CAAD 532/2018-T: Confidential Expenses, Micro-Entity Accounting & Financial Asset Measurement in IRC Tax

ARBITRAL DECISION

The Arbitrator, Dr. Sílvia Oliveira, designated by the Ethics Council of the Administrative Arbitration Centre (CAAD) to form the Single Arbitral Tribunal, constituted on 9 January 2019, decided the following:

1. REPORT

1.1

A A... Lda., legal entity no. ..., with registered office at Rua..., no. ..., in ... (hereinafter referred to as "Claimant"), submitted a request for arbitral pronouncement and constitution of a Single Arbitral Tribunal on 26 October 2018, pursuant to article 4 and article 10, no. 2 of Decree-Law no. 10/2011 of 20 January [Legal Framework for Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority (hereinafter referred to as "Respondent") is named as respondent.

1.2

The Claimant petitions in the arbitral request that it be declared illegal and that the following be partially annulled:

1.2.1

"(…) partially the IRC assessments nos. 2018 ... and 2018..., both of 21 June 2018, on the following grounds:

a) By error as to the legal prerequisites concerning the subjection to autonomous taxation of amounts received by Dr. A... in the name and on behalf of the Claimant in violation of article 88, no. 1 of the IRC Code;

b) Subsidiarily, to the extent that the petition in subparagraph a) above is rejected, by error as to the factual prerequisites, namely in the quantification of the values pending delivery by Dr. A..., these amounting only to EUR 17,014.73".

1.2.2

"(…) partially the IRC assessments no. 2018 ... and 2018..., both of 21 June 2018, by error as to the legal prerequisites inasmuch as the same disregard the application of the historical cost criterion in the recording of securities held by the Claimant with B..., considering instead that there were fiscally relevant gains through increases in fair value thereof";

1.3

Additionally, to the extent that the petitions formulated in the previous point are upheld, the Claimant petitions that there be determined "(…) the partial annulment of the respective compensatory interest assessments in the amount of EUR 3,898.82", if "the reimbursement to the Claimant of the amount of EUR 45,583.72 wrongfully borne be ordered", if "the existence of error attributable to the Services of the Tax Administration be recognised and, consequently, it [the Administration] be condemned to pay indemnitory interest, computed on the amounts to be reimbursed, from the date of their voluntary payment – 5 July 2018 – until the issuance of the respective credit notes (…)" and if "the Tax Administration be condemned in the costs of the arbitral proceedings, all with the other legal consequences".

1.4

The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD on 29 October 2018 and notified, on the same date, to the Respondent.

1.5

Given that the Claimant did not proceed to appoint an arbitrator, pursuant to article 6, no. 1 of RJAT, the undersigned was designated as arbitrator on 18 December 2018 by the President of the Ethics Council of CAAD, the appointment having been accepted within the timeframe and under the terms legally provided for.

1.6

On the same date, the Parties were duly notified of this designation, having manifested no desire to challenge it, in accordance with the combined provisions of article 11, no. 1, subparagraphs a) and b) of RJAT and articles 6 and 7 of the Ethics Code.

1.7

Thus, in accordance with the provision in subparagraph c) of no. 1 of article 11 of RJAT, the Arbitral Tribunal was constituted on 9 January 2019, and an arbitral order was issued on the same date directing the Respondent to, in accordance with article 17, no. 1 of RJAT, submit a Response within a maximum period of 30 days and, should it wish, request the production of additional evidence.

1.8

Additionally, in that arbitral order, it was further stated that the Respondent should remit to the Arbitral Tribunal, within the timeframe for submitting the Response, a copy of the administrative file.

1.9

On 8 February 2019, the Respondent submitted its Response, having defended itself by impugnation and concluded that "(…) there exists no illegality whatsoever in the conduct of the AT, the assessments impugned being legally sustained, and therefore they must remain valid in the legal order", and that "(…) the present request for arbitral pronouncement should be judged dismissed (….), and the respondent entity should accordingly be absolved of the petition".

1.10

On 11 February 2019, both Parties were notified of an arbitral order with the following tenor:

"Taking into account:

a) The fact that no matter of exception that needs to be addressed was raised in the Response submitted on 8 February 2019;

b) The fact that the position of the Parties is fully defined in the case file and supported by the documentary evidence attached;

In this context, no utility is seen in holding the meeting provided for in article 18 of the Legal Framework for Tax Arbitration (RJAT).

Thus, in accordance with the principles of the autonomy of the Arbitral Tribunal in the conduct of proceedings, celerity, simplification and informality of procedure (articles 19, no. 2, and 29, no. 2, of RJAT), as well as taking into account the principle of limitation of useless acts provided for in article 130 of the Code of Civil Procedure (CPC), applicable by virtue of the provision in article 29, no. 1, subparagraph e) of RJAT, this Arbitral Tribunal decided:

1. To dispense with the holding of the meeting referred to in article 18 of RJAT;

2. To determine that the proceedings continue with optional written submissions, to be presented within the successive period of 10 days, counted from notification of this order;

3. To designate 8 March 2019 for purposes of delivering the arbitral decision.

(…)".

1.11

In the same order, the Arbitral Tribunal further notified "(…) the Respondent, already previously notified for this purpose, to submit the administrative file within the supplementary period of 5 days, counted from notification of this order (…)" and warned "(…) the Claimant that, until the date of delivery of the arbitral decision, it should proceed with payment of the subsequent arbitral fee, in accordance with article 4, no. 3 of the Regulation of Costs in Tax Arbitration Proceedings and communicate this payment to CAAD" (which it did on 21 February 2019).

1.12

On 12 February 2019, the Respondent attached to the case file the respective administrative file.

1.13

The Claimant submitted written submissions on 21 February 2019, reiterating what was set out in the petition.

1.14

The Respondent did not submit, within the granted timeframe, written submissions.

2. CAUSE OF ACTION

2.1

The Claimant begins by stating that "the present Petition aims at the constitution of an Arbitral Tribunal (…), for the examination of the legality of the following additional IRC assessments and compensatory interest:

(i) Additional assessment no. 2018..., relating to the fiscal year 2014 and to which corresponds compensation no. 2018..., in the total amount of EUR 22,923.90, of which EUR 2,446.11 relating to compensatory interest and,

(ii) Additional assessment no. 2018..., relating to the fiscal year 2015 and to which corresponds compensation no. 2018..., in the total amount of EUR 33,217.08, of which EUR 2,412.79 relating to compensatory interest and EUR 4,604.94 relating to the reimbursement of tax refunded to the Claimant on 2 August 2016".

