CAAD Decision 524/2018-T: IRC Non-Deductible Expenses for Sports Companies – Player Intermediation and Transfer Pricing

Arbitral Tax Jurisprudence

Process no. 524/2018-T

Decision Date: 2019-09-13

Tax: IRC

Value of Claim: € 267,879.70

Subject Matter: IRC – Non-deductible expenses – art. 23 CIRC. Sports Company. Intermediation services in player acquisitions. Acquisition of players' image rights. Transfer pricing – art. 63 CIRC. Reversal of amortization expenses.

ARBITRAL DECISION

The arbitrators designated to form the Arbitral Court, Dr. Alexandra Coelho Martins, arbitrator president designated by the Ethics Council of the Administrative Arbitration Centre (CAAD), Prof. Doctor Rui Duarte Morais designated by the Claimant, and Prof. Doctor Américo Brás Carlos, designated by the Respondent, hereby agree as follows:

I. REPORT

A..., hereinafter referred to as the Claimant, taxpayer no. ..., with registered office at ...–..., ..., ..., ..., ..., came to request the constitution of an Arbitral Court with the designation of an arbitrator, pursuant to the provisions of article 2, no. 1, letter a), article 6, no. 2, letter b) and article 10, no. 1, letter a) and no. 2, all of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters ("RJAT").

The Claimant submits a request for arbitral pronouncement of declaration of illegality and consequent partial annulment of assessment no. 2015..., of Income Tax on Corporate Entities ("IRC"), for the tax year 2011, including Municipal Surcharge and related compensatory interest, in the total amount of € 267,879.70, following the express dismissal of the hierarchical appeal lodged against the decision dismissing the administrative recourse presented against the aforementioned assessment act.

The Respondent is the Tax and Customs Authority, hereinafter referred to as "TA" or "Respondent".

The Claimant designated as Arbitrator Prof. Doctor Rui Duarte Morais, pursuant to the provisions of article 6, no. 2, letter b), of the RJAT.

On 23 October 2018, the request for constitution of the Arbitral Court was accepted by the President of CAAD and followed its normal processing, namely with notification to the TA, on 3 September 2018.

Pursuant to the provisions of letter b) of no. 2 of article 6 and no. 3 of the RJAT, and within the period provided in no. 1 of article 13 of the RJAT, the highest officer of the TA service designated as Arbitrator Prof. Doctor Américo Brás Carlos.

Following the request presented by the arbitrators designated by the parties for the arbitrator-president to be designated by the Ethics Council, the Dr. Alexandra Coelho Martins was designated in that capacity by order of 21 December 2018 of the President of the Ethics Council, pursuant to article 6, no. 2, letter b), second part of the RJAT.

All arbitrators communicated acceptance of the assignment, and the President of CAAD informed the parties of this designation on 9 January 2019, for the purposes of the provisions of article 11, no. 7 of the RJAT.

The Collective Arbitral Court was constituted on 29 January 2019.

The Claimant disagrees with the four corrections to taxable profit underlying the IRC assessment being challenged, namely:

(a) Expenses not accepted for tax purposes in payments to football entrepreneurs in the context of player recruitment, based on alleged dual representation, on the basis of article 23 of the IRC Code – correction of € 740,166.65 to taxable income;

(b) Reversal of amortization expenses relating to commitments incurred with player B... – correction of € 112,500.00 to taxable income;

(c) Expenses not accepted relating to the acquisition of image rights of C... ("C...") and D..., also based on article 23 – correction of € 625,000.00 to taxable income; and

(d) Imputation of interest in transactions with related entities, the Club, pursuant to article 63 of the IRC Code – correction of € 207,888.82 to taxable income.

According to the Claimant, the tax act is invalid due to the following cumulative illegalities on which it bases its request for the merits of this arbitral action to be upheld:

(a) Erroneous apprehension of facts and incorrect subsumption to applicable law;

(b) Partial uselessness of the dispute;

(c) Violation of res judicata (article 100 of the General Tax Law ("LGT") and articles 581 and 619 of the Code of Civil Procedure ("CPC");

(d) Violation of articles 23, 45, no. 1, letter c) and 63, all of the IRC Code;

(e) Violation of articles 35, 55, 74, 75 and 77 of the LGT;

(f) Violation of article 6 of the Supplementary Regime of Tax and Customs Inspection Procedure ("RCPIT") and of article 10 of the Code of Tax Procedure and Process ("CPPT");

(g) Illegality of Circulars nos. 15/2011 and 17/2011;

(h) Violation of articles 22 and 24 of Law no. 28/98, of 26 June.

In the request for arbitral pronouncement, the Claimant further formulates a subsidiary request for annulment of the assessment of compensatory interest in case of dismissal of the other requests. Five documents were attached and three witnesses were listed.

On 6 March 2018, the Respondent presented a Reply, in which it defended itself by impugnation, having attached the administrative file ("PA") on 7 March.

Regarding the expenses not accepted relating to player recruitment, the Respondent argues that the Claimant failed to prove that intermediation services in the recruitment of various players by sports agents were attributable to it, since these agents represented the players and not the Claimant.

Regarding the expenses disallowed relating to the acquisition of players' image rights, it argues that the Claimant did not prove the necessity of concluding a contract for the acquisition of these rights from the two players in question.

With regard to transactions with related entities, it considers that the conditions for applying the transfer pricing regime are met, and the method used by the TA to quantify the correction complied with the requirements imposed by the legislator, namely the identification of comparable operations practiced with non-related entities.

Regarding the matter of reversal of amortization of expenses, the Respondent considers that there is an omission in the accounting and tax reporting of this reversal by the Claimant. It further rejects the possibility of annulment of compensatory interest in the event that the arbitral request for partial annulment of the assessment is dismissed.

Finally, the Respondent states that the facts relevant to the decision are documentary proven in the proceedings, considering the examination of witnesses to be unnecessary. It concludes that the action is without merit and that the TA should be absolved from the request.

With a view to establishing the facts, a meeting as referred to in article 18 of the RJAT was held on 6 May 2019, in which witnesses E... and F... were heard and the third witness indicated by the Claimant was dispensed with. Also during the instruction of the case, the Court notified the Claimant to attach the following documents: i) contracts with sponsors; ii) accounting statements with the reversal of the amortization mentioned in articles 257 et seq. of the request for arbitral pronouncement ("ppa"); and iii) order of the Deputy Director General of Taxes regarding VAT. The Parties were notified to present successive written submissions and a date was set for the pronouncement of the arbitral decision.

