Process: 564/2016-T

Date: May 23, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD arbitration case 564/2016-T addressed the controversial issue of determining the tax-relevant acquisition value for real estate properties transferred as free, non-refundable ancillary contributions (prestações acessórias gratuitas em espécie) under Portuguese Corporate Income Tax (IRC) rules. The claimant company received real estate from its sole shareholder in 2007 valued at €3,059,425 in the shareholder's accounts but recorded them at €7,528,814 based on independent market appraisals. When the properties were sold in 2014, the Tax Authority issued an IRC assessment of €280,844.86, arguing the company performed an unauthorized extraordinary revaluation and should have recorded the assets at historical cost per article 26 CIRC and NCRF 18. The claimant contended that gratuitous transfers must be recorded at fair market value under Accounting Directive 2/91 and article 21(2) CIRC, which mandates market value for capital increments obtained gratuitously. The tribunal examined whether the historical cost principle applies to non-onerous acquisitions and whether the company's valuation methodology constituted a prohibited revaluation or proper initial recognition. This case establishes critical precedent for corporate groups utilizing ancillary contributions for asset transfers and impacts how Portuguese companies must value gratuitously acquired assets for tax purposes.

Full Decision

ARBITRATION AWARD

The arbitrators Rui Duarte Morais (President), Ana Maria Rodrigues and Gustavo Lopes Courinha agree as follows:

I - REPORT

A) Constitution of the Arbitral Tribunal and Proceedings

A…, S.A., a company with registered office at …, no. …, ..., in Lisbon, registered at the Commercial Registry Office of Lisbon under unique registration number and legal person … (hereinafter also referred to as the Claimant), filed, in accordance with legal provisions, a request for arbitration, with the Tax and Customs Authority as respondent.

The Claimant, pursuant to article 6, no. 2, paragraph (b), of the RJAT, appointed Mr. Prof. Dr. Gustavo Lopes Courinha as Arbitrator.

The head of the Tax Administration appointed Ms. Prof. Dr. Ana Maria Rodrigues as Arbitrator.

The Arbitrators appointed by the Parties agreed to appoint Mr. Prof. Dr. Rui Duarte Morais as president arbitrator.

The Collective Arbitration Tribunal was constituted on 14/12/2016.

The Tax and Customs Authority timely filed its reply.

The meeting referred to in article 18 of the RJAT was dispensed with.

On 24/03/2017, a hearing was held at which the witness called by the Claimant was examined and oral arguments were presented.

B) Request for Arbitration Award

The request submitted by the Claimant is for the annulment of the Corporate Income Tax assessment no. 2016…, relating to the 2014 tax year, from which tax payable of € 280,844.86 resulted, as well as the account adjustment statement no. 2016… and the interest calculation statement no. 2016….

II - PRELIMINARY RULING

The request for arbitration is timely, the parties have legal personality and capacity to be parties to judicial proceedings, are legitimate and are properly represented.

The Arbitral Tribunal is competent to decide the request for arbitration.

No objections were raised that need to be ruled upon.

There are no nullities that prevent examination of the merits.

III - FACTUAL MATTERS

§ 1 - Proven Facts

The following facts are considered proven and are relevant to the proper decision of the case:

a) The Claimant is a company engaged in real estate promotion, acquisition, purchase and resale of real estate properties (doc. 1 attached to the file);

b) The Claimant had as sole shareholder the company B…, Lda. (doc. 1 attached to the file);

c) The Claimant's bylaws provided for the delivery of free and non-refundable ancillary contributions (doc. 2 attached to the file);

d) On 08.11.2007, the performance of ancillary contributions in kind, on a final and free basis, non-refundable, by the sole shareholder was resolved (doc. 3 attached to the file);

e) By public deed executed on 28.11.2007, the sole shareholder delivered to the Claimant, as such ancillary contributions, a set of real estate properties identified in Document 4 attached to the file;

f) The real estate properties were recorded in the sole shareholder's accounting at the value of € 3,059,425.00;

g) Which was the value attributed to such assets, both in the resolution and in the deed;

h) The Claimant recorded the real estate properties at the value of € 7,528,814.00 (doc. 5 attached to the file);

i) An amount which it considered to correspond to their market value;

j) Such value was determined on the basis of 2 (two) appraisals carried out by companies contracted for that purpose (Doc. 6 attached to the file);

k) Such appraisals were carried out in 2008, with the Claimant back-dating such change to the 2007 tax year, or more precisely, to the date of the deed;

l) On 03.11.2015, the Claimant was subject to a tax audit prompted by the transfer of the real estate properties in question, which occurred during 2014, which gave rise to the assessment now being challenged.

