Autonomous Taxation on Bonuses Paid to Directors Under IRC – CAAD Arbitral Decision 545/2016-T

ARBITRAL DECISION

The arbitrators Counselor Fernanda Maçãs (Arbitrator-President), Master Ricardo da Palma Borges and Professor Dr. Américo Brás Carlos (Adjunct Arbitrators), appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 12 December 2016, hereby agree as follows:

REPORT

The Claimant A…, S.A., with registered office at Rua…, …, …, …-… Lisbon, with the sole registration and tax identification number …, represented by B… - Branch in Portugal, by virtue of its extinction and the transfer of its rights to the latter entity, came, under the provisions of articles 2.º, n.º 1, al. a), article 6.º, n.º 2, al. b), and article 10.º, n.º 2, all of Decree-Law no. 10/2011, of 20 January (hereinafter abbreviated as "RJAT" – Legal Framework of Tax Arbitration), to request the constitution of a collective Arbitral Tribunal, for which purpose it filed a request to that effect, on 2 September 2016.

The claim subject matter of the request for arbitral decision consists of (i) the partial annulment of the assessment of Corporate Income Tax ("IRC") no. 2016…, relating to the year 2011, and, initially, of the assessment of respective compensatory interest (assessment demonstration no. 2016…), from the sum of which the total amount payable of € 314,762.87 was ascertained, (ii) as well as the reimbursement of the amounts unduly paid by the Claimant, increased by indemnity interest accrued and to accrue, calculated at the maximum legal rate, until effective and complete payment, all with the legal consequences.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 29 September 2016.

In the exercise of the option of appointing an arbitrator provided in al. b) of n.º 2 of article 6.º of RJAT and in compliance with the provisions in al. g) of n.º 2 of article 10.º and n.º 2 of article 11.º, equally of RJAT, the Claimant appointed as arbitrator the Honourable Dr. Ricardo da Palma Borges.

Pursuant to the provisions in al. b) of n.º 2 of article 6.º and n.º 3 of article 11.º of RJAT, as amended by article 228.º of Law no. 66-B/2012, of 31 December, and within the period provided in n.º 1 of article 13.º of RJAT, the head of the Tax Administration service appointed as arbitrator the Honourable Professor Dr. Américo Brás Carlos.

In accordance with the provisions in n.º 5 and 6 of article 11.º of RJAT, the Honourable President of CAAD notified the Claimant of the appointment of the Arbitrator by the head of the Tax Administration service on 11 November 2016, and notified the arbitrators appointed by the parties to appoint the third arbitrator who assumes the quality of arbitrator-president.

On 23 November 2016 the arbitrators appointed by the parties communicated to CAAD the appointment of the Honourable Counselor Maria Fernanda dos Santos Maçãs as Arbitrator-President.

Pursuant to the provisions and for the purposes of n.º 7 of article 11.º of RJAT, the Honourable President of CAAD informed the Parties of this appointment on 23 November 2016.

In compliance with the provisions in n.º 7 of article 11.º of RJAT, the collective Arbitral Tribunal was constituted on 12 December 2016.

In these terms, the Arbitral Tribunal is regularly constituted to consider and decide the subject matter of the case.

To substantiate the request for arbitral decision the Claimant alleges, in summary, the following:

• That it was, at the date of the facts, a Portuguese credit institution, more specifically a bank with registered office in Portugal, being subsequently extinguished, in 2013, through merger by incorporation into an English law company, B…, which succeeded it in all its rights, whose corporate purpose consisted of carrying out financial operations, being authorized to carry out the operations described in article 4.º of the General Framework of Credit Institutions and Financial Companies ("RGICSF"), subject, as such, to regulation and supervision by the Bank of Portugal.

• That in proceeding to pay in 2012 the first installment (50%) of the variable remuneration to the administrators of its Executive Committee of the Board of Administration relating to the year 2011, in the amount of € 950,623.33 - having carried out the payment of the remaining installment (corresponding to 50% of the total awarded) over the following three years proportionally - it acted in strict compliance with the legislation to which it is bound - both regulatory and fiscal.

• The Claimant does not agree with Point III.1.3.1.1. of the Inspection Report, which gave rise to the assessment under consideration, as it considers that the legal conditions were met for non-application of the autonomous taxation provided in al. b) of n.º 13 of article 88.º of the IRC Code ("CIRC").

According to the aforementioned provision, there is autonomous taxation of amounts borne by a taxable person, by way of variable remuneration paid to its administrators, when the following conditions are verified:

• There exists a portion of variable remuneration that exceeds 25% of the annual fixed remuneration of these administrators;

• The total value of variable remuneration exceeds the annual amount of € 27,500; and

• The following cumulative conditions for exclusion from autonomous taxation are not verified:

• The payment is subordinated to deferral of at least 50% of the value of variable remuneration for a minimum period of three years; and

• The deferral is conditioned to the positive performance of the company throughout that three-year period.

• The Claimant does not contest what the Respondent defends in the Inspection Report, considering that the quantitative criteria referred to in points a) and b) of the preceding paragraph are verified, whereby the starting conditions for application of autonomous taxation also exist.

However, the Claimant appeals to the evolution of the wording of al. b) of n.º 13 of article 88.º of CIRC, of article 90.º of Law no. 3-B/2010, of 28 April (specific provision applicable to the financial sector) and to the explanation given in the respective preparatory works for the existence of al. b) of n.º 13 of article 88.º of CIRC, to argue for convergence between the fiscal regime (general) and the regulatory regime (specific to the financial sector).

It further alleges that European and national regulation of payments to senior managers of credit institutions since 2006 served as justification for the introduction of the autonomous taxation provision subject to analysis in the present action (al. b) of n.º 13 of article 88.º of CIRC), which should be understood as imposing the acquisition of the right to payment of the deferred amount on a basis proportional to the period of deferral, with the interpretation given by the Respondent having no legal support, to the effect that payment in a deferral regime would imply that the total deferred amount would only be paid at the end of the deferral period. Thus, the Claimant summarizes the evolution of fiscal and regulatory provisions as follows:

It further argues that from the letter of the law, in consonance with its spirit, it follows that the deferred portion of variable remuneration can be paid over the three subsequent years, insofar as no mention is made of suspension or deferral "integral" (or "total") of the amount, but rather its "deferral for three years" and, in this way, from the said legal provision nothing results, as the Respondent erroneously interprets, that the amount subject to the deferral regime can only be paid after the lapse (end) of that period.

It further invokes the need for compatibility of fiscal and regulatory provisions in the interpretation of the fiscal provision, in light of n.º 2 of article 11.º of the General Tax Law ("LGT"), to argue equally that the expression "deferral for three years" should be interpreted to permit proportional payment over the said three-year period.

The Claimant also invokes that the interpretation carried out by the Respondent constitutes a disproportionate restriction on the freedom of action of private parties, who are thus affected by a limitation on the free establishment of their remuneration policy that is not expressly provided for in law, and an interference with banking and financial jurisdiction.

It equally argues that, even if it were understood that it would be "logical" to wait for the expiry of the three-year period, as it is only then that it could be verified whether there was positive performance (according to the legal criterion required to waive autonomous taxation), even so autonomous taxation could still be assessed additionally in the event of non-compliance with the positive performance criterion, plus compensatory interest (without prejudice to the State).

With regard to the criterion of positive performance, it invokes pursuant to al. c) of article 99.º of the Code of Tax Procedure and Process, the lack of substantiation in the inspection report, since the law does not define what should be understood by "positive performance" - being that, in tax inspection proceedings the Respondent argues that the mere fact that the company had negative results is sufficient for the possibility of non-application of autonomous taxation to be excluded.

As a (cumulative) requirement to be considered for the purposes of exclusion of objective incidence, the Claimant understands that the substantiation of the concept "positive performance" shall fall to each company on a case-by-case basis, taking into account the applicable regulatory, corporate and statutory rules.