On 21 May 2019, the Claimant attached the sponsorship contracts and the fixed asset record relating to player B...'s transfer and chose not to present submissions.

By order of 14 June 2019, in view of the complexity of the issues, the period for pronouncement of the Arbitral Decision was extended by two months.

The Respondent presented final submissions on 25 June 2019, in which it considered that the testimony given was vague and generic, reiterating its initial position.

II. CASE MANAGEMENT

The Court was regularly constituted and is competent, ratione materiae, to hear the IRC assessment acts and related compensatory interest in dispute and, reflexively, the acts of second/third instance that confirmed them, in light of the provisions of articles 2, no. 1, letter a), 5, no. 3, letter a), 6, no. 2, letter a) and 11, no. 1, all of the RJAT.

The parties have legal personality and capacity, have standing and are regularly represented (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March).

The request for arbitral pronouncement is timely, because presented within the period provided in article 10, no. 1, letter a) of the RJAT.

No procedural nullities or preliminary issues were identified that prevent the merits from being heard.

III. FACTUAL BASIS

1. PROVEN FACTS

A. The Claimant is a sports corporation that brings together the professional football activity of G... and is governed by the special legal regime established in Decree-Law no. 67/97, of 3 April, as amended by Law no. 107/97, of 16 September, being registered for the exercise of "Activity of sports clubs", CAE 093120 – cf. Tax Inspection Report contained in the PA.

B. In the course of its activity, the Claimant proceeds to define the profile and characteristics of football players it needs to achieve its intended sporting objectives. However, the Claimant does not have internal scouting resources, prospection and concrete identification of players fitting that profile, in particular in the international market, as it would be excessively costly to have scouts spread throughout the world – cf. testimony of the two witnesses heard.

C. Thus, to access players with a good quality/price ratio, with the desired characteristics, the Claimant normally contracts intermediation services from specialized companies/professional agents (football agents) whose activity consists of active search, identification and prospection of players ("scouting") operating in certain geographical areas – cf. testimony of the two witnesses heard.

D. This procedure involves surveying various companies/agents with which the profiles and characteristics of the desired players are shared, with contacts generally being made by the Club president – cf. testimony of the two witnesses heard.

E. However, the conclusion of an intermediation contract with these companies/agents and the payment of their respective commissions only occurs if a player is actually contracted. The intermediation contract or "Agreement" is concluded only with the company/agent that identified the player who will be hired and that intermediated the transaction – cf. testimony of the two witnesses heard.

F. It is common practice, especially in the case of foreign players, who only come to Portugal when there is already an agreement for their recruitment (with the Claimant's previous contacts with the agent generally being made by telephone) that both the employment contract with the player and the intermediation contract with the company/agent are simultaneously formalized in writing when the player travels to Portugal, without prejudice to the verbal intermediation agreement being prior – cf. testimony of the two witnesses heard.

G. When the Claimant contracts the services of agents, it is unaware of whether these agents also represent, perhaps, the players – cf. testimony of the two witnesses heard.

H. It was in these terms that the companies mentioned in Column 2 of the following table intervened as agents of the Claimant, to which it made payments for intermediation in the recruitment of the players listed in Column 1, whose entrepreneurs, in turn, are referenced in Column 3, whenever applicable – cf. TIR:

I. The Claimant's sponsors wish to use the most high-profile football players in promotional campaigns for their products and services, with it being normally included a clause in sponsorship contracts that requires the Claimant to make some of its players available for such campaigns – cf. testimony of the two witnesses heard and copy of three sponsorship contracts attached by the Claimant.

J. The acquisition of players' image rights with the consequent availability of these players for promotional campaigns for sponsor products constitutes an added value in sponsorship negotiations, due to the interest sponsors have in being able to use the most high-profile players in promotional campaigns for their products – cf. testimony of the two witnesses heard and copy of three sponsorship contracts.

K. Sponsors contribute in a very significant way (approximately 40%) to the Claimant's ordinary income – cf. Report and accounts of the Claimant and fact not disputed by the Respondent.

L. The Claimant considered that football players C... and D..., who were part of its squad, due to their professional curriculum (international players for the main teams of Brazil and Portugal, respectively) would be a fundamental asset for marketing events, maintenance and acquisition of sponsors, so, in addition to their recruitment, it acquired their image rights for the period they were contracted – cf. testimony of the two witnesses heard and image rights transfer contracts contained in the TIR.

M. The acquisition of image rights was also carried out by the Claimant with the aim of preventing the image of these players (the most high-profile) from being associated with brands competing with the Claimant's sponsors, or preventing them from participating in marketing campaigns for the sponsors' products, which could harm the maintenance and obtaining of sponsorships – cf. testimony of the two witnesses heard.

N. Thus, on 6 September 2010, the Claimant concluded, as transferee, an "Image Exploitation Rights Transfer Contract for a Professional Football Player" relating to player D... with the company XX... which held these rights – cf. TIR.

O. In this "Image Exploitation Rights Transfer Contract for a Professional Football Player", player D... signs both for himself and in representation of the aforementioned company, of which he is a partner-manager – cf. TIR.

P. As consideration for this contract, the Claimant committed to paying to company XX... the sum of € 600,000.00, divided into three seasons – cf. TIR.

Q. On 21 June 2011, the Claimant concluded, as transferee, an "Image Exploitation Rights Transfer Contract for a Professional Football Player" relating to player C... with the Brazilian company: YY..., Ltd. – the entity that held these rights – cf. TIR.

R. In this "Image Exploitation Rights Transfer Contract for a Professional Football Player", player C... signs both for himself and in representation of the aforementioned Brazilian company – cf. TIR.

S. As consideration for this contract, the Claimant committed to paying to the Brazilian company the sum of € 1,055,000.00, divided into four seasons – cf. TIR.

T. The acquisition of image rights of D... and C... was intended to promote the Club and the sponsors through the image of these players – cf. testimony of the two witnesses heard and copy of three sponsorship contracts attached by the Claimant.

U. The players in question – D... and C... – actually participated in promotional campaigns for sponsors and in autograph sessions – cf. testimony of the two witnesses heard.

