Process: 528/2017-T

Date: May 29, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration (Process 528/2017-T) addresses the tax treatment of intangible assets for IRC (Corporate Income Tax) purposes, specifically concerning the amortization of a pharmaceutical marketing authorization (AIM). The taxpayer A… Lda. acquired assets and rights related to pharmaceutical product "B…" in 2005 and obtained a marketing authorization from Infarmed, which required periodic renewal (initially for 5-year periods). The company recorded the AIM as an intangible asset with a 10-year useful life and applied straight-line depreciation of €450,000 annually for fiscal years 2012-2014. The Tax Authority rejected these amortizations, issuing additional IRC assessments, arguing that the asset had unlimited use rights and therefore could only be depreciated if actual depreciation was proven and recognized by the tax administration. The taxpayer filed an administrative review (reclamação graciosa) that was tacitly rejected, then sought arbitration under Article 2(1)(a) and Article 10 of RJAT. The core dispute centers on whether pharmaceutical authorizations constitute finite-life intangible assets subject to systematic amortization under Articles 29 and 34 of CIRC and Article 16(1) of Regulatory Decree 25/2009, or whether they are indefinite-life assets requiring proof of actual impairment. The taxpayer argued that the authorization's temporal limitation (5-year renewal periods), technological obsolescence, and market evolution justified depreciation. The case illustrates the tension between accounting standards (NCRF6) and IRC tax rules regarding intangible asset classification, and raises questions about when regulatory authorizations qualify as limited-life assets for tax depreciation purposes.

Full Decision

ARBITRAL DECISION

The Arbitrators Dr. José Poças Falcão (presiding arbitrator), Dr. Rui Pires and Dr. Maria Antónia Torres (member arbitrators), designated by the Deontological Council of the Centre for Administrative Arbitration ("CAAD") to constitute this Collective Arbitral Tribunal, constituted on 14 December 2018, agree as follows:

1. REPORT

1.1

A…, Lda., taxpayer no. …, with registered office at …, Rua …, …, …, …– …, notified of the tax acts embodied in the additional assessment of Corporate Income Tax (IRC) no. 2016…, of 22.09.2016, in the statement of compensatory interest calculation no. 2016…, in the statement of account adjustment no. 2016…, relating to the financial year 2012, in the additional assessment of IRC no. 2016…, of 22.09.2016, in the statement of compensatory interest calculation no. 2016…, and in the statement of account adjustment no. 2016…, relating to the financial year 2013, and in the additional assessment of IRC no. 2016…, of 22.09.2016, in the statement of compensatory interest calculation no. 2016…, and in the statement of account adjustment no. 2016…, relating to the financial year 2014, and following the tacit rejection of the administrative review request submitted on 2 March 2017 against such acts, requested the constitution of an arbitral tribunal, pursuant to Article 2, paragraph 1, subparagraph a), and Article 10, both of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT").

1.2

The request for arbitral pronouncement has as its object the declaration of illegality, and consequent annulment, of the acts of assessment of corporate income tax (IRC) and of the decision of tacit rejection of the administrative review request submitted by the Claimant, better identified above and also in the initial petition presented by the Claimant, which is hereby incorporated and reproduced for all legal purposes. Compensation is also requested for the undue guarantee that the Claimant was obliged to provide.

According to the initial petition, the Claimant was notified of the acts of additional IRC assessment referred to above, and not agreeing with such acts, submitted an administrative review request on 2 March 2017, which was tacitly rejected, whereupon it requested the constitution of this Arbitral Tribunal, a request that was accepted.

The Claimant considers its request to be manifestly timely, given that the 90-day period for the request to constitute the Arbitral Tribunal should be counted, in this case, from the date of the formation of the presumption of tacit rejection, which occurred.

It is also the Claimant's understanding that the cumulation of claims should be accepted (annulment of the IRC assessment acts for the years 2012, 2013 and 2014), given that this concerns the appraisal of the same factual circumstances and the application of the same legal principles and rules.

1.3

On 28 January 2005, the Claimant acquired certain assets and rights related to the pharmaceutical product called "B…". Following that acquisition, and in order to introduce the pharmaceutical product to the market, the Claimant requested from Infarmed the transfer of the respective marketing authorization (AIM) to the Claimant. Subsequently, on 15 February 2007, the Claimant requested the renewal of that authorization, which was approved by Infarmed for a period of 5 years.

The Claimant considers that the AIM is not and was not granted for an unlimited period of time and, in that regard, recorded it in its intangible assets, proceeding with the annual depreciation thereof using the straight-line method. For this purpose, the Claimant estimated a useful life of the asset of 10 years, considering not only the period of authorization granted by Infarmed (on the assumption that the commercialization of any pharmaceutical product is naturally conditioned by prior authorization from the Regulator and that Infarmed, at that time, renewed AIMs for periods of 5 years), but also recognizing the natural depreciation both through use over time and through wear and technological evolution in a constantly evolving market.