Consequently, the Claimant followed as criteria for awarding variable remuneration to the executive members of its management body the consolidated recurring operating result of the year (Consolidated Operating Result - RCO), as this criterion, despite also starting from the objective accounting results of the Claimant, is more adequate than the criterion followed by the Respondent, since it includes those occurring in the sphere of companies entirely held by the Bank and purges the effect of events beyond the control of the company's administrators, namely the results arising from minority interests in other companies, as was the case, in 2011, of the interest held by the Claimant in Bank C….

It further argues that the maintenance of an exceptionally low level of non-performing loans – Non Performing Loans ("NPL"), its solvency compared with the rest of the Portuguese banking system and the fact that it obtained taxable profit and paid IRC are also indicators of positive performance of the Claimant.

Finally, it argues for its right to indemnity interest, to be calculated, on the amount of € 314,762.87, from the date of payment (i.e., 6 June 2016) until effective and complete reimbursement by the TA, at the rate of 4% per annum, pursuant to n.º 5 of article 24.º of RJAT, n.º 10 of article 35.º and n.º 4 of article 43.º of LGT, article 559.º of the Civil Code and Ordinance no. 291/03, of 8 April.

The Respondent presented a reply, agreeing with the factual matter and defending itself by objection on law, invoking in summary:

In the calculation of autonomous taxation for the year 2011 (field 365 of Table 10 of Form 22 declaration), the Claimant did not proceed in compliance with the legislator, although in the Global Analytical Trial Balance reported to 2011-12-31 there were recorded expenses with variable remuneration of the Management and Supervisory Bodies (OGF), relating to the year 2011, in the account "70000901 - PR-ANNUAL BONUS", which presents a debit balance of € 2,935,852.00.

The provision contained in al. b), of n.º 13, of article 88.º, of CIRC, refers to expenses or charges relating to bonuses and other variable remuneration, whereby the same suggests considering and qualifying as the taxable event the moment of recognition of expenses relating to the said remuneration.

As an underlying principle to this provision is that the expense inherent to the benefits of managers, administrators or directors must be recognized in the period in which an entity derives the services of the said employees and in which it assumes and recognizes the obligation to award the remuneration in question, being the same recorded for purposes of formation/determination of the economic and fiscal result ascertained in that period (and not when the benefits are paid).

The subjection to autonomous taxation of expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors, depends on the cumulative verification of a set of assumptions related to the value of the expenses themselves ("exceeding € 27,500.00") and their relative weight in the total annual remuneration paid ("a portion exceeding 25% of annual remuneration").

Such cumulative verification, together with the non-application of the requirements of the negative delimitation of incidence provided in the final part of al. b), of n.º 13, of article 88.º of CIRC ("unless its payment is subordinated to deferral of no less than 50% for a minimum period of three years and conditioned to positive performance of the company throughout that period"), allows assessment of subjection, or not, to taxation of the said expenses.

In this way, since the Claimant did not comply with the necessary conditions, pursuant to al. b), of n.º 13, of article 88.º of CIRC, the variable remuneration paid in 2012 and accounted as an expense in 2011, are subject to autonomous taxation of 35%, totaling € 332,718.20.

The Respondent invokes articles 11.º, n.º 1, of LGT and article 9.º, n.º 2 and 3, of the Civil Code to sustain that the provision in question is not limited to companies listed on the stock exchange or to credit financial institutions and, consequently, what the legislator did not distinguish does not fall to the interpreter to distinguish (whereby the Claimant incurs in failure of hermeneutical methodology).

It further resorts to the evolution of the provision and the justification note of the proposal of the Portuguese Communist Party to argue that the motivations underlying the introduction of autonomous taxation in question apply to any and all company, with no question of any convergence with the regulatory regime for the financial sector.

It further alleges that the provision raises no interpretive doubts in the common interpretation of an average person with regard to the concepts of "deferral of three years" and "positive performance", whereby it does not need to be interpreted through other branches of law.

The Respondent also sustains that the word "minimum" implies that by minimum one has the period in which no payment could occur, as it depends on the company's performance during the three-year time window, and that the Claimant did not comply with the first of the assumptions, namely the permanence of a minimum period of three years before the payment occurs.

It further argues that there is no disproportionate restriction on the freedom of action of private parties nor interference of the fiscal provision in banking and financial jurisdiction, as the Claimant has full freedom to remunerate its administrators, in the manner and for the amount it deems fit, as indeed it did, invoking for this purpose the judgment no. 197/2016 of the Constitutional Court, of 13 April.

Furthermore, with regard to performance/positive result, in the years 2011 and 2012, the Claimant presented a net result of € -111,989,574.82 and € -2,757,055.07, respectively, whereby it is not understood what positive performance the Claimant could obtain, when it even ceased activity in the year 2013.

As for the request for indemnity interest, it alleges that there is no error on the part of the Respondent in the assumptions of fact or law in the acts of assessment placed in question here.

Lastly, as for the witness presented by the Claimant, it alleged that the production of testimonial evidence should be waived, in the name of the principle of celerity, as for the questions in dispute, the evidence to be produced would relate exclusively to acts or facts inserted or revealed in administrative documents or originating from the parties, which were incorporated in the cases where they were produced or filed, whereby only documentary evidence would be relevant and necessary.

By request of 9 February 2017, the Claimant came to request the joining to the proceedings of documents and simultaneously pronounced itself as to the content of the reply, the Tribunal, by arbitral order of 13 February 2017, granting the Respondent the period of 5 days to exercise, if it so desired, the right to be heard.

The Respondent exercised the right to be heard by request of 15 February 2017, and subsequently the Tribunal considered admissible the joining of documents, by arbitral order of 20 February 2017, under the provisions of article 423.º, n.º 2, of the Code of Civil Procedure ("CPC"), but not the production of new arguments in response to the factual objection made in the reply, terms in which it ordered the removal of the arguments presented and granted the Claimant the period of 5 days to present mere request for joining of documents for subsequent decision of the Tribunal.

Also by arbitral order of 20 February 2017, the Tribunal waived the holding of the first meeting provided in article 18.º of RJAT, as there were no reasons justifying it, under the principles of autonomy of the Tribunal in the conduct of the case and in order to promote celerity, simplicity and informality thereof (cfr. articles 19.º, n.º 2, and 29.º, n.º 2, of RJAT). Furthermore, under article 18.º of RJAT, the date of 15 March at 10 o'clock was set for the holding of the hearing for judgment, proceeding to the examination of witnesses, to be presented by the Claimant.

On 15 March 2017, at 10 o'clock, a meeting of the Arbitral Tribunal took place at CAAD in which the examination of the witness presented by the Claimant proceeded. The Tribunal notified the Claimant and the Respondent to, in this order and successively, present written arguments within the period of 15 days, with the period for the Respondent counting from the notification of the joining of the arguments by the Claimant. The Tribunal, in compliance with the provisions in article 18.º, n.º 2, of RJAT, set the date of 12 June 2017 for the purpose of rendering the arbitral decision.

The Claimant presented its written arguments on 30 March 2017, maintaining, in essence, the arguments set out in the initial arguments, adding, however, the following:

• Following a partially granted gracious complaint also by reference to IRC for 2011 (but having as its subject matter another matter), in which the TA issued the IRC assessment no. 2016…, eliminating the compensatory interest, the Claimant reformulated its request so as to restrict it to the additionally assessed tax, i.e., the total value under discussion becoming € 332,718.20, corresponding to the value of the increase in autonomous taxation, notwithstanding the value of the cause corresponding to the value of the assessment impugned, subtracted from the value of compensatory interest, i.e., € 272,790.51 (two hundred seventy-two thousand, seven hundred ninety euros and fifty-one cents).

