IRS Tax Transparency Regime: Deduction of Costs Under Article 23 CIRC – CAAD Decision 550/2016-T

ARBITRAL DECISION

Claimants: A…, taxpayer no. …, domiciled at …, … …, …-… …and OTHERS, duly identified in the request for arbitral decision,

Respondent: TAX AND CUSTOMS AUTHORITY

I. REPORT

1. A…, taxpayer no. …, domiciled at …, no. …, …, …, …-… …, (hereinafter referred to as 1st Claimant); B…, taxpayer no. …, domiciled at Street…, no. …, …-… …, (hereinafter referred to as 2nd Claimant); C…, taxpayer no. …, domiciled at Street…, no. …, …-… …, (hereinafter referred to as 3rd Claimant), and D…, taxpayer no. …, domiciled at Street …, no. ... …-… …(hereinafter referred to as 4th Claimant), presented on 05-09-2016 a request for constitution of an arbitral tribunal pursuant to the provisions of paragraph a) of no. 1 of article 2, and article 10, nos. 1 and 2, both of Decree Law no. 10/2011, of 20 January (hereinafter referred to as RJAT) and articles 1 and 2 of Regulatory Order no. 112-A/2011, of 22 March, in which the Tax and Customs Authority is requested (hereinafter referred to as AT or Respondent), with a view to declaring the illegality and annulment of the following acts of additional Personal Income Tax assessments and respective compensatory interest, with reference to the years 2011 and 2012:

• assessments no. 2015 … (PIT 2011) and 2015 … (Compensatory Interest 2011), which gave rise to collection note no.…, in the amount of € 2,717.04, relating to the 1st Claimant:

• assessments no. 2015 … (PIT 2012) and 2015 … (Compensatory interest 2012), which gave rise to collection note no.…, in the total amount of € 7,741.67, relating to the 2nd Claimant;

• assessments no. 2015… (PIT 2011) and 2015… (Compensatory interest 2011), which gave rise to collection note…, in the amount of € 16,695.27, relating to the 2nd Claimant;

• assessments no. 2015 … (PIT 2012) and 2015 … (Compensatory interest 2012), which gave rise to collection note no.…, in the amount of 20,941.52, relating to the 2nd Claimant;

• assessments no. 2015 … (PIT 2011) and 2015… (Compensatory interest 2011), which gave rise to collection note no.…, in the total amount of €. 3,230.31, relating to the 3rd Claimant;

• assessments no. 2015 … (PIT 2012) and 2015… (Compensatory interest 2012), which gave rise to collection note no.…, in the total amount of €1,799.96, relating to the 3rd Claimant;

• assessments no. 2015 … (PIT 2012) and 2015… (Compensatory interest 2011), which gave rise to collection note no.…, in the amount of € 927.44, relating to the 4th Claimant.

2. The request for constitution of the Singular Arbitral Tribunal was accepted by His Excellency the President of CAAD and notified to the Respondent on 26-09-2016.

3. Pursuant to and for the purposes of the provisions of paragraph a) of no. 2 of article 6 of RJAT, by decision of His Excellency the President of the Deontological Board of CAAD, duly notified to the parties within the prescribed periods, the undersigned was appointed as arbitrator, who communicated to the Deontological Board and to the Center for Administrative Arbitration (CAAD) his acceptance of the appointment within the period stipulated in article 4 of the Deontological Code of the Center for Administrative Arbitration.

4. On 10-11-2016 the parties were notified of such appointment and did not express any intention to challenge the arbitrator's appointment, pursuant to the combined provisions of articles 11, no. 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

5. The Singular Arbitral Tribunal was constituted on 25-11-2016, in accordance with the provisions of paragraph c) of no. 1 of article 11 of RJAT, in the wording given to it by article 228 of Law no. 66-b/2012, of 31 December.

6. An order was issued on 02-01-2017 inviting the Claimants to pronounce themselves on the exception raised by the AT.

7. The Claimants having on 09-01-2017 proceeded to submit their respective response.

8. On 16-01-2017, an arbitral order was issued, duly notified to the parties, which justified the waiver of the meeting referred to in article 18 of RJAT, the examination of the witness indicated by the Claimants, as well as the waiver of proof by party statements, granting them the faculty of submitting written pleadings, and indicated a deadline for the issuance and notification to the parties of the arbitral decision.

9. The parties did not submit written pleadings.

10. The accumulation of claims even if relating to different acts, and the joinder of claimants, are admissible within the scope of tax arbitration, in view of the provisions of article 3, no. 1 of RJAT.