Thus, the Claimant disagrees with the correction made by the Respondent, following an inspection action to which it was subject, which consisted in correcting its taxable amount by the amount of depreciation effected with respect to said intangible asset (€450,000), in each of the three years subject to the inspection.

As the Claimant did not pay the amount of IRC resulting from said corrections, it was cited for the respective tax enforcement proceedings, having to provide a bank guarantee. Subsequently, it submitted the said administrative review request which was tacitly rejected.

The Claimant considers that the assessment acts sub judice, as well as the decision of tacit rejection of the administrative review request submitted, should be deemed illegal and annulled, given that since the IRC code makes the acceptance of asset depreciation (including intangibles) dependent on their depreciation, the acceptance of the depreciation effected is justified in this case, given that the asset in question will have a loss of value both through the passage of time and through technological evolution, and is, moreover, subject to the renewal of its AIM by Infarmed.

1.4

The Respondent's understanding is that, first of all, the acquisition contract for the assets and rights relating to the pharmaceutical product "B…", entered into between the Claimant and the seller, does not result in a temporal limitation on the use of the trademark.

The Respondent then contends that the solution to the dispute in the case will necessarily involve assessing the correct accounting regime for the costs in question and any correction of the accounting result for IRC tax purposes. The legislator established the model of partial dependence of tax law on accounting, with the accounting result being the starting point for determining taxable profit, which is then subject to the tax adjustments required by the IRC. It is therefore necessary to assess whether the accounting of the asset in question was carried out correctly and whether, subsequently, the appropriate corrections were made for tax purposes.

The Respondent considers that, in the specific case, the requirements for tax acceptance of the depreciation relating to the intangible asset in question are not met, given that it is an intangible asset acquired for consideration but whose exclusive use was not limited in time. Therefore, according to the standards, such an asset will only be depreciated in the case of actual depreciation duly proven and recognized by the Tax Authority.

The Respondent further states that the factors mentioned by the Claimant as having been used as the basis for calculating the useful life of 10 years for the intangible asset in question depend on exogenous factors and do not allow for a reliable estimate. The Respondent concludes by stating that from NCRF6 it is clear that an intangible asset with a finite life is depreciated, whereas an intangible asset with an infinite useful life is not.

1.5

The arbitral tribunal meeting provided for in Article 18 of the RJAT was dispensed with and it was considered unnecessary to produce witness evidence.

2. PRELIMINARY MATTERS

The Tribunal was regularly constituted and is competent ratione materiae in accordance with Article 2 of the RJAT.

The parties have legal capacity and standing, show themselves to be legitimate parties and are properly represented (cf. Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

No procedural irregularities were identified in the proceedings.

3. FACTS

With relevance to the decision on the merits, the Tribunal considers the following facts to be proven:

• On 28 January 2005, the Claimant acquired certain assets and rights related to the pharmaceutical product called "B…".

• Following that acquisition, and in order to introduce the pharmaceutical product to the market, the Claimant requested from Infarmed the transfer of the respective marketing authorization (AIM) to the Claimant. Subsequently, on 15 February 2007, the Claimant requested the renewal of that authorization, which was approved by Infarmed for a period of 5 years.

• The pharmaceutical product became part of the Claimant's intangible assets, and the Claimant proceeded with the annual depreciation thereof. For this purpose, the Claimant estimated a useful life of the asset of 10 years.

• The Claimant considered the depreciation effected as relevant for tax purposes.

Grounds for the Facts

The conviction regarding the facts deemed proven was based on the evidence presented by the Claimant and the Respondent, attached to the case file.

No essential facts with relevance for the appraisal of the merits of the case were found to have gone unproven.

4. LAW

With the facts established, it is necessary to consider the legal issues raised by the parties.

The question sub judice concerns the acceptance, for tax purposes, of the depreciation effected by the Claimant with respect to the intangible asset relating to the pharmaceutical product "B…".

In accordance with Article 29 of the CIRC, tax depreciation is restricted to elements of assets subject to depreciation, that is, those that "systematically suffer losses of value resulting from their use or from the passage of time". Article 34 of the CIRC clarifies that the following are not accepted as a tax deduction: "reinstatements and depreciation of elements of assets not subject to depreciation".

In accordance with the provisions of Article 16, paragraph 1 of DR 25/2009, of 14 September, "intangible assets are depreciable when subject to depreciation, namely, because they have a limited temporal duration". And in this context, subparagraph b) of the same article provides that the following intangible assets are depreciable: "Elements of industrial property, such as patents, trademarks, permits, production processes, designs or other assimilated rights, acquired for consideration and whose exclusive use is recognized for a limited period of time".

