Process: 551/2017-T

Date: June 8, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 551/2017-T addresses a dispute over an IRC (corporate income tax) additional assessment of €98,830.02 for fiscal year 2013, where the Tax Authority (TA) disregarded a real estate acquisition transaction. The taxpayer company challenged the assessment, arguing the TA improperly applied the general anti-abuse clause under Article 38(2) of the Portuguese General Tax Law (LGT) without following mandatory procedural requirements set forth in Article 63 of the CPPT. The core issue involved whether the TA could disregard a property purchase promise contract and recharacterize the transaction for tax purposes. The claimant argued the TA violated several fundamental principles: (1) failed to respect the presumption of good faith and truth under Article 75 LGT; (2) did not follow the specific substantiation, hearing, and authorization requirements of Article 63 CPPT when disregarding transactions; (3) improperly invoked Article 2 RCPIT only in the response phase rather than during investigation; and (4) created potential double taxation by treating the same flow as both advance profit in 2013 and future capital gains in 2018. The TA defended its position by asserting it did not actually apply the anti-abuse clause but rather made corrections based on its inspection powers under Article 2 RCPIT, claiming the alleged defects would at most constitute voidability, not nullity. This case highlights critical procedural safeguards taxpayers possess when tax authorities challenge transaction structuring, emphasizing the distinction between general anti-abuse provisions requiring strict procedural compliance versus routine inspection adjustments under broader authority.

Full Decision

ARBITRAL DECISION

REPORT

A…, LDA, Tax ID No. …, with registered office at Rua …, No. …, …, parish of …, municipality of …, hereby submits, pursuant to Article 2, No. 1, paragraph a), Article 10, No. 1, paragraph a) and No. 2, of Decree-Law No. 10/2011, of 20 January, and Articles 96 et seq. of the Legal Framework for Tax Arbitration (RJAT) Code of Tax Procedure and Process (CPPT), a request for the constitution of an arbitral tribunal and for an arbitral decision against the additional corporate income tax assessment No. 2017… relating to the fiscal year 2013, the total amount of which was € 98,830.02 (ninety-eight thousand eight hundred and thirty euros and two cents), already including € 14,830.02 (fourteen thousand eight hundred and thirty euros and two cents) in compensatory interest. The subject matter of the arbitral request is the aforementioned amount which already includes the corresponding compensatory interest, which has been calculated by the Tax and Customs Authority (hereinafter TA) in ID. Document No. 2017…, Compensation No. 2017….

The request for the constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 13-10-2017.

In accordance with Articles 5, No. 2, paragraph a), 6, No. 1, and 11, No. 1 of the RJAT, the Deontological Council of this Centre for Administrative Arbitration (CAAD) appointed the undersigned as a collective arbitral tribunal, with their acceptance confirmed on 7-10-2017.

The parties were duly notified of this appointment, to which they raised no objection in accordance with the combined provisions of Articles 11, No. 1, paragraphs b) and c) and 8 of the RJAT and Articles 6 and 7 of the CAAD Code of Ethics.

By virtue of the provisions of paragraph c) of No. 1 and No. 8 of Article 11 of the RJAT, as per communication from the President of the Deontological Council of CAAD, the Arbitral Tribunal was constituted on 28.12.2017.

Notified for that purpose, the TA responded, defending itself by means of opposition, and submitted the administrative file.

As it was deemed unnecessary, the meeting provided for in Article 18 of the RJAT was dispensed with and the parties were invited to make written submissions, which they did, reaffirming the positions already previously assumed.

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

The TA could not have disregarded the property acquisition operation in the manner in which it did, as this is null and void.

It must apply the law in a general and abstract manner, consistent and uniform, taking into account the concrete situation of the taxpayer, and not in a discretionary manner.

It must respect the presumption of truth and good faith enshrined in Article 75 of the General Tax Law (LGT) of the declarations submitted by taxpayers in accordance with the provisions of the law, as well as the provision of Article 77, No. 3 of the LGT concerning the substantiation of procedural acts relating to operations involving taxpayers and other subjects with whom they establish special relationships.

Article 38, No. 2 of the LGT regulates the disregard of acts and legal transactions, considering them ineffective provided that "…they are essentially or principally directed by artificious or fraudulent means and with abuse of legal forms towards the reduction, elimination or temporal deferment of taxes", and is of mandatory application to the case in question.

