Process: 565/2016-T

Date: June 1, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 565/2016-T) addresses critical issues concerning the calculation of international double taxation credits under IRC and the deductibility of tax benefits from autonomous assessments. The claimant, a Portuguese SGPS, challenged the 2013 IRC assessment, arguing that Double Taxation Conventions with Algeria, Brazil, Greece, Pakistan, and Poland should prevail over domestic Article 91 CIRC provisions. The central dispute involves whether the tax credit fraction should be calculated on gross income (as withheld at source by foreign states) or net income (after deducting expenses). The claimant contended that using net income for the credit calculation while source countries tax gross amounts aggravates double taxation, contradicting the CDT's purpose. Additionally, the company argued that tax benefits SIFIDE and RFAI should be deductible from autonomous IRC assessments under Article 90(2)(b) CIRC, since autonomous assessments form part of the total IRC liability. The Tax Authority countered that international accounting standards require net income calculations, that IRC comprises dual separate computations with distinct purposes, and that investment tax benefits can only offset tax calculated on profit-based taxable income, not autonomous assessments, to maintain the conceptual coherence between benefit objectives and profit-related amounts. This decision clarifies the interplay between international tax treaties, domestic IRC provisions, and the structural dualism of Portuguese corporate taxation.

Full Decision

ARBITRAL DECISION

The Arbitrators José Baeta de Queiroz, António Alberto Franco and Fernando de Jesus Amado dos Santos, designated by the Ethics Council of the Administrative Arbitration Centre to form the present Arbitral Tribunal, hereby agree to the following

ARBITRAL DECISION

I – REPORT

  1. A…– SGPS, SA, legal entity no.…, with registered office at the place of …–…, …-… …, presented, on 16-09-2016, a request for constitution of the arbitral tribunal, under the terms of Articles 2º and 10º of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as RJAT), in conjunction with Article 102º of the Code of Tax Procedure and Process (abbreviated as CPPT), in which the Tax and Customs Authority (hereinafter referred to as the Respondent) is the respondent.

  2. The Claimant seeks, through its request, a declaration of illegality of the act of assessment of Corporate Income Tax (IRC) for the fiscal year 2013 bearing no. 2014…, as well as the dismissal of the administrative appeal which it presented regarding it.

  3. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 19-09-2016.

3.1. The Claimant did not proceed with the appointment of an arbitrator, whereby, under the provisions of subparagraph a) of no. 2 of Article 6º and subparagraph b) of no. 1 of Article 11º of the RJAT, the President of the Ethics Council designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the prescribed period.

3.2. On 16-11-2016 the parties were notified of the appointment of the arbitrators, with no impediment being raised.

3.3. In accordance with the provision in subparagraph c) of no. 11º of the RJAT, the collective arbitral tribunal was constituted on 02-12-2016.

  1. In support of its request for arbitral pronouncement the Claimant alleged, in summary, the following:

It contests the act of dismissal of the administrative appeal which it presented, with reference to the self-assessment of IRC for the fiscal year 2013.

It contends that the measure of the limitation of the deduction of tax established in the Conventions on Double Taxation (CDT) – and, in the present case, of Algeria, Brazil, Greece, Pakistan and Poland – is broader than that which applies by virtue of Article 91º, no. 1, b), of the Corporate Income Tax Code (CIRC).

Therefore, since the tax on income paid in Greece, Brazil, Algeria, Pakistan and Poland, through withholding at source, exceeded the fraction of tax on income calculated before deduction, corresponding to the income that can be taxed in that other State, this shall be the amount to be deducted from the tax paid in the State of residence (Portugal), so as to mitigate double taxation.

Whereby the amounts of tax withheld in those States to be deducted should not be those which appear in the declarations which it presented, but should be increased by € 279,372.69.

It understands that this should be the case inasmuch as the calculation of the fraction of tax under the applicable provisions of the CDT identified above should have as its reference the gross income, and not the net income (of expenses and losses incurred for its obtaining), and that those prevail over all norms of Portuguese domestic law below the constitutional level and in the event of conflict between them, the internal norms must yield to the provisions therein contained.

