Summary
Full Decision
ARBITRAL DECISION
Parties
Claimant: A…, NIPC PT…, with registered office at … no.…, …-…
Respondent: Tax and Customs Authority (AT)
I. REPORT
On 2 October 2017 the Claimant filed with CAAD a request for arbitral pronouncement (ppa) requesting, under the Legal Regime for Arbitration in Tax Matters (RJAT), the constitution of a singular arbitral tribunal (TAS).
THE REQUEST
The Claimant intends, regarding Corporate Income Tax (IRC) for the financial year 2012, that the TAS declare "illegal the act of tax assessment for corporate income tax no. 2016 … and, likewise, ... the dispatch of the Deputy Director of Finance, in replacement regime, dated 28 June 2017 which dismissed the administrative complaint, both the assessment act and the said dispatch being annulled accordingly and the Claimant's right to compensation for guarantee unduly provided being recognised".
That is, the "... request for arbitral pronouncement is presented both against the dispatch of the Deputy Director of Finance of the Finance Directorate of Lisbon, in replacement regime, dated 28 June 2017, and against the additional assessment of Corporate Income Tax and compensatory interest for the financial year 2012, no. 2016…, resulting in the amount payable of € 31,124.57", including the said interest.
THE CAUSE OF ACTION
Given that on 17 February 2014 the Claimant filed the Corporate Income Tax Return for 2012 (replacement return) and considered as a negative component of taxable profit a bad debt in the amount of € 5,272,603.24, which resulted from transactions carried out with company B…;
A company that was the "parent company" of the present Claimant, which held 100% of its capital;
Because the AT, in compliance with Service Order no. 012016…, of 27.05.2016, initiated a tax inspection procedure, within which it reclassified, for tax purposes, certain accounting values, namely, "... concluded ... that the bad debt of € 5,272,603.24 on company B…, could not be recognised as an expense of the financial year", insofar as "... in the specific case, the respective legal requirements are not met, namely: (1) the insolvency proceedings of the company on which the credits were held – B… was not concluded; (2) the communication to the debtor that the credit would be considered bad and recognised as a negative component of the taxable base for the financial year was omitted";
The Claimant concludes that article 41 of the Corporate Income Tax Code - 2012 version – does not provide that the uncollectibility of credits can only be recognised after judgment or termination of the proceedings, nor will communication to the debtor be required (nos. 1 and 2 of article 41 of the Corporate Income Tax Code), because: (1) the debtor, as a non-resident, is not a taxpayer subject to Portuguese Corporate Income Tax, (2) its positive or negative results in no way affect Portuguese tax revenue, (3) the communication, whose form is not provided by law, would be pointless, because the debtor company, the parent company, "had full and complete knowledge of such intention, having even participated in the decision-making process as a shareholder".
It submits that the decision dismissing the administrative complaint and the assessment suffer from (1) illegality due to violation of the rules contained in articles 41, no. 2, of the Corporate Income Tax Code, 55 of the General Tax Law, 104 no. 2 and 266 of the Constitution; (2) lack of reasoning due to non-conformity with the rules of articles 268, no. 3, of the Constitution and 77, nos. 1 and 4, of the General Tax Law; (3) violation of the principle of proportionality insofar as article 36 of the Corporate Income Tax Code, in its then current wording, in view of the age of the credit, permitted the recognition of this expense "in no way ... limited by the fact that these were related entities".
It further submits that the assessment of compensatory interest was illegal because (1) there is no delay in the assessment of taxes in the dimension resulting from the Supreme Administrative Court judgment of 23.02.1999, (2) its assessment was not reasoned, that is, the "fault" of the taxpayer in the delay or postponement of the assessment was not alleged, (3) the Claimant was not notified for prior hearing on its assessment; resulting in violations of the rules contained in articles 35-1 of the General Tax Law and article 60-3 of the General Tax Law.
OF THE SINGULAR ARBITRAL TRIBUNAL (TAS)
The request for constitution of the TAS was accepted by the President of CAAD and automatically notified to the AT on 03-10-2017.
By the Deontological Council of CAAD the signatory of this decision was appointed as arbitrator, and the parties were notified thereof on 21.11.2017. The parties did not manifest any intention to refuse the appointment, in accordance with article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.
The Singular Arbitral Tribunal (TAS) has been regularly constituted since 14.12.2017 to appraise and decide the subject matter of this dispute (articles 2, no. 1, paragraph a) and 30, no. 1, of the RJAT).
All these actions are documented in the records contained in the Procedural Management System, which are hereby considered reproduced.
On 14-12-2017 the AT was notified in accordance with and for the purposes of article 17-1 of the RJAT. It replied on 30.01.2018, submitting the Administrative File (PA) composed of two computerised files, designated as Part1 (with 112 pages) and Part2 (also with 112 pages). In its reply the AT advocated that the meeting of parties provided for in article 18 of the RJAT should not be held.
By dispatch of 30.01.2018 the Claimant was invited to state whether it still wished to hear the witness it had listed and to adopt a position on whether or not to hold the meeting of parties provided for in article 18 of the RJAT.
By dispatch of 14.02.2018, the holding of the meeting of parties provided for in article 18 of the RJAT was dispensed with, given the Respondent's failure to take a position. However, a deadline was set for final written and successive submissions.
The Claimant also did not submit written submissions. The Respondent, by request of 06.03.2018, communicated that it would also not counter-argue, due to lack of contradictory procedure, maintaining everything it had stated in its reply.
By dispatch of 03.04.2018 the date for handing down the final decision was scheduled.
PROCEDURAL REQUIREMENTS
Legitimacy, capacity and representation – The parties are legitimate, enjoy legal personality and procedural capacity and are represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Regulation no. 112-A/2011, of 22 March).
Principle of contradictory procedure - The AT was notified in accordance with paragraph m) of this Report. All procedural documents and all documents attached to the proceedings were made available to the respective other party in the CAAD Procedural Management System. Both parties were always notified of their attachment.
Dilatory exceptions - The arbitral procedure does not suffer from defects and the request for arbitral pronouncement is timely given that it was filed within the prescribed period in paragraph a) of no. 1 of article 10 of the RJAT, as evidenced by the fact that the Claimant filed the request for pronouncement on 02.10.2017 and the date recorded in the Portuguese Post Office notification register of the decision dismissing the administrative complaint being 04.07.2017 (fact alleged by the Claimant in article 2 of the request which the Respondent did not challenge).