The TA cannot consider that the promise to purchase contract is valid but fiscally ineffective at the same time that it refuses to apply Article 38, No. 2 of the LGT, insofar as this has sufficient basis in Article 2 of the Supplementary Regime for Tax and Customs Inspection Procedure (RCPIT) and violates the principles of protection of legitimate expectations and legal certainty which are fundamental rights of taxpayers.

Furthermore, the TA should have invoked Article 2 of the RCPIT during the investigation phase, before assessment, and not solely in the response, insofar as this limits the taxpayer's possibilities of defence.

This legal disregard must necessarily comply with the provisions of Article 63 of the Code of Tax Procedure and Process (CPPT) which regulates, in detail: i) the substantiation mechanism; ii) the hearing process to be applied; iii) the superior authorization of the highest-ranking official of the Service for the disregard provision to be applied.

The regime of Article 63 of the CPPT was not followed, whereby the process of disregard and correction of the flows recorded in the accounts of the Claimant did not comply with the applicable norms, and the assessment act is null by virtue of: a) Defect of violation of law – Article 38, No. 2 of the LGT; b) Defect of form in the absence of adequate substantiation Article 63 of the CPPT; c) Defect of form in the absence of the specific right to be heard provided in Article 63 of the CPPT; d) Defect of form due to lack of authorization from the highest-ranking official of the Service – Article 63 of the CPPT.

The property was sold to the Claimant Company, and the statements of the TA to the effect that the intention of the sellers was not to proceed with the transfer are unfounded.

Given that there was a transaction of the property, it will generate the realization of capital gains by the sellers in the year 2018. The correction made to the recorded flow in the Company's accounts implies a double taxation of the same flow: i) as an advance on account of profits in the year 2013 by virtue of the legally baseless act of the TA; ii) as capital gains of the sellers from the gains realized in the alienation of the property in 2018.

The same accounting flow cannot have double characterization and double tax effect.

If this occurs, this double taxation is unconstitutional and contrary to the principle of taxpaying capacity which prevents the taxpayer from being taxed twice for the same monetary flow, in this case by intervention of the TA contrary to what the Law provides.

It concludes by requesting the declaration of illegality and the subsequent annulment of the assessment.

The Tax and Customs Authority submitted a response, having sustained in summary:

The alleged defects of illegality which the Claimant intends to be attributed to the disputed assessment do not give rise to the defect of nullity, as is demonstrated through the provision of Article 161 of the Code of Administrative Procedure (CPA), with no special provision providing for such defects the sanction of nullity, such defects being, at most, generators of voidability, in accordance with Article 163 of the CPA.

All the defects invoked by the Claimant, which allegedly affect the inspection procedure and consequently the assessment arising therefrom, suffer from being non-existent and inapplicable to the case in question.

It makes no sense to invoke defects relating to the application of the general anti-abuse clause of Article 38, No. 2 of the LGT, when at no time, as is apparent from the Inspection Report, did the TA understand that these were simulated operations, or characterized the conduct of the Claimant as fraudulent or abusive.

Notwithstanding the legal consecration of the general anti-abuse clause, the TA is not obliged to apply it, and may and should make the necessary corrections based on special anti-abuse provisions, or other provisions of the tax codes that require adjustments to declared income.

The TA has legal legitimacy to make corrections to the taxable income declared by the taxpayer when the legal provisions applicable to their concrete tax situation are not complied with, as the principle of legality indeed imposes on it.

The corrections made by the Tax Inspection result from the competence attributed to it by Article 2 of the RCPIT, which consists in assessing the conformity of the elements declared by taxpayers with tax legislation.

These corrections had as their initial basis the fact that: "(…) the taxpayer recorded in its tangible fixed assets, under the item '4323 – Buildings and Other Constructions', a property located in ..., whose documentary support is limited to a promise to purchase contract in the amount of € 350,000.00, executed on 05.01.2013 between the company and its managing partner".

Even assuming that the Claimant held possession of the property, such possession was merely precarious, and in fact the transfer of ownership only occurred on 31/08/2017 with the execution of the public deed of purchase and sale.

If the promissory buyer obtains delivery of the thing before the execution of the transfer contract, it acquires the corpus possessorius, but not the animus possidendi, thus remaining in the situation of a mere holder or precarious possessor.

Having regard to the future and uncertain nature of the intended use of the property (i.e., the installation in part of it of a surgery of a non-managing partner, a dentist and child of the owners who was then working abroad).