It argues, moreover, that the ultimate reason for the CDT is to eliminate/mitigate international double taxation, whereby the interpretative solutions which most closely approach such objective should be preferred over the remainder. If it were permitted that the source State taxed the income at its gross value and the State of residence calculated the fraction of tax on its net amount, it would aggravate double taxation – if we compare it with the alternative situation, in which both the taxation and the calculation of the fraction of tax have as their reference the gross amount of the income – since it broadens the tax base to be assessed by the source State, given that the gross value is often superior – and never, by definition, inferior – to the net value of the income, whilst at the same time reducing the amount of the credit for double taxation.

It understands, on the other hand, that being autonomous IRC assessments, assessed on the basis of Article 90º, no. 1, of the CIRC, the tax benefits SIFIDE and RFAI can naturally be deducted therefrom on the basis of subparagraph b) of no. 2 of that provision.

Indeed, the final IRC assessment includes not only the collection of IRC stricto sensu, but also the autonomous assessments, whereby in that respect, to such amount of tax assessed it is permitted that tax benefits which operate by deduction from the collection be deducted from the total IRC to be paid by the taxpayer and, therefore, also from the autonomous assessments since these are considered components of the IRC.

  1. The Tax and Customs Authority presented its response, invoking in summary the following:

To state that the expression "calculated before deduction" permits inference that the income in question corresponds to the value before the costs of its obtaining are deducted, cannot find any acceptance, for, as properly stated in the decision dismissing the administrative appeal procedure presented by the Claimant, it is contrary to international accounting standards ("IASB"), which serve as the basis for the norms in force in the European Union.

Furthermore, serving the CDT to resolve conflicts of a fiscal nature in a context of internationalization, it is to be expected that their norms aim to harmonize the different legislations, adopting the same guiding principles: the IRC should take into account only net income.

On the other hand, it contends that there is not a single IRC assessment, but rather two calculations, two distinct computations which, although processed, are in accordance with the terms of subparagraph a) of no. 1 of Article 90º of the CIRC.

The integration of autonomous assessments into the IRC Code (and the IRS Code), conferred a dualistic nature, in certain respects, on the normative system of this tax, which was embodied, namely, within the framework of subparagraph a) of no. 1 of Article 90º of the CIRC, in separate computations of the respective collections, owing to the fact that they are subject to different rules.

Whereby the amount computed under the terms of subparagraph a) of no. 1 of Article 90º does not have a unitary character, since it comprises values calculated according to different rules, to which different purposes are also associated, whereby the deductions provided for in the subparagraphs of no. 2 can only be made to the part of the IRC collection with which there exists a direct correspondence, in order to maintain the coherence of the conceptual structure of the standard regime of the tax.

Deductions from the collection by way of tax benefits, the amount to which they are made, can only relate to the tax assessed on the basis of the taxable matter determined in accordance with the rules of Chapter III and the rates provided for in Article 87º of the CIRC, under penalty of an inconsistency resulting from the subversion of the necessary interconnection which, at the material level, must exist between the objectives pursued by the benefits and the very amount represented by profit.

Regarding investment benefits – as is the case with RFAI and SIFIDE – there is an inseparable link between the amount of the investment tax credit and the part of the IRC collection calculated on the taxable matter based on profit, and if it were otherwise, the necessary articulation which, at the material level, must exist – between the objectives pursued by the tax benefits and their impact on the very amount which serves as the basis for calculating the taxable matter and the collection – profit – would be subverted.

It concludes, therefore, the Respondent for the legality of the acts of tax assessment contested by the Claimant which should, accordingly, be upheld.

  1. By order of 20-01-2017, the hearing provided for in Article 18º of the RJAT was dispensed with.

  2. The parties presented arguments, maintaining the positions set forth in their respective pleadings.

II – PRELIMINARY MATTERS

8.1. The tribunal is competent and is regularly constituted.

8.2. The parties possess legal standing and capacity, are duly interested and are regularly represented (Articles 4º and 10º, no. 2, of the RJAT and Article 1º of Regulation no. 112-A/2011, of 22 March).

8.3. The proceeding is free of nullities.

8.4. No exceptions have been raised which obstruct knowledge of the merits of the case.

III – FACTUAL AND LEGAL MATTERS

III.1. Factual Matters

  1. Factual Matters

9.1. It is important, first and foremost, to note that the Tribunal is not required to pronounce itself on everything alleged by the parties; rather, it has the duty to select the facts which are relevant to the decision and to distinguish the proven facts from those not proven (cf. Article 123º, no. 2, of the CPPT and Article 607º, nos. 3 and 4, of the Code of Civil Procedure (CPC), applicable by virtue of Article 29º, no. 1, subparagraphs a) and e), of the RJAT). In this way, the facts relevant to the judgment of the case are chosen and delineated based on their legal relevance, which is established in regard to the various plausible solutions of the question(s) of law.