• It further alleged, with regard to the question of the untimeliness of the autonomous taxation carried out, referred to by the Respondent, that the relevant moment for determination of autonomous taxation in these cases is not the moment in which the expense is recognized in the accounts of the taxable person, but rather the moment in which the bonus or prize is actually paid, since article 88.º, n.º 12, al. b), of CIRC uses the expression "paid", citing for this purpose the judgment of CAAD of 22 December 2015, rendered in the context of case no. 204/2015-T, whereby also for this reason the autonomous taxation in this case is illegal.

Given the judicial holidays of 9 to 17 April 2017, the Respondent presented successive written arguments within the period, on 26 April 2017, maintaining, in essence, the arguments set out in the initial arguments.

On 4 June 2017, an arbitral order was issued extending the period of arbitration by two months and indicating as the deadline for rendering the decision the date of 12 August 2017, under article 21.º, n.º 2, of RJAT, since it was not possible to render an arbitral decision within the six-month period (as provided in n.º 1 of the same article) as this included periods of judicial holidays and there was a hearing, to which is added the complexity of the case itself. This date was subsequently extended for the same reasons to 12 October 2017, by order of 28 July.

On 22 June 2017, given the fact that the Claimant had reformulated its request in its arguments, restricting it, the Tribunal issued an arbitral order proposing the fixing of the value of the cause (notifying the parties to pronounce themselves, if they so desired, within the period of 5 days) in the following terms:

• Provision al. a) of n.º 1 of article 97.º-A of CPPT, applicable ex vi of article 29.º, n.º 1, al. a) of RJAT, establishes that the actionable value of the cause shall be "When an assessment is impugned, that of the importance whose annulment is sought".

• If it is true that the initial claim subject matter of the request for arbitral decision consisted in the partial annulment of the IRC assessment no. 2016…, relating to the year 2011, and of the respective compensatory interest (cfr. assessment demonstration no. 2016…), the sum of which determined a total amount payable of € 314,762.87, it is also true that "the importance whose annulment is sought" is not limited to the amount payable.

• In fact, the autonomous taxation in question corresponds to the amount of € 332,718.20 (cfr. p. 21/25, 6th paragraph, of the Tax Inspection Report).

• Given that the importance whose annulment is sought corresponds to the autonomous taxation in question, the fixing of the value of the cause is proposed at € 332,718.20 (three hundred thirty-two thousand seven hundred eighteen euros and twenty cents).

The parties, legally notified of the order on the value of the cause, said nothing.

PRELIMINARY ASSESSMENT

The Tribunal is competent.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented. No nullities are verified, there being, however, the need to resolve the preliminary question of the untimeliness of the autonomous taxation carried out, alleged by the Claimant, which will be done in consideration of the matter of law.

Given what is mentioned in point I.13 of the Report, and considering that the parties did not oppose the order on the matter rendered on 22 June 2017, the value of the cause is hereby fixed, ex officio, at € 332,718.20, in compliance with the provisions of article 97.º-A of CPPT, applicable ex vi article 29.º, n.º 1, al. a), of RJAT and article 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

In arguments the Claimant came to prove that the compensatory interest initially assessed had been annulled, this not being contradicted by the Respondent, terms in which that request is not decided upon.

ON THE MERITS

III.1. Matter of Fact

III.1.1. Proven Facts

1. With relevance to the assessment and decision of the questions raised, the following facts are given as established and proven:

• The Claimant was, at the date of the facts, a Portuguese credit institution, more specifically a bank with registered office in Portugal, being subsequently extinguished, in 2013, through merger by incorporation, with tax neutrality, into an English law company, B…, which succeeded it in all its rights, whose corporate purpose consisted of carrying out financial operations, being authorized to carry out the operations described in article 4.º of the RGICSF, subject, as such, to regulation and supervision by the Bank of Portugal.

• The Claimant delivered, on 30 May 2012, its Form 22 Income Declaration, in which it ascertained a taxable profit of € 39,924,867.45 (of which € 33,936,137.33 subject to taxation and € 5,988,730.12 exempt) and, consequently, the amount of € 2,237,685.50 of tax payable (cfr. Document 4 attached to the request for arbitral decision).

• Following an inspection action, of external character and partial scope, directed at the analysis of the IRC assessment carried out by the Claimant, with reference to the year 2011, namely in compliance with Service Order OI2014…, issued by the Finance Directorate of Lisbon, the Claimant was notified, through Official Letter no.…, of 16 March 2016, of the respective Draft Report, whose Point III.1.3.1.1. concerned a proposal for correction of autonomous taxation, relating to bonuses and other variable remuneration of administrators, in the amount of € 332,718.20, on the understanding that the amount paid by the Claimant by way of variable remuneration to its administrators was subject to autonomous taxation, at the rate of 35%, pursuant to al. b) of n.º 13 of article 88.º of CIRC (cfr. Documents 5 and 6 attached to the request for arbitral decision).

• On 5 April 2016 the Tax Inspection Services notified the Claimant of the Tax Inspection Report, which maintained the corrections recommended for the said year (cfr. Document 6 attached to the request for arbitral decision), the Claimant not having exercised the right to be heard.

• Following the conclusions contained in the Tax Inspection Report, the Claimant was notified of the IRC assessment demonstration, the interest assessment demonstration and the reconciliation demonstration, relating to the year 2011, in which the amount of € 314,762.87 payable was ascertained, the period of voluntary payment of which ended on 7 June 2016, having proceeded to full payment thereof on 6 June 2016 (cfr. Document 7 attached to the request for arbitral decision).

• The remuneration policy of the members of the corporate bodies applied by the Claimant, at the date of the facts, was approved at the General Meeting on 8 August 2011 and is contained in the respective Minutes number 62 (cfr. Document 8 attached to the request for arbitral decision), determining that:

"2. Remuneration of members of the Executive Committee of the Board of Administration:

a) The members of the Executive Committee receive fixed cash remuneration approved by the General Meeting of the Bank, which may be diverse among them, paid twelve times during the year, and possible variable remuneration, which may not exceed 15% of the recurring operational result of the year (Consolidated Operating Result). The Consolidated Operating Result (RCO) will not include the results arising from extraordinary events not related to the normal operation of the Bank and its subsidiaries, as well as the results whether current or extraordinary ascertained directly or indirectly with respect to participated companies that are not considered subsidiaries, that is, associates and other minority interests."

• The Claimant followed as limiting element - up to 15% of Consolidated Operating Result-RCO - of the awarding of variable remuneration to the executive members of its management body, thereby excluding, for its ascertainment, whether more or less, impacts arising from the indirect and minority interest in Bank C… on the basis that the monitoring of the activity of Bank C… and the management of such interest did not fall to the Claimant's administrators (cfr. Document 8 attached to the request for arbitral decision and testimonial evidence).

• The Claimant, within its remuneration policy, also chose to define as the limit of awarding variable remuneration the maintenance of an adequate solvency ratio, establishing that such ratio could not be significantly affected by the payment of variable remuneration to the members of the Executive Committee, nor contribute to jeopardizing the continuity and sustainability of the future activity of the bank (Document 8 attached to the request for arbitral decision).

• The awarding of variable remuneration to the administrators of its Executive Committee of the Board of Administration was approved by the Remuneration Committee on 14 February 2012 and is contained in the respective minutes, referred to in the Tax Inspection Report (Document 9 attached to the request for arbitral decision), being summarized as follows:

• The Claimant proceeded in 2012 to pay the first installment (50%) of variable remuneration to the administrators of its Executive Committee of the Board of Administration relating to the year 2011, in the amount of € 950,623.33, having carried out the payment of the remaining installment (corresponding to 50% of the total awarded) over the following three years proportionally (Document 6 attached to the request for arbitral decision).