11. To support their claims, the Claimants, in joinder and invoking essentially the same factual and legal grounds, allege, with relevance to what matters here, the following (which is mentioned mostly by transcription):

11.1. The tax assessment acts now contested originated from an inspection action carried out on the company E…, SROC, (…) of which the Challengers are partners, which gave rise to various corrections of the taxable income (see article 1 of the request for arbitral decision)

11.2. (…) bearing in mind that E… is a company subject to the tax transparency regime, the aforementioned taxable matters are imputed to the respective partners, pursuant to articles 6 of the CIRC and 20 of the CIRS (see article 4 of the request for arbitral decision),

11.3. having given rise to the acts of assessment of tax and compensatory interest (…) notified to the Challengers (see article 5 of the request for arbitral decision and documents nos. 1 to 7 attached thereto),

11.4. The challengers (….) proceeded to their respective payment (see article 6 of the request for arbitral decision and documents nos. 8 to 14 attached thereto),

11.5. (…) by disagreeing with the corrections made and the subsequent assessments, the Challengers reacted through administrative appeals, which came to be wholly dismissed by orders dated 13.06.2016 notified to the challengers through official letters of 13 and 14 June 2016 (see article 7 of the request for arbitral decision and documents nos. 15 to 18 attached thereto),

11.6. (…) the Challengers [do not] now intend to contest the correction relating to invoices issued in the name of partner A… (….), (see article 13 of the request for arbitral decision),

11.7. Regarding the corrections related to expenses at the domicile of partner Dr. B… in the amount of 915.51 € in 2011 and 798.36 € in 2012, relating to his internet subscription, the AT is not correct (see article 15 of the request for arbitral decision),

11.8. (…) E… assumes the burden of partner B…'s subscription because this service is intended to protect backup copies of the said company ("back-ups"), (see article 16 of the request for arbitral decision),

11.9. Another correction that is contested is related to expenses invoiced by "…", with the description of use of sports facilities, in the amount of € 1,678.05 in 2011 and € 1,115.25 in 2012 (see article 30 of the request for arbitral decision),

11.10. (…) the facilities of this gymnasium are contiguous to the facilities of one of the offices and headquarters of E… and have as an accessory advantage the use of its covered garage, with several cards that were used by various employees as parking, since the cost is clearly lower than the costs of public parking subscriptions in the area, which amounted to approximately 600 € annually for each vehicle, (see article 31 of the request for arbitral decision),

11.11. Also subject to correction were expenses recorded as office supplies, in the amount of € 869.64 in 2011 and € 92.52 in 2012 (see article 33 of the request for arbitral decision),

11.12. (….) these corrections relate to five entries with individual values of € 113.96, € 112.42, € 426.83, € 100.40 and € 106.02, relating to the year 2011, and one entry of € 92.52, relating to 2012 (see article 34 of the request for arbitral decision),

11.13. (…) an invoice was also rejected relating to the purchase of a "Dock Station for Ipod, in the amount of € 426.80, on the argument (unfounded) that this is an item that is not suitable for the company's activity (see article 37 of the request for arbitral decision),

11.14. (…) another aspect corrected by the AT concerns the charge assumed by E… regarding the condominium of the fractions it occupies with its offices, amounting to € 1,598.93 in 2011 and € 3,329.59 in 2012 (see article 41 of the request for arbitral decision),

11.15. (…) they proceeded to correct expenses related to gift items. In the amount of € 3,020.12, relating to the year 2011 and € 2,291.44, relating to the year 2012 (see article 47 of the request for arbitral decision),

11.16. (...) in E… there is the practice and tradition of giving gifts to its employees at Christmas and of giving toys to their children (…), (see article 48 of the request for arbitral decision),

11.17. These gifts obey, moreover, a gift and toy distribution list (see article 49 of the request for arbitral decision),

11.18. (…) The Claimants also refer to the correction of € 10,411.92, carried out by the TIS related to health insurance provided to employees, with the same manifesting disagreement with the interpretation they produce regarding article 43 of the CIRC (see articles 51 to 65 of the request for arbitral decision),

11.19. Regarding the corrections contained in points III.2.1.6 and III.2.2.9 of the Inspection Report, corrections are highlighted with expenses in the name of other taxpayers in the amount of € 7,868.93 in 2011 and € 8,500.12 in 2012, signaled by the Claimants in article 66 of the request for arbitral decision,

11.20. (…) corrections [that] relate to the payment of social security charges of partner C… in the years of 2011 and 2011, and of partner D… in the year 2012 (see article 67 of the request for arbitral decision),

11.21. The Claimants also refer, under articles 74 and following of the request for arbitral decision, regarding the corrections made with travel and accommodation expenses in the amount of 23,388.71 €, regarding 2011 and 33,644.29 € in 2012, there making various considerations regarding their disagreement with the determination of the same.

12. In summary conclusion (our responsibility) the Claimants conclude that the expenses (summarily signaled) incurred by the transparent company "E…" were necessary for the formation of its income and as such should not have been disregarded by the AT, in view of the provisions of article 23 of the CIRC."