V. The Claimant incurred, as an expense of the period [tax year 2011], in the amount of € 625,000.00, relating to the acquisition of image rights of football players D... and C... – cf. TIR (€ 200,000.00 and € 425,000, respectively).

W. The Claimant concluded, on 12 April 2010, with the company ZZ..., S.A., an Agreement for management and monetization of the sporting and economic rights of player B..., which provided for the payment of € 450,000.00, having, already in the tax year 2010, amortized one quarter (¼) of that amount (€ 112,500.00), which it considered as an expense of that period, with the contract being valid for four seasons – cf. TIR and testimony of the first witness.

X. This Agreement was revoked by mutual agreement on 20 October 2011, with the parties considering, by express provision, that the contract never produced any effects and that nothing was owed within its scope – cf. TIR and testimony of the first witness.

Y. In the tax year 2011, the Claimant did not recognize/account in income accounts of class #7 the reversal of the amount € 112,500.00, which had been considered as an expense in 2010, omitting the accounting and consequent tax reporting of the reversal of the amortization – cf. TIR.

Z. G... ("Club") holds a 36% interest in the capital of the Claimant – cf. TIR.

AA. The Claimant grants financial support to the Club through unremunerated loans, recorded as such [loans], having waived charging interest – cf. TIR.

BB. The Claimant was subject to a tax inspection action, titled Service Order OI2015..., of general scope, covering IRC for the special tax period of 2011 – cf. TIR.

CC. As a result of this inspection, the TA made corrections to the Claimant's taxable profit for IRC in the amount of € 1,685,555.47, with the grounds stated in the Tax Inspection Report – TIR – which was notified to the Claimant and is transcribed in the relevant parts:

"III.1.1. REPRESENTATION IN NAME OF PLAYER

[…]

From the documentary analysis carried out, it was found that the recording of values in intangible assets, relating to intermediation / representation services, is supported by the following documents:

a) "Agreements" concluded between A... and the agent / company of the agent, whereby the SP undertakes to pay to the latter if the player signs / renews contract with A...

b) Sports employment contracts concluded between A... and each player, having been stated, or having been verified, that the agent's participation was made in name and in representation of the player.

In the sports employment contracts concluded with the players who signed the contract, it was confirmed by the various entities that signed the contract that the agent acted in representation of the player and not of A...

Thus, from the "agreements" it results that A... accepts to bear the costs of intermediation / representation made in name of the players.

Now, for a cost to constitute an expense, it must necessarily correspond to the consumption of a good / service in the sphere of that entity.

Therefore, not having consumption of the service occurred in representation of A..., these costs cannot be considered as tax expenses of the SP, pursuant to no. 1 of article 23 of the IRC Code.

Regarding the represented entity

The (new) FIFA Regulations relating to Player Agents, approved by FIFA's Executive Committee on 29-10-2007 and coming into force on 01-01-2008, establish that agent remuneration be made exclusively by its client.

Note that the Regulations of Agents, in no. 8 of its article 19, still with the intent to prevent conflicts of interest, imposes the prohibition of "dual representation" and determines that an agent of players may only represent or manage the interests of one of the parties involved in the transaction.

But it is not only FIFA Regulations that impose such provision.

The Legal Regime of the Sports Employment Contract and the Sports Training Contract (RJCTD), published with Law no. 28 /98, of 26 June, provides in no. 2 of article 22 that "the person exercising the activity of sports entrepreneur can only act in name and on behalf of one of the parties to the contractual relationship".

Consequently, pursuant to no. 1 of article 24 of the RJCTD, "they can only be remunerated by the party they represent".

This anomalous situation, of the club / SAD remunerate the player's agent, is somewhat common, which AAA... has warned about: "(...) the ambiguities and indefinitions that frequently surround the activity of entrepreneurs/intermediaries are reflected, not only in the fact that these may perform functions for the benefit of either party, but also in the fact, clearly anomalous, of such entrepreneurs, even when they provide their services to the practitioner, are sometimes remunerated by the club(!) or even see their remuneration divided (or multiplied) by both intervening parties (...)".

The framing of the activity of sports entrepreneurs in the conclusion of contracts for transfer, acquisition and renewal of players' sporting rights was clarified with the publication of Circular no. 15/2011 of the DGCI. The key question for accepting the cost in the sphere of A... would be to know which party the agent represented and which it considered essential to include in the transaction.

This question was thoroughly answered by the SP when concluding contracts with each player where it was expressly stated, by all parties, that the agent represented the player. In other cases, where the representation in name of the player was not contractually expressed, it was proven by other documents that the agent/representative actually represented the player.

Regarding the legal-tax framing of this cost, letter c) of no. 1 of article 45 of the IRC Code provides that "costs that fall on third parties which the company is not legally authorized to bear" are not deductible for determining taxable profit.

Corresponding the costs in question to the remuneration of the sports entrepreneur while representing the player in the transaction, these costs constitute a cost of the player and not of A...

Thus, it could only come to constitute a cost of A... if it had been legally provided for, namely in a contract signed with the player, that it would fall to the SP to bear the cost due with the representation of the player, i.e., the cession of the player's debt to A...

In this case also, it could not fail to be considered as income to be taxed in the sphere of the player, subject to withholding at source to be carried out by the employer entity, which, according to the SP's accounting records, did not happen.

Conclusion

The agents represented the players and not A..., therefore it was the players who imposed their presence in the transaction.

Not having the service been provided in representation of A..., it does not correspond to the consumption of a service in the sphere of the SP, thus not constituting a provably essential cost for the realization of income or for the maintenance of the income-generating source, pursuant to no. 1 of article 23 of the IRC Code.

On the other hand, having the agent acted in representation of the player, both Portuguese law and FIFA regulations impose that it can only be remunerated by the player, therefore, pursuant to letter c) of no. 1 of article 45 of the IRC Code, this cost would not be deductible for determining taxable profit.

III.1.1.1. Amortization expenses in the recruitment of H....

In the tax period of 2011, SP A... recorded as an expense the amount of 25,000.00 EUR, relating to the amortization of 50% of the costs related to intermediation in the recruitment of player H...[…].

On 10-03-2010, A... signed with I..., agent no. 2, licensed by the Portuguese Football Federation, partner-manager of CCC..., Ltd. […], an "Agreement".

In the preamble of this "Agreement", A... "acknowledges that the AGENT intermediated the recruitment of player H..., which resulted in the effective signature of a professional sports employment contract (…)".