SUMMARY OF THE CLAIMANT'S POSITION
The Claimant confines the present dispute to consideration of the following questions: "a) whether the law determines that the uncollectibility of credits can only be recognised, for tax purposes, after judgment or termination of the proceedings referred to therein; b) whether it was required to communicate to the debtor the intention to recognise an expense on the grounds of uncollectibility of the credit".
And as stated above (in f) of this Report), concludes that article 41 of the Corporate Income Tax Code - 2012 version – does not provide that the uncollectibility of credits can only be recognised after judgment or termination of the proceedings, nor will communication to the debtor be required (no. 2 of article 41 of the Corporate Income Tax Code), because: (1) the debtor, as a non-resident, is not a taxpayer subject to Portuguese Corporate Income Tax, (2) its positive or negative results in no way affect Portuguese tax revenue, (3) the communication, whose form is not provided by law, would be pointless, because the debtor company, the parent company, "had full and complete knowledge of such intention, having even participated in the decision-making process as a shareholder".
And, as already stated in g) and h) above, submits that the decision dismissing the administrative complaint and the assessment suffer from (1) illegality due to violation of the rules contained in articles 41, nos. 1 and 2, of the Corporate Income Tax Code, 55 of the General Tax Law, 104 no. 2 and 266 of the Constitution; (2) lack of reasoning due to non-conformity with the rules of articles 268, no. 3, of the Constitution and 77, nos. 1 and 4, of the General Tax Law; (3) violation of the principle of proportionality insofar as article 36 of the Corporate Income Tax Code, in the wording of the Code as at 31 December 2012, in view of the age of the credit, permitted the recognition of this expense "in no way ... limited by the fact that these were related entities".
It further submits that the assessment of compensatory interest was illegal because (1) there is no delay in the assessment of taxes in the dimension resulting from the Supreme Administrative Court judgment of 23.02.1999, (2) its assessment was not reasoned, that is, the "fault" of the taxpayer in the delay or postponement of the assessment was not alleged, (3) the Claimant was not notified for prior hearing on its assessment; resulting in violations of the rules contained in articles 35-1 of the General Tax Law and article 60-3 of the General Tax Law.
It concludes by stating that the request for pronouncement should be "... judged entirely well-founded because proven and, consequently, the act of assessment for corporate income tax no. 2016 … should be declared illegal and, likewise, the dispatch of the Deputy Director of Finance, in replacement regime, dated 28 June 2017 which dismissed the administrative complaint should be declared illegal, both the assessment act and the said dispatch being annulled accordingly and the Claimant's right to compensation for guarantee unduly provided being recognised".
SUMMARY OF THE RESPONDENT'S POSITION
The Respondent advocates a completely different reading of the law, with the AT's Reply, to a large extent, corresponding to the reasoning set out in the Tax Inspection Report (RIT), which also corresponds to the reasoning of the decision dismissing the administrative complaint.
It begins by agreeing with the Claimant that the applicable law to the case is article 41 of the Corporate Income Tax Code, in the wording of 31 December 2012, stating with regard to the credit of € 5,272,603.24 on company B…"... considering that the year in which it accounted for it was the year 2012, the Claimant was obliged, already in that financial year, to meet the legal requirements demanded by the law then in force, being bound from the outset to prove its right, notwithstanding the fact that the inspection procedure occurred subsequently, as indeed is always the case", it being clear that "... it is not possible to speak of a change in legal regime regarding the recognition of a credit resulting from the insolvency proceedings when we compare the wording of Law no. 55-A/2010, of 31 December and Law no. 82-B/2015", for the reason that "... Law no. 82-B/2015 merely served to clarify that uncollectibility is only verified in insolvency proceedings after the judgment of verification and ranking of claims has acquired the force of res judicata or, in the event that there is one, after the homologation of the plan which is the subject of the deliberation held in the creditors' meeting, provided for in article 156 of the Insolvency and Business Recovery Code".
And it concludes: "however, it was not the non-presentation of that certificate that determined the correction of the tax in question, not least because as is detailed in the RIT, steps were taken to ascertain the material truth and not merely the formal truth", "because what was relevant for the correction of the tax was the fact that the insolvency proceedings in question had not been concluded, merely pending, with the definition of disputed legal positions being determined only at the end of the proceedings and not at their commencement or subsequent processing"
It further states, reproducing part of Arbitral Decision P. 390/2015-T of 18.04.2016: "moreover, the mere insolvency decision does not prove the impossibility of collecting its credits, as the creditor must claim the same against the insolvent estate. And only from verification of the impossibility of the insolvent estate meeting the claimed credits, should A… desrecognise these credits in its financial statements. Because, as stated, an asset should only be desrecognised when the contractual rights to receipts resulting from it are realised, expire or are transferred to other entities. Therefore, it would be important to verify objective proof of the impossibility of appropriating cash flows resulting from the various financial assets, that is, their extinction, for any of the reasons provided for in the legal system".
Adding that, as regards no. 2 of article 41 of the Corporate Income Tax Code in force in 2012, if "... communication by the Claimant to the debtor of the recognition of the expense for tax purposes was required as an additional requirement of its applicability, which was also not observed by the Claimant".
And in conclusion states: "in summary, the Tax Inspectors made a declaratory interpretation of article 41 of the Corporate Income Tax Code in force at the time, merely choosing the meaning that the text directly and clearly allowed, considering this to be the one that corresponded to legislative intent".
Although the AT acknowledged that the Claimant claimed the credits against its parent company in the insolvency proceedings in the Court of the District of ... (Germany) (article 49 of the Reply) and that the claim was not accepted summarily by the Court, which considered them unenforceable, for the reason that the Respondent was held 100% by the company subject to bankruptcy proceedings (articles 14 and 15 of the Reply), it states that "... the Tax Inspectors concluded that the present Claimant had not proven the requirements of article 41 of the Corporate Income Tax Code to establish its right to see this loss be relevant negatively in the determination of its taxable profit", "since it could only have done so if it had been demonstrated that the uncollectibility of the credit occurred in special insolvency proceedings in the following terms: (i) the taxpayer to prove that its customer/debtor was unable to fulfil its payment obligations, inability only ascertainable when the final result of the debtor's insolvency proceedings; (ii) by communicating to the debtor the recognition of the expense for tax purposes, to the insolvency administrator".