Now, depreciation is understood to mean the systematic (continuous over time) loss of value of the asset through the passage of time, through its continuous wear or through usual and normal obsolescence in the face of evolution.

That is, at the moment an asset is acquired, the taxpayer acquiring it must, based on reliable and realistic estimates, assess whether it will lose value gradually and repeatedly. If so, this systematic reduction in the value of the asset is incorporated both for accounting and tax purposes through depreciation.

The legislator, aware of the interpretive difficulty of the concept of "depreciation" associated with intangibles (whether in its qualitative aspect or in its quantitative part – over how many years depreciation should be effected), created an explanation to facilitate interpretation, assuming that an intangible asset with limited temporal duration is necessarily subject to depreciation and is capable of tax depreciation.

However, this does not mean that the opposite is not depreciable. Put positively: in the case of depreciation, intangible assets, even without limited temporal duration, may be tax depreciable. Everything depends on the specific case. In some situations, the intangible asset without limited temporal duration does not suffer systematic, gradual and periodic losses of value – and, consequently, is not subject to depreciation, neither for accounting nor for tax purposes. But in other cases, despite not having limited temporal duration, it gradually and systematically loses its value over the course of its use over time.

The crucial point is rather the assessment made at the moment of acquisition of that asset, as to whether it is subject to depreciation, given the factual reality in which it is situated, despite not having a limited temporal duration. Limited temporal duration is not confined solely to the legal-formal category of intangible rights with temporally limited use, but extends also to the economic realities of real and factual depreciation of intangible assets, despite not having legally limited temporal duration (right of use limited in time).

And this also occurs with tangible assets. A vehicle is depreciated not based on the years the taxpayer intends to be the owner thereof, but based on the number of years during which it is estimated (and tax law requires) that such asset will have economic utility for the organization, even though the vehicle is normally used beyond the 4-year depreciation period provided for in tax law. It is perishable and, therefore, depreciable.

In the specific case, the Tax Authority did not question the depreciation period, did not argue that the Claimant might have perhaps accelerated the depreciation in an accounting and tax choice more intensive than the real and economic depreciation of the asset, having only raised a preliminary issue: that of the actual depreciation of the asset, stating that, in fact, the asset in question has an "indefinite" useful life, and therefore unlimited.

Now, analyzing the case at hand, it seems reductive to conclude that the useful life of the asset is indefinite and therefore unlimited, merely because it was not fixed in the contract that supported its acquisition, having apparently been ignored by the Respondent the particular and prior assumptions for the pharmaceutical product to be commercialized (Infarmed AIM – without automatic renewals) and, likewise, the technical and technological obsolescence directly related to the market in question, particularly its evolutionary and research component.

It seems clear to us that, by the fact alone that the pharmaceutical product "B…" does not have a limited contractual duration, such should not be grounds for concluding that it does not depreciate. As referred to above, and better explained in the arbitral decision of case no. 162/2017-T of CAAD, the expression "limited temporal duration" is not confined solely to the legal-formal category of intangible rights with temporally limited use, but extends also to the economic realities of real and factual depreciation of intangible assets, despite not having legally limited temporal duration".

It is true that the commercialization of the pharmaceutical product depends on the AIM and that this authorization, albeit possibly renewable for indeterminate periods, does not mean that the intangible asset cannot be depreciated both for accounting and tax purposes, nor does it mean that its useful life is indefinite.

The fact that a given asset continues to provide benefit to its owner after the initially established useful life is simply the result that the estimated useful life period does not coincide with the actual life period, but this is neither can be prohibitive of the depreciation of the asset.

In sum, it is our understanding that the intangible asset in question has a limited useful life, arising both from the passage of time, with the consequent technical and technological obsolescence, related to the constant evolution in medical research, and from the regulatory context of the industry that requires that authorizations for entry into the pharmaceutical product market be requested and renewed.

Therefore, the respective depreciation should be accepted for tax purposes, in accordance with the provisions of the IRC Code and DR 25/2009.

On the Claim for Compensation for the Provision of Bank Guarantee

The Claimant petitions for the condemnation of the Respondent in the obligation to compensate it for the costs and expenses incurred in the provision of a bank guarantee for the suspension of the tax enforcement proceedings to which it was subject, in accordance with Article 53 of the LGT.

It is clear from the case file that the illegality of the impugned tax assessment acts is directly attributable to the Respondent, which, on its own initiative, effected them without complying with all legal formalities.

Consequently, the Claimant is entitled to be compensated for the damages resulting from the provision of the said bank guarantee.

5. DECISION

Based on the foregoing, it can only be concluded that the Claimant was incorrectly taxed, in which terms, and with the grounds set out above, this arbitral tribunal rules in favor of the claim for a declaration of illegality of the tax assessment acts for IRC, relating to the years 2012, 2013 and 2014, better identified above, as well as of the decision of tacit rejection of the administrative review request submitted, with the Respondent being obliged to compensate the Claimant for the costs and expenses incurred in the provision of a bank guarantee in accordance with Article 53 of the LGT.