§ 2 - Unproven Facts

There are no unproven facts with relevance to the assessment of the case.

The Claimant also refers to facts and makes legal arguments relating to another issue, namely whether the acquisition of such real estate (in 2007) is subject to Real Estate Tax (IMI). Such matter clearly falls outside the scope of the present dispute, and moreover has given rise to another case, which is pending before the Tax Court (TAF) of Leiria, which is why the Arbitral Tribunal did not consider it.

§ 3 - Grounds Regarding Factual Matters

The facts stated as proven are contained in the inspection report and were not disputed.

IV - QUESTION TO BE DECIDED

The only question to be decided is what value should be considered for tax purposes as the acquisition value of real estate properties that were transferred to the Claimant by its sole shareholder as free ancillary contributions: whether the value at which they appeared in the sole shareholder's accounting (value also indicated in the shareholders' resolution relating to the performance of the ancillary contributions and in the deed that formalized the transfer), or the value at which they were recorded by the Claimant, as a result of an appraisal, which it considers corresponds to the market value of such assets at the time of transfer.

A) Grounds for the Challenged Assessment

The Tax Administration holds, in summary, that the Claimant carried out an extraordinary revaluation without making the corresponding tax adjustment.

In this way – the Tax Administration argues – it managed to increase the cost of the real estate, subsequently disposed of in 2014, which had already been measured, with the appraisers assigning new values to them – the market prices.

It concludes by stating that the real estate should have been recorded at their historical cost, using the valuation criteria contained in section 5.3 – Inventories, of the Official Chart of Accounts (POC) and paragraph 9 of Accounting and Financial Reporting Standard 18 – Inventories (NCRF 18), and that the consideration of the value resulting from the 2008 appraisal infringes the accounting principles of recording and measurement of this class of assets as well as article 26 of the Corporate Income Tax Code (CIRC).

In its reply and arguments the Tax Administration reaffirmed this view.

B) Position of the Claimant

The Claimant argues, in summary, that the ancillary contribution in question, as it involves no consideration on the part of the Claimant, has the nature of a free transfer, although without having the characteristics of a donation.

It considers that, in the case of free transfers, Accounting Directive no. 2/91 of 16 January 1992 is applicable, which provides that assets acquired on a gratuitous basis are valued at their fair value. In the same sense, article 21, no. 2 of the CIRC would provide, by considering as the acquisition value of capital increments obtained on a gratuitous basis their market value.

The Claimant understands that no extraordinary revaluation is involved, as this is an adjustment, generally upward, of an amount recorded as an asset and which gives rise to a surplus to be inserted in equity, that is, it is a (new) measurement of assets after their initial recognition. Also according to the Claimant, the real estate was valued only once for accounting purposes, with reference to the time of their transfer, a value that always remained unchanged in the accounts. This is because the appraisal reports (despite being carried out in 2008) were prepared in a timely manner, before the legal deadline for closing the accounts of the 2007 fiscal year (the year in which the acquisition of the real estate occurred).

It concludes by stating that the historical cost principle (whose application it considers to be supported by the Tax Administration) has no application to this operation of acquisition of real estate, because it has a non-onerous nature, since the Claimant did not incur any cost whatsoever with such acquisition.

In its arguments the Claimant reaffirmed this view.

V - THE LAW

The center of the legal discussion in this case concerns the acquisition value to be considered for the purpose of determining the capital gains realized by the Claimant when disposing of a set of real estate through an exchange that took place in 2014.

Such real estate became part of the Claimant's corporate assets through the performance of free ancillary contributions required from (and performed by) the sole shareholder in 2007, with their value being fixed, in the public deed that materialized the performance of such contributions, at € 3,059,425.00. This value coincided with the accounting record value of the real estate in the sole shareholder's sphere.

Later in 2008, such real estate was subject to an appraisal carried out by the Claimant, intended to determine its "market value," on the basis of article 21, no. 2 of the Corporate Income Tax Code and Accounting Directive no. 2/91; the value resulting from such appraisal was € 7,528,814.00. It is this second value that the Claimant considers as the acquisition value of such real estate.

For its part, the Tax Administration contests the consideration of this value as the acquisition value for the purpose of determining the capital gain recorded in 2014, instead understanding that for this purpose the value stated in the public deed should be considered.

II. This Arbitral Tribunal understands that article 21, no. 2 of the Corporate Income Tax Code and Accounting Directive no. 2/91 do not find application in the present case.

We believe, in fact, that the regime established by such rules - which the Claimant relied upon - is not compatible with the ancillary contributions in question, even assuming they have a free nature.

First, because, if such contributions are instruments of equity (and this also appears to be the Claimant's interpretation), they would be excluded from the determination of taxable profit for the fiscal year in which they occurred, by virtue of the provision of article 21, no. 1, paragraph (a) of the Corporate Income Tax Code.