In the reasoning of the Inspection Report (RIT) the AT states that: "the fact ... that we are dealing with a non-resident debtor entity, the legislator did not expressly include any reservation, so that formal obligation would have had to be complied with".
And regarding the reading of paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code, it is stated in the Report of the Tax Inspectors (SIT) that in the "legal provision there is not established a specific 'phase' of the insolvency proceedings for the credit to be considered uncollectible".
Regarding the defects pointed out by the Claimant in the impugned acts, the Respondent refers to the reasoning contained in the RIT (final report of the inspection procedure) concluding that "... whether one agrees with the reasoning set out therein or not, it proves to be consonant with the dismissal conclusion adopted and is sufficiently clear and perceptible to any ordinary observer who confronts it therewith, because, from it, they are able to know the reasons determining the decision".
Regarding the alleged "non-compliance with the principles of proportionality, material truth and taxation on actual profit", it states that "... since the inspection procedure is the typical, suitable or appropriate means to investigate and verify correct compliance with tax obligations by taxpayers and, on the basis of this investigation to gather elements that allow ascertaining the possible existence of irregularities and there being no milder or less burdensome means to achieve such purpose, it is not clear how it can be alleged that the Tax Inspectors were not proportionate in their action against the Claimant".
As regards compliance with the principle of material truth, it states that "the RIT, however, shows that the Tax Inspectors did not stop at the elements provided by the Claimant, having promoted steps precisely in order to obtain the material truth".
Regarding the alleged disharmony with the principle of taxation on actual profit, it states "in fact, material justice is not, by force of the principle of tax legality, justice in the exclusive interest of either of the parties, but distributive justice, which is achieved by taxing each one according to their contributory capacity (art. 103 no. 1 of the Constitution)". "Now, failure to prove all expenses and losses and profits obtained or incurred in a given year or financial year is what violates the principle of taxation on actual profit". "Because if profits and profits attributable to it economically are not declared by taxpayers in a given year or financial year, the profit that comes to be determined cannot naturally correspond to the actual profit of that year or financial year, and it is in relation to that period of time that actual profit, for taxation purposes, should be assessed".
Regarding the defect of lack of reasoning for the assessment of compensatory interest, it states that "the requirements whose verification determines the constitution of the obligation to pay compensatory interest are the following: a) there being delay in the assessment of the tax; b) the tax being due c) there being fault on the part of the taxpayer for the delay".
And that "in the case of the correction in question, relating to non-acceptance as an expense of uncollectible credits, the divergence between the AT and the Claimant does not result from a different interpretation of the applicable legal rules, but from the burden of proof of expenses falling on the latter and not being observed by it", since "... it was verified that the Claimant acted with total disregard for the requirements and conditions provided by law which it cannot claim not to know", concluding that "such conduct cannot thus fail to be censurable in light of the above-mentioned rules, and consequently, the compensatory interest now demanded is due".
It pleads for dismissal of the request for arbitral pronouncement, concluding: "the present request for arbitral pronouncement should be declared DISMISSED, as not proven, the additional corporate income tax and compensatory interest tax acts impugned being maintained in the legal order and the Respondent entity being absolved accordingly of the claim".
II - QUESTIONS FOR THE TRIBUNAL TO RESOLVE
Both parties agree that the applicable law to the case is article 41 of the Corporate Income Tax Code, wording in force on 31.12.2012 (position of the Claimant and article 34 of the Reply), which is as follows:
Regime of other expenses
Article 41
Uncollectible credits
1 - Uncollectible credits may be directly considered as expenses or losses of the taxation period provided that:
a) This results from insolvency and business recovery proceedings, execution proceedings, extra-judicial reconciliation proceedings for viability of companies in insolvency or in difficult economic situation mediated by IAPMEI - Institute for Support of Small and Medium Enterprises and Investment, from an arbitral tribunal decision in the context of disputes arising from the provision of essential public services or from credits that are prescribed in accordance with their respective legal regime for the provision of essential public services and, in this case, their value does not exceed the amount of (euro) 750; and
b) No loss from impairment has been recognised or, if it has been, it proves insufficient.
2 - Without prejudice to the maintenance of the obligation for civil purposes, the deductibility of credits considered uncollectible under the preceding number or under the provisions of article 36 is further dependent on the existence of proof of communication to the debtor of the recognition of the expense for tax purposes, which must recognise that amount as a profit for the purpose of determining taxable profit.
Therefore, following on from what is stated in the request, it is clear that the questions at the level of judgment, in terms of matters of law, relate to the interpretation of this normative, with this specific wording, that is, more specifically:
"a) Whether the law determines that the uncollectibility of credits can only be recognised, for tax purposes, after judgment or termination of the proceedings referred to therein;
b) Whether it was required to communicate to the debtor the intention to recognise an expense on the grounds of uncollectibility of the credit".
The AT in the RIT (tax inspection report) states (pages 101 verso of PA), albeit in different terms, this same thing:
"In the present case, we are dealing with the recognition of an expense relating to credits owed by a non-resident company, and the case is governed by German tax laws. The legal provision established in article 41 of the Corporate Income Tax Code contemplates situations that are provided for, and whose application occurs in the Portuguese legal system. However, since the legislator did not expressly create any reservation in the law in the event that the debtors of the credits are non-residents, it allows us to conclude that the spirit underlying this article is that there must be a situation proven by the taxpayer that its customer/debtor is unable to fulfil its payment obligations. Otherwise, the legal provision would establish an unequal regime between resident and non-resident debtors.
In the Portuguese case, this impossibility is established by the final result of insolvency and business recovery proceedings, or execution proceedings, or extra-judicial reconciliation proceedings for viability of companies in insolvency or in difficult economic situation, or by an arbitral tribunal decision in the context of disputes arising from the provision of essential public services or credits that are prescribed".