Within this framework, the following facts with relevance to the decision are considered proven:

a) In the taxation period of 2013, the Claimant was the dominant company – and responsible for the self-assessment of IRC – of the Group composed of the companies identified below, to which the Special Tax Treatment Regime for Groups of Companies ("RETGS") was applicable:

  • B…, S.A., with Tax ID no.…;

  • C…, S.A. (at the time of the facts D… S.A.), with Tax ID no. … ("D…");

  • E…, S.A., with Tax ID no.…;

  • F…, S.A., with Tax ID no.…;

  • G…, S.A., with Tax ID no.…;

  • H…, SGPS, S.A. (at the time of the facts I… SGPS, S.A.), with Tax ID no.…;

  • J… S.A., with Tax ID no. … ("J…");

  • K…, S.A., with Tax ID no.….

b) The Claimant filed, on 31-05-2014, an IRC Income Declaration (Form 2), with reference to the taxation period of 2013 of the group of companies which it heads (Form 22 Declaration to which was assigned the code …-… -…), with the corresponding IRC self-assessment.

c) On 28-05-2015, it filed, with respect to the same taxation period, a replacement Form 22 Declaration (Form 22 Declaration to which was assigned the code …-… -…), with the corresponding IRC self-assessment.

d) In that IRC declaration the Claimant deducted the amount of the foreign tax credit for double taxation, having as its reference, for the calculation of the fraction of IRC, the net income obtained in Algeria, Brazil, Greece, Pakistan and Poland.

e) By the same declaration, the Claimant proceeded with the self-assessment of the autonomous assessments owed by each of the companies in the Group which it heads, having deducted only part of the amount of the tax benefits – SIFIDE – which remained deductible.

f) The Claimant filed, on 30-03-2016, an administrative appeal, which was dismissed, the respective decision having been sent by registered mail on 17-06-2016.

g) The Claimant proceeded with payment of the impugned tax, as a result of the self-assessment which it made.

9.2. Justification for the Factual Matters:

The factual matters given as proven took into account the positions assumed by the parties in their pleadings and were based on the critical examination of the documentary evidence, as well as the administrative file attached to the proceedings.

9.3. There are no other facts with relevance for appraisal of the merits of the case which were not proven.

III.2. Legal Matters

The question to be examined in the present request for arbitral pronouncement is divided, on the one hand, into the treatment to be given to the foreign tax credit for double taxation, in light of the existence of international double taxation conventions, and, on the other, into the possibility of deducting amounts of tax benefits available for collection through autonomous assessment.

A – FOREIGN TAX CREDIT FOR DOUBLE TAXATION

The Claimant understands that it has improperly recorded, in the IRC declarations which it presented, the amounts of tax withheld in the States in which it obtained income and with which Portugal has concluded International Double Taxation Conventions (CDT), namely in Algeria, Brazil, Greece, Pakistan and Poland.

Indeed, as it contended in the administrative appeal which it presented, it argues that the amounts of tax withheld in those States, for purposes of determining the fraction of tax to be deducted, should have as its reference the gross income which it obtained in those States and not the net income (deducted of amounts on account of expenses incurred for its obtaining).

For its part, the Respondent understands that such understanding cannot find acceptance for being contrary to international accounting standards ("IASB") which serve as the basis for the norms in force in the European Union.

On one point the parties are in agreement: the prevalence, in light of the provision in no. 2 of Article 8º of the CRP, of the CDT over domestic ordinary legislation. That is, it is agreed, insofar as the case is concerned, that the rules provided for in the CDT in question override what is provided for in the CIRC.

In support of this same understanding, the Respondent moreover appeals to Circular Note 31501, of 28-05-1998, of the Department of Tax Benefits, which concludes to the effect that "in cases in which Portugal, in accordance with what is established in the CDT, has cumulative taxation competence, the elimination of international double taxation shall be done exclusively by the rules of the applicable Convention", and indeed this is the case.