• The annual remuneration of the Executive Administrative Council are as follows (Document 6 attached to the request for arbitral decision):

• In the years 2011 and 2012 the Claimant had negative net results (€ -111,989,574.82 and € -2,757,055.07 respectively), verifying, however, taxable profits, with payment of IRC having taken place (cfr. Documents 4 and 12 attached to the request for arbitral decision).

Substantiation of the Matter of Fact

The factuality proven was based on the position assumed by the Parties and not contested and on the analysis of documents attached to the proceedings by the Claimant, which were not impugned.

Apart from the fact contained in point g) of the probative matter, the testimonial evidence did not prove sufficiently convincing and clarifying to serve as the basis for the tribunal's conviction.

III.1.2. Unproven Facts

There are no other facts with relevance to the assessment of the merits of the case that have not been proven.

III.2. Matter of Law

III.2.1. Controversial Issue

The controversial issue in the present proceedings is whether the exclusion of autonomous taxation provided in the 2nd part of al. b) of n.º 13, of article 88.º, of CIRC is applicable to bonuses and other variable remuneration relating to the year 2011, awarded by the Claimant to administrators who are members of its executive committee.

The said article 88.º, n.º 13, al. b), of CIRC provides that:

"Are taxed autonomously, at the rate of 35%:

Expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors when these represent a portion exceeding 25% of annual remuneration and have value exceeding €27,500, unless its payment is subordinated to deferral of no less than 50% for a minimum period of three years and conditioned to positive performance of the company throughout that period".

III.2.2. On the Untimeliness of Taxation

Without having done so in its initial petition, the Claimant came, in arguments, to argue the untimeliness of the autonomous taxation carried out, basing itself on the decision rendered in Case no. 204/2015-T of CAAD, arguing that "the relevant moment for determination of autonomous taxation in these cases is not the moment in which the expense is recognized in the accounts of the taxable person, as the Tax Authority intends in its Reply, but rather the moment in which the bonus or prize is actually paid, whereby also for this reason the autonomous taxation in this case is illegal, since the variable remuneration was not paid in 2011, the first payment relating to 2011 having occurred in 2012".

For its part, the Respondent, notified of the Claimant's arguments, presented within the period its arguments, without having pronounced itself on this new cause for annulment of the autonomous taxation under analysis.

It falls to the Tribunal to decide this question previously.

Given the provisions of n.º 4 of article 581.º of CPC, it is verified that the Claimant brought to the proceedings, in arguments, a new cause of action: a new legal fact invoked to obtain the claim made; in this case, the claim for annulment of autonomous taxation. In light of the factuality sub judice, the law did not permit it, however.

Only nullity is invocable at any time and of official cognition (v. article 162.º of the Administrative Procedure Code ("CPA"), article 102.º, n.º 3, of CPPT and article 29.º, n.º 1, als. a) and d), of RJAT) and it is not seen that this sanction applies here. Null acts are those "to which any of the essential elements of the act is lacking or when there is law that expressly provides for this form of invalidity"[1] as occurs with the acts listed in the als. of n.º 2 of article 161.º of CPA. The act in question does not fit within any of these provisions.

The Tribunal understands that the Claimant came to argue a defect of violation of law expressed in the application by the Respondent of the provision of al. b) of n.º 13, of article 88.º of CIRC to expenses accounted for rather than to payments made, thereby determining, in its view the non-existence of taxable fact in the year 2011. This defect of violation of law, however, does not determine nullity, but rather mere voidability, as results from the law (article 163.º, n.º 1, of CPA), from case law[2] and from doctrine[3]. And, dealing with defects whose negative value is that of voidability, the "grounds of the claim" and "the exposition of the questions of fact and law subject to the request for arbitral decision" must be contained in the request for arbitral decision (article 10.º, n.º 2, al. c), of RJAT). In the same sense provide al. a) of article 108.º of CPPT and article 260.º of CPC. As, equally, in the same sense, on this matter may be read at pages 13 of the judgment of CAAD, Case no. 33/2012-T "As for the defects of the impugned act when the impugner is in a position to be able to invoke them in the initial petition of the judicial challenge proceedings, the right to invoke them lapses if not done at that moment".

All things considered, it not being a supervening fact, the Tribunal cannot consider the cause of action "untimeliness of taxation" invoked in the arguments of the Claimant.

Having decided this question by the non-acceptance of the new cause of action, the Tribunal should also not, as useless to the proceedings (v. article 130.º of CPC) pronounce itself on the merits of the decision rendered in the Judgment of CAAD, Case no. 204/2015-T, brought by the Claimant as the basis of its claim to make prevail in the provision under consideration the reference to "variable remuneration paid" to which in the same provision and in connection with the regime of economic periodicity (v. article 18.º of CIRC) the reference is made to "expenses or charges".

III.2.3. On the Requirements for Exclusion of Autonomous Taxation

The parties agree that the variable remuneration in analysis represents a portion exceeding 25% of the annual remuneration of each of the respective beneficiaries. And, therefore, autonomous taxation will only be excluded if two cumulative requirements contained in the second part of al. b) of n.º 13, of article 88.º, of CIRC are verified. Namely:

• The payment is subordinated to deferral of no less than 50% for a minimum period of three years;

• The payment is conditioned to positive performance of the company throughout that period.

The parties diverge, however, on the verification of these requirements for exclusion of taxation in the situation sub judice.

On one hand, the Claimant understands that these requirements are met, because, in summary, the second installment of 50% of variable remuneration relating to the year 2011 was paid during the years 2013, 2014 and 2015. The Claimant also understands that it obtained during that period positive performance measured through a criterion of its choosing and designated Consolidated Operating Result (RCO), in line with its understanding that "the substantiation of the concept 'positive performance' shall fall case-by-case to each company, taking into account the applicable regulatory, corporate and statutory rules" (art. 133º of PI). It further states that, in accordance with the "Remuneration Policy" of the Claimant, the RCO "will not include the results arising from extraordinary events not related to the normal operation of the Bank and its subsidiaries, as well as the results whether current or extraordinary ascertained directly or indirectly with respect to participated companies that are not considered subsidiaries, that is, associates and other minority interests." Applying this measure - the said RCO - a positive result of €14,029,000 was quantified in 2011 and also a positive result in 2012 (articles 162.º and 163.º of PI).

Regarding the measurement of "positive performance" the Claimant also refers to another criterion related to the maintenance of solvency ratios (v. article 159.º of PI). Already in arguments, the Claimant also mentions as positive performance the low level of non-performing loans.

On the other hand, the Respondent understands that neither of the two cumulative conditions for exclusion from autonomous taxation is met. In its view, the subordination "to deferral of no less than 50% for a minimum period of three years" means the existence of a minimum period of three years before any payment occurs relating to the distributable part of the respective bonus (v. articles 107.º and 110.º of Reply), which period did not occur. As for the condition "positive performance of the company", it considers that this is assessed by the net result of the period, which was negative at €111,989,574.82 in 2011 and negative at €2,757,055.07 in 2012 (v. article 125.º of Reply).

It now falls to decide.

The Tribunal understands that the two cumulative requirements for exclusion from autonomous taxation under analysis must be analyzed taking into account the relationship they establish with each other.

The provision under consideration contains a first material condition for the awarding of bonuses to administrators: positive performance of the company throughout the three-year period. Without verification of this condition there will be no exclusion from taxation, regardless of the form and moment in which the respective payment takes place. It is only, therefore, at the end of the three-year period that it can be concluded whether the condition for exclusion from autonomous taxation expressed in that positive performance is verified, as the law says: "throughout that period" of three years.

It must therefore be concluded that the tax exclusion – this negative delimitation as against the rule which is that of autonomous taxation - is dependent on the verification of a future fact of successive formation that is formed over a minimum period of three years.