As it appears evident, in answering these questions, account must be taken of two facts that the parties do not contest, namely:
1. The Claimant, as a creditor entity, a sole proprietorship company, resident, was held 100% by a company resident in Germany;
2. The debtor company subject to insolvency proceedings in the District of ... (Germany), non-resident, is not subject to Portuguese tax law (due to the territorial nature of Corporate Income Tax) nor to Portuguese bankruptcy proceedings jurisdiction.
In terms of factual matters, the crux of the question concerns judgment as to whether, in light of the evidence produced in both the proceedings and in this process, it should be considered that it was sufficient to conclude that the requirements of article 41 of the Corporate Income Tax Code are met. This, in light of the concrete situation resulting from the control relationship of the insolvent, non-resident company over the resident company.
Should it be considered that the requirements of article 41 of the Corporate Income Tax Code in force in 2012 are met, this would result in the claim being upheld. In this circumstance, there would then be a need to consider the claim for compensation to the AT for the provision of an undue bank guarantee.
III. ESTABLISHED AND UNPROVEN FACTUAL MATTERS.
REASONING
Regarding factual matters the Tribunal does not have to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and discriminate the established facts from those not established (in accordance with article 123, no. 2, of the Administrative Procedure Code for Tax Proceedings and article 607, no. 3 of the Civil Procedure Code, applicable ex vi of article 29, no. 1, paragraphs a) and e), of the RJAT).
Thus, the facts pertinent to the judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions to the question(s) of law (in accordance with former article 511, no. 1, of the Civil Procedure Code, corresponding to current article 596, applicable ex vi of article 29, no. 1, paragraph e), of the RJAT).
Accordingly, taking into account the positions assumed by the parties and the documentary evidence submitted, the following facts were considered proven, with relevance to the decision, being indicated for each point brought to the established factual matter the means of proof considered relevant as reasoning.
Established Facts
1. In the 2012 financial year the Claimant was a sole proprietorship limited company, resident in Portugal, held 100% by a company resident in Germany with the trade name "B…" – as per article 8 of the request, article 14 of the reply and first paragraph of point III.1.3 of the tax inspection report (RIT) at page 63 of PA, part 1;
2. In 2012 the Claimant held credits against its parent company, resident in Germany, "B…", in the amount of 5,272,603.24 € - articles 6 and 10 of the request, article 16 of the reply and first paragraph of point III.1.3 of the tax inspection report (RIT) at page 63 of PA, part 1;
3. The credits concerned: 2,289,127.97 euros relating to the outstanding balance of cash pooling at the date of insolvency; 2,969,545.85 euros relating to amounts receivable from sales also at the date of insolvency and 13,930.00 euros relating to amounts received by the parent company from customer C… for sales by A… which were never paid to D… – as per last paragraph of article 48 of the reply;
4. On 28 June 2012, the company resident in Germany, B…, entered into insolvency proceedings in the Court of the District of ... (Insovenzgericht Amtsgericht ...), the Claimant having filed a claim of its credits on 30 July 2012 and notified on 01 August 2012 of the "conclusion of the verification process" indicating "wholly contested by the representative" – as per second page of document no. 5 attached with the request and pages 59 and 60, 69 to 71 of PA Part 1;
5. With respect to the documents contained on pages 59 and 60 and 69 to 71 of PA Part 1 (claim of credits in the German Court and court decision) the Claimant, in the inspection procedure, provided the following clarification: "... we sent a letter claiming credits on 27-07-2012, with copies of all invoices and supporting documentation". "In response to the claim of credits, we received the communication of the judgment of the Court of ... denying/contesting all credits. Attached is a copy of the decision handed down for the two groups of credits claimed and the certified translation thereof". "From the clarifications given by the German law office results the information that the most formal, legal and effective information is what we received as a judgment of the Court of ...". "This is a court judgment in response to the claim of credits submitted. For the insolvency proceedings, this decision concludes the proceedings for creditor D… since it contests all credits". "There is no other legal documentation that can be required relating to the denial of D…'s credits". "Also according to the information of the German law office, B…'s insolvency proceedings are not yet completely concluded".
"I hope that all this information, evidence and clarifications are sufficient to close the request for clarifications identified above, since I do not know (and the German lawyers do not know either) what other legal or formal information exists to prove that D… had no right to be reimbursed for the amounts it was owed by the insolvent entity and that this 'uncollectibility' occurred at the time the judgment of the Court of ... was received, that is, 17/09/2012." – as per article 52 of the AT's reply;
6. It was only due to the fact that the Claimant was held 100% by the company resident in Germany with the trade name "B…", that in the German court the credits claimed by the Claimant were considered non-enforceable – as per documents constituting pages 59 and 60, 69 to 71 of PA Part 1, as per article 15 of the AT's reply;
7. On 17 February 2014 the Claimant proceeded to submit the Corporate Income Tax Return ("IRC") Form 22, for the 2012 financial year, a replacement return, considering as a negative component of taxable profit the credit it considered uncollectible, in the amount of € 5,272,603.24 – as per articles 5 and 6 of the request and document no. 3 attached to the request;
8. On 27 May 2016, through service order no. OI2016…, an internal and partial scope inspection action was initiated against the Claimant (Corporate Income Tax – analysis of uncollectible credits, royalties and other expenses and losses) – as per article 9 of the request and article 11 of the reply;
9. Within the scope of the inspection procedure a report was drawn up in point III.1.3 of which it is stated: "A… in the 2012 financial year was held 100% by the German company B…. During this financial year B… entered into insolvency proceedings. As a result of this fact, and the German insolvency court's consideration of the credits claimed as non-enforceable, the taxpayer 'reclassified' the credits it held against its parent company in the amount of 5,272,603.24 as uncollectible debts (account 683).
This amount was considered for tax purposes, insofar as there was no reflection in Form 22, table 07, relating to the subject matter in question.
To justify the credits owed, maps/extracts were provided with details of which documents gave rise to them.
In order to prove the uncollectibility of the credits, in accordance with article 41 of the Corporate Income Tax Code, copies were sent, among others:
a) Of the claims of credits in the German insolvency court - Court of ... — Insolvenztabelle (Pages 106 to 109 of Annex I);
b) Of the means of defence available due to the fact that the claimed credits were not accepted by the insolvency court (Pages 112, 113 and 115 of Annex I);
c) Of the certificate of registration of the dissolution of the company due to the institution of insolvency proceedings (Pages 75 to 78 of Annex I);
In the present case, we are dealing with the recognition of an expense relating to credits owed by a non-resident company, and the case is governed by German tax laws.