2.2

The Claimant continues by stating that "such additional tax assessments were issued as a result of an external inspection action covering the fiscal years 2014 and 2015 of the Claimant (…)", but "the Claimant does not accept the additional IRC assessments (…) identified, deeming them illegal, requiring their respective annulment for the reasons that (…)" it presents.

Concerning the alleged existence of undocumented expenses

2.3

In this regard, "(…) the Claimant does not agree either with the quantification of the values received from C..., LDA. that remained pending delivery by Dr. A... to the Claimant, or with the characterization of such values as undocumented expenses".

2.4

The Claimant states that "in the understanding of the Tax Administration, EUR 25,993.55 remained undelivered with respect to 2014 and EUR 43,208.06 with respect to 2015, thus totalling EUR 69,201.61", whereas "according to the (…) understanding of the Claimant, no amount remained pending delivery with reference to 2014, with only the amount of EUR 17,014.73 remaining undelivered, relating to 2015".

2.5

According to the Claimant, "this divergence of understanding regarding the quantification of the amount pending restitution is connected to the characterization of the transfer of EUR 56,000.00, made by Dr. A... to the bank account of the Claimant on 31 December 2014, with the Tax Administration considering that it constituted a shareholder loan and the Claimant considering that it constituted a delivery of the remainder of the values received in 2014 and, as to the excess, an advance on account of values that Dr. A... was foreseeably going to receive by the Claimant in 2015 for services to be rendered to C..., LDA."

2.6

The Claimant recognizes that "as is evident from the final inspection report, the transfer of EUR 56,000.00 is effectively recorded (…) in account 268211 as a shareholder loan", and that "(…) this corresponds to an error in the accounting record, the dual aspect of the transfer made – delivery of values received in 2014 and, as to the excess, advance of values to be received in 2015 – not having been adequately reflected in the accounts".

2.7

The Claimant proceeds by stating that "indeed, of the EUR 56,000.00 transferred by Dr. A... to the Claimant on 31 December 2014, EUR 25,993.55 corresponded to the delivery of the amount that remained lacking with respect to 2014 and EUR 30,006.45 to the advance of amounts that Dr. A... was going to receive in the name and on behalf of the Claimant in 2015".

2.8

"Now, analyzing the accounts from a global perspective, it is easy to ascertain the rationale underlying the erroneous recording of this transfer as a shareholder loan: namely, that the amounts received by Dr. A... in the name and on behalf of the Claimant were not recorded in an account of his, but rather recorded in banks, as if they had immediately entered the company's bank account upon receipt" and, according to the Claimant, this is the reason why "(…) the transfer of EUR 21,700.00 to the Claimant's bank account (…) did not correspond to any entry in the Claimant's accounts".

2.9

"As for the transfer on 31 December 2014 of EUR 56,000.00 to the Claimant's bank account, since the amount thereof exceeded (…) the amount pending delivery at that date, it was necessary to proceed with the accounting record of the transaction, under penalty of the amount recorded in banks being less than the balance of the Claimant's bank account".

2.10

The Claimant recognizes that, in this regard, "there was (…) an error in the recording of this transfer, since the accountant (…) of the Claimant considered that the accounting treatment to be given to the entirety of the transferred amount should be the same because it was a single bank transfer when, in reality, it should have divided the transferred value, allocating EUR 25,993.55 to the delivery to the Claimant of the remainder of the amounts received by Dr. A... in 2014 and recording only the value of EUR 30,006.45 as a shareholder loan, to be offset against receipts relating to services to be rendered in 2015".

2.11

Thus, the Claimant reiterates that "in this context, when confronted with Dr. A...'s intention to make a transfer of EUR 56,000.00 to the bank account of this entity, the accountant (…) of the Claimant prepared a receipt for supplies in that amount and, in coherence with that decision, recorded the entirety of that amount in the accounts as a shareholder loan, in account #268211".

2.12

But, according to the Claimant, "regardless of the accounting record of the bank transfer in question, it is easy to infer (…) that it did not constitute a loan by Dr. A... to the Claimant", "(…) since it would not make sense to make a loan when there were still amounts pending delivery by Dr. A... to the Claimant".

2.13

Furthermore, in this regard, the Claimant states that "(…) the manner of accounting for a transaction cannot irreversibly determine its tax treatment, and it is always the taxpayer's right to demonstrate the existence of an error in its accounting records, the occurrence of which may, at most, only negate the presumption of truthfulness of statements, provided for in article 75, no. 1, of the LGT" and that, "on the other hand, it follows from the principle of inquiry inherent in article 58 of the General Tax Law that the tax administration must, in the procedure, carry out all necessary diligences to satisfy the public interest and to discover material truth (…)", requiring "(…) the Tax Administration to conduct its actions in the direction of discovering material truth, refraining from issuing tax assessments for merely formal reasons – above all, arising from the accounting of transactions, when it is shown that it does not correspond to reality".

2.14

Thus, the Claimant concludes that "regardless of the manner of accounting for this transfer, it is certain that of the EUR 56,000.00 transferred by Dr. A... to the Claimant on 31 December 2014, EUR 25,993.55 corresponded to the delivery of the amount that remained lacking with respect to 2014 and EUR 30,006.45 to the advance of amounts that Dr. A... was going to receive in the name and on behalf of the Claimant in 2015" and that, "in view of the above, the Tax Administration should have considered as pending delivery only the amount of EUR 17,014.73, as follows":

FISCAL YEAR 2014

Amount received directly by Dr. A...: EUR 58,575.00

Expenses of the Claimant paid by Dr. A...: EUR 10,881.45

Bank transfer of 02/07/2014: EUR 21,700.00

Bank transfer of 31/12/2014: EUR 25,993.55

Amount pending delivery: EUR 0.00

FISCAL YEAR 2015

Amount received directly by Dr. A...: EUR 58,825.00

Expenses of the Claimant paid by Dr. A...: EUR 11,803.82

Bank transfer of 31/12/2014: EUR 30,006.45

Amount pending delivery: EUR 17,014.73

2.15

In these terms, the Claimant concludes that "(…) the amount pending delivery in the fiscal years in question was not EUR 69,201.61, as sustained in the Final Inspection Report, but only EUR 17,014.73".

2.16

And the Claimant does not agree with the characterization of the amounts allegedly pending delivery as confidential expenses, subject to the autonomous taxation rate of 50%, as argued by the Respondent, because the Claimant understands that "(…) it is manifest that the amounts pending restitution do not meet the concept of undocumented expenses" as they are amounts pending restitution, "(…) with no accounting or factual basis for treating the value pending delivery (…) as undocumented expenses of the Claimant".