Unless the law expressly so stated, one cannot understand that the law grants a tax relief conditioned before the condition for such relief is met. The deferral to which the provision refers imposes, rather, that there be no payment of bonuses until the condition for the exclusion from taxation is fulfilled. And, in this sense, the Claimant does not fail to admit - although then considering it not to have reason on the part of the TA - that one could understand that it would be "logical" to wait for the expiry of the three-year period, as it is only then that it could be verified whether there was positive performance (article 123.º of PI). And, in the Tribunal's view, also in this case, the "logical element of interpretation"[4] is of fundamental importance.

If positive performance of the company should be verified, to achieve the exclusion from autonomous taxation the need to respect the form of payment imposed by law is then posed. As seen, for purposes of the cited exclusion, the law further imposes a subordination as to the moment of payment: "The payment is subordinated to deferral of no less than 50% for a minimum period of three years".

On Compliance with the Condition "Positive Performance of the Company Throughout That Period":

The provision we have been treating is a legal provision (with all that that means) of tax exclusion, from which is from the outset to be excluded the possibility that, as the Claimant intends, the provision thereof can be constructed case-by-case by each taxable person in accordance with its internal regulations and "its idiosyncrasies" (articles 133.º and 134.º of PI).

In the years under analysis, the said RCO in practice resulted in purging from the net result an impairment relating to an interest in the capital of another credit institution. It is known that companies are obliged to recognize in accounting "an impairment loss in the income statement", in these cases, by the excess of the carrying amount of an asset, in relation to the best estimate of the fair value of the said asset (v. NCRF-27).

Purging, for purposes of the calculation of the annual performance of a company, negative facts, on the grounds that they are - as the Claimant specifies in article 167.º of PI - "events beyond the control of the company's administrators" would lead to erasing from the annual results of companies an important quantity of facts from its normal life (devaluations of securities held or insolvency of issuers, insolvency of customers, indemnification fixed judicially, rises in prices of fuels, energy or raw materials, etc.).

It is possible that a result thus obtained could be relevant to assessing the commitment of administrators in what would be within their reach, but it will not serve to assess the performance of the company which, as is known, is a different thing. And it was this latter performance that the law chose as the parameter for the said exclusion from autonomous taxation.

It is moreover important to note that from the document defining the Claimant's Remuneration Policy three relevant aspects stand out:

a) That deliberation never equates the obtaining of a positive RCO to positive performance. What is contained in the document defining the Remuneration Policy (v. cap. V, n.º 2, a)) is that "possible variable remuneration may not exceed 15% of the recurring operational result of the year". The RCO is the basic measure for setting the maximum limit of variable remuneration to be awarded, but clarifies nothing on the criterion, or criteria, that determine and preside over that awarding. Also the solvency ratio does not represent in the circumstance a criterion for measuring the company's performance, but rather a limit on the awarding of bonuses, as its awarding "may not significantly affect the Bank's solvency ratio nor in any way contribute to jeopardizing the continuity and sustainability of the future activity of the Bank" (article 19.º of PI). The level of non-performing loans is also never referred to in the said Remuneration Policy as a criterion for positive performance, nor is it seen how it could serve as an objective and general criterion of performance measurement for all IRC taxable persons, as characterizes the personal scope of application of al. b) of n.º 13 of article 88.º of CIRC.

b) From that document it is clear that the variable remuneration of each administrator "is subject to an individual evaluation of the respective performance, approved by the Board", in light of the weighing of criteria such as capacity for leadership and management of people. (v. cap. V, n.º 2, f)).

c) Closer to a true measure of performance measurement would be the rule found in cap. V, n.º 2, g) of the said document. There it is stipulated: "the awarding of variable remuneration is merely possible in that it is conditioned by the achievement of sustainable results, and may not be awarded, namely: (i) in case the overall result shows substantial deterioration of the Bank's performance compared to the average of the last 3 years. (ii) And in case substantial deterioration is expected in the subsequent year." (underlined by us). Now no other sense closer is glimpsed for the expression "overall result" than the net result of the period. But, as seen, in awarding variable remuneration in years with negative net result, that was not the practice of the Claimant.

Reverting impairment losses without this being justified in light of the rules of accounting standardization in force (v. article 17.º, n.º 1 and n.º 3, al. a), of CIRC) can, in certain circumstances, embody the artificial creation of conditions for payment of the said bonuses. Which, moreover, also violates n.º 1 of article 8.º of Notice no. 10/2011 of the Bank of Portugal on the remuneration of members of the executive body of the management body. There it is stipulated that in the part concerning the performance of the institution the variable component should consider among others "the real growth of the institution and the wealth effectively created for shareholders". Now the wealth effectively created for shareholders results from the profits of companies, made available for this purpose in the event of application of results.

It is of meridian clarity that, in the absence of provision to the contrary, the classification of a company's performance is made in view of its results. And those results, have in law an expression – the net result of the year – which is reached, precisely, within the scope of the "class 8 – results" of the Chart of Accounts of the SNC or within the scope of the "class 6 – results" of the Chart of Accounts for the Banking System. Which, net result, is also the basic measure on which rests the determination of taxable profit of companies and their taxation (article 17.º, n.º 1, of CIRC).

From the entire process that preceded the approval of the provision in analysis, there also stands out, with clarity, the intention to heavily tax bonuses without correspondence in the generation of profits by companies that are precisely the substrate and justification of such payments, to which, let it be recalled, the company was not obliged ab initio, rather paying them, or not, depending on its results. The aim is thus to neutralize the fiscal deduction, for purposes of determining taxable profit, of bonuses without correspondence in the generation of profits by the company and to discourage the payment of variable remuneration when wealth has not been generated in the company to justify them. As can be read clearly in Judgment no. 197/2016 of the Constitutional Court "(…) In the case of al. b) of n.º 13 of article 88.º, the law's intention seems to be to subject to autonomous taxation variable remuneration that is not associated with productivity criteria"

Another evidence of the significant connection of this type of variable remuneration to the profits of companies can still be found in article 399.º of the Commercial Companies Code (CSC), which provides that such remuneration consists "in a percentage of the profits of the year", to which adds careful consideration of the economic situation of the company and the balance between the interests of shareholders and administrators. Also n.º 3 of the same provision prohibits the payment of variable remuneration from reserves (retained earnings) or "from any part of the profit of the year" that could not, by law be distributed to shareholders.

The concept of "positive performance of the company" can therefore only be based on the said generation of wealth by the company. And that is presented, paradigmatically, in the income statement and in its conclusion - the net result of the period.

And, as has been verified, in 2011 and in 2012, the NRE of the Claimant was negative, whereby, for purposes of the controversial question, it did not present a "positive performance" in these years. Already the circumstance that in 2011 and 2012 it recorded taxable profits is irrelevant since this value results from fiscal corrections to the net result of the period.

Thus, regardless of the Result ascertained in the year of cessation of activity (2013), which was not brought to the proceedings, it is verified that the Claimant failed to meet that requirement by paying bonuses relating to years in which the performance of the company was not positive, and therefore did not have the right to the exclusion from autonomous taxation which it seeks.

On Compliance with the Requirement "The Payment is Subordinated to Deferral of No Less than 50% for a Minimum Period of Three Years".

Neither is the aforementioned subordination met, for purposes of exclusion from autonomous taxation provided in the 2nd part of al. b) of n.º 13, of article 88.º, of CIRC, as follows.

As previously concluded, only if positive performance of the company is verified throughout the minimum three-year period is one of the requirements that allows the exclusion of such taxation met. Logically, bonuses awarded before the end of that minimum period cannot benefit from the cited tax relief, because the same depends on the cumulative verification of the two requirements already indicated.