The legal provision established in article 41 of the Corporate Income Tax Code contemplates situations that are provided for, and whose application occurs in the Portuguese legal system. However, since the legislator did not expressly create any reservation in the law in the event that the debtors of the credits are non-residents, it allows us to conclude that the spirit underlying this article is that there must be a situation proven by the taxpayer that its customer/debtor is unable to fulfil its payment obligations. Otherwise, the legal provision would establish an unequal regime between resident and non-resident debtors.
In the Portuguese case, this impossibility is established by the final result of insolvency and business recovery proceedings, or execution proceedings, or extra-judicial reconciliation proceedings for viability of companies in insolvency or in difficult economic situation, or by an arbitral tribunal decision in the context of disputes arising from the provision of essential public services or credits that are prescribed (our emphasis).
In this sense, if the uncollectibility of the debtor - B… - occurs, the expense can be considered as a tax-accepted expense if:
a) It results from the judgment closing the insolvency proceedings; and,
b) No loss from impairment has been recognised, or if it has been recognised, it proves insufficient.
As regards paragraph b), and in accordance with article 36 of the Corporate Income Tax Code, A… could have constituted a loss from impairment. However, by force of no. 3 of that article, it would not be accepted for tax purposes given that the debtor held 100% of A….
As regards paragraph a), and as stated in the email transcribed above "according to information from the German law office, B…'s insolvency proceedings are not yet completely concluded". Thus, with the insolvency proceedings not yet concluded, the taxpayer will not be able to recognise the tax expense in accordance with article 41 of the Corporate Income Tax Code given that the necessary conditions for that credit to be considered uncollectible are not yet met in this financial year.
Consulting the European Commission portal regarding German insolvency proceedings, and despite the information that it is outdated, it is stated regarding the question of:
"10. What are the conditions for closing the proceedings? After completion of the final distribution, the insolvency proceedings are officially closed. The closure decision is announced publicly. After the closure of insolvency proceedings, creditors may enforce their remaining credits against the debtor without restrictions. The situation is different if the debtor is a natural person and has requested discharge from payment of residual debts. If discharge is granted, creditors will not be able, in definitive terms, to enforce their credits against the debtor (exception: credits referred to in art. 302 of InsO). With the closure of insolvency proceedings, the debtor reacquires, in principle, the power to manage and dispose of assets previously subject to the proceedings.
If there are proceedings relating to a plan applicable to liabilities, insolvency proceedings are closed as soon as confirmation of that plan takes legal effect (§ 258, 1 2, InsO)."
It should also be noted that no. 2 of article 41 of the Corporate Income Tax Code imposes as a cumulative condition proof of communication to the debtor of the recognition of the expense for tax purposes, which will be translated into communication to the insolvency administrator, who must recognise that amount as profit for the purpose of determining taxable profit.
It is reiterated that, although we are dealing with a non-resident debtor entity, the legislator did not expressly include any reservation, so that formal obligation would have had to be complied with.
Thus, by the foregoing, the cumulative requirements provided for in nos. 1 and 2 of article 41 of the Corporate Income Tax Code not being met, the uncollectible credits in the amount of 5,272,603.24 € will not be accepted, and it will be added in field 722 of table 07 of Form 22."
- as per pages 63 to 65 of PA part 1 submitted by the AT with its reply;
10. On 06 July 2016, by office no. …, the Claimant was notified in accordance with articles 60 of the General Tax Law and of the Regulation of Tax Inspection Procedure Code (RCPITA), to exercise, within a period of 15 days, the right to be heard, which it exercised on 21 July 2016, with the submission of the following documents: Document 1: opening of B…'s insolvency proceedings filed with the Court ... (Insolvency Court) on 28-06-2012; appointment on 28-06-2012 of the insolvency administrator Dr. E…; scheduling of the creditors' meeting for 31-08-2012; copy of the forms for claiming credits; Document 2: copy of the claim of credits submitted to the insolvency administrator; Document 3: non-acceptance by the insolvency court of the claimed credits – as per pages 66 and 69 of PA part 1 submitted by the AT with its reply.
11. Following the exercise of the right to prior hearing by the Claimant referred to above, the following is stated in the RIT (inspection report): "In the analysis of the allegations presented by A… in exercise of the right to be heard, it was found that several issues were pointed out for it to disagree with the corrections proposed in the present report. Therefore, an attempt will be made to clarify the AT's understanding of each of them.
Requirement provided for in no. 1 of article 41 of the Corporate Income Tax Code - With respect to this requirement, the taxpayer alleges that it is not written in the wording "(... which did not refer at any point to the need for there to be a judgment closing insolvency proceedings, but only that uncollectible credits result from insolvency proceedings, which is manifestly the case".
Paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code provides that "1. Uncollectible credits may be directly considered as expenses or losses of the taxation period provided that: a) This results from insolvency and business recovery proceedings (...)".
Indeed: in that legal provision no specific 'phase' of the insolvency proceedings is established for the credit to be considered uncollectible. In fact, insolvency proceedings are initiated with the insolvency judgment where a date is defined from which a given entity is considered insolvent. After this date, the proceedings, very briefly, may have several outcomes, namely, being closed due to insufficiency of the insolvent estate, a business recovery plan being approved, among others.
However, given the wording of paragraph a) of no. 1 of article 36 of the Corporate Income Tax Code, which states that "1. For the purpose of determining losses from impairment provided for in paragraph a) of no. 1 of the preceding article, credits of doubtful recoverability are those in which the risk of uncollectibility is properly justified, which is verified in the following cases: a) The debtor has pending insolvency and business recovery proceedings or execution proceedings (...)," it is verified that the 'phase' is not the same.
It is inferred from the reading of paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code that in this legal provision, the result of insolvency proceedings must be something more definitive than the mere existence of insolvency proceedings as provided for in paragraph a) of no. 1 of article 36 of the Corporate Income Tax Code.
In this sense, the judgment closing the insolvency proceedings, in defining both an end to the proceedings, also establishes the final result thereof for each of the creditors.