According to the RIT, given the characteristics thereof and the activity carried out by the company, everything leads to the conclusion that the said property was being used in the personal sphere of its owner (managing partner of the company), and not in the exercise of the activity carried out by the company.

For these reasons, the property could never have been recorded in the accounts of the Claimant as a tangible fixed asset, because the same, at the date of the facts, lacked utility in the company's activity, generating no income whatsoever.

The Claimant failed to prove, as was incumbent upon it given the provision of No. 1 of Article 74 of the LGT, either in the course of the procedure or in the present proceedings, the reason why the property is recorded as tangible fixed assets, since the same generates no income whatsoever or is, in any way, allocated to the company's activity.

Given the delivery by the Claimant of the amount of € 300,000.00 to its partners, owners of the property in question, the tax inspection services could not fail to make the tax characterization they made.

That amount was received as advances on account of profits, as such characterized in Category E of capital income, specifically in paragraph h) of No. 2 of Article 5 of the Personal Income Tax Code (CIRS), according to which "2 - The fruits and economic advantages referred to in the preceding number include, in particular: h) The profits of entities subject to CIT made available to their respective members or holders, including advances on account of profits, excluding those referred to in Article 20.

Taking into account the date of occurrence of the taxable event, that is, the moment when the income was made available to the partners of the Claimant, the same is subject to taxation by withholding at the liberatory rate of 28%, in accordance with paragraph c), of No. 1, of Article 71 of the CIRS and Article 7, No. 1 and 3, a), 2), of the CIRS.

Thus, the Tax Inspection determined a factual situation that is characterized as an advance on account of profits, whereby it merely proceeded to make the corrections required by Articles 98, No. 3, and 101, No. 2, paragraph B), of the CIRS, without having to resort to the general anti-abuse clause.

The procedure to be followed in cases where there is recourse to the application of the general anti-abuse clause, provided in Article 63 of the CPPT, is totally inapplicable to the situation in question in these proceedings.

It concludes by sustaining the lawfulness of the assessment act contested by the Claimant which should, therefore, be maintained.

CASE MANAGEMENT

No exceptions were raised.

The Arbitral Tribunal is regularly constituted (Articles 5, Nos. 1 and 3, paragraph a), 6, No. 2, paragraph a) and 11 of the RJAT), and is materially competent (Articles 2, No. 1, paragraph a) of the RJAT).

The parties enjoy legal personality and capacity and are duly represented.

The proceedings do not suffer from any nullities nor were any exceptions raised, allowing us to proceed to decision on the merits of the case.

ASSESSMENT

MATTER OF FACT

Facts Established as Proven

Based on the documents brought to the proceedings and the administrative file, and without prejudice to other ancillary facts related thereto contained in the proceedings, the following facts relevant to the decision of the case sub judice are established as proven:

a) The Claimant carries on the activity of providing medical services, related to the specialty of general medicine, to which corresponds CAE No. 086906 "Other human health activities, n.e.c.", commencing on 2001/06/01.

b) On 5 January 2013, a promise to purchase contract was executed between the company and its managing partner concerning the property located in …, …, at Rua …, No. …, described in the Land Registry Office of … under the number … of 10/09/1992 and recorded in the urban property register under the article … of the parish of ….

c) The promise to purchase contract was not given real effect through registration.

d) The contract includes, among others, the following clauses: "III The agreed price is € 350,000.00 (three hundred and fifty thousand euros). IV As earnest money and part payment of the aforementioned price, the First Parties receive from the Second Party the sum of € 300,000.00 (three hundred thousand euros), paid on this date, for which the respective receipt is given:".

e) The Claimant recorded in its tangible fixed assets, under the item "4323 – Buildings and Other Constructions", the property identified in b), the documentary support of which is the promise to purchase contract also referred to therein.

f) As a counterpart to the debit in the account "4323 - Buildings and Other Constructions", the account 11.1-Cash was credited by the amount of € 300,000.00 and account 27881 – Other Debtors and Creditors by € 50,000.00.

g) The property in question is a single-family residence intended for residential purposes, located in a beach area.

h) The manager of the company stated, in declarations made to the TA on 28/03/2017, that the acquisition of the property aimed at the installation in part of it of a surgery of a non-managing partner, a dentist and child of the owners, who was then working abroad.

i) The deed of purchase and sale between the Claimant and its partners, owners of the property, was executed on 31 August 2017.