Pursuant to clause one of the same "Agreement" "the agent presents itself as creditor of the SAD for the intermediation carried out by it in the conclusion of the sports contract above mentioned".

According to clause two of the same "Agreement" "The amount referred to in the preceding clause is € 50,000.00 (fifty thousand euros), plus VAT, in accordance with the law (…)".

On the same date, 10-03-2010, A... concluded with player H..., (second party), a new "Sports Employment Contract", starting on 01-07-2010 and ending on 30-06-2012.

According to clause thirteen of the same, the "contract was concluded with the intervention of I..., Agent no. ..., Licensed by the Portuguese Football Federation, in representation of the second party".

Pursuant to no. 2 of article 22 of Law no. 28/98: "The person exercising the activity of sports entrepreneur can only act in name and on behalf of one of the parties to the contractual relationship."

It results from the "Agreement" that A... accepts to bear the costs of representation / intermediation carried out in name of the player. Now, for a cost to constitute an expense, that must correspond to the consumption of a good / service in the sphere of the entity.

The service was not provided in representation of A..., therefore it cannot be accepted as a tax expense of A..., pursuant to no. 1 of article 23 of the IRC Code.

On the other hand, even if it were not so, having the agent acted in representation of the player, both Portuguese law and FIFA regulations impose that it can only be remunerated by the player, therefore, pursuant to letter c) of article 45 of the IRC Code, that cost would not be tax-deductible for the purpose of determining taxable profit.

Thus, it is concluded that the amortization of that expense cannot be accepted as a tax expense, and it should be added to box 07 of the tax return form 22 of IRC, for the purpose of determining taxable profit, the amount of 25,000.00 EUR.

III.1.1.2. Amortization expenses in the recruitment of "C... "

In the tax period of 2011, SP A... recorded as an expense the total amount of 53,742.47 EUR, relating to the amortization of rights relating to player C..., (also known as C...) […].

Of that total amount, the amount of 6,250.00 EUR corresponds to the amortization of 15% of ¼ of the costs of intermediation, in the total amount of 100,000.00 EUR, relating to the acquisition of the financial and sporting rights of the player.

The amount in question was recorded as a provision of intermediation services in the acquisition of the player's sporting registration rights, according to "Agreement" signed on 24-07-2008, between A... and J..., Attorneys Associated.

From the document in question it appears that: "The first party undertakes to pay to the second party the amount of 100,000.00 Euros (...), for its intervention in the acquisition of the sporting registration rights of player C... ."

The sporting and financial rights of player C... were acquired by A... from S..., according to "Contract for transfer of sporting rights" signed on 24-07-2008. This contract makes no reference to the intervention of any agent.

No. 1 of article 28 of the FIFA Regulations relating to Player Agents, which came into force on 01-01-2008, stipulates the requirement that, in any contract in which the agent intervenes in representation of the club's interests, that agent must be identified as such.

On the same date, A... concluded with player C... a "Sports employment contract". In clause eleven it states that: "The parties declare that this contract was concluded without the intervention of player agents."

According to the report of the tax inspection, which concluded on the tax inspection action authorized by Service Order no. OI 2012...:

"On the other hand, it was possible to detect references on a website that Mr. K... acts as entrepreneur of the player: "C... did good work in ... during the Portuguese championship, and this awakened the interest of other clubs", said K..., entrepreneur of the player, who heads to Portugal and will accompany the player in the presentation to the new team", (see full news at http://... […]".

By searching the Internet, we find many other news items of the same date, in which the name of K... is referred to as entrepreneur, agent, representative or "manager" of the player:

[…]

In light of the documents described and the indication that attorney K..., representative of J..., Attorneys Associated, would have represented the player and not A..., it resulted, from the comparison between the factual situation described and letter a) of no. 2 of article 75 of the LGT, in the removal of the presumption of accounting veracity of the costs recorded as relating to a service provided in representation of the SP.

Thus, in the context of the inspection procedure for the tax year 2008, the SP was notified to "prove, in writing, the necessity of the costs borne in the amount of € 100,000.00, with the contract concluded with J..., Attorneys Associated, dated 24/07/2008, for the realization of profit or gains subject to tax or for the maintenance of the income-generating source".

In response to that notification, the SP alleged that "A... in the expectation of achieving a high gain with the transfer of the rights held over player C..., contracted with J... Attorneys to better achieve its objectives" and that "The negotiations were always conducted from Brazil by this company which, only does not appear mentioned in the employment contract of the athlete in question since its action was in the intermediation between A... and S... ."

In subsequent inspection proceedings, in response to identical notifications, A... maintained the same response. It did not present any documents / elements that could prove that the "agent" was representing A... and/or that would rule out the agent's involvement with the player.

The "agreement" with entity J... Attorneys Associated, which A... presents, was concluded on the same date as it concluded the "Sports employment contract" with the player.

Given the same date of conclusion of both contracts, it cannot be concluded that they would allow a temporal margin for negotiation between entities that were not already bound to each other.

In this context, the provision of a service to A... and its necessity is in question.

Having been rebutted the presumption of veracity which the accounting and the agreement presented could enjoy, it would be incumbent on the SP to prove that such cost constituted operations actually carried out for the benefit of A... and that this was essential for the realization of its income, which did not occur.

It is therefore concluded that non-acceptance as a tax expense, and for the purpose of determining taxable profit, it should be added the amount of 6,250.00 EUR.

III.1.1.3. Amortization expenses in the recruitment of L...

In the tax period of 2011, SP A... recorded as an expense the total amount of 44,375.00 EUR, relating to the amortization of 16.6(6)% of the costs related to the recruitment of player L...[…].

On 12-12-2008, the SP concluded, with entity M..., Ltd. […], represented by its sole manager N..., an "Agreement" by which it undertakes to pay that entity the amount of 35,000.00 EUR.

On 05-01-2009, the SP concluded, with football player L..., a sports employment contract, whereby the player undertakes to exercise his professional football activity for the benefit of the SP, valid from 01-01-2009 to 30-06-2014.

Pursuant to clause thirteen of this contract, the same "was concluded with the intervention of N..., Agent Licensed by the Portuguese Football Federation, with license no. ..., in representation of the Player".

It is therefore concluded that the service provided by M..., Ltd., by the person of its sole manager N..., was not provided in representation of A...