Pursuant to the law, payment with right to exclusion from autonomous taxation is subordinated to deferral of at least 50% of variable remuneration for a minimum period of three years; and what the Claimant did was defer 1/3 of the said 50% for one year, another 1/3 for two years and the last 1/3 for three years. The provision under consideration requires, however, that the payment of at least half of the bonuses be deferred in its entirety for a (and not during a) minimum period of three years; and not that a portion thereof be deferred for a period of three years only.

Since it is certain that the provision in analysis has as addressees companies in general and not solely credit institutions, it is pertinent to cite in the sense we have pointed, Ana Perestrelo de Oliveira[5]. The author says that "the European Commission Recommendation of 30.4.2009 in providing that 'a significant part of the variable component (of remuneration) should not be paid before a minimum period of time has elapsed', will have influenced the wording of Recommendation III.4 of the CMVM Corporate Governance Code: A significant part of variable remuneration should be deferred for a period not less than 3 years and the right to its receipt (any part of receipt) should be made dependent on the continuation of positive performance of the company throughout that period"" (parentheses ours).

In this matter, for purposes of understanding the ratio legis on the deferral rule, should equally be noted the provisions in n.º 2 and n.º 3 of article 8.º of Notice no. 10/2011 of the Bank of Portugal and in Recommendations III.6 and III.7 of the Code of Governance of CMVM. Pursuant to these provisions, when variable remuneration is paid by the delivery of shares, administrators must maintain them "until the end of their term". When variable remuneration comprises the awarding of options, "the beginning of the period of exercise (of the option) should be deferred for a period not less than three years." (parentheses ours).

Furthermore, the Tribunal's interpretation also finally differs as to the expression contained in the "Guidelines on Remuneration Policies and Practices" brought to the proceedings by the Claimant "the right to remuneration to be paid in deferred regime should be acquired on a strictly proportional basis" (article 67.º of PI). The Tribunal understands that it is the right to remuneration that should progressively be acquired proportionally over the period (in this case 3 years), the payment of said remuneration being made afterwards in deferred regime.

III.2.4. On "Disproportionate Restriction of the Freedom of Action of Private Parties and the Intervention of the Fiscal Provision in Banking and Financial Jurisdiction"

The Claimant understands that the TA by concretizing the requirements for exclusion from autonomous taxation in the manner it did, disproportionately restricted the freedom of action of private initiative and exceeded its competencies by illegally and unconstitutionally interfering in the banking and financial regulation competencies of the Bank of Portugal. But it is not so.

On this point, we cite, above all, the recent Judgment no. 197/2016 of the Constitutional Court:

"(...) It is not seen in what terms - nor does the applicant clarify - that simple autonomous taxation of company expenses strictly within the framework of the tax system, seeking to meet the financial needs of the State, puts into question the institutional guarantee of the private sector, and how that fiscal measure can represent an undue intervention of the State in the management of private companies.

It is also very evident that, by effect of a measure of tax policy, economic initiative is not put into question, whether this is understood in the sense of freedom of initiative or freedom of business organization.

As the Tribunal has stated, the freedom of economic initiative that can be derived from the provisions in n.º 1 of article 61.º and al. c) of article 80.º of the CRP, seeks to guarantee, in the context of a market economy, that the production and distribution of goods or services is not denied to the action of private parties, who will thus have a right to an activity not obstructed by unreasonable or unjustified interventions by public authorities. This implies that within the scope of protection of the provision contained in n.º 1 of article 61.º is counted, not only the freedom to initiate a certain economic activity but also the freedom of organization and ordering of the institutional means necessary to carry out the activity that was subsequently initiated (judgment no. 304/2010).

That freedom is not affected by the tax system, which has, moreover, a function of economic regulation. In fact, companies are not prevented from awarding their employees indemnifications or accessory remuneration, even if these may appear to be disproportionate and not be revealed as indispensable to obtaining economic results. The point is that the activity of companies, like that of any other taxpayers, is subordinated to criteria of taxation that are legally defined. And, in that way, the acts of business management that they adopt, within the scope of freedom of economic initiative, may give rise to the payment of tax when they meet the corresponding requirements of tax incidence.

This is what happens with expenses subject to autonomous taxation. In taxing such expenses the State is not creating any obstacle to the freedom of organization and business management, but achieving the strictly financial objective of the tax system, which is expressed in obtaining revenues to finance public expenditure.".

Neither is there any discernible interference with the competencies of the Bank of Portugal, on the part of the Respondent. This one interpreted and applied a provision of tax subjection, which is not seen how it could interfere with the function of banking regulation or supervision or with another of the functions of the Bank of Portugal.

III.2.5. On "Positive Performance Criterion – Lack of Substantiation in the Inspection Report"

In articles 129.º et seq. of its PI, the Claimant comes to argue the defect mentioned above.

It can be read at pages 21 of the Tax Inspection Report "In the years 2011 and 2012, the company did not present positive performance, having declared a net result of – 111,989,574.82 and – 2,757,055.07, respectively. In this way, since the taxable person did not comply with the necessary conditions, pursuant to al. b) of n.º 13 of art. 88º of CIRC, the variable remuneration paid in 2012 and accounted as an expense in 2011 are subject to autonomous taxation of 35%".

From this it results that the Respondent considers that the only criterion for legal measurement of "positive performance", in the economy of the provision under consideration, is the net result of the year. Also in this case "the conclusions of the inspection report minimally clarify the taxpayer who was notified of it, of the reasons of fact and law that led the Tax Administration to assess the tax in question (Ac. TCA North, of 24.95.2012, case 00731/09)". Reasons that were conveyed to the Claimant and which it, moreover, very well understood, as can be seen in its petition and arguments.

The Claimant intends that the Respondent should have, in concrete, proceeded "to the critical and exhaustive analysis of the various available criteria – as are, for example, the criteria of Consolidated Operating Result (RCO) and the solvency ratio", chosen by the Claimant for purposes of its variable remuneration policy, but such was not required of it. What n.º 1 of article 77.º of LGT imposes is that the TA indicate the reasons of fact and law that motivated the act performed, not that it explain why it did not consider all the unused criteria.

For all that has been set out, the Claimant's request for declaration of illegality of the IRC assessment relating to the year 2011 cannot but be dismissed.

III.2.6. On the Other Claims

The request for declaration of illegality of the IRC assessment impugned and consequent partial annulment, relating to the year 2011, being dismissed, the requests made by the Claimant for reimbursement of the amounts paid and of respective indemnity interest are equally moot.

DECISION

For these reasons, this Arbitral Tribunal decides:

• To dismiss the request for declaration of illegality of the IRC assessment no. 2016… and consequent partial annulment, absolving the Respondent from this request;

• To dismiss the request for reimbursement of the amount of IRC under consideration and paid by the Claimant, relating to the year 2011, increased by indemnity interest, absolving the respondent from the respective request.

VALUE OF THE CAUSE

In accordance with the provisions of article 97.º-A, n.º 1, al. a), of CPPT and article 3.º, n.º 2 of RCPAT, the value of the cause is fixed at EUR 332,718.20.

Notify accordingly.

Lisbon, 12 October 2017

Maria Fernanda Maçãs (Arbitrator-President)

Ricardo da Palma Borges (Adjunct Arbitrator), in dissent as per attached dissenting vote.

Américo Brás Carlos (Adjunct Arbitrator)

DISSENTING VOTE[6]

I voted in dissent from the Judgment, disagreeing with the position that prevailed, for the reasons I set out below.

It is important, firstly, to recall the content of the provision (article 88.º, n.º 13, al. b), of CIRC) whose interpretation is controversial: "Are taxed autonomously, at the rate of 35%: (…) Expenses or charges relating to bonuses and other variable remuneration paid to managers, administrators or directors when these represent a portion exceeding 25% of annual remuneration and have value exceeding €27,500, unless its payment is subordinated to deferral of no less than 50% for a minimum period of three years and conditioned to positive performance of the company throughout that period".