At the time of the facts to which the present request for arbitral pronouncement relates, the CDT celebrated by Portugal with Algeria (approved by Resolution of the Assembly of the Republic no. 22/2006), Brazil (approved by Resolution of the Assembly of the Republic no. 33/2001), Greece (approved by Resolution of the Assembly of the Republic no. 25/2002), Pakistan (approved by Resolution of the Assembly of the Republic no. 66/2003) and Poland (approved by Resolution of the Assembly of the Republic no. 57/1997) were in force.

In this way, the question at hand must be examined in light of the provisions contained in those CDT, given the superiority of their norms in relation to those of domestic origin and, in particular, to the CIRC, it not being, therefore, Article 91º of that code which provides the solution to the question.

The CDT in question contain substantially identical clauses for the appraisal of the case under analysis:

ALGERIA

CHAPTER IV

Elimination of Double Taxation

Article 23º

Methods

1—a) When a resident of Portugal obtains income which, in accordance with the provisions of this Convention, may be taxed in Algeria, Portugal shall deduct from the tax on the income of that resident an amount equal to the tax on income paid in Algeria. The amount deducted may not, however, exceed the fraction of the tax on income, calculated before deduction, corresponding to the income which may be taxed in Algeria.

BRAZIL

CHAPTER IV

Provisions for Eliminating Double Taxation

Article 23º

Method

1 — When a resident of one Contracting State obtains income which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall deduct from the tax on the income of that resident an amount equal to the tax on income paid in that other State.

The amount deducted may not, however, exceed the fraction of the tax on income, calculated before deduction, corresponding to the income which may be taxed in that other State.

GREECE

CHAPTER IV

Methods for Eliminating Double Taxation

Article 22º

1 — Without prejudice to the provisions of Portuguese law concerning the credit in Portuguese tax of tax paid in a territory outside Portugal (which does not affect its general principle):

a) When a resident of Portugal obtains income which, in accordance with the provisions of this Convention, may be taxed in the Hellenic Republic, Portugal shall deduct from the tax on the income of that resident an amount equal to the tax on income paid in the Hellenic Republic. The amount deducted may not, however, exceed the fraction of the tax on income, calculated before deduction, corresponding to the income which may be taxed in the Hellenic Republic;

PAKISTAN

Article 23º

Methods for Eliminating Double Taxation

1 — The laws in force in both Contracting States shall continue to govern the taxation of income in the respective Contracting State, except where provided otherwise by the provisions of this Convention.

2 — As regards Portugal, double taxation shall be eliminated in the following manner:

When a resident of Portugal obtains income which, in accordance with the provisions of this Convention, may be taxed in Pakistan, the Portuguese Republic shall deduct from the tax on the income of that resident an amount equal to the tax on income paid in Pakistan.

The amount deducted may not, however, exceed the fraction of the tax on income, calculated before deduction, corresponding to the income which may be taxed in Pakistan.

Protocol

Ad Article 23º

The expression "tax on income" does not include any amount required to be paid in respect of a failure or omission in connection with the taxes to which this Convention applies or which represents a penalty imposed in relation to those taxes.

POLAND

CHAPTER IV

Elimination of Double Taxation

Article 23º

Methods for Eliminating Double Taxation

Double taxation shall be eliminated in the following manner:

b) In the case of a resident of Portugal:

i) When a resident of Portugal obtains income which, in accordance with the provisions of this Convention, may be taxed in Poland, Portugal shall deduct from the tax on the income of that resident an amount equal to the tax on income paid in Poland. The amount deducted may not, however, exceed the fraction of the tax on income, calculated before deduction, corresponding to the income which may be taxed in Poland;

These CDT thus adopted the so-called "credit method", as a means of eliminating the double taxation resulting from situations of cumulative taxation as is the case here.

It follows that the State of residence calculates the tax on the basis of the total amount of the income of the taxpayer, including the income obtained in the other State – the source State – which, under the terms of the CDT, may be taxed there, and then deducts from the tax owed to it the tax paid in that source State, thus achieving the possible compatibility between the right to taxation by the source State of the income and by the State of residence.

The interpretative doubt will reside in the final part of the aforementioned clauses when they state that "the amount deducted may not, however, exceed the fraction of the tax on income, calculated before deduction, corresponding to the income which may be taxed in that other State". As it is stated in Arbitral Award 369/2015_T of 25-01-2016, "it will only have application in the unlikely case that the IRC rate applicable to a particular taxpayer be lower than the rate to which the income is subject in the source State", adding – citing Maria Margarida C. Mesquita, The Conventions on Double Taxation (Lisbon 1998), p. 290 – "the maximum deduction is equivalent to the rate of the income tax of the state of residence applied to the income obtained in the other State".