In fact, according to the contract signed by the player, that agent acted "in representation of the player", therefore that expense of 35,000.00 EUR cannot be accepted as a tax expense of A..., pursuant to no. 1 of article 23 of the IRC Code.

On the other hand, even if it were not so, having the agent acted in representation of the player, both Portuguese law and FIFA regulations impose that it can only be remunerated by the player, therefore, pursuant to letter c) of article 45 of the IRC Code, that cost would not be tax-deductible for the purpose of determining taxable profit.

Thus, it is concluded that the amortization of that expense cannot be accepted as a tax expense, and it should be added to box 07 of the tax return form 22, for the purpose of determining taxable profit.

Having in mind that, according to "Agreement for transfer of financial rights", concluded on 15-12-2008, with ZZ..., S.A., the SP transferred to that entity 50% of the financial rights of the player,

The value corresponding to the amortization of the amount of 50% of the value of 35,000.00 EUR, deducted from the amount of 10,000.00 EUR relating to the participation of DDD..., is calculated as follows:

50% x (35,000.00 - 10,000.00) x 16.6(6)% = 2,083.33 EUR

III.1.1.4. Expense in the conclusion of recruitment of O...

In the tax period of 2011, SP A... recorded as an expense the total amount of 138,666.66 EUR, relating to the amortization of costs related to the recruitment of player O... […].

Of the total amount recorded as an expense, the amount of 66,666.66 EUR stands out, relating to alleged costs of intermediation in the acquisition of the economic rights of the player.

On 08-06-2009, A... signed with P..., S.A., with registered office in Venezuela and O..., football player, an "Agreement for Sharing Economic Rights".

In the preamble of that "Agreement", under letter A), it states that: "The Player above identified is, in accordance with FIFA laws and regulations, a free player (…)".

Letter E) of the preamble states that: "The second party, (…), discovered the Player and intermediated its transfer to the first party which, as consideration grants to it, under this Agreement, part of the economic rights it holds over the Player."

As stated in the report resulting from the action of inspection authorized by Service Order no. OI 2012..., a power of attorney issued by R... was used. "This power of attorney shows that agent Mr. R... acts on behalf of P... and that a power of attorney is granted to Q... to act on behalf of P... . […]

On that date, 18-06-2009, A... concluded with football player O..., of Venezuelan nationality, a "Sports Employment Contract".

In clause twelve of said contract it was expressly stated that it was "concluded with the intervention of R..., Agent no. ..., Licensed by the Royal Spanish Football Federation, in representation of the second party", i.e., in representation of the player.

The FIFA Regulations relating to Player Agents establish, in no. 1 of its article 28, that in any contract in which an agent intervenes in representation of the club's interests, this fact must be specified in the respective transfer or employment contract.

And, pursuant to no. 2 of article 22 of Law no. 28/98: "The person exercising the activity of sports entrepreneur can only act in name and on behalf of one of the parties to the contractual relationship."

Having Mr. R... been confirmed by A... and the player as the sole player agent that intervened in this transaction and knowing that he is founder and representative of entity P..., as well as that a power of attorney was granted to Mr. Q... to act in representation of P..., then, we must conclude that the intervention of P... in this process is indistinguishable from the representation of the player's agent, Mr. R...

Thus, in the agreement in question, A... accepts to bear the cost of intermediation/representation carried out in name of the player. Now, for a cost to constitute an expense, it must necessarily correspond to the consumption of a good/service in the sphere of an entity.

Consequently, not having consumption of the service occurred in representation of A..., this cost, in the amount of 200,000.00 EUR, cannot be considered.

In consequence, pursuant to no. 1 of article 23 of the IRC Code, the amount of 66,666.00 EUR, recorded in the account "68.73 – Other costs and losses, In non-financial investments, Disposals", cannot be accepted as a tax expense.

III.1.1.5. Amortization expenses in the recruitment of T...

The taxpayer recorded as an expense of the period the amount of 37,500.00 EUR, relating to the amortization of 25% of costs related to the recruitment of player T...[…].

On 21-05-2010, A... concluded an "Agreement" with U..., Ltd. […], represented by its director V....

Pursuant to that "Agreement", A... intended "to recruit player T..., for the Seasons 2010/2011, 2011/2012, 2012/2013 and 2013/2014, and for this purpose it resorted to the services provided by the second party." and "For the services provided by the second party, for its intervention in the acquisition of player T..., the first party will have to pay the amount of 150,000.00€ (...)".

According to "Articles of association" signed on 13-09-2010, which appears on the Ministry of Justice portal, the partners of U..., Ltd., are V... and W....

On the same date, 21-05-2010, A... concluded with player T..., of Nigerian nationality, a "Sports employment contract".

Pursuant to clause thirteen of the same, the "contract was concluded with the intervention of (...)W..., Agent licensed by Canada CSA, with License no. ..., in representation of the second party".

In the sports employment contract concluded between the player and A... it was confirmed by the various intervening entities – player, A... and agent - that agent W... acted in representation of the player, and not of A...

Furthermore, it was found that agent W... is a partner of company U..., Ltd., with which V... appears to charge for the services described above, therefore we must conclude that the company's intervention in this process is indistinguishable from the representation of the player's agent.

It results from the "Agreement" combined with the "Sports employment contract" that A... accepts to bear the costs of representation / intermediation carried out in name of the player. Now, for a cost to constitute an expense, that must correspond to the consumption of a good / service in the sphere of the entity.

Pursuant to no. 2 of article 22 of Law no. 28 /98: "The person exercising the activity of sports entrepreneur can only act in name and on behalf of one of the parties to the contractual relationship."

The service was not provided in representation of A..., therefore it cannot be accepted as a tax expense of A..., pursuant to no. 1 of article 23 of the IRC Code.

On the other hand, even if it were not so, having the agent acted in representation of the player, both Portuguese law and FIFA regulations impose that it can only be remunerated by the player, therefore, pursuant to letter c) of article 45 of the IRC Code, that cost would not be tax-deductible for the purpose of determining taxable profit.

Thus, it is concluded that the amortization of that expense cannot be accepted as a tax expense, and it should be added to box 07 of the tax return form 22, for the purpose of determining taxable profit, the amount of 37,500.00 EUR.

III.1.1.6. Amortization expenses in the recruitment of EEE...