They further petition for payment of indemnity interest, pursuant to the provisions of article 43 of the General Tax Law and article 61, no. 5 of the Tax Procedure and Process Code.

13. The AT, duly notified for this purpose, presented its response timely by way of exception and impugnation, having proceeded to join the administrative files, both that relating to the company "E…" and those concerning the Claimants, namely those concerning the projects and final decisions reached within the scope of the administrative appeals presented.

13.1. It raises the exception of untimeliness of the underlying request for arbitral decision and,

13.2. By impugnation it sustains a perspective and position contrary to that presented by the Claimants in line with the position already assumed by it in the context of dismissal of the administrative appeals presented by the Claimants per se, as well as that presented by the company of which the Claimants are partners, called "E…, SROC" a company subject to the "tax transparency" regime, arguing in summary the following (which is mentioned mostly by transcription);

13.3. (…) that companies taxed under the tax transparency regime are taxed fundamentally by their actual income, calculated in accordance with the provisions of the CIRC, (see article 29 of response),

13.4. For this purpose, article 115 of the CIRC establishes the obligation for such entities to have organized accounting in accordance with commercial and tax law, requiring in its no. 3 that all entries be supported by supporting documents dated and capable of being presented whenever necessary, (see article 30 of response),

13.5. (…) the CIRC institutes certain deviations from the taxation of net income, proceeding to the non-consideration of certain tax deductible expenses, (see article 32 of response),

13.6. (…) in the context of burden of proof, it is already well established at the case law level that organized accounting enjoys a presumption of truthfulness, therefore it is up to the AT to rebut this presumption by demonstrating that the recorded facts are not true (see article 35 of response);

13.7. The same is not true of the qualification of the sums recorded as deductible costs, the burden of proving their indispensability for the obtaining of profits or for the maintenance of productive capacity falling on the taxpayers, if the AT questions it, (see article 36 of response),

13.8. (…) the fundamental premise underlying fiscal deductibility is that costs or losses of companies can only be deductible when, being duly proven, they prove to be indispensable for the realization of profits or for the maintenance of the productive source of the company in question (see article 39 of response),

13.9. (…) the 1st Correction in 2011 in the amount of € 915.51 and in 2012 of € 798.36 (…) relates to expenses at the domicile of partner Dr. B… relating to his Internet subscription (see article 43 of response),

13.10. The invoices issued by "…" were subject to correction, as detailed in the Report (see article 44 of response),

13.11. (…) we are faced with a charge not capable of use by the company E… such as the subscription to INTERNET which covers the contractualized "Package" of television, available TV channels, e.g., Sport TV, invoiced to the address of another taxpayer, the partner of the company, Dr. B… (see article 45 of response),

13.12. (…) 2nd Correction of € 1,678.15 in the year 2011 and € 1,115.25 in the year 2012 (…) regarding expenses with the use of the gymnasium and towel services of …, the RR justify that the same should be due to the fact that such facilities are contiguous to their facilities, which brings them as an accessory advantage the use of its covered garage (see article 55 of response),

13.13. (…) the company can only consider as deductible costs of the fiscal year the amounts spent in favor of Employees, obeying objective and identical criteria for all even if belonging to different professional classes cfr. paragraph a) of no. 4 of article 43 of the CIRC (see article 57 of response),

13.14. The 3rd Correction relating to the year 2011, in the value of € 869.64 and to the year 2012, in the amount € 92.52 (…) concerns office supplies (see article 59 of response),

13.15. The RR contest the tax correction that fell on the purchase of the second Dock Station for iPOD, and the explanation advanced by them could even justify this purchase, were it not for the fact that E…, on 18.12.2011, had already acquired another device with similar characteristics, which is why it was considered that this acquisition not conforming with the activity carried out, embodied a cost that clearly exceeded the objective needs and capacities of the company (see article 60 of response),

13.16. The 4th Correction, of €. 1,598.93, in the year 2011 and € 3,329.59 in the year 2012 (…) relate to condominium expenses (see article 65 of response),

13.17. The RR only contest the amount of € 965.60 which was based on the fact that the responsibility for the charge belongs to the condominium owner as owner of the fraction, and these charges should be debited to him and not to the tenant, the company (see article 66 of response),

13.18. The 5th Correction, of € 3,020.12, in the year 2011 and € 2,291.44, in the year 2012 (…) relates to gifts to its employees at Christmas (see article 71 of response),

13.19. Recognizing these practices, what is required of taxpayers is that these expenses be duly documented with identification of their recipients so as to determine their indispensability, which was also not done in the case in question (see article 73 of response),

13.20. These expenses to employees can even contribute to the expansion of the company's activity, but this can only be assessed if the recipients were known because if possibly one or more gifts were intended for non-employees of the company it will be difficult to assess such expansion (see article 75 of response),