2.17

In this regard, the Claimant concludes that there is "(…) illegality and consequent voidability (…) of the additional IRC assessments (…) to the extent that they determine the subjection of the amount that remained pending delivery to the autonomous taxation rate of 50% (…)".

Concerning the accounting of the securities portfolio held with B...

2.18

"According to the Final Inspection Report, a correction was further determined regarding the accounting of a portfolio of B... securities, reflected in the Claimant's accounts (…) by considering:

(i) That alleged gains from increases in fair value of these assets in the fiscal years of 2014 should have been included in the Claimant's taxable profit;

(ii) That dividends distributed in 2014 as a result of the ownership of these assets should have been included in the Claimant's taxable profit;

(iii) That losses from impairment of the assets would have been improperly considered in 2015".

2.19

However, the Claimant understands that "the corrections proposed by the Tax Administration relating to alleged gains from increases in fair value of the financial assets cannot be accepted, as they suffer from an error in the measurement of the Claimant's financial assets (…)".

2.20

Indeed, the Claimant argues that being "(…) a microentity (…)", as such it "(…) must organize its accounts in accordance with NC-ME, unless it opts for the application of NCRF-PE or NCRF (…)", having the Claimant, in the fiscal years 2014 and 2015, "(…) opted for the application of NC-ME, and must consequently organize its accounts in compliance (…)".

2.21

Now, "specifically with regard to the measurement of financial assets and liabilities, the NC-ME provides (…)" that "(…) an entity must measure its financial assets and liabilities at cost, understood as the nominal amount of contractual rights and obligations involved. Financial assets relating to accounts receivable and equity participations are measured at acquisition cost, subject to subsequent adjustments arising from possible impairments".

2.22

Thus, the Claimant concludes that "(…) having (…) opted for the application of NC-ME, the measurement of its financial assets must be made at historical cost, possibly subject to adjustments arising from possible impairments, and not at fair value", and that "consequently, no gain from increases in fair value of these assets remained unrecorded, with nothing to be added to taxable profit in this respect".

2.23

Thus, the Claimant argues that "there is no legal basis for the addition to taxable profit (…) of the values of EUR 7,485.91 (2014) and EUR 25,040.25 (2015), being illegal and consequently voidable (…) the additional IRC assessments (…) to the extent that they consider these additions (…)".

Concerning the illegality of compensatory interest assessments

2.24

According to the Claimant, "it being widely demonstrated that there is partial illegality of the additional tax assessments in question, it necessarily follows that there is illegality of the respective compensatory interest assessments to the extent relating to the tax assessed that is not shown to be due (…), which should equally be partially annulled".

Concerning the right to indemnitory interest

2.25

In this regard, the Claimant states that, having proceeded with full payment of the amounts assessed whose legality is disputed and "(…) the tax acts at the origin of the present case being affected by the vice of violation of law, as has been amply demonstrated, the Claimant has the right to payment of indemnitory interest (…), on the basis of error attributable to the Services of the Tax Administration".

3. RESPONSE OF THE RESPONDENT

3.1

The Respondent begins by stating that "the Claimant was the subject of an inspection action (…), aimed at verifying the regularity of the IRC declarations for 2014 and 2015", "from which resulted the proposed corrections to the amount declared by the Claimant, set out in the assessment notes now impugned".

3.2

According to the Respondent, "as appears from the accounting records of the Claimant, it provided services exclusively to C... Lda.", and "the amounts invoiced to its client (C... Lda) were paid entirely to the managing shareholder of the Claimant, Dr. A...".

3.3

However, the Respondent argues that "(…) the accounting records of the Claimant are (…) wrong" because "the inspection services of the AT (…)" determined "(…) that there is a discrepancy between receipts and subsequent bank deposits in accounts held by the Claimant".

3.4

In this regard, the Respondent states that "of this the principal and clear example is a deposit made by Dr. A..., in the amount of EUR 56,000.00, not as a return of any amount earned in the name of the Claimant company, but as a loan by the same to the Claimant (…)", and that, given it was recorded as such, "(…) the managing shareholder A..., not only did not show that he was delivering any amount received in the name of the Claimant, but was left with the legal position of creditor of the Claimant (of which he is managing shareholder)".

3.5

The Respondent states that it wonders "(…) with due respect for the procedural rights recognized in Law, how the Claimant can attempt the present attempt to validate a procedure of clear tax evasion".

3.6

The Respondent argues that "autonomous taxation is intended (…) to discourage taxpayers from concealing the destination of their expenses and, concomitantly, to prevent such unproven expenses from serving to carry out a distribution of profits without the corresponding taxation" and understands that "what occurs, in this case, is the verification of the existence of undocumented expenses, which triggered, necessarily and as would be easy to foresee by any taxpayer who does not consider themselves removed from compliance with the Law, the autonomous taxation now impugned".

3.7

Thus, the Respondent understands that "(…) there exists no illegality whatsoever in the conduct of the AT, the assessments impugned being legally sustained, and therefore they must remain valid in the legal order", concluding that "(…) the present request for arbitral pronouncement should be judged dismissed (…), and the respondent entity should accordingly be absolved of the petition".

3.8

The Respondent did not submit, in the Response, any arguments to rebut the position of the Claimant regarding the correction made by the TIS (in the RIT) concerning the accounting of the securities portfolio held with B....

4. PRELIMINARY RULING

4.1

The request for arbitral pronouncement is timely, as it was presented within the timeframe provided in subparagraph a), of no. 1, of article 10 of RJAT.

4.2

The Tribunal is materially competent and is regularly constituted, in accordance with article 2, no. 1, subparagraph a), articles 5 and 6, all of RJAT.

4.3

The parties enjoy legal capacity and standing, are legitimate regarding the request for arbitral pronouncement, and are duly represented, in accordance with the provisions of articles 4 and 10 of RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March.

4.4

The cumulation of petitions made by the Claimant is legal and valid, in accordance with article 3, no. 1 of RJAT.

4.5

No procedural nullities were identified.

4.6

There are no exceptions that need to be addressed.

5. MATTERS OF FACT

5.1

Preliminarily, and with regard to matters of fact, it is important to point out that the Tribunal does not have to pronounce on everything that was alleged by the Parties (regarding facts), but rather has the duty to select the facts that matter for the decision and discriminate between proved and unproved facts [cf. article 123, no. 2, of the Code of Procedure and Tax Process (CPPT) and article 607, nos. 3 and 4, of CPC (applicable by virtue of article 29, no. 1, subparagraphs a) and e), of RJAT].