j) The Claimant was the subject of an inspection procedure with Service Order No. OI2017…, relating to the period of 2013, carried out by the Tax Inspection Services of the Finance Directorate of … of the Tax and Customs Authority initiated with the aim of determining the tax situation of the Claimant focusing on the facts listed above.

k) It appears in the draft inspection report:

"As already mentioned, this inspection procedure was initiated by an inspection action carried out in respect of the year 2014, during which it was verified that the taxpayer recorded in its tangible fixed assets, under the item "4323 - Buildings and Other Constructions", a property located in ..., whose documentary support is limited to a promise to purchase contract in the amount of € 350,000.00, executed on 05.01.2013 between the company and its managing partner.

As a counterpart to the debit in the account "4323 - Buildings and Other Constructions", the account 11.1- Cash was credited by the amount of € 300,000.00 and account 27881 - Other Debtors and Creditors by € 50,000.00.

When questioned about this situation, the taxpayer informed, as per the statement record in Annex 1, that:

The said promise to purchase contract had the objective of reflecting in the company the money that had gone out during the construction phase of the property and which was affecting the cash balance, also reflecting the said property in the company's assets;

The corresponding deed has not yet been executed due to financial difficulties

Having consulted the computer system, it was verified that the property in question is a single-family residence intended for residential purposes, located in a beach area, whereby given the characteristics thereof and the activity carried out by the company, everything leads to the conclusion that the said property is being used in the personal sphere of its owner (managing partner of the company), and not in the exercise of the activity carried out by the company.

Taking into account the definition of tangible fixed assets contained in NCRF 7, TFA are assets held for use in the production or supply of goods or services, or for administrative purposes, and which are expected to be used for more than one period.

According to the same standard, the cost of a tangible fixed asset should be recognized as an asset if, and only if:

It is probable that future economic benefits associated with the asset will flow to the entity; and,

The cost of the asset can be measured reliably.

Thus, the main question to be considered concerns the fact of whether the asset will provide future economic benefits to the entity, namely through its use in the production of goods and/or services to be sold and/or provided by the entity, which is not the case in the situation in question.

Similarly, an investment property could be at issue. However, according to NCRF 11, the recognition of an investment property only occurs when:

It is probable that future economic benefits associated with the investment property will flow to the entity; and,

The cost of the property can be measured reliably.

Now, in the case in question, no benefits are known for the company, as the property is generating no income whatsoever.

It is thus verified that the property in question does not meet the conditions to be recognized as an asset in the patrimony of the company.

Analysis of the Promise to Purchase Contract

A promise to purchase contract is a contract established between the parties to agree on the future purchase of a good. Although not mandatory, it is important to guarantee the rights and duties of those involved in the transaction, formalizing the transaction and its conditions.

A promise to purchase contract must comply with certain requirements, whereby if a property is at issue, it should include:

  • identification of the promissory seller and buyer;

  • identification of the good to be transacted (location, typology, registration entry and land register description);

  • the price of the acquisition and the form of payment, the amount of payment as earnest money and the schedule of further payments, if any;

  • mention of alienation free of any encumbrances or charges;

  • date of deadline for the execution of the deed of purchase and sale;

  • identification of sanctions in the event that the deed of purchase and sale is not executed on the agreed date;

Analyzing the promise to purchase contract executed (Annex 2), it is verified that it does not stipulate any deadline for the execution of the deed, nor does it make reference to any penalties for non-compliance therewith, despite the fact that it states that € 300,000.00 has already been paid as earnest money. These facts lead to the conclusion that this contract was only executed due to the existence of special relationships between the intervening parties (partner and company), as it does not appear credible that between independent entities a promise to purchase contract would be executed without the same safeguarding the rights and duties of both parties.

Given the foregoing, namely the fact that the property is generating no income for the company and more than four years have elapsed since the date of the execution of the promise to purchase contract without the respective deed having been executed, it is concluded that the said contract had only the objective of "giving legal form" to the outflow of money from the company to the partner, it not being the intention of the parties that the ownership of the property be transferred to the company, and thus the effects created by the contract in the sphere of the company cannot be considered.

Thus, confirming the receipt by the partner of the amount of € 300,000.00 and the failure to prove that there are alleged loans, provision of services or the exercise of corporate offices, it is considered that such amount was received as advances on account of profits, which fall within Category E of income (capital) pursuant to paragraph h) of No. 2 of Article 5 of the CIRS.