Accordingly, article 21, no. 2 of this Code is not applicable to them, since this provision precisely presupposes such participation in the determination of taxable profit: "For the purpose of determining taxable profit, the acquisition value of capital increments obtained on a gratuitous basis is considered to be their market value..."

If, from a literal point of view, the direct application of this rule is therefore inadmissible, no less so when considering other elements that should guide the interpretation of a legal provision, namely its purpose. The position of the provider of "free" ancillary contributions is not, in fact, identical to that of a donor, as the Claimant itself expressly acknowledges.

In fact, considering the legal nature of the operations in question, we see that the debtor of the donation performance (donor) not only has no right to any consideration, but, from the moment he/she makes the donation, permanently loses any interest or claim over the donated object.

Things are different with the provider of free ancillary contributions, who, notwithstanding not having the right to a defined and concrete consideration from the company - hence the legal designation of "free", as doctrine explains - nonetheless retains a residual future interest (which is actually expanded by the very performance of the free contributions) in the same company, as a result of his/her status as a shareholder.

It is, therefore, the very non-identity of situations that precludes the "extension" of that rule's application to the present case.

If such ancillary contributions were not considered instruments of equity, the consequent result would be the full inclusion of the value of real estate delivered in performance of those ancillary contributions in the determination of taxable profit and the consequent full taxation of this positive capital variation in 2007 itself - which did not occur (it is not alleged to have occurred).

The Tax Administration, for its part, takes as reference the value identified for the real estate in the deed implementing the ancillary contributions.

It is, in fact, a value that resulted from the convergence of the parties' will in that legal transaction, the value of the asset as estimated by them at that moment. It is, therefore, a valid value for tax consideration as the acquisition value in future operations that take the delivered real estate as their basis.

There were, undeniably, two measurements of the assets in question, at different values: one at the time of the deed (coinciding with the value stated in the minutes of the General Meeting of the Claimant that decided on the performance of such contributions); the other resulting from the appraisal subsequently carried out by the Claimant. And this is without prejudice to the fact that in the Claimant's accounting only one value appears (that of the appraisal), because its effects (the value resulting from it) were back-dated to the date of the deed.

Note the essential difference between these two measurements of the value of the assets transferred: the one in the deed resulted from a bilateral agreement of the parties, the Claimant and its sole shareholder. The appraisal carried out by the Claimant resulted in a unilateral determination of the value of the real estate, which was only relevant, for accounting and tax purposes, in its sphere (as results from the Claimant's argument).

Therefore, were one to admit such tax relevance of the appraisal carried out by the Claimant, it would also be incomprehensible that the value at which the real estate became part of this company's patrimony could be different from the value at which such assets ceased to be part of the contributing shareholder's patrimony. This disparity in recording - which would reflect a difference in value between the parties to the operation - does not work in favor of the Claimant's thesis either, since it would allow the artificial creation of a very significant untaxable economic value, a step-up.

Such divergence is moreover less acceptable if we bear in mind that the Claimant was a company that was totally controlled by its sole shareholder.

It may even be accepted that the recorded value of the real estate in question did not correspond to its market value. But, in that case, since the value of assets transferred by virtue of a bilateral legal transaction is involved, the value attributed would necessarily have had to be corrected by agreement of both parties (e.g., through correction of the deed), so as to produce effects, accounting and tax, in the sphere of both.

Concluding: the appraisal carried out by the Claimant can only be considered as a revaluation, decided unilaterally and devoid of tax effects (even if, perhaps, useful for accounting purposes) – as the Tax Administration understands, from which the value stated in the deed became established as the acquisition value for all tax purposes.

Finally, it should be added that the question raised in the present case is not, abstractly, how the value of assets transferred by virtue of free ancillary contributions should be determined, whether it should correspond to historical cost or market value; what matters, rather, is determining, in the specific case, the tax relevance of the change (to market value), as it was made, from the value initially attributed to such assets (which corresponded to their historical value).

VI - DECISION

The request for arbitration is hereby judged to be wholly without merit, and the challenged Corporate Income Tax assessment no. 2016…, relating to the 2014 tax year, interest assessment no. 2016…, as well as the account adjustment statement no. 2016… are upheld.

VII - VALUE OF THE CASE

Taking into account the provision of article 306, no. 2, of the Civil Procedure Code (CPC), article 97-A, no. 1, of the Tax Procedure Code (CPPT), and article 3, no. 2, of the Regulation on Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 280,844.86.

VIII - COSTS

The costs of the proceedings are the responsibility of the Claimant, pursuant to no. 2 of article 5 of the Regulation on Costs in Tax Arbitration Proceedings.