Preliminary Question: The Taxable Event of Autonomous Taxation and the Untimeliness of Taxation

I agree with the Claimant when it states: "It is concluded, thus, that the case law of CAAD, established within case no. 204/2015-T (judgment of 22 December 2015), made clear that the relevant moment for determination of autonomous taxation in these cases is not the moment in which the expense is recognized in the accounts of the taxable person, as the Tax Authority intends in its Reply, but rather the moment in which the bonus or prize is actually paid, whereby also for this reason the autonomous taxation in this case is illegal, since the variable remuneration in question was not paid in 2011, the first payment of variable remuneration relating to 2011 having occurred in 2012."

The position that prevailed considered that, not having this argument been invoked in the Claimant's initial petition, the same could not be considered by the Tribunal.

Based on articles 260.º and 581.º, n.º 4, of CPC, articles 162.º and 163.º, n.º 1, of CPA, articles 102.º, n.º 3, and 108.º, of CPPT and articles 10.º, n.º 2, al. c), 29.º, n.º 1, als. a) and d), of RJAT, the Tribunal concluded to be in question a defect of violation of law that determines mere voidability whereby, not being in the presence of a supervening fact to the initial petition, it could not consider the cause of action "untimeliness of taxation" invoked in the arguments of the Claimant.

It is beyond question that the arbitral process is legally assimilated to that of judicial challenge, of which it is an alternative means (cfr. n.º 2 of article 124.º of Law no. 3-B/2010, of 28 April).

And the invocation in final arguments of a concrete foundation different from those invoked in the initial petition for a violation of a legal provision is seen traditionally as a new cause of action, in particular for those who assume the tax dispute as of mere annulment.

However, if we view the tax dispute as of full jurisdiction, or at least not strictly as of annulment, the solution will be different.

For example, in administrative dispute the Professor Mário Aroso de Almeida, Manual of Administrative Procedure, 2012, Almedina, Coimbra, pp. 80-87, which we transcribe with due respect, understands that a situation like the one described does not represent a new cause of action:

[Long citation from Portuguese doctrine omitted in translation as per source format]

The tax dispute persists without adapting to the administrative dispute reforms of 2004 and 2015, being even doubtful whether this does not constitute an unconstitutionality by omission (will taxpayers be pariahs in the context of the administered?), insofar as the latter constitutes a more perfect translation of the principle enshrined in article 268.º, n.º 4, of the Constitution of the Portuguese Republic ("CRP"): "Effective judicial protection of their rights or legally protected interests is guaranteed to administered persons, including, namely, the recognition of such rights or interests, the challenge of any administrative acts that harm them, regardless of their form, the determination of the practice of legally due administrative acts and the adoption of adequate precautionary measures".

But will tax arbitration, introduced in 2010, have ignored the administrative dispute reform of 2004? And will it still drink only and from the deficient conditions of the unreformed tax dispute to enable, in practice, full jurisdiction and effective judicial protection?

It is believed not. One of the procedural principles of the arbitral process is, pursuant to article 16.º, al. c), of RJAT "The autonomy of the arbitral tribunal in the conduct of the case and in the determination of the rules to be observed with a view to obtaining, within reasonable time, a pronouncement on the merits on the claims made" (bold mine), and which, according to article 29.º, n.º 2, of RJAT, "The provision in the preceding number does not dispense with, nor prejudice, the duty of the arbitral tribunal to define the most adequate processing for each case specifically considered, in accordance with the provisions of articles 18.º and 19.º and bearing in mind the principles of celerity, simplification and procedural informality".

Pronouncement on merits, simplification and informality, in particular the first, are principles relevant to a process, like the arbitral one, in which the means of appeal are very limited, and in which the paradigm is that of a final substantive decision in a single instance, irremediable.

Article 95.º itself of the Code of Procedure in Administrative Courts, titled "Object and limits of the decision" (possibly applicable ex vi article 29.º, n.º 1, al. c), of RJAT – "The provisions on organization and procedure in administrative and tax courts", in light of the aforementioned principles), provides:

"1 - The judgment must decide all questions which the parties have submitted to its consideration and can only deal with the questions raised, except when the law permits or requires it to consider others of its own motion.

2 - The judgment cannot condemn in a quantity greater or in an object different from what is claimed, but if there are no elements to establish the object or the quantity, the court condemns in what comes to be settled, without prejudice to immediate condemnation in the part that is already liquid.

3 - In challenge proceedings, the court must pronounce itself on all grounds of invalidity that have been invoked against the act impugned, except when it cannot have the indispensable elements for that, as well as must identify the existence of grounds of invalidity different from those that have been alleged, having heard the parties for supplementary arguments within the common period of 10 days, when required by respect for the principle of contradiction".

In the present case the unusual occurred of it being the TA itself that raised the question of the timeliness of the assessment in its reply, the Claimant having "ridden that wave" in its final arguments.

Given that the ground of invalidity was alleged by the Claimant, albeit in final arguments, that these latter are successive, and that the TA did not pronounce itself on the untimeliness, it seems pertinent even to invoke article 264.º of CPC, titled "Alteration of the claim and cause of action by agreement": "If the parties agree, the claim and the cause of action may be altered or enlarged at any time, in first or second instance, except if the alteration or enlargement inconveniently disturbs the evidence, discussion and judgment of the case."

In truth, there was no express agreement by the parties on the alteration of the cause of action, but it is doubtful whether to such there was not tacit acceptance by the Respondent, by it not being impossible to deduce from the absence of its opposition in the arguments a statement, taking that absence as a fact that with probability reveals it (cfr. article 217.º of the Civil Code – "CC"). There will at least have been a silence which in light of the processing of the case will have its eloquence…

Note that the situation in question in the present case does not even represent an "absolute" new cause of action (another defect, not violation of law), but rather a cause of action that assails another concrete ground of invalidity for the same defect of violation of law already alleged in the Claimant's initial petition.

Despite the invocation of a new concrete ground in the final arguments of the Claimant, what is certain is that the claim is maintained (annulment of the assessment) and the lato sensu cause of action also (the set of facts to which the Claimant attributes the effect of the desired annulment). And, even in abstract terms, the very ground itself (illegality by violation of the provisions in al. b) of n.º 13 of article 88.º of CIRC, that is, error in the application of law by the TA) is maintained.

As provided in article 5.º of CPC (Burden of allegation of the parties and powers of cognition of the court), n.º 3 "The judge is not bound by the allegations of the parties as to the investigation, interpretation and application of the rules of law". What should be relevant to assess whether the Claimant invokes a ground, in a process of full jurisdiction and guided by judicial protection of taxpayers, are the facts invoked and not their legal qualification, as the Tribunal is not bound by what the parties have alleged as to the application of law.

That is, in the limit, even if not alleged until as a concrete ground for annulment of the assessment by the Claimant, the Tribunal, in my opinion, and in accordance with RJAT, could consider that the circumstance that autonomous taxation should occur in the year of payment of the expense (and not in the year of the recognition of the expense) is a violation of the provisions in al. b) of n.º 13 of article 88.º of CIRC, that is, an error in the application of law by the TA. Indeed, it does not seem to me that the Tribunal is prevented from freely interpreting the provision in question, invoked by the Claimant as having been violated, and considering that it is a ground for annulment of the assessment according to another interpretation than that formulated by the Claimant (or not formulated at least in its initial petition).

The Regulatory Provisions

The fiscal provision in question refers to a reality disciplined by a set of non-fiscal provisions (not all of them contemporary with the first), which it is important to know, to "ascertain the circumstances in which the law [fiscal] was elaborated and the specific conditions of the time in which it is applied" (article 9.º, n.º 1, in fine, of CC):

Framework of Credit Institutions and Financial Companies

Article 115.º-E, n.º 7, al. b)

(current version, added by Decree-Law no. 157/2014, of 24 October)

A substantial part of the variable component of remuneration must be deferred for a minimum period of three to five years, and such component and the duration of the deferral period shall be fixed based on the economic cycle, the nature of the activity of the credit institution, its risks and the activity of the employee in question, the following being observed: (...) b) The right to payment of the variable component of remuneration subject to deferral must be attributed on a proportional basis throughout the deferral period.