The primary objective of the CDT is to eliminate or, at least, mitigate, the taxation resulting from the cumulativeness of international competence.

Now, for calculation of the tax of the State of residence, in this case the IRC – with a worldwide tax base – the taxable matter is considered which takes into account the totality of the income, and therefore also that obtained abroad, as well as the expenses incurred for its obtaining.

Whereby only the full deduction of the tax paid in the source State (with the limits contained in the CDT), determined on the basis of the gross income obtained there, permits achieving the objective of the total elimination of double taxation.

As stated in the aforementioned arbitral decision "the total tax to be paid by the taxpayer (the sum of the tax to be paid in the source and residence States) should be equal to the tax which he would pay if all his income had its origin (source) in the State of residence".

The application of the provision in subparagraph b) of no. 1 of Article 91º of the CIRC would frustrate, at least in part, the objective of elimination of double taxation sought by the CDT in question.

It is, therefore, necessary to accept the position of the Claimant set forth in the administrative appeal which it presented and which was not accepted by the Respondent.

B – CORRECTIONS TO TAXABLE INCOME

In the decision dismissing the administrative appeal, the Tax and Customs Authority understands that "in nos. 1 and 2 of Article 90º of the CIRC there is no reference to autonomous assessments" and then concludes that with the existence of any collection which was not of taxable matter, any deduction from that collection would be contrary to the spirit of the IRC system, namely by deduction of the tax benefits of SIFIDE. Whereby it concluded that deduction of these benefits from the collection is not admissible.

However, in the response which it presented the Respondent contends that:

  • "the assessment of autonomous assessments is carried out on the basis of Articles 89º and 90º no. 1 of the IRC Code but, applying different rules for the calculation of the tax:

(1) in one case the assessment operates, by applying the rates of Article 87º to the taxable matter computed in accordance with the rules of Chapter III of the Code;

(2) in the other case, diverse collections are computed depending on the diversity of the facts which give rise to the autonomous assessment".

To conclude that "(…) the amount computed under the terms of subparagraph a) of no. 1 of Article 90º does not have a unitary character, since it comprises values calculated according to different rules, to which also differentiated objectives are associated, whereby the deductions provided for in the subparagraphs of no. 2 can only be made to the part of the IRC collection with which there exists a direct correspondence, in order to maintain the coherence of the conceptual structure of the standard regime of the tax".

The disagreement will reside, in sum and only, in the understanding of how to proceed with the assessment, for the Tax and Customs Authority understands that, with diverse collections being computed depending on the diversity of the facts which give rise to the autonomous assessment, the deductions provided for in the subparagraphs of no. 2 of Article 90º of the CIRC can only be made to the part of the IRC collection with which there exists a direct correspondence, understanding that this is not verified in relation to the IRC collection which results from the autonomous assessments.

It does not seem to us, however, that the Respondent is correct, and it is, indeed, more or less established, within the scope of arbitral jurisprudence, that the tax assessed through the autonomous assessments provided for in the CIRC has the nature of IRC (see, among others, arbitral decisions nos. 59/2014-T, 79/2014-T, 80/2014-T; 95/2014-T and 602/2015-T and 31/2016-T).

Indeed, and as it was decided in those decisions, no. 1 of Article 90º of the CIRC refers to the final IRC assessment, of which is the total amount of tax to be paid under this heading and which includes not only the collection of IRC stricto sensu, but also the autonomous assessments. Furthermore, the assessment of IRC which is carried out on the basis of the income declaration presented by taxpayers under Article 120º of that Code, of which not only consists the taxable matter which will serve as the basis for the calculation of the IRC collection stricto sensu, as well as any expenses to which the autonomous assessments will apply.

There are not, therefore, reasons for us to deviate from that understanding, whereby it is established that the differences between the determination of the amount resulting from autonomous assessments and that resulting from taxable profit are restricted to the determination of the taxable matter and to the applicable rates, which are those provided for in Chapters III and IV of the CIRC for the IRC which has as its basis the taxable profit and in Article 88º of the CIRC for the IRC which has as its basis the taxable matter of the autonomous assessments and the respective rates.