These income are, in accordance with paragraph c) of No. 1 of Article 71 of the CIRS, subject to taxation by withholding at the liberatory rate of 28%, at the moment they are made available, as provided in sub-paragraph 2) of paragraph a) of No. 3 of Article 7 of the CIRS, whereby the said amount is subject to taxation at the moment when the company proceeded to its recognition, that is, January 2013.

Thus, the taxpayer should have effected the withholding tax legally due in the period 2013/01, on the amount of € 300,000.00 and proceeded to its delivery to the State Treasury by 20 February 2013, as provided in No. 3 of Article 98 combined with paragraph b) of No. 2 of Article 101, both of the CIRS, whereby correction is made to the total value of € 84,000.00 (€ 300,000.00 x 28%), plus the corresponding compensatory interest in accordance with Article 35 of the General Tax Law, by reference to Article 91 of the CIRS.

l) Regarding this report, the following opinion was issued by the team coordinator:

"I confirm the content of this report resulting from an internal inspection action carried out for the analysis of the tax situation in respect of PIT - Withholdings for the year 2013.

In accordance with the facts and grounds described in Section III of the report, the amount of € 300,000.00 was received by the partner, as earnest money and part payment in a promise to purchase contract for a property, considered as an advance on account of profits, and as such characterized in Category E of income (capital) pursuant to paragraph h) of No. 2 of Article 5 of the CIRS.

These income are, in accordance with the paragraph of No. 1 of Article of Article 71 of the CIRS, subject to taxation by withholding at the liberatory rate of 28%, at the moment they are made available, as provided in sub-paragraph 2) of paragraph a) of No. 3 of Article 7 of the CIRS, whereby the said amount is subject to taxation at the moment when the company proceeded to its recognition, that is, January 2013, giving rise to unpaid tax in the amount of € 84,000.00.

The draft report was sent for the purpose of prior hearing, in accordance with the provisions of Article 60 of the General Tax Law and Article 60 of the Supplementary Regime for Tax and Customs Inspection Procedure.

The right to be heard was exercised, however the facts alleged by the taxpayer are not capable of altering the position taken in the draft report, whereby the proposed corrections are maintained.

(…)

For the purpose of calculating the unpaid tax, the corresponding correction document was prepared.

For consideration by the superior authority".

m) On the opinion referred to in the preceding paragraph, the following decision was issued:

"I agree with the corrections and proposals contained in the opinion of the Chief of Team, in light of the grounds set forth in the report.

Notify the taxpayer in accordance with Article 62 of the RCPITA and Article 77.0 of the LGT. Proceed accordingly.

…, 2017.07.21

By subdelegation of the Deputy Finance Director (in substitution)

The Chief of Division".

n) Following the corrections proposed in the Tax Inspection Report, the Tax and Customs Authority prepared the corporate income tax assessment and compensatory interest, relating to 2013, with No. 2017… and statement of account reconciliation No. 2017… and 2017….

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

Regarding the matter of fact, the Tribunal does not need to pronounce on everything that was alleged by the parties, being incumbent upon it to select the facts that matter for the decision and to distinguish the proven from the unproven matters (cf. Article 123, No. 2, of the CPPT and Article 607, No. 3 of the CPC, applicable ex vi Article 29, No. 1, paragraphs a) and e), of the RJAT).

The relevant facts for the judgment of the case are chosen and selected according to their legal relevance, which is determined in attention to the various plausible solutions to the questions at issue in the dispute (v. 596, No. 1, of the CPC, ex vi of Article 29, No. 1, paragraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties and the documentary evidence submitted to the proceedings, namely the administrative file, the facts listed above were considered proven as having relevance for the decision.

MATTER OF LAW

The Claimant invokes in particular, in the present request for an arbitral decision, the illegality of the assessment due to violation of the provisions of Articles 38, No. 2 of the LGT and 63 of the CPPT.

For its part, the Respondent counter-argues with the deficient accounting of the promise to purchase contract recorded in the accounts of the Claimant, deeming its registration in tangible fixed assets inappropriate under the item "4323 – Buildings and Other Constructions", as this does not fit either in NCRF 7 (which considers as tangible fixed assets those held for use in the production or supply of goods or services, or for administrative purposes, and which are expected to be used for more than one period), nor in NCRF 11 (if an investment property were at issue, which would only occur if it were probable that future economic benefits associated with the property would flow to the entity and its cost could be measured reliably). Associating such grounds with the fact that the promise to purchase contract has only contractual effects, it completely disregards it, to conclude that its existence and, consequently, the amount received by the partner as earnest money and part payment, constituted an advance on account of profits and as such characterized in Category E of income of the CIRS.