The taxpayer recorded as an expense of the period the amount of 143,333.33 EUR, relating to the amortization of 33.3(3)% of costs, in the amount of 430,000.00 EUR, related to the recruitment of player EEE... […].

Of the total amount referred to in the preceding paragraph, 380,000 EUR are due for the signature of the "Agreement for transfer of financial rights", signed on 01-07-2010, with FFF..., with registered office in Brazil, relating to the acquisition of 60% of the financial rights of the player.

The remaining amount of 50,000 EUR is referred to in the "Agreement" concluded on the same date between the SP and entity X..., Unipersonal, A...

SAD intended to recruit the player, "and for this purpose it resorted to the services provided by the second party".

By clause one of said "Agreement", A... "undertakes to pay to the second party the amount of 50,000.00 Euros".

On the same date, 01-07-2010, the SP concluded with the player a "Sports employment contract".

Pursuant to clause thirteen, the "contract was concluded with the intervention of Z..., Agent no. ..., Licensed by the Brazilian Football Federation, in representation of the second party", i.e., in representation of the player.

In the sports employment contract concluded between A... and the player it was confirmed by the various intervening entities, player, A... and agent, that the agent acted in representation of the player and not of A....

As stated in the inspection report of the action authorized by Service Order no. OI 2012..., pursuant to the power of attorney called "Particular Instrument of Power of Attorney", issued by Z..., football player agent, where he "appoints and nominates Mr. Y...(...) as his sufficient attorney, to whom he grants powers, exclusively, for the special purpose of representing him before A... for any matters and negotiations relating to player EEE..., and may conclude the necessary instruments between the grantor and A...", "it was found that the FIFA AGENT established a power of attorney for X... to the effect that this represents the FIFA AGENT in negotiations between the player and A..., with powers to conclude all necessary contracts."

Thus, A... accepted to bear the costs of intermediation / representation carried out in name of the player, provided through the services provided by X..., in the total amount of 50,000.00 EUR.

Now, for a cost to constitute an expense, it must necessarily correspond to the consumption of a good/service in the sphere of an entity.

In this context, X... represented the player and not A..., therefore it was the player who imposed his presence in the negotiations.

Consequently, not having the service been provided in representation of A..., it does not correspond to the consumption of a service in the sphere of this one, thus not constituting a provably essential cost for the realization of income subject to tax or for the maintenance of the income-generating source, pursuant to no. 1 of article 23 of the IRC Code.

On the other hand, having the "agent" acted in representation of the player, both Portuguese law and FIFA regulations impose that this can only be remunerated by the player, therefore, pursuant to letter c) of no. 1 of article 45º of CIRC, this cost also could not be deductible for the purpose of determining taxable profit.

In conclusion, it is concluded that it is not accepted as a tax expense, and it should be added, for the purpose of determining taxable profit, pursuant to no. 1 of article 23 of the IRC Code and letter c) of no. 1 of article 45 of the IRC Code, the amount of 16,666.66 EUR.

III.1.1.7. Expenses in the recruitment of PP...

In the tax period of 2011, SP A... recorded as an expense the amount of 25,000.00 EUR, relating to intermediation/representation services, relating to the recruitment of player PP...[…].

On 21-06-2010, a "Contract for definitive transfer of sporting registration rights of a professional football player" was concluded between QQ... and the SP. Pursuant to that contract, QQ... transferred to A..., for the amount of 750,000.00 EUR, all the sporting rights of player PP....

In this contract for transfer of the sporting rights of player PP..., no reference is made to the intermediation of any player agent, in representation of either party, whether the transferor, the transferee or the player.

From the documentary analysis carried out in the context of the inspection action authorized by Service Order no. OI 2012..., the final report of which was duly notified to the SP, it appears that the provision of service by BB......, Ltd., is supported in an "Agreement" concluded on 22-06-2010 between the SP and that entity, represented by CC....

In clause one of said Agreement, it was declared that "The first party undertakes to pay to the second party the total amount of 50,000.00€, 00 Euros (fifty thousand euros), for its intervention in the acquisition, on a definitive basis, of the sporting registration rights of player PP... ".

On the same date, 22-06-2010, A... concluded with player PP... a sports employment contract.

In clause thirteen of that contract it states that: "This contract was concluded with the intervention of DD..., Agent no. ..., Licensed by the English Football Federation, in representation of the second party", i.e., in representation of the player.

In the sports employment contract concluded between A..., the player and agent DD..., it was confirmed by the various intervening entities that the agent acted in representation of the player and not of A...

Upon consultation of the website of entity BB..., Ltd., on the Internet, it is found that DD... appears as founder and president of that entity, and that CC... appears as head of office in Portugal.

From the comparison between the factual situation described and the applicable legislation, cfr. letter a) of no. 2 of article 75 of the LGT, the removal of the presumption of good faith resulted in the fact that the costs recorded are corresponding to costs provably essential for the realization of the income of the SP.

Thus, in the context of the inspection action authorized by Service Order no. OI 2012..., the SP was notified in the following terms and for the following purposes:

"Considering that: - The sports employment contract concluded with player PP... identifies in clause Thirteen the FIFA agent DD... as representative of the player; - It was, through a contract concluded with BB..., Ltd, represented by Mr. CC..., agreed to pay the amount of € 25,000.00 for the intermediation provided in the recruitment of the player, with no FIFA agent being mentioned in this intermediation; - In the contract for transfer of the player from QQ..., no participation of any FIFA agent was identified in the transaction; - By searching the Internet it was possible to identify a page belonging to BB..., where it is described that the FIFA agent DD... is a founding member of the company and its director; - Mr. CC... is a Football Consultant and responsible for Portugal by the company. – Please identify if there was another FIFA agent who intermediated the transaction and pursuant to no. 1 of article 23º of the Code on Income of Corporate Entities (CIRC), prove in writing the necessity of the costs borne for the realization of profit or gains subject to tax or for the maintenance of an income-generating source, in the amount of € 25,000.00, recorded in the accounts under account 62201 - "Specialized work" charged and as such considered cost, (…)".

In response to said notification, A... answered: "The sports agents with intervention in the recruitment of the player are those mentioned in the documents already in the possession of the TA" and "In this case, A... knew of the existence of a strong proximity between that company and the player". It presented no other elements that documented the services provided.