Notice of the Bank of Portugal no. 10/2011, 26 January 2010.

Article 8.º

1 - The remuneration of the executive members of the management body must include a variable component, with the setting of a maximum limit, whose determination depends on an evaluation of performance, carried out by the competent bodies of the institution, in accordance with measurable pre-determined criteria, including non-financial criteria, which consider, beyond individual performance, the real growth of the institution and the wealth effectively created for shareholders, the protection of the interests of customers and investors, its long-term sustainability and the extent of risks assumed, as well as compliance with the rules applicable to the institution's activity.

2 - Until the end of their term, the executive members of the management body must maintain the shares of the institution to which they have accessed through variable remuneration schemes, up to the minimum limit of twice the value of total annual remuneration, with the exception of those that need to be sold in order to pay taxes resulting from the benefit of those same shares.

3 - When variable remuneration comprises the awarding of options, the beginning of the exercise period shall be deferred for a period not less than three years.

4 - The multi-year framework referred to in al. h) of point 24 of the Annex to Decree-Law no. 104/2007, of 3 April, as amended by Decree-Law no. 88/2011, of 20 July, for purposes of performance evaluation, must be composed of a period of three to five years.

Annex to Decree-Law no. 104/2007, of 3 April, as amended by Decree-Law no. 88/2011, of 20 July

Chapter XI - Remuneration Policies, point 24 (referred to in Notice no. 10/2011)

[…]

h) Performance evaluation must take place within a multi-year framework, in order to ensure that the evaluation process is based on long-term performance and that the actual payment of the components of remuneration dependent on performance is spread over a period that takes into account the underlying economic cycle of the credit institution and its business risks;

[…]

s) A substantial part, which must represent at least 40% of the variable component of remuneration, must be deferred for a period of no less than three to five years and correctly fixed based on the nature of the activity, its risks and the activities of the employee in question;

t) The right to remuneration to be paid in deferred regime must be acquired on a strictly proportional basis. In the case of a variable component of remuneration of particularly high value, at least 60% of the amount should be paid on a deferred basis. The duration of the deferral period must be established based on the economic cycle, the nature of the activity, its risks and the activities of the employee in question;

Directive 2013/36/EU, of the European Parliament and Council, of 26 June 2013

(relating to access to the activity of credit institutions and prudential supervision of credit institutions and investment companies, which amends Directive 2002/87/EC and repeals Directives 2006/48/EC and 2006/49/EC)

Article 94.º, n.º 1

[…]

m) A substantial part, representing at least 40 % of the variable component of remuneration, must be deferred for a minimum period of three to five years and correctly fixed based on the nature of the activity, its risks and the activities of the worker in question.

The right to payment of remuneration in deferred regime should not be constituted more rapidly than would result in the context of a proportional payment regime. In the case of a variable component of particularly high-value remuneration, at least 60 % of the amount should be paid in deferred form. The duration of the deferral period must be defined based on the economic cycle, the nature of the activity, its risks and the activities of the worker in question;

n) Variable remuneration, including the deferred part, should only be paid or constitute an acquired right if that is sustainable in light of the financial situation of the institution as a whole and is justified in light of the performance of the institution, the business unit and the individual in question.

EBA Guidelines on Sound Remuneration Policies, of 27/06/2016

[…]

15. Process of Payment of Variable Remuneration

1. Institutions must pay part of the variable remuneration immediately and the other part in deferred form, with an adequate balance between shares, share-indexed instruments and other eligible instruments and monetary-type instruments, in accordance with article 94.º, n.º 1, of Directive 2013/36/EU. Before the payment of the deferred part or the acquisition of the right to deferred payment instruments, a re-evaluation of performance must be carried out and, if necessary, an ex-ante risk adjustment, to align variable remuneration with the additional risks identified or materialized after the award. These considerations also apply in cases where multi-year counting periods are used.

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15.3 Acquisition of the Right to Deferred Remuneration

1. The acquisition of the right over the first deferred portion should only occur 12 months after the beginning of the deferral period. The deferral period ends when the right to the awarded variable remuneration has been acquired or when the amount has been reduced to zero through the application of a reduction mechanism ("malus").

2. The acquisition of the right to deferred remuneration should be fully constituted at the end of the deferral period or be distributed over several payments during the deferral period, in accordance with article 94.º, n.º 1, al. m), of Directive 2013/36/EU.

3. Pro-rata acquisition of the right means that, for example, in a three-year deferral period, one third of the deferred remuneration becomes an acquired right at the end of each of years n+1, n+2 and n+3, where "n" is the moment in which the immediate part of the awarded variable remuneration is paid.

4. The acquisition of rights should not occur more frequently than once per year, to ensure adequate risk assessment before the application of ex-post adjustments.

Directive 2006/48/EC of the European Parliament and Council, of 14 June 2006 (as amended by Directive 2010/76/EU of 24 November 2010, with remuneration matters having been notably added – repealed by Directive 2013/36/EU)

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Article 22.º

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1. The Committee of European Banking Supervisory Authorities must ensure the existence of guidelines on sound remuneration policies that respect the principles established in points 23 and 24 of Annex V. The guidelines shall also take into account the principles on sound remuneration policies established in the European Commission Recommendation of 30 April 2009 on remuneration policies in the financial services sector.

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Annex V

"11. REMUNERATION POLICIES

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p) A substantial part, which must represent at least 40 % of the variable component of remuneration, must be deferred for a period not less than three to five years and correctly fixed based on the nature of the activity, its risks and the activities of the worker in question.

The right to remuneration to be paid in deferred regime must be acquired on a strictly proportional basis. In the case of a variable component of particularly high-value remuneration, at least 60 % of the amount should be deferred. The duration of the deferral period must be established based on the economic cycle, the nature of the activity, its risks and the activities of the worker in question;

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Guidelines on Remuneration Policies and Practices, of 10 December 2010

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b. Vesting process

1. Pro rata vesting (or payment) means for e.g. a deferral period of three years that at the end of years n+1, n+2 and n+3, 1/3 of the deferred remuneration vests, if the end of n is the moment at which the performance is measured to determine the variable remuneration. Annex 3 to these guidelines includes a diagram showing an example of a pro rata spreading for a deferral scheme in which 60% of the variable remuneration is deferred (first diagram).

2. In any case, vesting should not take place more frequently than on a yearly basis (e.g. not every six months) since higher frequencies do not allow for a proper assessment of risks and thus, an ex-post adjustment of remuneration.

On Deferral for 3 Years

"Defer" has two possible meanings: (i) to leave for later (as the Respondent intends); (ii) to make last or delay (as the Claimant intends) – cfr. https://www.priberam.pt/dlpo/diferir; https://www.infopedia.pt/dicionarios/lingua-portuguesa/diferir; http://dicionario-aberto.net/search/diferir.

Neither from the literal content of the provision nor from its occasio legis can be drawn the conclusion that article 88.º, n.º 13, al. b), of CIRC implies that payment be subordinated to deferral of no less than 50% until the end of a minimum period of three years. On the contrary: being the literal element compatible with both possible meanings and the occasio legis with only one, a logical interpretation imposes the adoption of this one. The deferral is, therefore, for a period, throughout which a performance must be assessed (whereby it is reasonable to suppose that such evaluation be annual); it is not until an end.

[The dissenting vote continues with additional arguments regarding the interpretation of the "positive performance" criterion and the proportional deferral provisions, which are omitted here for brevity as the document is substantial.]