13.21. The 6th correction, of € 10,411.92, relating to the year 2011 (…) concerns health insurance (see article 77 of response),

13.22. The RR state that the criterion of generality of employees does not imply their totality, identity or automatic character and that the AT did not take into account the date on which the beneficiaries were hired, what their contractual link was and the places where they performed services (see article 78 of response),

13.23. (….) as referred to in the Report "A table was drawn up containing the employees of the company, contained in model 10 of the year 2012. This table identifies employees with income from category A dependent work, as those identified in the salary processing of December 2012 (since there may be movements of employees in and out) and those identified in the policies sent in annex 26" and from the policies presented it was verified that the same supported an expense inherent to health insurance with 14 employees out of a universe of 20 (see article 79 of response),

13.24. (…) the company can only consider as deductible costs of the fiscal year the amounts spent with health insurance premiums supported in favor of Employees, when the benefits are established for the generality of Employees, obeying objective and identical criteria for all, even if belonging to different professional classes cfr. paragraph a) of no. 4 of article 43 of the CIRC (see article 81 of response),

13.25. The 7th Correction, of € 8,500.12 relates to the year 2012 (…) and concerns expenses in the name of other taxpayers connected with the payment of social security of partners C… and D… (see article 85 of response),

13.26. (….) the social security payment guides related to the payment of contributions by these partners, in their capacity as self-employed workers, the payment guides having been issued for their NIF's reflecting charges with their activity in individual name, which is why such charges cannot be deductible from the company's taxable income (see article 87 of response),

13.27. The 8th and last contested correction of € 23,388.71 of the year 2011 and € 33,644.29, in the year 2012 (….) concerns expenses with travel and accommodation (see article 89 of response),

13.28. Notwithstanding that it can be validated that the activity carried out by the RR may justify some travel, what the TIS could observe by confronting the accounting entries with information collected in various hotel units, was that there were there not only the partners, but their respective families, and in other cases it was not possible to identify the recipient (see article 92 of response),

14. The parties have legal personality and capacity, are legitimate and are legally represented (article 3, 6 and 15 of CPPT, by virtue of article 29, no. 1, paragraph a) of RJAT, and both the joinder of claimants and the accumulation of claims are admissible, pursuant to the provisions of no. 1 of article 3 of RJAT.

15. The case does not suffer from nullities, the exception of "lapse of right of action" having been invoked.

Having the AT in its response raised the exception of "lapse of right of action", constituting a preliminary issue that may prevent knowledge of the merits, the same shall be assessed as a priority.

-Lapse of right of action

For decision of the exception raised by the AT, it is important to take into account the following factual circumstances:

. Claimant A… was notified of the additional Personal Income Tax assessments and compensatory interest at issue here, on 14-09-2015.

• Claimant B… on 18-09-2015,

-Claimant C… on 09-09-2015, and,

• Claimant D… on 18-09-2015

. the request for arbitral decision was filed with CAAD on 05-09-2016.

In the circumstances described, and bearing in mind that the request for arbitral decision was filed with CAAD on 05-09-2016, the period for the Claimants to file a request for constitution of arbitral tribunal with CAAD would long since have expired, in view of the provisions of paragraph a) of no. 1 of article 10 of RJAT;

"1. The request for constitution of an arbitral tribunal is presented:

a) Within a period of 90 days, counted from the facts provided in nos. 1 and 2 of article 102 of the Tax Procedure and Process Code, regarding acts capable of independent impugnation and, as well, from the notification of the decision or from the end of the legal period of the hierarchical appeal decision.

The facts provided in the said normative of CPPT, following the revocation of its no. 2 by Law no. 82-E/2014, of 31 December, are, for what matters here: "a) the end of the period for voluntary payment of the tax obligations legally notified to the taxpayer; "b) notification of the remaining tax acts, even when they do not give rise to any assessment; "c) notification of the remaining acts that may be subject to independent impugnation in accordance with this code"

Before the aforementioned revocation, no. 2 of article 102 of the CPPT provided for a period of 15 days to judicially challenge when faced with an act of express dismissal of an administrative appeal.

However, in the exception of "lapse of right of action" that it raises, the AT does not appear to have considered the fact that all the Claimants filed administrative appeals against the underlying assessments and that from the dismissal of the same they were notified on 13 and 14 June 2016,

That fact – notification of the dismissal of the administrative appeal – being absolutely determinant for assessing the timeliness of the request for arbitral decision, in view of the provisions of no. 1 of article 10 of RJAT and paragraphs b) and e) of no. 1 of article 102 of the Tax Procedure and Process Code, that is, three months after its occurrence.

Having the notification of the dismissal of the administrative appeals occurred on 13 and 14 June 2016 and the request for arbitral decision presented on 5 September following, the same is contained within the legal period.

Thus, and without need for any other additional considerations, with the Respondent entity having no reason to prevail, in this segment.