Faced with the position assumed by the Respondent, it appears to us, saving a better opinion, that the reasoning it invokes will not be adequate for the purpose it intends. This is because it will certainly not be the deficient or inappropriate accounting – which would enable it to proceed with technical corrections in the taxable income of the Claimant – that will permit it to remove the cost incurred with the promise to purchase contract in question and, on the contrary, consider, without more, that the same constitutes an advance on account of profits by the partners.

Suffice it to consider the following. In the course of the inspection procedure, the TA verified that the Claimant included in its accounts a document titled as a promise to purchase contract for a property. The Respondent never put in question that such contract was actually executed.

In fact, in response to the exercise of the right to be heard, it stated in the Inspection Report: "It is not contested that the promise to purchase contract in question was validly executed by the parties under their contractual freedom, provided for in Article 405 of the Civil Code, which provides that 'within the limits of the law, the parties have the faculty to freely determine the content of contracts, execute contracts different from those provided in this code or include in these the clauses they deem fit'".

That is to say, the TA concluded that, although there was valid execution of a promise to purchase contract between the Claimant and its partner, "the said contract had only the objective of 'giving legal form' to the outflow of money from the company to the partner".

Furthermore, the Respondent considers that given the future and uncertain nature of the intended use of the property, its characteristics and the activity carried out by it, everything leads to the conclusion that the property would not be allocated to the exercise of the activity carried out by the Claimant.

Before such elements, the burden of proof for which would be on the Respondent, it is true, and based on the concept of the indispensability of costs, the TA could have corrected the taxable income of the Respondent by not accepting the costs incurred with the execution of the promise to purchase contract in question, relying on the provision of Article 23, No. 1, of the CIRC - which in the version of DL 159/2009, of 13 July, applicable to the case, provided that only costs are considered to be "verifiably indispensable for the realization of income subject to tax or for the maintenance of the productive source" – taking into account that it considers that such cost benefits only a third party, the partner.

However, it is not on this reasoning that the Respondent bases the tax act in question and to which this arbitral tribunal is bound.

The TA rather considered that, although true and real, such contract was only executed with a view to obtaining a reduced tax burden for the partner. Or, if one wishes, it was executed as a fraud against the law in which "unlawfulness will emerge here from the result, as it achieves something that law prohibits, and not from its means, as these are admissible. One does not act openly against what is prescribed in the law, rather one circumvents it, achieving the effects one intends to achieve. In fact, the taxpayer who, through acts that are in themselves lawful but anomalous, achieves economic results equivalent to those which would be obtained through the normal ways of legal provision, but remaining exempt or taxed at a lesser rate, circumvents tax law" (João Nuno Calvão da Silva – Tax Avoidance and General Anti-Abuse Clause, 2006, O. Advogados).

In the Respondent's version, the promise to purchase contract, although valid, had only the objective of allowing a more favorable taxation in the sphere of the partner (having not, however, demonstrated that the taxation of the capital gains obtained by the partner, with the alienation of the property, would be more favorable than if the same amount were taxed at the rate of 28%, as it claims). Moreover, it should also be borne in mind that the definitive transfer of ownership of the property occurred in 2017.

Having established this, it is necessary to determine the consequences at the tax level – and in particular, corrections to the taxable income to be made by the TA – of the invocation of the execution of the promise to purchase contract with that purpose.

Although it is not directly applicable to the case in question – as it only applies in the case of pure simulation – note No. 1 of Article 39 of the LGT when it provides that "in the event of simulation of a legal transaction, taxation falls on the actual legal transaction and not on the simulated legal transaction". Such provision allows the TA to proceed with corrections to the taxable income, introducing those that are relevant (see, by way of example, the Decisions of TCA South of 06-10-2010 – Proc. 03629/09 and of 22-05-2007 – Proc. 1068/06), but because it is in the context of relative simulation (in that sense João N. Calvão Silva), which does not occur in the situation in question.