For a cost to constitute an expense, it must necessarily correspond to the consumption of a good/service in the sphere of an entity. Consequently, not having consumption of the service occurred in representation of A..., this cost cannot be considered as an expense of A..., pursuant to no. 1 of article 23 of the IRC code.

Considering the elements provided by A... and the information collected from the website of the company, we note that the agent and the company had "strong proximity" with the player because they represented him, and not A... The agent represented the player and not A..., therefore it was the player who imposed his presence in the negotiations.

Consequently, not having the service been provided in representation of A..., it does not correspond to the consumption of a service in the sphere of this company, thus not constituting a provably essential cost for the realization of income subject to tax or for the maintenance of the income-generating source, pursuant to no. 1 of article 23 of the IRC code.

On the other hand, having the agent represented the player, both Law no. 28/98, of 26 June, and FIFA Regulations impose that this can only be remunerated by the player, therefore, pursuant to letter c) of no. 1 of article 45º of CIRC, this cost could not be deductible for the purpose of determining taxable profit.

Thus, it is concluded by its non-acceptance, as a tax expense, and it should be added, for the purpose of determining taxable profit, the total amount of 25,000.00 EUR, pursuant to no. 1 of article 23 and letter c), no. 1, of article 45º of the IRC Code.

III.1.1.8. Expenses in the recruitment of EE...

In the tax period of 2011, A... recorded as an expense the amount of 15,000.00 EUR, relating to "intermediation costs" related to the recruitment of player EE... . […].

On 18-06-2010, A... (first party) signed with FF..., S.A. […], (second party), represented by its administrator GG..., an "Agreement".

In the preamble of said "Agreement" it states that: "the first party intends to recruit, definitively, player EE..., and for this purpose resorted to the services provided by the second party."

According to clause one of the "Agreement": "The first party undertakes to pay to the second party the total amount of 60,000.00€, 00 Euros (sixty thousand euros), for its intervention in the acquisition, definitively, of the sporting registration rights of player EE... ."

On 17-06-2010, A... concluded with GGG..., SAD […], a "Contract for Definitive Transfer of Sporting Registration Rights of Professional Football Player".

Pursuant to the contract, GGG..., SAD: "definitely transfers to the Second Party [A...], free of any encumbrances or charges, the sporting registration rights (i.e. "Federal Rights") of player EE..., effective as of the present date, (…)".

Pursuant to clause five: "This contract is subject to the condition that the player concludes with the Second Party his respective sports employment contract, in accordance with the regulatory requirements required for that purpose."

On the same date, 18-06-2010, A... concluded with football player EE... (here second party), of Senegalese nationality, a "Sports Employment Contract", for three seasons starting on 01-07-2010 and ending on 30-06-2014.

Pursuant to clause thirteen: "This contract was concluded with the intervention of GG..., Agent no. ..., Licensed by the Portuguese Football Federation, in representation of the second party."

In the sports employment contract concluded between A... and the player it was confirmed by the various intervening entities, A..., player and agent, that the agent acted in representation of the player, and not of A...

In this context, the agent represented the player and not A..., therefore it was the player who imposed his presence in the negotiations.

For a cost to constitute an expense, it must undoubtedly correspond to the consumption of a good or service in the sphere of an entity.

Not having consumption of the service occurred in representation of A..., this cost, in the amount of 15,000.00 EUR, cannot be considered as an expense of the SP, pursuant to no. 1 of article 23º of the IRC Code.

Having the "agent" acted in representation of the player, both Portuguese law and FIFA regulations impose that this can only be remunerated by the player, therefore, pursuant to letter c) of no. 1 of article 45º of CIRC, this cost could not be deductible for the purpose of determining taxable profit.

Thus, it is concluded by its non-acceptance as a tax expense, pursuant to no. 1 of article 23 of the IRC Code and letter c), no. 1, of article 45º of the IRC Code, and it should be added, for the purpose of determining taxable profit, the amount of 15,000.00 EUR.

III.1.1.9. Amortization expenses in the recruitment of B...

The taxpayer recorded as an expense of the period the amount of 37,500.00 EUR, relating to the amortization of 12.5% of costs related to the recruitment of player B... […].

On 12-04-2010, A... (first party) concluded an "Agreement" with HH..., of Spanish nationality, agent licensed by the Royal Spanish Football Federation, with license no. ..., (second party).

Pursuant to that "Agreement", HH...: "represents the Player and intermediated his transfer to the first party".

As consideration for the signature of said "Agreement", the SP committed itself to pay to HH... the amount of 300,000.00 EUR, in two seasons.

As stated in the "Agreement" itself, the agent "represents the player", i.e., the agent acted in representation of the player and not of A...

On the same date, 12-04-2010, A... concluded with player B..., of Spanish nationality, (second party), a "SPORTS EMPLOYMENT CONTRACT".

Pursuant to clause thirteen of the same, the "contract was concluded with the intervention of ... HH..., Agent Licensed by the Royal Spanish Football Federation, with License no. ..., in representation of the second party".

Pursuant to no. 2 of article 22 of Law no. 28/98: "The person exercising the activity of sports entrepreneur can only act in name and on behalf of one of the parties to the contractual relationship."

It results from the "Agreement" that A... accepts to bear the costs of representation / intermediation carried out in name of the player. Now, for a cost to constitute an expense, that must correspond to the consumption of a good / service in the sphere of the entity.

The service was not provided in representation of A..., therefore it cannot be accepted as a tax expense of A..., pursuant to no. 1 of article 23 of the IRC Code.

On the other hand, even if it were not so, having the agent acted in representation of the player, both Portuguese law and FIFA regulations impose that it can only be remunerated by the player, therefore, pursuant to letter c) of article 45 of CIRC, that cost would not be tax-deductible for the purpose of determining taxable profit.

Thus, it is concluded that the amortization of that expense cannot be accepted as a tax expense, and it should be added to box 07 of the tax return form 22, for the purpose of determining taxable profit, the amount of 37,500.00 EUR.

III.1.1.10. Amortization expenses in the recruitment of II...

In the tax period of 2011, SP A... recorded as an expense the amount of 83,500.00 EUR, relating to the amortization of rights relating to player II...[…].

On 30-06-2011, A... signed an "Agreement" with JJ... […]; LL..., with registered office in..., Brazil, represented by MM...; and NN..., Ltd. –..., with registered office in..., Brazil, represented by OO..., (second parties).