5.2

Thus, the facts relevant to the judgment of the case are chosen and outlined according to their legal relevance, which is established in view of the various plausible solutions to the question(s) of Law.

Proved Facts

5.3

The Claimant is a commercial partnership limited by quota, registered in the Commercial Registry Office of Cascais since 7-11-2000, whose activity falls within CAE 86906 "Other Human Health Activities, N.E.C."

5.4

Within its scope, the Claimant dedicates itself to the provision of medical services in the field of refractive ocular surgery.

5.5

For tax purposes, the Claimant is classified, for IRC purposes, under subparagraph a) of no. 1 of article 2 of the IRC Code, with this tax applying to the taxable profit determined by the General Taxation System, and for VAT purposes, is classified as a taxable person covered by the normal VAT exemption regime.

5.6

In the fiscal years 2014 and 2015, the Claimant had as its sole client C..., Lda., legal entity no. ..., with registered office in ..., ..., ..., located at Rua ...,

5.7

The refractive ocular surgery services provided by the Claimant, on a subcontracting basis, were all performed at the facilities of C..., Lda., and materially executed by Dr. A... (hereinafter referred to as Dr. A...), ophthalmologist and managing shareholder of the Claimant.

5.8

In the fiscal years 2014 and 2015, medical services were provided by the Claimant to C..., Lda. in the total amount of, respectively, EUR 58,575.00 and EUR 58,825.00, in a total of EUR 117,400.00.

5.9

According to the conditions agreed between the Claimant and C..., Lda., "(…) in the years in question, the managing shareholder received the payments in the name and on behalf of the Company, the checks being made (…) payable to the managing shareholder".

5.10

Dr. A... received directly from C..., Lda. the various payments relating to the services identified in points 5.6. to 5.8., above.

5.11

The values being received by Dr. A... were not deposited in the Claimant's bank account (opened with BANK D...), remaining in his possession.

5.12

Nevertheless, the amounts paid by C..., Lda., relating to the services provided by the Claimant, in the years 2014 and 2015, were accounting recorded in account # 121 – D..., as if such amounts had immediately entered the Claimant's bank account upon receipt, which did not occur.

5.13

As a result, there were no movements in the bank extracts of the D... account relating to receipts for services provided by the Claimant, in 2014 and 2015, to C..., Lda.

5.14

In the year 2014, of the EUR 58,575.00 received by Dr. A... (in the name and on behalf of the Claimant), EUR 10,881.45 were used by him for the payment of expenses of the Claimant relating to its activity.

5.15

On 2 July 2014, Dr. A... proceeded to transfer EUR 21,700.00 to the Claimant's bank account.

5.16

On 31 December 2014, Dr. A... transferred to the Claimant's bank account the amount of EUR 56,000.00.

5.17

The transfer identified in the previous point was recorded in the Claimant's accounts in account #268211 as "shareholder loan".

5.18

In the year 2015, of the EUR 58,825.00 received by Dr. A... (in the name and on behalf of the Claimant), EUR 11,803.82 were used by him in the payment of expenses of the Claimant relating to its activity.

5.19

In compliance with Service Orders nos. OI2017... and OI2017..., an external inspection action was instituted covering the fiscal years 2014 and 2015, the initial scope of which was VAT and withholdings on Income Tax on Individuals (IRS), subsequently expanded to also include Income Tax on Legal Entities (IRC), "(…) following the facts verified in the course of the inspection acts, to verify the variations in permutative assets of the company, recorded in the declaration (…) IES submitted between 2013 and 2015".

5.20

The inspection acts began on 31 May 2017.

5.21

Within the scope of the said inspection action, the Claimant was notified on 21 February 2018 to provide clarifications and submit documents, which were provided on 23 February 2018, through its certified accountant.

5.22

The Claimant was notified of Office..., of 2 May 2018, relating to the Draft Report of the Tax Inspection (RIT), in accordance with which it was notified of the draft corrections to be made to the IRC taxable matter, in the amount of EUR 32,526.16 (for reference to 2014) and EUR 40,382.22 (for reference to 2015), on the basis of:

5.22.1

Alleged irregularities in the accounting of a securities portfolio held with B... and dividends attributed to shareholders in the fiscal year 2014, and

5.22.2

Subjection to the autonomous taxation rate of 50% of alleged undocumented expenses of the Claimant relating to (i) withdrawals from the Claimant's bank account not reflected in the accounts, in the total amount of EUR 1,440.00, and (ii) alleged discrepancies between the amount of receipts relating to services rendered to C..., Lda., recorded in the Claimant's accounts and the respective bank extracts.

5.23

By the same Office, the Claimant was notified to exercise its prior hearing right, within 15 days, the Claimant exercising the same in writing, received by TIS on 18 May 2018 (Entry no. 2018...), in accordance with which it expressed views only regarding the correction proposed relating to the subjection to the autonomous taxation rate of 50% of alleged discrepancies between the amount of receipts relating to services rendered, in 2014 and 2015, to C..., Lda., recorded in the Claimant's accounts and the respective bank extracts, disagreeing with the quantification of the difference between receipts corresponding to services rendered and the amounts deposited in the Claimant's bank account, as well as disagreeing with the characterization of such amount as corresponding to undocumented expenses.

5.24

The Claimant expressly recognized in the prior hearing submission the existence of imprecisions in its accounting records, namely with regard to the manner in which the transfer of EUR 56,000.00 made, in 2014, by Dr. A... to the Claimant's bank account was recorded.

5.25

Upon notification for this purpose, Dr. A... appeared, on 31 May 2018, at the facilities of C..., Lda., to provide statements relating to the payments of the services by him rendered, in the years 2014 and 2015, the organization of the Claimant's accounts, and the patrimonial relations between the Claimant and the shareholders.

5.26

The Claimant was notified, on 15 June 2018, of Office no. ..., of 18 June 2018, relating to the Final RIT, with the Tax Administration having altered the Draft RIT (previously notified) following an error identified by it relating to the sum of the portions of the value pending delivery by Dr. A... to the Claimant:

5.26.1

With regard to the year 2014, the TIS corrected the said amount from EUR 26,115.44 to EUR 25,993.55, and

5.26.2

With regard to the year 2015, the TIS corrected the said amount from EUR 45,583.53 to EUR 43,208.08.

5.27

Otherwise, the remainder of the content of the Draft RIT was maintained in the final version of the RIT.

5.28

Following the Final RIT, additional IRC and compensatory interest assessments nos. 2018 ... and 2018 ..., dated 21 June 2018, were issued, relating to the years 2014 and 2015, which determined the payment by the Claimant of the amounts of, respectively, EUR 22,923.90 and EUR 33,217.08.