Requirement provided for in no. 2 of article 41 of the Corporate Income Tax Code - With respect to this matter the taxpayer disagrees, stating that it lacks "(...) any sense that the national legal system impose rules on non-resident entities without any activity in Portugal and even less regarding the determination of profit in their country of origin. Now, if the main objective of this provision (communication to the debtor of the recognition of the expense for tax purposes so that it recognises the respective amount in determining its taxable profit) is exactly this recognition by the debtor (which as we have seen cannot be imposed by national rules on non-resident entities) would it not then be concluded that such communication lacks any sense."
As regards the question of the imposition of rules on non-resident entities without any activity in Portugal, this does not occur in the case in question. Indeed, and as described both in the present report and in the right to be heard ..., B… (company governed by German law), held in 2012, 100% of the capital of A… as well as voting rights, so that, although the registered office of the parent company (B…) is not in national territory, in terms of the group, the company had activity in Portugal being subject to national tax rules by the commercial relationships it had in our country.
As regards compliance with what is provided for in no. 2 cumulatively with the provisions of the various paragraphs of no. 1 of the article in question, these are the means by which the legislator considered had to be complied with in order for uncollectible credits to be accepted for tax purposes, this being indeed the primary objective of this article (of which no. 2 is an integral part).
It is true that no. 2 of article 41 has implicit the compliance with two obligations: one, in the sphere of the creditor, having to carry out the communication; and another, in the sphere of the debtor, in the recognition of profit/income upon receipt of that communication of a debt that will no longer be paid as a result of the regularisation of that credit by its creditor, which is communicated to it.
In the case in question, A…, being in the sphere of the creditor, and as a result of the principle of neutrality, regardless of the debtor being non-resident in national territory, is subject to the national legal procedures for the validity of its tax rights.
...
The loss from impairment has the same tax effect - An impairment loss could not be accepted in accordance with the rule cited by the taxpayer, given that the credits do not result from the normal activity of the taxpayer, this being the requirement provided for in article 35 deemed essential for acceptance of the values in accordance with the rule provided for in article 36 of the Corporate Income Tax Code.
Conclusion - Given the foregoing, and given that the requirements provided for in nos. 1 and 2 of article 41 of the Corporate Income Tax Code have not been met, the correction proposed is to be maintained.
X. Conclusions
As a result of the comparison between the IES statement and Form 22 of the year 2012, it was found that it was necessary to validate the amounts relating to uncollectible debts.
For this purpose this inspection procedure was initiated. In compliance with this, the taxpayer was notified, by office no. … of 27-05-2016, to present various elements.
In the analysis of the documents submitted it was found that uncollectible credits did not meet the requirements provided for in article 41 of the Corporate Income Tax Code, for them to be accepted for tax purposes, so the taxpayer was notified by Office no. … of 06-07-2016 to exercise the right to be heard.
On 21-07-2016 A… exercised its right, disagreeing with the corrections proposed in the inspection report.
After analysing the allegations presented it is concluded that no evidence was presented that the requirements provided for in article 41 of the Corporate Income Tax Code were met, so the taxpayer's claim was not upheld".
- as per pages 69 to 73 of PA part 1 submitted by the AT with its reply;
12. On an unascertained date the Claimant was notified of the additional assessment of Corporate Income Tax and compensatory interest to which the assessment number 2016… corresponds, resulting in a total amount payable of 31,124.57 euros, with payment deadline of 04 October 2016 – as per article 1 and document no. 1 attached with the request;
13. On 25 November 2016 the Claimant filed an administrative complaint against the assessment, which was dismissed by dispatch of 28 June 2017 and the decision notified on 04 July 2017 – as per article 25 of the AT's reply, article 2 of the request and document no. 2 attached with the request;
14. Since the Claimant did not pay the amount assessed against it, the AT instituted tax enforcement proceedings no. …2016…, within which, on 14 November 2016, it made a request for suspension of enforcement by providing a bank guarantee …, "on first demand", dated 31 October 2016, the issuing entity, in the name and at the request of the Claimant, being Bank F… and the beneficiary entity being the Tax and Customs Authority, for a total amount of 39,683.75 euros – as per articles 143 and 144 of the request and document no. 9 attached with the request;
15. On 02 October 2017 the Claimant filed the present request for arbitral pronouncement (ppa) with CAAD – entry record in the CAAD Procedural Management System of the request for arbitral pronouncement.
Unproven Facts
There is no other factual matter alleged that was not considered proven and that is relevant for the composition of the case.
The facts brought to the established factual matter are configured as being accepted by both parties.
IV. APPRAISAL OF THE QUESTIONS FOR THE SINGULAR ARBITRAL TRIBUNAL (TAS) TO RESOLVE
As referred to above, in part II of this decision, the crux of the question, in terms of appraisal and judgment of the established facts, will relate to the assessment made of the evidence produced in this process and in the procedures that preceded it (inspection and administrative complaint), in order to ascertain whether it is susceptible to being considered, as a whole, as sufficient evidence and as such proof that the credit in question did become uncollectible by the end of 2012, so that, in accordance with paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code, it can be concluded that it could be directly considered an expense or loss of the respective financial year.
It should be stated from the outset that we do not consider it necessary or even possible to resort to paragraph a) of no. 1 of article 36 of the Corporate Income Tax Code to 'infer' that the result of the insolvency proceedings is the judgment closing the insolvency proceedings.
First because the text of the law will not permit it (paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code, a norm that is self-sufficient in the 2012 wording). Second, because, in general and abstract terms, 'uncollectibility' may be clearly defined in the bankruptcy proceedings, even before the judgment closing them, depending on the specific case. Finally, because it cannot be reasoned in this case as if it were an insolvency proceeding running under Portuguese jurisdiction, by the fact that it ran under German jurisdiction, according to German bankruptcy proceedings (the English version can be seen at Downloads/InsO%20German%20Insolvency%20Code%20-%20English%20version%20(updated%2002%2009%202013).pdf).
Let us examine the established facts:
Point 5 of established factual matters: "From the clarifications given by the German law office results the information that the most formal, legal and effective information is what we received as a judgment of the Court of ...". "This is a court judgment in response to the claim of credits submitted. For the insolvency proceedings, this decision concludes the proceedings for creditor D… since it contests all credits". "There is no other legal documentation that can be required relating to the denial of D…'s credits". "Also according to the information from the German law office, B…'s insolvency proceedings are not yet completely concluded". (we emphasise the passages we consider most relevant).