The exception of untimeliness, should it have been raised, fails.

II. SUBSTANTIVE GROUNDS

A.1. Facts Established as Proven

a. the Claimants are partners of the company called "E…, SROC", subject to the tax transparency regime,

b. the acts of assessment of Personal Income Tax and compensatory interest contested had their origin in the consequence of an external inspection action carried out on the said company in accordance with Service Order number OI 2014… of the Tax Inspection Services of the Finance Department of …,

c. in the said report the TIS proceeded to corrections in respect of Corporate Income Tax and Value Added Tax, with reference to the fiscal years of 2011, and 2012,

d. the company "E…" reacted against such assessments through its respective administrative appeal which came to be dismissed,

e. following such dismissal the company filed a request for arbitral decision seeking declaration of illegality of the Corporate Income Tax and Value Added Tax assessments, relating to the periods of 2011 and 2012, within the scope of proceedings nos. 352/2016-T and 354/2016-T which took place within the scope of CAAD,

f. as a result of the inspection action carried out against the company "E…" and by virtue of being faced with a company subject to the tax transparency regime, inspection actions were carried out by the TIS individually to each of the Claimants,

g. from which resulted corrections in respect of Personal Income Tax to the taxable income of the various Claimants, in accordance with the provisions of article 20 of CIRS in conjunction with article 6 of CIRC,

h. against the assessments made the Claimants presented administrative appeals, which by order issued on 2016-06-13, by the Head of the Finance Department Division of … (by delegation of authority) were dismissed,

i. such dismissals notified to them, through official letters…, of 2016-06-14, … of 2016-06-13, …, of 2016-06-14 and official letter…, of 2016-06-14 (see documents nos. 15 to 18 of the request for arbitral decision),

j. the Claimants proceeded to the payment of the Personal Income Tax assessments and compensatory interest at issue here, (see documents nos. 8 to 14 of the request for arbitral decision),

k. the PA [administrative files] attached regarding the company "E…", and the Claimants, are hereby reproduced.

l. on 2016-09-05 the Claimants filed the request for constitution of Singular Arbitral Tribunal, which gave rise to the present proceedings, formulating a request for declaration of illegality of the identified Personal Income Tax assessments and indemnity interest (see the case management information system of CAAD).

A.2. Facts Established as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the Factual Matter Established as Proven and Not Proven

Regarding the factual matter, the tribunal does not have to pronounce itself on everything that was alleged by the parties, it being up to it, rather, to have the duty of selecting the facts that matter for the decision, of discriminating the proven from the not proven matter [(see art. 123, no. 2, of CPPT and article 607, no. 3 of CPC, applicable by remission of article 29, no. 1, paragraphs a) and e) of RJAT)].

Thus, the facts pertinent to judgment of the case are chosen and cut out in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (see previous article 511, no. 1 of CPC, corresponding to the current article 596, applicable by remission of article 29, no. 1, paragraph e) of RJAT).

Thus, taking into consideration the positions assumed by the parties, the documentary evidence attached to the proceedings and the PA(s) attached, the facts listed above are considered proven with relevance to the decision.

B. ON THE LAW

Before we address the central issue that the present proceedings convoke, it will be necessary to make, albeit brief, an incursion into the normative framework that underlies it (companies under the tax transparency regime and indispensability of expenses/costs).

- on the tax transparency regime

In the case of the present proceedings we are faced with a company subject to the tax transparency regime, as defined in accordance with the provisions of article 6 of CIRC, which fundamentally is characterized by imputing to the partners or members of the transparent company the respective taxable income even if there has been no distribution of profits.

The collective personality of the entity is disregarded for purposes of taxation of the income determined, this being imputed to its partners or members, to be taxed in the context of Personal Income Tax or Corporate Income Tax, depending on whether they are natural or legal persons.

In the context of Personal Income Tax the imputed values are integrated as net income of category B, the aforementioned imputation being carried out in accordance with what results from the constitutive act of the respective entity or, failing elements, in equal shares, in accordance with the provision of no. 3 of article 6 of CIRC:

Article 6

Tax transparency

"1. It is imputed to the partners, being integrated, in accordance with the applicable legislation, in their taxable income for purposes of Personal Income Tax or Corporate Income Tax, as the case may be, the taxable income determined in accordance with this Code, of the companies hereinafter indicated, with registered office or effective management in Portuguese territory, even if there has been no distribution of profits:

(…)

b) Companies of professionals.