5.29

The deadline for payment of the additional IRC and interest assessments identified in the previous point was 3 August 2018.

5.30

The Claimant, on 5 July 2018, proceeded with payment of the assessed amounts, in the total value of EUR 56,140.98, which correspond to EUR 51,282.08 relating to tax and EUR 4,855.90 relating to compensatory interest.

5.31

In the arbitral petition, the Claimant impugns partially the IRC and compensatory interest assessments identified in point 5.28., above, the total amount impugned being EUR 45,583.72 (EUR 41,684.90, as IRC and EUR 3,898.82, as compensatory interest).

5.32

No other facts capable of affecting the substantive decision of the petition were proved.

Motivation regarding Matters of Fact

5.33

With regard to the proved matters of fact, the conviction of the Arbitral Tribunal was based, in addition to the free assessment of the positions assumed by the Parties (regarding facts), on the content of the documents attached, by both Parties, to the case file, as well as on the analysis of the administrative file remitted by the Respondent.

Unproved Facts

5.34

No other facts were determined as unproved with relevance for the arbitral decision.

6. MATTERS OF LAW

6.1

The factual matter being established as proved, it now imports determining the applicable law to the underlying facts, in accordance with the questions to be decided.

6.2

In the arbitral process under analysis, the Claimant considers that a significant part of the amount assessed as IRC (EUR 41,684.90) is illegal, inasmuch as it results:

(i) From the erroneous characterization as undocumented expenses of the amounts pending delivery by Dr. A... to the Claimant;

(ii) From the erroneous quantification of the amounts pending delivery by Dr. A... to the Claimant, which amount to EUR 17,014.73 and not EUR 69,201.61;

(iii) From the erroneous quantification by the Respondent of the gains relating to a portfolio of securities held by the Claimant with B..., whose correction determined the addition to the taxable profit of the Claimant of the values of EUR 7,485.91 (2014) and EUR 25,040.25 (2015), as it was considered, by the Respondent, that gains from increases in fair value relating to the said securities portfolio were not correctly accounted for by the Claimant.

6.3

"That is, of the corrections determined by the Tax Administration, the Claimant accepts only the following (corresponding to an IRC value of EUR 9,597.19):

(i) Subjection to autonomous taxation at the rate of 50% of the amount of EUR 1,440.00, relating to withdrawals from the Claimant's bank account not reflected in the accounts;

(ii) Taxation of dividends in the value of EUR 24,394.22;

(iv) Taxation of a loss from reduction of fair value improperly considered in the accounts, in the amount of EUR 15,985.07".

6.4

Consequently, the Claimant petitions in the arbitral request that the illegality be declared and, as a result, the IRC assessments no. 2018 ... and 2018..., of 21 June 2018, be partially annulled, which it quantifies at EUR 41,684.90:

6.4.1

By error as to the legal prerequisites concerning subjection to autonomous taxation of the amounts received by Dr. A... in the name and on behalf of the Claimant;

6.4.2

By error as to the factual prerequisites relating to the quantification of the values pending delivery by Dr. A... to the Claimant;

6.4.3

By error as to the legal prerequisites inasmuch as such assessments disregard the application of the historical cost criterion in the recording of securities held by the Claimant with B..., having considered that there were fiscally relevant gains from increases in fair value thereof.

6.5

As a consequence of the petition described in the previous point, the Claimant further requests that partial annulment of the respective compensatory interest assessments (which it quantifies at EUR 3,898.82) be determined and the reimbursement of the total amounts for which annulment is requested (EUR 45,583.72) be ordered.

6.6

But, in view of what is stated in the arbitral petition and in the submissions, would the Claimant's petition be well-founded? Or, on the contrary, was the Respondent correct in effecting the corrections that gave rise to the IRC and interest assessments that are here impugned?

6.7

In this regard, it is necessary to analyze both positions in order to assess the elements, of fact and of law, invoked to support the illegality of the assessments that are the subject of this arbitral process, which focus:

6.7.1

On the interpretation to be given to "undocumented expenses" for purposes of autonomous taxation so as to determine whether the underlying facts come within the category of undocumented expenses;

6.7.2

Should this interpretation be in the direction of subsuming the facts in the category of undocumented expenses, to assess whether the value quantified by the Respondent as capable of being thus classified is or is not correct;

6.7.3

To decide whether or not the fair value rule is applicable in the measurement of financial assets held, in 2014 and 2015, by the Claimant.

6.8

Preliminarily to the analysis to be carried out with regard to the interpretation to be given to undocumented expenses, it is necessary to refer to some considerations relating to provisions that must be remembered and observed in this regard, for purposes of IRC.

6.9

In general terms, according to the provision in subparagraph a) of no. 1 of article 3 of the IRC Code, this tax applies to "the profit of commercial or civil companies in commercial form, cooperatives and public enterprises and that of other legal entities or entities referred to in subparagraphs a) and b) of no. 1 of the preceding article that exercise, as their main activity, an activity of a commercial, industrial or agricultural nature".

6.10

According to no. 2 of the same article, "for purposes of the provision in the preceding number, profit consists of the difference between the values of net assets at the end and at the beginning of the tax period, with the corrections established in this Code", and that, in accordance with no. 4, "for purposes of this Code, all activities consisting of carrying out economic operations of an entrepreneurial character, including the provision of services, are considered to be of a commercial, industrial or agricultural nature".

6.11

In accordance with the provision in no. 1 of article 16 of the IRC Code, "the matter subject to taxation is, as a rule, determined on the basis of a declaration by the taxable person, without prejudice to its control by the tax administration".

6.12

Now, according to the provision in article 17, no. 1 of the IRC Code, "the taxable profit of legal entities and other entities mentioned in subparagraph a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the period and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounts and eventually corrected in accordance with this Code" (emphasis added).

6.13

In accordance with no. 3 thereof, it is stated that "in order to allow the determination referred to in no. 1, the accounts must:

a) Be organized in accordance with accounting standardization and other legal provisions in force for the respective sector of activity, without prejudice to compliance with the provisions set out in this Code;

b) Reflect all transactions carried out by the taxable person and be organized in such a manner that the results of transactions and patrimonial variations subject to the general IRC regime may clearly be distinguished from those of the remainder" (emphasis added).