Point 6 of established factual matters: "It was only due to the fact that the Claimant was held 100% by the company resident in Germany with the trade name "B…", that in the German court the credits claimed by the Claimant were considered non-enforceable".
It appears clear that, in terms of the insolvency proceedings that took place in the German Court, it must be concluded that, in that jurisdiction, the Claimant's credit was considered unenforceable because of the control relationship of the debtor company (non-resident) over the creditor company, here the Claimant (resident).
What may be considered contradictory is the information from the German law office that "B…'s insolvency proceedings are not yet completely concluded" and this, certainly, because
1. It will relate to other creditors and other credits, which were not indeed ascertained in the RIT;
2. And because situations could potentially exist where creditors (holders of contested credits, as occurred with the Claimant), in light of article 180, 174-2 and 179-2 of the German Insolvency Code, with the possibility of resorting to declaratory actions (article 174-2), but it appears this would only be possible on the basis of "unlawful act, committed with intent by the debtor", (see "important indications for creditors of credits on the insolvent estate contested" - page 103 of PA Part 1 submitted with the Reply). In the case of article 179-2 it refers to an enforceable title or judgment that has become final, which is not the case in this proceeding.
That is, it should be considered that what is referred to by the German lawyers is that, without placing in question that as regards the Claimant the insolvency proceedings were concluded, in general the proceedings still had procedures to follow, certainly for other creditors, not the Claimant, until it was formally terminated.
In fact, from what is known in this process, it is not seen how "unlawful act, committed with intent by the debtor" (committed against the creditor here) could be invoked to support a declaratory action to claim verification of the credit, particularly because these are related companies and nobody is going to act against itself in material terms.
We conclude, therefore, in light of what is proven and in the reading of the facts made above, that as soon as the German Court notified the Claimant that its credit was non-enforceable, its proven uncollectibility resulted, and consequently the requirement provided for in paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code in the version in force in 2012 was fully met.
The reasoning contained in the RIT and in the Reply, regarding the application to the case of Portuguese bankruptcy procedural law, appears to us unsustainable, by the simple evidence of the facts: the insolvency proceedings of the German company (with repercussions certainly on the subsidiary company in Portugal) took place in Germany, according to German procedural law, making it not make sense to apply any of the Portuguese procedural norms of insolvency proceedings to this case. Hence, by force of the evidence of the facts, the referral that paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code makes to procedural laws of judicial jurisdictions, in this case, seems to be understood to do so with respect to the procedural rules of the jurisdictions of the countries where the proceedings take place.
In the reading that this TAS adopts of the facts brought to this process, it seems clear that, according to German procedural jurisdiction, the Claimant's credit against its parent company became definitely uncollectible as soon as it was judicially notified of its non-enforceability, because it is a company in a control relationship at 100%.
Nor does it appear that it can be maintained that if understood as understood above, one is advocating for an unequal regime between residents and non-residents (see part of the RIT reproduced in point 9 of established factual matters), which besides already exists somewhat across various tax systems. What is at issue here will be to take into account the truth of the facts, insofar as if the insolvency proceedings take place in other jurisdictions than the Portuguese one, it will be in light of those rules that one should reason to ascertain the definitive uncollectibility of the credits.
Nor does it appear that the allegation that the norm of paragraph a) of no. 1 of article 41 of the Corporate Income Tax Code (as regards proof of the formal end of bankruptcy proceedings) was merely 'clarified' with the alterations of its wording that occurred thereafter, notably in the Budget Law for 2016, has foundation. The law was altered and the alterations, in principle, only apply to the future.
The second question that arises and which was considered as an obstacle to the success of the Claimant's claim in the inspection and administrative complaint proceedings relates to the lack of the requirement provided for in no. 2 of article 41 of the Corporate Income Tax Code, version of 2012.
No. 2 of article 41 of the Corporate Income Tax Code in force in 2012 states:
Without prejudice to the maintenance of the obligation for civil purposes, the deductibility of credits considered uncollectible under the preceding number or under the provisions of article 36 is further dependent on the existence of proof of communication to the debtor of the recognition of the expense for tax purposes, which must recognise that amount as a profit for the purpose of determining taxable profit.
The Claimant sustains the following:
1. the debtor, as a non-resident, is not a taxpayer subject to Portuguese Corporate Income Tax;
2. its positive or negative results in no way affect Portuguese tax revenue;
3. the communication, whose form is not provided by law, would be pointless, because the debtor company, the parent company, "had full and complete knowledge of such intention, having even participated in the decision-making process as a shareholder".
For its part the Respondent in the RIT sustains the contrary, but acknowledges: "It is true that no. 2 of article 41 has implicit the compliance with two obligations: one, in the sphere of the creditor, having to carry out the communication; and another, in the sphere of the debtor, in the recognition of profit/income upon receipt of that communication of a debt that will no longer be paid as a result of the regularisation of that credit by its creditor, which is communicated to it.
In the case in question, A…, being in the sphere of the creditor, and as a result of the principle of neutrality, regardless of the debtor being non-resident in national territory, is subject to the national legal procedures for the validity of its tax rights".
As it appears evident the norm in question will be constructed to function only between resident entities. The reason for this normative is well clear in its formulation: "the debtor must recognise that amount as a profit for the purpose of determining taxable profit".
The law does not speak about the form in which the 'evidence' is produced or is or should be accepted. The law speaks of 'existence of proof' of the communication, with a view to a specific purpose. The function of evidence is the demonstration of the reality of the facts (article 341 of the Civil Code).
Notorious facts, those of general knowledge, neither require to be alleged nor proved (article 412 of the Civil Procedure Code).
Moreover, the Claimant alleged before the AT, in the course of proceedings, what it came to allege in this process and is reproduced above, whereby nothing prevented such indications from being freely assessed as being equivalent to statements of a party (article 466 of the Civil Procedure Code).
That is, as long as it is manifest that the substantive objective of the law (the legal interest it seeks to safeguard) is fully assured, the law should be considered complied with.
