directly employed in the company's core operational activities, proper accounting treatment, and compliance with State aid rules under EU law.
Can a company claim the CFEI investment tax credit in its IRC Model 22 periodic income declaration for 2013?
Yes, companies could claim CFEI in their IRC Model 22 periodic income declaration for 2013, provided they met the eligibility requirements under Law 49/2013. The credit was claimed in specific fields of the tax return: field 774 of Schedule 07 for general tax benefits and field 355 of Schedule 10 for investment-related credits. However, the Tax Authority retained discretion to verify whether claimed investments genuinely qualified under the legal criteria. If the AT determined that assets were investment properties under NCRF 11 accounting standards held primarily for rental income rather than operational use, the CFEI claim would be rejected. Taxpayers could challenge such rejections through the administrative appeal process (reclamação graciosa) and subsequently through CAAD arbitration if the gracious complaint was denied. The burden of proof rested on the taxpayer to demonstrate that investments constituted eligible operational assets rather than excluded investment properties.
What are the legal grounds for challenging an IRC self-assessment related to CFEI at CAAD arbitration?
The legal grounds for challenging IRC self-assessments related to CFEI at CAAD include procedural errors, incorrect legal interpretation, or misapplication of Law 49/2013 to the taxpayer's specific circumstances. Under Article 2 of the LRAT (Legal Regime for Arbitration in Tax Matters), taxpayers can request arbitration for disputes concerning the legality of tax acts, including self-assessments and administrative appeal decisions. Before accessing CAAD, taxpayers generally must exhaust the administrative appeal procedure (reclamação graciosa) pursuant to Articles 131-133 of the Tax Procedure Code (CPPT). The arbitration request must identify the contested acts, specify the factual and legal grounds, and quantify the disputed amount. Common challenges include: (1) whether investments qualify as operational assets versus investment properties; (2) correct application of NCRF accounting standards; (3) interpretation of 'principal purpose' tests for asset classification; (4) proper calculation of eligible investment amounts; and (5) compliance with temporal and formal requirements for claiming the credit.
How does the CAAD arbitral tribunal review the legality of tax authority decisions on investment tax credits?
The CAAD arbitral tribunal reviews tax authority decisions on investment tax credits by conducting a comprehensive legality assessment under Article 124 of the CPPT. The tribunal examines whether the Tax Authority correctly interpreted and applied the relevant legal provisions (Law 49/2013 for CFEI) to the established facts. The review encompasses both legal interpretation and factual determination. Regarding facts, the tribunal independently evaluates evidence presented by both parties, applying the standard of proof under Article 74 of the CPPT and Articles 596 and 607 of the Civil Procedure Code. The tribunal determines which facts are proved, not proved, or legally irrelevant based on documentary evidence, inspection reports, and party submissions. For legal questions, the tribunal interprets the statutory requirements de novo, without deference to the AT's interpretation. The burden of proof generally rests on the taxpayer to demonstrate entitlement to tax benefits under Article 74(1) of the CPPT. The tribunal must issue a reasoned decision within six months under Article 21 of the LRAT, addressing all substantive legal arguments and factual disputes raised by the parties.
What is the procedure for filing a gracious complaint (reclamação graciosa) before requesting CAAD tax arbitration on CFEI disputes?
Before requesting CAAD arbitration on CFEI disputes, taxpayers must generally file a reclamação graciosa (gracious complaint) with the Tax Authority under Articles 131-133 of the CPPT. This administrative appeal must be filed within 120 days of notification or knowledge of the contested tax act (self-assessment or external assessment). The complaint should identify the specific errors in the tax determination, present factual and legal arguments supporting the taxpayer's position, and request correction or annulment of the illegal amount. The taxpayer must attach supporting documentation, including investment records, accounting classifications, and evidence demonstrating compliance with CFEI requirements. The Tax Authority has four months to decide the complaint (extendable in complex cases). If the complaint is denied or deemed tacitly rejected after the statutory period, the taxpayer may then request CAAD arbitration within 90 days under Article 10 of the LRAT. However, Article 102(1)(b) of the CPPT allows direct challenge without prior gracious complaint in certain circumstances. The arbitration request must reference the prior administrative proceeding and attach the gracious complaint decision (or proof of tacit rejection) along with all relevant documentation establishing the taxpayer's entitlement to the disputed tax credit.