Whereby, whatever the calculations to be performed, the self-assessment which the taxpayer or the Tax and Customs Authority must carry out under the terms of Articles 89º, subparagraph a), 90º, no. 1, subparagraphs a), b) and c), and 120º or 122º, all of the CIRC, is unitary, and on the basis of it the global IRC is calculated, regardless of the taxable matters relating to each of the types of taxation which underlie it.

It may be said, moreover, that it is not only the assessments provided for in Article 88º of the CIRC which may encompass several calculations of application of rates to certain taxable matters, for the same can occur in the situations provided for in nos. 4 to 6 of Article 87º.

B.1 Question of Deductibility of Investment Expenses Provided for in SIFIDE from the Amounts Due by Way of Autonomous Assessments

In 2013, the Fiscal Incentive System for Research and Business Development II (SIFIDE II) was in force, which was approved by Article 133º of Law no. 55-A/2010, of 31 December, and amended by Article 163º of Law no. 64-B/2011, of 30 December.

This legislation establishes the following, in its Articles 4º and 5º:

Article 4º

Scope of the Deduction

1 - Corporate income tax taxpayers resident in Portuguese territory who exercise, as their main activity, a business activity of an agricultural, industrial, commercial and services nature, and non-residents with a permanent establishment in that territory may deduct from the amount computed under the terms of Article 90º of the Corporate Income Tax Code, and to the extent thereof, the value corresponding to expenses with research and development, to the extent not financed by non-refundable state grants, incurred in the taxation periods from 1 January 2011 to 31 December 2015, in a double percentage:

a) Basic rate - 32.5% of the expenses incurred in that period;

b) Incremental rate - 50% of the increase in the expenses incurred in that period in relation to the simple arithmetic mean of the two preceding years, up to the limit of € 1,500,000.

(…)

3 - The deduction is made, in accordance with Article 90º of the Corporate Income Tax Code, in the assessment relating to the taxation period mentioned in the preceding number.

4 - Expenses which, due to insufficiency of collection, cannot be deducted in the year in which they were incurred may be deducted up to the sixth immediately following year.

(…)

Article 5º

Conditions

Only the IRC taxpayers which cumulatively meet the following conditions may benefit from the deduction referred to in Article 4º:

a) Their taxable profit is not determined by indirect methods;

b) They are not in debt to the State and to social security for any taxes or contributions, or have their payment duly guaranteed.

In the case at hand, the Tax and Customs Authority does not question that the Claimant meets the subjective and objective requirements to benefit from SIFIDE, having dismissed the administrative appeal because it understands that the expenses in question cannot be deducted from the amounts paid by way of autonomous assessments, because the deduction can only be made from the IRC collection resulting from the application of the IRC rate to the taxable profit.

As mentioned, Article 90º of the CIRC also refers to the assessment of autonomous assessments.

And, as also stated, there is no legal support for affirming that, in the event that several calculations have to be made in a declaration to determine the IRC, more than one self-assessment is carried out.

The legislation which approved SIFIDE does not state that the credits arising from it are deductible from any and all IRC collection; rather, it defines the scope of the deduction by alluding, in its no. 1 of Article 4º, to "the amount computed under the terms of Article 90º of the Corporate Income Tax Code, and to the extent thereof".

No. 3 of the same Article 4º confirms that it is the amount which will be computed under the terms of Article 90º of the CIRC which is relevant to implement the deduction by stating that "the deduction is made, in accordance with Article 90º of the Corporate Income Tax Code, in the assessment relating to the taxation period mentioned in the preceding number".

Thus, by mere declarative interpretation, it is concluded that Article 4º, no. 1, of SIFIDE II, by establishing the deduction to "the amount computed under the terms of Article 90º of the Corporate Income Tax Code, and to the extent thereof", implies the deduction from the amount of the autonomous assessments which are computed under the terms of that Article 90º.

Furthermore, it cannot be seen, in the eventual nature of anti-abuse norms which assume some autonomous assessments (footnote 1), an explanation for their removal from the respective collection from the scope of deductibility of the benefit of SIFIDE II, for there is no legal support for removing the deductibility from the collection provided by corrections based on norms of an indisputably anti-abuse nature, such as, for example, those relating to transfer pricing or undercapitalization.