The TAS considers that it would be a formal pointlessness if it were required, for example, a written document of the Claimant, addressed and delivered to the holder of 100% of its capital, non-resident, for the purpose of, only thus, being able to recognise that amount of the uncollectible credit (in Portugal), forcing the German company to consider an equal amount as profit for the purpose of determining taxable profit (in Germany), for the reason that Portuguese law does not have this effect in German territory.
The Claimant's parent company is not a taxpayer in Portugal, but rather in Germany, and it does not appear that from the fact of having the right to vote in the Claimant and the holding of 100% of its capital, can result the tax obligation to order the preparation of any formal communication, of usefulness that is not envisaged.
In fact, the norm in question, as it is drafted, does not appear to have application to situations of this type, between resident and non-resident entities, even more so related, because the interest it seeks to safeguard (Portuguese tax revenue), if the norm were applicable, at least in a situation such as the one in the file, would result in an evident pointlessness, without practical utility.
But even if this were not so, in a situation such as this process, in which a non-resident company owns 100% of the capital of a resident company (and holds the corresponding vote in terms of management), it should be understood that, proven that control relationship, it is equivalent to sufficient evidence of the 'existence ... of communication', because it is a notorious fact or then the simple statements to this effect by the resident company should be assessed as integrating this aim.
It is considered, therefore, in light of the described, that it was not required of the Claimant the formal compliance, via written document, of the communication provided for in no. 2 of article 41 of the Corporate Income Tax Code, the proof of its control relationship with the German company being sufficient, as it carried out. Even if it were not so, as a notorious fact or resulting from a statement by the interested party which offers no reasonable doubt, this requirement is considered met.
Accordingly, the request for arbitral pronouncement is upheld, because the additional assessment of Corporate Income Tax and the decision dismissing the administrative complaint are not in conformity with article 41 of the Corporate Income Tax Code, in its 2012 wording, in the reading that is advocated above.
Being upheld, as it is, one of the non-conformities pointed out by the Claimant to the impugned acts with the law, it becomes unnecessary to verify other non-conformities that the Claimant pointed out.
Compensation for undue provision of guarantee
The Claimant, in addition to the request for declaration of illegality and annulment of the assessment act and likewise of the dispatch of the Deputy Director of Finance, in replacement regime, dated 28 June 2017 which dismissed its administrative complaint, requested that it be recognised as having the right to compensation for guarantee unduly provided.
It was proven, in accordance with point 14 of established factual matters, that the Claimant did not pay the amount assessed against it, with the AT instituting tax enforcement proceedings no. …2016…, within which, on 14 November 2016, it made a request for suspension of enforcement by providing a bank guarantee …, "on first demand", dated 31 October 2016, the issuing entity, in the name and at the request of the Claimant, being Bank F… and the beneficiary entity being the Tax and Customs Authority, for a total amount of 39,683.75 euros.
The cumulation of claims relating to the same tax act is implicitly presupposed in article 3 of the RJAT, when it speaks of 'cumulation of claims even if relating to different acts', which allows one to understand that the cumulation of claims is also possible relating to the same tax act, so an interpretation in this sense has, at least, the minimum of verbal correspondence required by no. 2 of article 9 of the Civil Code.
The regime of the right to compensation for undue guarantee is contained in article 53 of the General Tax Law, which establishes the following:
Article 53
Guarantee in case of undue payment
1. The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be indemnified in whole or in part for the losses resulting from its provision, if it has maintained it for a period exceeding three years, in proportion to the success in administrative review, challenge or opposition to enforcement that have as their object the guaranteed debt.
2. The period referred to in the preceding number does not apply when it is verified in administrative complaint or judicial challenge that there was error attributable to the services in the assessment of the tax.
3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the amount guaranteed of the rate of indemnificatory interest provided for in this law and may be claimed in the same administrative complaint or judicial challenge proceeding, or autonomously.
4. Compensation for undue provision of guarantee shall be paid by deduction from tax revenue for the year in which payment was made.
In the case in question, it is manifest that the error underlying the assessment of Corporate Income Tax and compensatory interest is attributable to the Tax and Customs Authority, since the assessment is additional, was initiated by it and the Claimant in no way contributed to such error being committed. The same applies to the decision dismissing the administrative complaint filed against the assessment.
Therefore, the Claimant has the right to compensation for the guarantee provided.
As there are no elements that allow determination of the amount of compensation, the condemnation must be made with reference to what comes to be determined in execution of this decision (articles 609, no. 2, of the Civil Procedure Code and 565 of the Civil Code, applicable in accordance with article 2, paragraph d) of the General Tax Law).
V - OPERATIVE PART
For the reasons and on the grounds stated above:
1. The request for arbitral pronouncement seeking the declaration of illegality and annulment of the decision dismissing the administrative complaint, contained in dispatch of 28 June 2017, with the decision notified on 04 July 2017 as referred to in point 13 of the established factual matters and seeking the annulment of the additional assessment of Corporate Income Tax and compensatory interest to which the assessment number 2016… corresponds, resulting in a total amount payable of 31,124.57 euros, is upheld for non-conformity with article 41 of the Corporate Income Tax Code, in the reading advocated above;
2. Consequently, the decision dismissing the administrative complaint and the additional assessment of Corporate Income Tax are annulled;
3. The request for recognition of the right to compensation for undue provision of guarantee is also upheld. Because there are no elements that allow determination of the amount of compensation, the Tax and Customs Authority is condemned to indemnify the Claimant in whatever comes to be determined in execution of this decision (articles 609, no. 2, of the Civil Procedure Code and 565 of the Civil Code, applicable in accordance with article 2, paragraph d) of the General Tax Law).
Value of the case: in accordance with the provisions of article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (and paragraph a) of no. 1 of article 97A of the Administrative Procedure Code for Tax Proceedings), the value of the case is fixed at 31,124.75 € euros.
Costs: in accordance with the provisions of article 22, no. 4, of the RJAT, the amount of costs is fixed at € 1,836.00 according to Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.
Notify accordingly.
Lisbon, 23 April 2018
Singular Arbitral Tribunal (TAS),
Augusto Vieira
Text prepared by computer in accordance with the provisions of article 131, no. 5, of the Civil Procedure Code, applicable by reference from article 29 of the RJAT.
The wording of this decision is governed by the spelling prior to the 1990 Orthographic Agreement.
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