As far as the case is concerned, Article 38, No. 2 of the LGT provides that "ineffective in the tax context are acts or legal transactions essentially or principally directed, by artificious or fraudulent means and with abuse of legal forms, towards the reduction, elimination or temporal deferment of taxes that would be due as a result of facts, acts or legal transactions of an identical economic purpose, or the obtaining of tax advantages that would not be achieved, in whole or in part, without the use of such means, whereby taxation is then effected in accordance with the applicable norms in their absence and the intended tax advantages are not produced".

Such provision consecrated among us the so-called general anti-abuse clause which seeks to combat tax avoidance, that is, "the planned conduct of the taxpayer that results in conduct apparently lawful, generating a tax advantage not admitted by the legal system" (Gustavo Lopes Courinha – The General Anti-Abuse Clause in Tax Law, page 15).

For such clause to take effect, "the Tax Administration will have to prove that the taxpayer carried out an act or set of acts or legal transaction previously planned either through express agreement to that effect or by the foreseeability thereof, which in reality were only carried out solely with the aim of obtaining tax advantages. This is because, if these tax advantages did not exist, the act or transaction would never even be carried out by the taxpayer" (Patrícia Meneses Leirião – The general Anti-Abuse Clause and its Application Procedure, page 104) and also Gustavo L. Courinha, op. cit., page 167).

But, beyond that demonstration, its application must, unlike what occurs with special anti-abuse clauses, comply with the proper procedure established in Article 63 of the CPPT. As the same author says, "for No. 2 of Article 38 of the LGT to be applied, it will have to be subject to a 'ruling system', that is, to an administrative procedure carried out by the Tax Administration which, in the Portuguese case, is provided for in Article 63 of the CPPT".

It was this procedure that the TA did not adopt and the Claimant alleges to be essential and decisive for the correction that led to the assessment now contested.

Indeed, the provision in question imposes a set of formalities (of which we highlight, in particular, the obligation of prior hearing, to its application, of the taxpayer, a special duty of substantiation and prior authorization by the highest-ranking official of the service).

Now, this procedure "reveals sensible concerns to ensure its correctness and to strengthen the guarantees of defense of taxpayers" (Jorge Lopes Sousa – CPPT, I, page 581), whereby its breach will entail the omission of a formality deemed essential, tarnishing the final assessment act with illegality.

It is true that, as the Respondent alleges, one will not be faced with a situation of nullity – as the same is not expressly provided for in the case – but of mere voidability, which, moreover, constitutes the rule in the context of administrative and tax law, given the provision of No. 1 of Article 163 of the current Code of Administrative Procedure.

Voidability which the Claimant raised in the present request for an arbitral decision, which it did in a timely manner and for which it has legitimacy.

Whereby it must be concluded that the assessment in question is illegal and, for that reason, cannot be maintained in the legal system.

DECISION

Therefore, this Arbitral Tribunal decides:

  • to rule the request for an arbitral decision well-founded and, consequently, to annul the additional corporate income tax assessment and compensatory interest on corporate income tax and the respective compensatory interest No. 2017…, relating to the fiscal year 2013.

Value of the Proceedings

The value of the proceedings is fixed at € 98,830.00, in accordance with Article 306, No. 1 of the CPC and Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

The amount of the arbitration fee is fixed at € 2,754.00, to be borne by the Respondent, considering its defeat.

Notify accordingly.

Lisbon, 8 June 2018

The Arbitrators

(José Baeta de Queiroz)

(Alberto Franco)

(Jónatas Machado)