The provision in paragraph a) of no. 4 of the same article defining what is considered professional: "the company constituted for the exercise of a professional activity specially provided in the list of activities to which article 151 of the Personal Income Tax Code refers, in which all partner natural persons are professionals of that activity"

In conclusive and summary form regarding the characterization and scope of the regime in question, we appropriate the enlightening synthesis that derives from the Judgment of the Central Administrative Court of the South of 27-03-2012 [1]:

"1. In the context of Corporate Income Tax the tax transparency regime aims to achieve three main objectives, which are:

a) Fiscal neutrality achieved through taxation of the partners or members of the company, as if they exercised the activity directly;

b) The combat against tax evasion, in order to prevent the possibility of taxpayers constituting intermediary companies for the purpose of tax avoidance;

c) The elimination of double economic taxation of distributed profits, in that these companies are not taxed in the context of Corporate Income Tax, but rather in the person of their partners or members, in the context of Corporate Income Tax or Personal Income Tax, depending on whether they are legal or natural persons.

1. The tax transparency regime applies mandatorily to companies resident in Portugal that are duly identified in art. 6, no. 1, of CIRC., among which are professional partnership companies, as is the case of companies constituted by doctors (see art. 6, no. 4, al. a) of C.I.R.C.), all taking into consideration the list of professional activities to which art. 151 of C.I.R.S. refers (…)

2. The tax transparency regime is essentially characterized by the imputation to the partners or members of the transparent company of the respective taxable income, even if there has been no distribution of profits. The taxable income of these companies is determined in the context of Corporate Income Tax, so, although subordinated to this regime, they do not lose the status of taxpayer of the tax, being subject to the fulfillment of all obligations like any other type of company, namely, the presentation of the periodic income declaration.

In the context of Personal Income Tax, the imputed values are integrated as net income in category B. The aforementioned imputation is carried out in accordance with what results from the constitutive act of the respective entity or, failing elements, in equal shares (see art. 6, no. 3 of C.I.R.C.). The true characterization of the tax transparency regime of the company can be defined as a situation of non-taxation in the context of Corporate Income Tax and not of exemption from the same tax (…).

As regards taxation rules and drawing on the teaching of RUI MORAIS,[2] it can be concluded that "companies subject to the tax transparency regime are subjects of Corporate Income Tax (…) not being however obligated to payment of this tax. The taxpayers of this obligation are the respective partners, regardless of an actual distribution of dividends"

The author further notes in the cited work that;

"Such entities, namely companies of professionals, are juridically the holders of the income (of the taxable profit)" to conclude that, "they are therefore legitimate and necessary parties in any proceedings that concern the quantification of such profit, even if for tax purposes"

The last of the segments transcribed serves as a pretext for noting (or rather, recalling) that following the result of the tax inspection carried out on the company "E…, SROC" the AT proceeded to corrections in the context of Value Added Tax and Corporate Income Tax with consequent additional assessments, to which, the company in question not agreeing with the same, reacted through their respective administrative appeals which dismissed, were, in turn, at the genesis of the requests for arbitral decision that took place, respectively under numbers 352/2016 and 354/2016-T, at CAAD.

Proceedings in which the respective decisions have already been issued, both finding the claims unfounded regarding, respectively, the request for annulment of additional assessments in the context of Corporate Income Tax and Value Added Tax.

It being noted that the Personal Income Tax assessments put in issue in the present proceedings derive from the same report drawn up by the TIS, as results from the attached administrative files and from the very articulation of the Claimants: "The tax assessment acts now contested originated from an inspection action carried out on the company E…, SROC, with the NIPC…, of which the claimants are partners, which gave rise to various corrections of the taxable income" (see article 1 of the request for arbitral decision).

- on the interpretation of article 23 of CIRC

At the time to which the underlying facts refer, no. 1 of article 23 of CIRC provided as follows:

Article 23

Expenses

"1. Expenses are considered those which are demonstrably necessary for the realization of the income subject to tax or for the maintenance of the productive source, in particular:

a) Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general expenses of production, preservation and repair:

b) Those relating to distribution and sale, covering transportation, advertising and placement of goods and products;

c) Of a financial nature, such as interest on foreign capital applied in the operation, discounts, premiums, transfers, exchange rate differences, expenses with credit operations, collection of debts and issue of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to instruments valued at amortized cost:

d) Of an administrative nature, such as remuneration, including those attributed as participation in profits, allowances, current consumption materials, transportation and communications, rents, litigation, insurance, including life and "Life" branch operations, contributions to savings funds – retirement, contributions to pension funds and to any social security complementary schemes, as well as expenses with termination benefits and other post-employment or long-term benefits of employees;

e) Those relating to analyses, rationalization and consultation;

f) Of a fiscal and parafiscal nature:

g) Depreciations and amortizations:

h) Adjustments in inventories, impairment losses and provisions;

i) Expenses resulting from the application of fair value in financial instruments;

j) Expenses resulting from the application of fair value in consumable biological assets that are not pluriannual forestry exploitations;

l) Realized losses;

m) Indemnities resulting from events whose risk is not insurable"

It was concluded from the normative in question that the determining question for the admissibility of expenses is their proof and indispensability for the realization of the profits or gains subject to tax or for the maintenance of the productive source.