From the document in question it appears that: "The first party intends to recruit player II..., and for this purpose it resorted to the services provided by the second parties jointly, namely for the purposes of intermediation and assistance in said recruitment".

On the same date, 30-06-2011, A... concluded with player II..., of Brazilian nationality, a "Sports Employment Contract", for two seasons, starting on 01-07-2011 and ending on 30-06-2013.

According to clause twelve of said contract: "The parties declare that this contract was concluded without the intervention of player agents."

No. 1 of article 28 of the FIFA Regulations relating to Player Agents, which came into force on 01-01-2008, stipulates the requirement that, in any contract in which an agent intervenes in representation of the club's interests, that agent must be identified as such.

The "Agreement" with entities JJ..., LL..., and NN..., Ltd., which A... presents, was concluded on the same date it concluded the "Sports Employment Contract" with the player.

Given the same date of conclusion of all contracts, it cannot be concluded that they would allow a temporal margin for negotiation between entities that were not already bound to each other.

From the Internet we found a news item published on the website of JJ..., where one can read: "The 23-year-old central defender represented by JJ... signed a 4-year contract with the multimillionaire Russian club. / The career of II... had a meteoric rise in the last year, much because of JJ... which recognized its great value when it passed through ..., where it played the modest State Championship of ..., having immediately in the past 2011/2012 season placed the player in Europe to play in G..., (…)".

From various sources of information, accessible via the Internet, namely on the "..." website, it is proven that the name of KK... is referred to as player's agent: "G... secured two reinforcements for the coming season today: goalkeeper HHH... and central II..., the ... found out. Both players are represented by KK..., (…)". KK... is a partner and manager of JJ..., Ltd.

On the website "..." on the Internet is the data of player II..., among which appears his entrepreneur LL... who, together with JJ..., constitute the second parties mentioned in the "Agreement" above referred to.

It appears, therefore, that those second parties of the "Agreement" referred to had a business connection with the player and not with A....

A... accepts to bear the costs of representation / intermediation carried out in name of the player. Now, for a cost to constitute an expense, that must correspond to the consumption of a good / service in the sphere of the entity.

The service provided by the representatives / agents of the player was not provided in representation of A..., therefore it cannot be accepted as a tax expense of A..., pursuant to no. 1 of article 23 of the IRC Code.

Having the agent acted in representation of the player, both Portuguese law and FIFA regulations impose that it can only be remunerated by the player, therefore, pursuant to letter c) of article 45 of the IRC Code, that cost would not be tax-deductible for the purpose of determining taxable profit.

It is therefore concluded by its non-acceptance as a tax expense, and it should be added, for the purpose of determining taxable profit, the amount of 83,500.00 EUR.

III.1.1.11. Amortization expenses in the recruitment of RR...

In the tax period of 2011, A... recorded as an expense the total amount of 63,962.50 EUR, relating to the amortization of rights relating to player RR... […].

Of the amount referred to in the preceding paragraph, we highlight the amount of 25,000.00 EUR, corresponding to the amortization of 25% of the amount of 100,000.00 EUR, which the SP recorded as expenses relating to intermediation in the recruitment of the player.

On 08-06-2011, A... signed an "Agreement" with entity JJ..., with registered office in ... […], represented by FIFA agent KK....

From the preamble of said "Agreement" it appears that: "The first party intends to recruit player RR..., and for this purpose it resorted to the services provided by the second party."

Pursuant to clause one of the "Agreement": "The first party undertakes to pay to the second party, for the services provided by its intervention in the acquisition of the sporting registration rights of player RR..., the amount of 100,000.00 € (…)".

On the same date, 30-06-2011, A... concluded with player RR... […] a "Sports Employment Contract", for four seasons, starting on 01-07-2011 and ending on 30-06-2015.

According to clause thirteen of said contract: "This contract was concluded with the intervention of KK..., Agent Licensed by the Portuguese Football Federation, with License no. ..., in representation of the second party."

It appears that KK..., who represented JJ... in the signature of the "Agreement" with A..., appears in the conclusion of the "Sports Employment Contract" as representative of the player.

Pursuant to no. 2 of article 22 of Law no. 28/98: "The person exercising the activity of sports entrepreneur can only act in name and on behalf of one of the parties to the contractual relationship."

It results from the "Agreement" that A... accepts to bear the costs of representation / intermediation carried out in name of the player. Now, for a cost to constitute an expense, that must correspond to the consumption of a good / service in the sphere of the entity.

The service was not provided in representation of A..., therefore it cannot be accepted as a tax expense of A..., pursuant to no. 1 of article 23 of the IRC Code.

On the other hand, even if it were not so, having the agent acted in representation of the player, both Portuguese law and FIFA regulations impose that it can only be remunerated by the player, therefore, pursuant to letter c) of article 45 of the IRC Code, that cost would not be tax-deductible for the purpose of determining taxable profit.

Thus, it is concluded that the amortization of that expense cannot be accepted as a tax expense, and it should be added to box 07 of the tax return form 22, for the purpose of determining taxable profit, the amount of 25,000.00 EUR.

III.1.1.12. Amortization expenses in the recruitment of "SS... "

In the tax period of 2011, A... recorded as an expense the total amount of 500,000.00 EUR, relating to the amortization of rights relating to player SS..., (also known as SS...): […].

Of that total amount, the amount of 100,000.00 EUR corresponds to the amortization of the acquisition of sporting rights, according to "Contract for Temporary Transfer of Federal Rights", concluded on 18-08-2011, with WW.... LDA., with registered office in Japan.

Of that total amount, the amount of 400,000.00 EUR was recorded as a provision of intermediation services in the acquisition of the player's sporting registration rights.

On 18-08-2011, A... signed an "Agreement" with: VV..., FIFA agent, TT..., Ltd. […] and UU..., Ltd., with registered office in Brazil, both represented by VV....

From the preamble of said "Agreement" it appears that: "The First Party intends to recruit the services of the Second Party with a view to the possible acquisition of football players (…)".

And further, that: "Furthermore, the First Party intends to also recruit the Second Party to assist it in the recruitment of player SS..., (…)".

As stated above, on the same date, on 18-08-2011, WW... Ltd., transferred the sporting rights of the player to A..., for the period from 18-08-2011 to 02-06-2012. This contract makes no reference to the intervention of