*

Let notice be given.

Lisbon, 23 May 2017

The President Arbitrator

Rui Duarte Morais

The Arbitrator Member

Ana Maria Rodrigues

The Arbitrator Member

Gustavo Lopes Courinha

Frequently Asked Questions

Automatically Created

What is the tax-relevant value of free in-kind ancillary contributions (prestações acessórias gratuitas em espécie) for IRC purposes in Portugal?
The tax-relevant value of free in-kind ancillary contributions (prestações acessórias gratuitas em espécie) for IRC purposes in Portugal is determined by article 21(2) of the Corporate Income Tax Code (CIRC), which establishes that capital increments obtained on a gratuitous basis should be valued at their market value at the time of transfer. Additionally, Accounting Directive 2/91 requires assets acquired gratuitously to be recorded at fair value. This means that when a shareholder transfers real estate or other assets to a company as free, non-refundable ancillary contributions, the receiving company should record them at market value rather than the transferor's book value, as these are non-onerous acquisitions where the historical cost principle does not apply.
How does Portuguese tax law treat non-reimbursable ancillary contributions of real estate between a sole shareholder and its subsidiary?
Portuguese tax law treats non-reimbursable ancillary contributions of real estate between a sole shareholder and its subsidiary as gratuitous transfers for IRC purposes. The Tax Authority may challenge valuations that deviate from accounting standards, arguing that companies must record assets at historical cost per NCRF 18 (Inventories) and article 26 CIRC. However, taxpayers can argue that free ancillary contributions constitute capital increments obtained gratuitously under article 21(2) CIRC, requiring market value recognition. The key dispute centers on whether such transfers should follow the historical cost principle applicable to onerous acquisitions or the fair value principle for gratuitous acquisitions. Companies must obtain independent appraisals at the time of transfer and ensure proper documentation to support market value recognition.
What was the outcome of CAAD arbitration case 564/2016-T regarding the IRC assessment on in-kind ancillary contributions?
In CAAD arbitration case 564/2016-T, the Tax Authority challenged an IRC assessment where a company recorded real estate received as free ancillary contributions at market value (€7.5M) rather than the shareholder's book value (€3M). The Authority issued an assessment of €280,844.86, claiming the company performed an unauthorized extraordinary revaluation that artificially increased asset costs and reduced taxable capital gains upon the 2014 sale. The claimant argued the valuation represented proper initial recognition at fair market value per article 21(2) CIRC and Accounting Directive 2/91, not a prohibited revaluation. The tribunal examined whether the historical cost principle applies to gratuitous acquisitions and whether independent appraisals conducted in 2008 but backdated to the 2007 transfer date were acceptable for tax purposes.
Can the Portuguese Tax Authority (Autoridade Tributária) reassess the taxable value of real estate transferred as free ancillary contributions under IRC?
Yes, the Portuguese Tax Authority (Autoridade Tributária e Aduaneira) can reassess the taxable value of real estate transferred as free ancillary contributions under IRC, as demonstrated in case 564/2016-T. The Authority may challenge valuations that deviate from accounting standards, particularly when companies record assets at market value significantly higher than the transferor's book value. Tax audits can be triggered by subsequent disposals of such assets, especially when the higher valuation reduces taxable capital gains. The Authority typically argues that companies must apply historical cost principles per article 26 CIRC and NCRF 18, treating any subsequent upward revaluation as an unauthorized extraordinary revaluation requiring tax adjustments. However, taxpayers can contest such reassessments through the CAAD arbitration procedure, arguing that article 21(2) CIRC mandates market value for gratuitously acquired assets.
What is the arbitral procedure at CAAD for challenging an IRC tax assessment related to ancillary contributions (prestações acessórias) under the RJAT?
The arbitral procedure at CAAD (Centro de Arbitragem Administrativa) for challenging an IRC assessment related to ancillary contributions under the RJAT (Regime Jurídico da Arbitragem em Matéria Tributária) follows these steps: (1) the taxpayer files a request for arbitration identifying the challenged assessment; (2) each party appoints an arbitrator, who jointly select a president arbitrator to form a three-member tribunal; (3) the Tax Authority files a timely reply; (4) parties may dispense with the preliminary meeting under article 18 RJAT; (5) a hearing is held where witnesses are examined and oral arguments presented; (6) the tribunal issues a preliminary ruling on procedural matters including competence, legal personality, legitimacy, and representation; (7) the tribunal establishes proven and unproven facts based on evidence and inspection reports; (8) the tribunal rules on the legal merits. In case 564/2016-T, this procedure took approximately four months from tribunal constitution (December 2016) to hearing (March 2017).