Frequently Asked Questions

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What is the general anti-abuse clause under Article 38(2) of the Portuguese General Tax Law (LGT) and how was it applied in CAAD Process 551/2017-T?
Article 38(2) of the Portuguese General Tax Law (LGT) establishes the general anti-abuse clause, allowing the Tax Authority to disregard acts and legal transactions that are essentially or principally directed through artificial or fraudulent means and with abuse of legal forms toward reducing, eliminating, or deferring taxes. In CAAD Process 551/2017-T, the taxpayer argued the TA improperly applied this clause to disregard a real estate acquisition without following required procedures. However, the TA contended it never actually invoked Article 38(2) or characterized the operations as simulated or abusive, instead relying on its general inspection powers under Article 2 of the Supplementary Regime for Tax and Customs Inspection Procedure (RCPIT). This distinction is crucial because applying the anti-abuse clause triggers specific procedural requirements under Article 63 CPPT that the TA did not follow, whereas corrections based on general inspection authority have different procedural frameworks and legal consequences.
What procedural requirements under Article 63 of the CPPT must the Tax Authority follow when applying the anti-abuse clause to disregard transactions?
Article 63 of the CPPT establishes mandatory procedural requirements when the Tax Authority applies provisions to disregard transactions, including anti-abuse clauses. These requirements include: (i) a detailed substantiation mechanism explaining why the transaction should be disregarded; (ii) a specific hearing process allowing the taxpayer to respond before the disregard is applied; and (iii) authorization from the highest-ranking official of the Tax Service before the disregard provision can be implemented. In Process 551/2017-T, the claimant argued the assessment was null due to the TA's failure to comply with these requirements, specifically alleging defects of violation of law (Article 38(2) LGT), defects of form due to absence of adequate substantiation, absence of the specific right to be heard under Article 63, and lack of authorization from the appropriate superior authority. These procedural safeguards protect taxpayers from arbitrary recharacterization of legitimate transactions and ensure transparency in the application of anti-abuse provisions.
Can the Portuguese Tax Authority disregard a real estate acquisition for IRC purposes based on the general anti-abuse clause?
The Portuguese Tax Authority can potentially disregard a real estate acquisition for IRC purposes based on the general anti-abuse clause under Article 38(2) LGT, but only if strict conditions and procedural requirements are met. The transaction must be essentially or principally directed through artificial or fraudulent means with abuse of legal forms to achieve tax reduction, elimination, or deferment. Critically, the TA must follow the procedural framework of Article 63 CPPT, including proper substantiation, specific taxpayer hearing rights, and authorization from the highest-ranking service official. In CAAD Process 551/2017-T, the TA notably avoided formally invoking the anti-abuse clause, instead relying on general inspection powers under Article 2 RCPIT to make corrections. This suggests the TA may have recognized that the substantive conditions for applying Article 38(2) were not met or sought to avoid the stringent procedural requirements of Article 63 CPPT. The case illustrates that while the TA has broad authority to correct declared income, disregarding transactions under anti-abuse provisions requires meeting higher legal and procedural thresholds than routine inspection adjustments.
How does the presumption of good faith under Article 75 of the LGT protect taxpayers in IRC additional assessments?
Article 75 of the Portuguese General Tax Law (LGT) establishes a presumption of good faith and truth regarding declarations submitted by taxpayers in accordance with legal provisions. This presumption serves as a fundamental protection in IRC additional assessments by shifting the burden of proof to the Tax Authority to demonstrate that taxpayer declarations are inaccurate or improperly characterized. In CAAD Process 551/2017-T, the claimant invoked this presumption to argue the TA must respect the accounting treatment and legal characterization of the real estate transaction as originally declared. The presumption means the TA cannot arbitrarily disregard or recharacterize transactions without substantial evidence and proper legal justification. When combined with the substantiation requirements of Article 77(3) LGT for related-party transactions and the procedural safeguards of Article 63 CPPT, Article 75's presumption creates a protective framework requiring the TA to present clear, documented reasoning supported by evidence before overriding taxpayer declarations. This protection is particularly significant in cases involving transaction structuring or related-party dealings where the line between legitimate tax planning and abusive arrangements may be disputed.
What are the documentation and reasoning obligations of the Tax Authority under Article 77(3) of the LGT for transactions involving related parties?
Article 77(3) of the Portuguese General Tax Law (LGT) imposes specific documentation and reasoning obligations on the Tax Authority regarding procedural acts involving taxpayers and related parties with whom they establish special relationships. These obligations require the TA to provide detailed substantiation explaining the basis for corrections or adjustments, particularly when challenging transactions between related entities where transfer pricing or special relationship considerations may apply. In CAAD Process 551/2017-T, the claimant argued the TA failed to meet these substantiation requirements when disregarding the property acquisition transaction. The documentation obligations serve several purposes: ensuring transparency in tax administration, enabling taxpayers to understand and effectively challenge corrections, preventing arbitrary or inconsistent treatment, and maintaining procedural fairness. When the TA invokes special provisions like the anti-abuse clause or makes corrections involving related-party transactions, Article 77(3) requires more than conclusory statements—the TA must articulate specific facts, legal analysis, and reasoning connecting the taxpayer's conduct to the legal provisions justifying correction. Failure to meet these documentation standards can render assessments null or voidable, as the taxpayer's defense rights and the principles of legal certainty and legitimate expectations depend on adequate TA substantiation.