As already referred, and which is here retaken, from the inspection action carried out on the Claimants, through the Service Orders of the District Finance Department of …, numbers, OI 2014…, OI 2014…, OI 2015…/… and OI 2015…, corresponding, respectively, to Claimants A…, B…, C…, and D…, resulted corrections in terms of Personal Income Tax to the taxable income for the fiscal years of 2011 and 2012 (with the exception of Claimant D…, only targeted regarding the year 2012), based on the imputation to them in their capacity as partners of the company "E…, SROC., in accordance with article 20 of CIRS, in conjunction with article 6 of CIRC, of the corrections made to it (in the context of Corporate Income Tax and Value Added Tax) within the scope of Service Order no. OI 2014… of the same Finance Department.

It will therefore be important to ascertain the indispensability of the expenses in question – for purposes of the provisions of article 23 of CIRC.

As was already written in an enlightening manner within the scope of proceedings no. 796/2014 of CAAD, "the indispensability of a given cost, in accordance with article 23 of CIRC, depends on a task of legal qualification of such costs, correlating them with the social scope of the taxpayer.

It is, therefore, an analysis that falls to the judge and to which the taxpayer should collaborate by seeking to frame that cost with its activity, explaining the motivation inherent to the realization of the cost and the objectives it proposes to achieve with it".

In the arbitral decision in question, it is further referred with notable pertinence, that "the mere fact of a given expense being alleged by the taxpayer to exist documentary support cannot, by itself, determine its acceptance as a deductible cost"

Invoking the teaching of Rui Morais, [3] we can from the same gather that:

"We have already seen that the question of the "indispensability" of a cost is a matter of qualification (question of law), so strictly speaking, there is no question of burden of proof here (…)

(…) we will next emphasize that the refusal, by the administration, of acceptance of a given cost by invoking that it is unnecessary does not call into question the truth of the taxpayer's accounting records, but only the qualification made by it (in the context of profit determination) of that cost (which is accepted to have really existed).

Whence such non-consideration does not legitimize recourse to methods of indirect evaluation, but only what, normally, is called "technical corrections" of the declared taxable income (…)

(...) And here, according to our understanding, it falls to it the burden of allegation precisely because, otherwise, such facts will hardly be known (…)"

In identical sense, it is extracted from the Judgment of the Supreme Administrative Court of 05-11-2014, reported by His Excellency Councilor Fonseca Carvalho, within the scope of proceedings no. 0570/13:

"III- The concept of indispensability of costs is an indeterminate concept and it has fallen to case law its filling, but in a case-by-case manner with no concrete definition of the same having emerged from such labor"

Also seconded, in this particular segment, by the recent Judgment of the Central Administrative Court of the South, of 07-05-2015:

"1. For the fiscal concept of cost, the definition contained in the aforementioned art. 23 of C.I.R.C. applies, which, after transmitting to us in a broad manner the notion of costs or losses as encompassing all expenses made by the company that are demonstrably necessary for the realization of profits or for the maintenance of the productive source, proceeds to a merely exemplary enumeration of various expenses of this type. We are faced with a concept of cost that can be considered common to both the fiscal and commercial balance sheet. The fiscal definition of cost, as a broader concept than costs of production and acquisition, departs from a broad perspective of activity and necessity of the company, thus establishing an objective connection between the activity of the latter and the expenses which will inevitably result from it. And it does so with a clearly fiscal purpose, which consists in distinguishing between costs that can be accepted for fiscal purposes and which, therefore, will influence the calculation of taxable profit and those that cannot be accepted for that purpose. Costs or losses of the company constitute, therefore, the negative elements of the income statement, which are fiscally deductible when, being duly proven, they prove to be indispensable for the realization of profits or for the maintenance of the productive source of the company in question. The absence of any of these requirements implies the non-consideration of the said elements as costs, and the respective amounts should therefore be added to the accounting profit.

The judgment we have been citing continues;

"2. The requirement of indispensability of a cost has been jurisprudentially interpreted as an indeterminate concept requiring case-by-case filling, as a result of an analysis from an economic-business perspective, in the perception of a relationship of economic causality between the assumption of a charge and its realization in the interest of the company, given the corporate object of the commercial entity in question, it being forbidden for the Tax Authority to take actions that call into question the principle of freedom of management and autonomy of the will of the taxpayer. Nevertheless, if the Tax Authority doubts fundamentally the insertion in the corporate interest of a given expense, the burden of proof that such operation is inserted in its corporate scope falls on the taxpayer.