6.14

On the other hand, in accordance with the provision in article 123, no. 1 of the IRC Code, "commercial companies (…) that exercise, as their main activity, a commercial, industrial or agricultural activity, with head office or effective management in Portuguese territory (…), are obliged to have accounts organized in accordance with the law that, in addition to the requirements indicated in no. 3 of article 17, allow the control of taxable profit", and that in accordance with the provision in no. 2, subparagraph a) of the said article 123 of the IRC Code, "in the execution of the accounts (…) all entries must be supported by justifying documents, dated and capable of being presented whenever necessary", and that according to subparagraph b), "transactions must be recorded chronologically (…)" (emphasis added).

6.15

Additionally, according to the provision in no. 1 of article 63-C of the LGT, "taxable persons for IRC (…) are obliged to hold, at least, a bank account through which must be exclusively moved the payments and receipts relating to the entrepreneurial activity developed" (emphasis added).

6.16

Article 104, no. 2 of the Constitution of the Portuguese Republic (CRP) states that enterprises must be taxed fundamentally according to real income, and the determination of profit through accounting methods is far from expressing the exact profit of an enterprise, but is considered by the legislator to be the most appropriate means for determining the distribution of tax burdens.

6.17

Thus, although fiscal law departs from accounts for the determination of the amount of tax to be paid, accounting profit is not necessarily the same as fiscal or taxable profit, particularly because the latter is the result of the application of rules "imposed" by the fiscal legislator in order, above all, to disregard certain expenses, since the greater the acceptance of expenses, the lower the profit and, consequently, the lower the taxation.

6.18

However, it is not always easy to detect which expenses may have been incurred with objectives of tax evasion, and in this vein, articles 23 and 23-A of the IRC Code establish which expenses may or may not be accepted in determining taxable profit, that is, those that contribute (or do not contribute) to obtaining or guaranteeing income subject to IRC.

6.19

Indeed, in article 23, no. 1 of the IRC Code, it is stated that "for the determination of taxable profit, all expenses and losses incurred or borne by the taxable person to obtain or guarantee income subject to IRC are deductible" and that, in accordance with no. 2 thereof, some types of deductible expenses or losses are exemplified, and in accordance with no. 3 and 4, it is stated that "the deductible expenses (…) must be proven by documentary evidence, regardless of the nature or medium of the documents used for that purpose" and "in the case of expenses incurred or borne by the taxable person with the acquisition of goods or services, the supporting document (…) must contain, at least (…)" the elements identified there (emphasis added).

6.20

Article 23-A of the IRC Code, on the other hand, states that "the following charges are not deductible for the purposes of determining taxable profit, even when recorded as expenses of the tax period" listing them and here highlighting "(…) autonomous taxation (…)" and "undocumented expenses".

6.21

That is, costs or losses of an enterprise constitute the negative elements of the profit and loss account, which are deductible from a tax perspective when, being duly proven, they are indispensable for realizing the profits or for maintaining the source of production of the enterprise in question.

6.22

The absence of any of these requirements implies that the said elements are not considered as costs, with the respective amounts being added to the accounting result for purposes of determining the fiscal result.

6.23

But what should be understood as an undocumented expense?

Undocumented Expenses – Nature and Regime

6.24

The notion of what should be understood by undocumented expenses, given the regulatory evolution of the IRC Code, has had a meaning and scope that the jurisprudence of our higher courts has been establishing, as a concept not positively determined.

6.25

In this regard, should be considered as undocumented expenses those which do not specify their nature, origin or purpose, being, by essence, undocumented, thus presenting no documentary evidence that justifies them.

6.26

That is, by undocumented expenses are understood those which do not present or do not have any supporting or justifying document for effecting the respective payment.

6.27

By contrast, by expense or charges not duly documented are understood those which have documentary support, which is not in its due and legally required form.

6.28

The assessment of the existence or not of proper documentation and confidentiality of the expense should be made with regard to the act by which the taxable person bears the charge or expense which is capable of affecting the net result of the fiscal year, for purposes of determining the matter subject to IRC taxation, that is, the charge will not be duly documented when there is no documentary proof required by law demonstrating that it was actually borne by the taxable person.

6.29

Thus, in accordance with the Decision of TCAS of 07/02/2012 (case no. 04690/11), "undocumented expenses are those which have no documentary support at the accounting level. In turn, expenses not duly documented will be those whose documentary support does not comply with the legally required requirements, although it allows identification of the beneficiaries and the nature of the transaction" (emphasis added).

6.30

And, in this regard, the cited Decision further states that "(…) it can be argued that the provision in analysis (…) constitutes a manifestation of the principle of legal proof, as it requires a special formality (documentary proof), a formality which cannot be dispensed with (…)".

6.31

In other words, the non-deductibility of undocumented expenses is the logical consequence of the taxation of real income, which in turn rests upon and depends on organized accounts (the taxation of real income rests upon and depends on compliance with accounting obligations): the revenues and the expenses are those that are provably realized.

6.32

In IRC, any of the expenses referred to in the previous points (undocumented expenses and expenses not duly documented) carry, as we have seen, for the taxpayer, the consequence of non-deductibility, for tax purposes, of the associated expense in relation to the determination of taxable profit, but undocumented expenses are also subject to autonomous taxation.

6.33

In this matter, it should be recalled that with the entry into force, on 1 January 1989, of the new IRC Code, approved by Decree-Law no. 442-B/88 of 30 November, confidential (or undocumented) expenses were only not accepted as costs or losses (in accordance with the provision in subparagraph h), of no. 1, of article 41 of that Code), and that, according to the provision in article 4 of Decree-Law no. 192/90 of 9 June (repealed by Law no. 30-G/2000 of 29 December – article 7, no. 11, as the regime was included in the IRC Code), "confidential or undocumented expenses made in the scope of the exercise of commercial, industrial or agricultural activities (…) by taxable persons of IRC (…) are subject to autonomous taxation in (…) IRC (…) at a rate of 10% without prejudice to the provision in subparagraph h) of no. 1 of article 41 of the CIRC" (emphasis added).

6.34

That is, with the inclusion of this type of expense in the provisions of the IRC Code, the same came to be subject to autonomous taxation at the rate of 10%.

6.35

As a result of successive amendments to the IRC Code, the autonomous taxation of undocumented expenses was increased, being, in general terms, since the entry into force of the State Budget Law for 2008 (Law no. 67/2007 of 31 December, through the application of the rate of 50% (in accordance with the provision in article 88, no. 1 of the IRC Code), "(…) without prejudice to its non-consideration as expenses in accordance with subparagraph b) of no. 1 of article 23-A".