The value of the case is fixed at €410,826 (four hundred and ten thousand eight hundred and twenty-six euros), in accordance with the provisions of Articles 3, paragraph 2 of the Regulation on Costs in Tax Arbitration Proceedings (RCPAT), 97-A, paragraph 1, subparagraph a) of the CPPT and 306 of the CPC.

The amount of costs is fixed at €6,732 (six thousand seven hundred and thirty-two euros) under Article 22, paragraph 4 of the RJAT and Table I attached to the RCPAT, to be paid by the Respondent, in accordance with the provisions of Articles 12, paragraph 2 of the RJAT and 4, paragraph 4 of the RCPAT.

Notification is ordered.

Lisbon, 29 May 2018

The Collective Arbitral Tribunal,

(José Poças Falcão)

(Rui Pires)

(Maria Antónia Torres)

[Text drawn up by computer, in accordance with Article 131, paragraph 5 of the Code of Civil Procedure, applicable by reference from Article 29, paragraph 1, subparagraph e) of the RJAT].

[The drafting of this arbitral decision is governed by the spelling rules prior to the Orthographic Agreement of 1990].

Frequently Asked Questions

Automatically Created

How are intangible assets amortized for IRC purposes under Articles 29 and 34 of the Portuguese Corporate Tax Code (CIRC)?
Under Articles 29 and 34 of the Portuguese Corporate Tax Code (CIRC), intangible assets acquired for consideration are generally tax-deductible through depreciation if their use is limited in time. Article 34 establishes that tax depreciation must reflect actual asset wear or obsolescence. For intangible assets without temporal limitation, systematic amortization is not automatically accepted; instead, taxpayers must prove actual depreciation recognized by the Tax Authority. The IRC operates under a partial dependence model where accounting results serve as the starting point, subject to specific tax adjustments required by the Code.
What does Article 16(1) of Regulatory Decree 25/2009 establish regarding the depreciation of intangible assets in Portugal?
Article 16(1) of Regulatory Decree 25/2009 establishes the framework for depreciation of intangible assets in Portugal, distinguishing between assets with finite and indefinite useful lives. Intangible assets acquired for consideration with exclusive use limited in time are depreciable over their estimated useful life. Assets without temporal limitation can only be depreciated when actual depreciation is duly proven and recognized by the Tax Authority. This provision aligns with accounting standard NCRF6, which requires entities to assess whether intangible assets have finite or indefinite useful lives, with only finite-life assets subject to systematic amortization.
Can pharmaceutical rights and drug-related assets be classified as depreciable intangible assets for IRC purposes?
Pharmaceutical rights and drug-related assets can be classified as depreciable intangible assets for IRC purposes if their use is demonstrably limited in time. Marketing authorizations (AIMs) issued by Infarmed present a complex case: while they require periodic renewal (historically for 5-year periods), they may be renewable indefinitely if regulatory requirements are met. The key determination is whether the authorization constitutes a finite-life asset subject to systematic depreciation or an indefinite-life asset requiring proof of actual impairment. Factors considered include the contractual acquisition terms, regulatory renewal conditions, technological obsolescence, market evolution, and whether the temporal limitation is substantive or merely administrative.
What happens when a taxpayer disagrees with additional IRC assessments and files a grievance complaint (reclamação graciosa) that is tacitly denied?
When a taxpayer disagrees with additional IRC assessments and files an administrative review request (reclamação graciosa) that is tacitly denied, the taxpayer has 90 days from the formation of the tacit rejection presumption to request the constitution of an arbitral tribunal at CAAD under Article 10 of RJAT (Decree-Law 10/2011). Tacit rejection occurs when the Tax Authority fails to issue an express decision within the legal timeframe. The taxpayer can seek annulment of both the original assessment acts and the tacit rejection decision. During the dispute, if tax enforcement proceedings are initiated, the taxpayer may need to provide a guarantee (bank guarantee or other security) to suspend collection pending resolution of the arbitration.
Is a taxpayer entitled to compensation for an undue guarantee provided during an IRC tax dispute at CAAD arbitration?
Yes, a taxpayer may be entitled to compensation for an undue guarantee provided during an IRC tax dispute at CAAD arbitration if the arbitral tribunal rules in favor of the taxpayer and annuls the challenged assessment acts. Article 171 of the Tax Procedure Code (CPPT) and related provisions establish the right to reimbursement of costs associated with guarantees that were improperly required due to illegal tax assessments. This compensation typically covers bank fees, commissions, and other costs directly attributable to providing the guarantee. The taxpayer must specifically request this compensation in the arbitration petition, as occurred in this case where the claimant sought both annulment of the assessments and compensation for the undue guarantee provided to suspend tax enforcement.