1. It is the understanding of case law and doctrine that the Tax Authority cannot evaluate the indispensability of costs in light of criteria relating to the opportunity and merit of the expense. A cost is indispensable when it relates to the activity of the company, and costs unrelated to the activity of the company shall be those in which it is not possible to discern any causal nexus with the profits or gains (or with the income, in the current expression of the Code – see art. 23, no. 1 of C.I.R.C.). explained in terms of normality, necessity, congruence and economic rationality."

Illustrated in broad strokes the criteria for assessment of the indispensability and deductibility of expenses in light of article 23, it will now be up to us, in this context, to apply the same to the underlying case taking into consideration the arguments of the AT that sustain its non-consideration.

Now, weighing what has been said, it appears that in the present case, the costs in question disregarded by the AT and which were at the origin of the above-mentioned corrections do not appear to be indispensable in accordance with the provisions of article 23 of CIRC for the obtaining of profits.

To such conclusion, under pain of redundancy and with the objective of avoiding unnecessary transcriptions which, in truth would add nothing of significance, it appears that the reference to what has been above transcribed regarding the arguments adduced by the parties in defense of their theses, concretely under points 11.1 to 11.21 and 13.3 to 13.28, proves to be, already, sufficient to conclude that the incurred expenses, at the domicile of one of the Claimants, the expenses with gymnasium, expenses recorded as acquisition of office supplies where the acquisition of a "Dock Station for iPod" appears, items designated only by the mark "…" to which are added other expenses with gifts and acquisition of goods not assigned to the activity of the company of the Claimants, to which is added the impossibility of deduction by law of costs with health insurance policies in view of the provisions of no. 2 of article 43 and paragraphs a) and b) of no. 4 of article 43 of CIRC, as well as the non-consideration/non-deductibility of costs relating to social security payments, in view of the provisions of paragraph f) of no. 1 of article 23 of CIRC (at the time of the facts, article 45, no. 1, paragraph c), the expenses incurred with travel and accommodation beyond the Claimants themselves, other expenses in the name of third parties (namely those relating to the condominium of the facilities of "E…") and others better and more detailedly signaled by the TIS, are such as not to constitute expenses or ineligible costs for purposes of the provisions of article 23 of CIRC.

Without prejudice to the disagreement and justification of the costs in question and their indispensability presented by the Claimants, (which in a certain way replicate those presented by the company "E…" in reaction, either administrative, or within the scope of the requests for arbitral decision that were at the origin of the aforementioned proceedings nos. 352/2016-T and 354/2016-T) the same were not such as to raise doubts for this Tribunal that in any way could have led to a different position from that already stated.

Having re-analyzed the reasons for the corrections of assessments carried out by the AT and the argumentary of their disagreement presented by the Claimants, which stand out from the reports of the TIS, from the request for arbitral decision and the respective response, this Singular Arbitral Tribunal decides to judge the request for arbitral decision unfounded, maintaining in the legal order the Personal Income Tax assessments and compensatory interest underlying the same.

III - REIMBURSEMENT OF AMOUNTS PAID AND INDEMNITY INTEREST

The Claimants formulate a request for restitution of the amounts paid, increased by indemnity interest counted from 9-11-2015 until full reimbursement.

The reimbursement of amounts and the right to indemnity interest depend on the merit of the request for declaration of illegality of the assessments.

Consequently, such request being unfounded, the requests for reimbursement and indemnity interest are necessarily unfounded as well.

III. DECISION

In harmony with the foregoing, this Singular Arbitral Tribunal decides:

• to judge the exception of "lapse of right of action" unfounded,

• to judge the requests for declaration of illegality of the aforementioned tax assessment acts of Personal Income Tax and compensatory interest unfounded,

• to absolve the Tax and Customs Authority of the claims,

• to condemn the Claimants to payment of the costs of the proceedings.

IV. VALUE OF PROCEEDINGS

In conformity with the provisions of articles 296, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 41/2013, of 26 June, 97A), no. 1, paragraph a) of the Tax Procedure and Process Code, and article 3 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 54,953.91.

V. COSTS

In accordance with the provisions of articles 12, no. 2, 22, no. 4 of RJAT, and articles 2 and 4 of the Regulations on Judicial Costs in Tax Arbitration Proceedings, and Table I attached hereto, the amount of costs is set at € 2,142.00.

NOTIFY

Text prepared by computer, in accordance with the provisions of article 131 of the Code of Civil Procedure, applicable by remission of article 29, no. 1, paragraph a) of the Regulatory Framework for Tax Arbitration, with blank verses, and reviewed by the arbitrator.

The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990, except as regards the transcriptions made.

Fourth of April of two thousand and seventeen.

The Arbitrator

(José Coutinho Pires)

[1] Judgment reported by His Excellency Judge Joaquim Condesso within the scope of proceedings no. 05287/12.

[2] On Personal Income Tax, Almedina, April 2006, page 171.

[3] Notes on Corporate Income Tax, Almedina, 2009, reprint of the 2007 edition, pages 88 and following.