6.36

With regard to the taxable event, in the matter of autonomous taxation, it can be affirmed that it is the realization of the expense itself, not being faced with a complex fact of successive formation over a year, but with an instantaneous tax fact that is exhausted in the act of realization of certain expense which is subject to taxation (although the determination of the amount of tax, resulting from the application of the various taxation rates to the various acts of realization of expense considered, is to be carried out at the end of a determined tax period).

6.37

But the fact that the assessment of the tax is carried out at the end of a determined period does not transform it into a periodic tax, of successive formation or of lasting character because that operation of assessment amounts only to the aggregation, for collection purposes, of the set of operations subject to that autonomous taxation, whose rate is applied to each expense, with no influence of the volume of expenses incurred in the determination of the rate.

6.38

The rule which establishes autonomous taxation may thus approximate the nature of specific anti-abuse clauses, functioning in a rigid manner, having as an advantage a more or less automatic application and dispensing the Tax Authority of an effort of inquiry.

6.39

In a simplistic sense, it could be said that the creation of autonomous taxation aimed to discourage abuses in various types of expenses, which by their nature could be in the personal sphere and not entrepreneurial because "this form of taxation was justified by the difficulty in distinguishing between the private character and the entrepreneurial nature of certain expenses, and the existence of certain forms of income that were not taxed in the person of their beneficiaries (or because these were not known or because the income was not determinable with precision)".

6.40

It is today indisputable the understanding, in jurisprudence and in doctrine, that the "ratio" of autonomous taxation resides in the subjection to taxation of certain expenses that, although they contribute to the formation of the taxable profit of the enterprise, do not clearly arise from its normal activity or that, even if they do arise, may be of non-exclusive use in the performance of that same activity.

6.41

As Casalta Nabais teaches, "the imposition of autonomous taxation is explained (…) by the need to prevent and avoid that, through these expenses, enterprises carry out disguised distribution of profits, especially dividends which would thus only be subject to IRC as profits of the company, as well as to combat the tax fraud and evasion occasioned by such expenses not only in relation to IRS or IRC, but also in relation to the corresponding contributions, both from entities and employees, to social security".

6.42

Thus, with this type of taxation the legislator aimed, on the one hand, to encourage taxable persons to stop incurring expenses which negatively affected fiscal revenue (IRC) susceptible of diversion to private consumption, and on the other hand, to prevent expenses borne in this respect from taking the form of income for collaborators which would not be subject either to IRS or to contributions to Social Security.

6.43

But could autonomous taxation then be considered as a tax on expenses?

6.44

Autonomous taxation has as its basis the presumption of the existence of income that has ceased to be taxed, not only for IRC purposes but also for IRS.

6.45

Indeed, the normativity of autonomous taxation is constructed on the basis of a presumption, as it is presumed that in those expenses there is income that has ceased to be taxed, considering them as means apt for forms of escape from the tax.

6.46

In expenses that are not deductible (as is the case with undocumented expenses), autonomous taxation also underlies the ideas that such expenses may not be indispensable for the maintenance of the productive source, not being therefore borne by the enterprise in the interest of the organization.

6.47

Thus, it can be affirmed that autonomous taxation is justified by being a mechanism to combat tax evasion, as there is thus greater effectiveness and even efficiency in the collection of revenues through the subjection of certain expenses to that type of taxation.

6.48

Nevertheless, the existence of AT should not be based solely on the need for revenue collection (although this purpose is also achieved) and, for that reason, each rate provided should not be fixed with a view to revenue collection but taking into account the objectives of each autonomous taxation specifically provided for.

On the Interpretation to be Given to the Concept of Undocumented Expenses

6.49

It is settled case law of the STA that undocumented expenses are "expenses for which there is no documentary proof, and these are expenses borne by the taxable person which in accounting terms affect the net result of the fiscal year, reducing it" (emphasis added).

6.50

Thus, it is important to point out that although fiscal law does not accept as deductible expenses those for which there is no documentary proof (which is inherent to the very concept of taxation of real income), we know that there are undocumented expenses because the accounts reflect a decrease in the net result.

6.51

Indeed, "[t]he assessment of the existence or not of proper documentation and confidentiality of the expense is made with regard to the act by which the taxable person bears the charge or expense which is capable of affecting the net result of the fiscal year, for purposes of determining the matter subject to IRC taxation. That is, the charge will not be duly documented when there is no documentary proof required by law demonstrating that it was actually borne by the taxable person and the expense will be confidential when it is not revealed who received the sum in which the expense is embodied" (emphasis added).

6.52

It should be recalled that confidential expense was also an undocumented expense, and therefore, with regard to the division between the two (which was subsequently eliminated from the text of the law), it was and is doubtful whether the distinction between the two figures had any relevance in our tax regime while it existed [between the validity of Decree-Law no. 192/90 of 9 June and Law no. 67-A/2007 of 31 December (Budget Law for 2008)].

6.53

Indeed, the 2008 Budget Law gave new wording to article 88 of the IRC Code, eliminating the reference to confidential expenses, now referring only to "undocumented expenses" (which are subject, from then on, to autonomous taxation at the rate of 50%), and such amendment came to place our legislation in line with OECD recommendations, which censure any type of recognition of confidential expenses, including in accounting legislation.

6.54

On the other hand, it also became clear that that differentiation had no practical significance because, on the one hand, the taxation regime was the same and, on the other, confidential expenses are, by nature, undocumented.

6.55

Thus, the evolution of the tax regime applicable to confidential or undocumented expenses demonstrates a penalizing purpose, and it can be argued that, as we have seen, the autonomous taxation regime can pursue this purpose, through the taxation of income which would otherwise not be able to be taxed in the legal sphere of the beneficiary thereof (configuring a kind of tax liability on principal grounds and regardless of whether the income is or is not declared in the legal sphere of the beneficiaries).

6.56

The fact that the absence or insufficiency of documentary proof (which is required for tax purposes) leads to non-deductibility and autonomous taxation of such expenses means that it would also not be accepted because the person receiving the underlying sum was unknown for tax purposes (regardless of inquiries by the tax administration).

6.57

It is therefore not surprising that, faced with the equivalence of the two situations, both because the facts are similar (absence of documentation as to essential elements for the taxation of real income, that is, according to organized accounts) and because the consequences are identical (non-deductibility of expenses plus autonomous taxation), our law has eliminated (18 years later) the autonomization of the two figures and has opted for the category of "undocumented expenses".

6.58

Indeed, in the logic of taxation of real income and inherent accounting obligations, undocumented expenses absorbed the figure of confidential expense, and the autonomization of the two categories of undocumented expenses in law (even if for a long time with identical consequences) has historical reasons as it was the historical evolution of our tax regime applicable to confidential expenses that explains that we have arrived at autonomous taxation of undocumented expenses, and it may be questioned whether that evolution of the legal regime does not demonstrate a penalizing purpose, alongside a strictly fiscal reason related to the non-deductibility of such expenses.

6.59

Now, such purpose has been expressly referred to by the STA and by the Constitutional Court (Decision no. 18/2011), in accordance with which, for the Constitutional Court, the regime has a "penalizing" purpose and one of "discouraging practices" that may "involve situations of criminal unlawfulness or of lesser fiscal transparency".

6.60

Thus, continues the Constitutional Court in the same Decision, "(…) we are faced with expenses that are included in the enterprise's accounts and may have been relevant to the formation of income, but are not documented and cannot be considered as costs, and which, because of this, are penalized with taxation of 50%. The fiscal logic of the regime rests on the existence of a presumable prejudice to the Public Treasury, as it is not possible to prove, due to lack of documentation, whether there was VAT due or other taxes that were due in relation to the transactions carried out, or whether the income that third parties have come to earn through the commercial relations maintained with the taxable person of the tax has been declared for purposes of the incidence of income tax".

6.61

Thus, autonomous taxation also falls on charges which correspond to the nucleus of the concept of real income, net income and compliance with accounting obligations, and autonomous taxation seeks to discourage the deduction of expenses that affect fiscal revenue.

6.62

And according to the understanding of Advisor Vítor Gomes, "[a]lthough formally inserted in the CIRC and the amount it allows to collect is assessed in its ambit and as IRC (…) we are faced with autonomous taxation, as the very letter of the provision says. And that makes all the difference. It is not a question of taxing income at the end of the tax period, but of a particular type of expense in itself, for understandable reasons of tax policy (…). The manifestation of wealth on which this portion of the taxation will fall (the fact revealing tax capacity which it is intended to reach) is the simple realization of that expense, at a given moment. Each expense is, for this purpose, an autonomous tax fact, to which the taxpayer is subject (…)".

6.63

In Decision no. 310/12 of 20 June (Reporting Advisor João Cura Mariano), the Constitutional Court came to reformulate the doctrine of Decision no. 18/11, referred to above in point 6.59, approaching the then dissenting vote of Advisor Vítor Gomes and the Decision of STA no. 830/11, also cited here.

Conclusions

6.64

In view of the foregoing, we can consider that autonomous taxation affects the expense of the taxable person (taxpayer) and not their income, and in doing so, the legislator is abdicating from the rule of taxation of income increase and net income.

6.65

If the non-deductibility of undocumented expenses is inherent to taxation of net income, autonomous taxation of such expenses does not observe that rule and has purposes different from the taxation of income increase.

6.66

It is acknowledged that, alongside the jurisprudence of the Constitutional Court and STA, autonomous taxation has sanctionary and anti-abuse purposes as autonomous taxation is the consequence of a violation of a duty (the duty that expenses be documented according to the rules required in the IRC Code) and has a purpose of reprimand (and not exclusively of revenue collection).

6.67

Thus, autonomous taxation of undocumented expenses in the legal sphere of those who incur them is, from the perspective of this taxable person, a taxation of the expense and not of the income, with a penalizing purpose, of anti-abuse, even implying a tax liability, as it is intended to reach the income earned by the beneficiary through autonomous taxation (in this case, the principle of proportionality would here also require the possibility of proving that the beneficiary declared such income).

6.68

Having arrived here, it falls to decide whether in the present case we are faced with "undocumented expenses" as the Respondent understood or whether such interpretation makes no sense whatsoever, as the Claimant argues, for purposes of applying the autonomous taxation regime.

6.69

We have seen it to be settled case law that undocumented expenses are expenses for which there is no documentary proof, and these will be expenses borne by the taxable person which, in accounting terms, affect the net result of the fiscal year, reducing it.

6.70

In the case under analysis, it is established fact that the Claimant expressly recognized the existence of a set of deficiencies and irregularities in its accounting records "(…) which do not fail to require a redoubled effort of analysis (…)".

6.71

It is also established fact that the amounts paid by C..., Lda., for the services provided by the Claimant, in 2014 and 2015, were not deposited in its bank account (D...), as they were received, and this procedure generated discrepancies between the amounts evidenced in the bank extracts presented by the Claimant to the TIS and the accounting records made in account #121 (D...) because such values had been recorded in that account.

6.72

As a consequence of the procedure adopted, there was no change in the net result of each of the fiscal years (2014 and 2015), as in these were duly reflected the values associated with the service provisions made to C..., Lda. (recorded as a credit in account #72113).

6.73

The improper movement of account #121, with the record of payments from C..., Lda., which were not deposited did not affect Results as that account is an Asset account.

6.74

On the other hand, despite the sanctionary character implicit in the characterization of autonomous taxation, not all the requirements were met here for the described facts to be subsumed in the concept of undocumented expense and thus for the TIS to be able to understand that such facts "(…) constitute outflows of funds from the sphere of the company, without any support proving the actual recipient and the purpose for which they were used".

6.75

In truth, in the scope of the explanations requested during the inspection procedure, the TIS came to know that the payments from C..., Lda., in the years in question, were made to the managing shareholder, who received them in the name and on behalf of the Claimant (see point 5.9, above) and who used them to pay expenses of the latter (see point 5.14, above), having made, in 2014, two bank transfers in favor of the Claimant, in the amount of EUR 21,700.00 and EUR 56,000.00 (see points 5.15 and 5.16, above), although this latter transfer was "improperly" recorded in account #268211 as a shareholder loan.

6.76

Thus, taking into account the effort of the Claimant in attempting to clarify the irregularities detected, this Arbitral Tribunal understands that the amounts pending delivery by Dr. A..., determined by the TIS, which gave rise to the characterization of such amounts as undocumented expenses, do not come within, therefore, the concept of undocumented expense, as detailed above, and therefore such amounts cannot be subject to autonomous taxation.

6.77

And this is so much the case that, although the TIS made corrections regarding the consideration of alleged undocumented expenses for purposes of autonomous taxation, at the rate of 50%, they did not consider them as costs not indispensable to the formation of income, as the legal characterization determines, as we are not faced with undocumented expenses nor did these contribute as expenses to the formation of taxable profit, reducing it and causing prejudice to the Public Treasury.

6.78

All considered, in the case under analysis, the irregularities identified in the Claimant's accounts against the amounts evidenced in the bank extracts cannot be considered as undocumented expenses, in the terms set out above, the answer to the question set out in point 6.7.1, above, being negative.

6.79

Thus, this Arbitral Tribunal