On the other hand, the fact that the deductibility of the SIFIDE II tax benefit be limited to the collection of Article 90º of the CIRC, to the extent thereof, does not permit concluding that the tax credit can only be deducted if there is taxable profit, for what that fact requires is that there be IRC collection, which can exist even without taxable profit, namely by virtue of the autonomous assessments.

Thus, pointing to the literal tenor of Article 4º of SIFIDE II to the effect that the deduction applies also to the IRC collection derived from autonomous assessments computed under the terms of Article 90º of the CIRC, it is only by means of a restrictive interpretation that the application of the tax benefit to the IRC collection provided by autonomous assessments could be excluded.

The viability of a restrictive interpretation encounters, from the outset, a general obstacle, which is that norms which create tax benefits have the nature of exceptional norms, as flows from the express tenor of Article 2º, no. 1, of the Tax Benefits Statute (EBF), whereby, in the absence of a special rule, they must be interpreted in their precise terms, as is established jurisprudence. (footnote 2) In the case of tax benefits, explicitly provided for is the possibility of extensive interpretation (Article 10º of the EBF), but not of restrictive interpretation, whereby, as a rule, the tax benefit should not be interpreted with less amplitude than that which, in a declarative interpretation, results from the tenor of the norm which provides for it.

In any case, a restrictive interpretation is only justified when "the interpreter reaches the conclusion that the legislator adopted a text which betrays its thought, insofar as it says more than that which it intended to say. Also here the ratio legis will have a decisive word. The interpreter should not allow itself to be drawn by the apparent scope of the text, but should restrict it so as to render it compatible with the legislative thought, that is, with that ratio. The argument upon which this type of interpretation rests is usually expressed thus: cessante ratione legis cessat eius dispositio (where the reason for being of the law ends, its scope ends)" (footnote 3).

As a basis for a restrictive interpretation could be ventured the fact that some autonomous assessments aim to dissuade certain behaviors of taxpayers susceptible of affecting the taxable profit and, consequently, of diminishing the tax revenue, and its dissuasive force will be attenuated with the possibility of the respective collection being subject to deductions.

But, the dissuasion of those behaviors is justified only by the concerns of protection of tax revenue and the tax benefits granted, by definition, are "measures of an exceptional character instituted for the protection of relevant extrafiscal public interests which are superior to those of the taxation they prevent" (Article 2º, no. 1, of the Tax Benefits Statute (EBF).

And, in the case of the SIFIDE II tax benefits, the reasons of an extrafiscal nature which justify their taking precedence over tax revenues are, from the legislative perspective, of enormous importance, as is inferred from the justification in the Report on the State Budget for 2011:

3.2.1 - System of Fiscal Incentives for Research and Business Development II (SIFIDE)

Considering that one of the assets of competitiveness in Portugal is through the commitment to technological capacity, scientific employment and the conditions for assertion in European space, SIFIDE (System of Fiscal Incentives for Research and Business Development), now in the version SIFIDE II, to be in force in the periods 2011 to 2015, enables the deduction from the IRC collection for companies that invest in R&D (research and development capacity). Being research and development of companies "a decisive factor not only of their own affirmation as competitive structures, but of productivity and economic growth in the long run", it is understood that preference has been given to the incentive of the commitment to technological capacity, scientific employment and the conditions for assertion in European space, which, in the long term are reduced to the obtaining of greater tax revenues.

The importance which, from the legislative perspective, was recognized to this tax benefit provided for in SIFIDE II, is decisively confirmed by the fact that it is indicated as being specially excluded from the general limit on the relevance of tax benefits in IRC, which is indicated in Article 92º of the CIRC (result of the assessment).

Therefore, it is certain that one is dealing with tax benefits whose justification is legislatively considered more relevant than the obtaining of tax revenues, being inferred from that Article 92º that the legislative intention to incentivize the investments in research and development provided for in SIFIDE II is so firm that it goes to the point of not even establishing any limit on the deductibility of the IRC collection, despite this tax regime having been created and applied in a period of notorious difficulties in public finances.

Thus, there is no legal basis, namely in light of the legislative intention which it is possible to detect, for, on the basis of a restrictive interpretation, excluding the deductibility of the SIFIDE II tax benefit from the collection of the autonomous assessments which results directly from the letter of Article 4º, no. 1, of the respective legislation, combined with Article 90º of the CIRC.

On the other hand, the eventual limitation of the application of the tax benefit to companies which presented taxable profit in 2013 would amount to a very strong restriction of its field of application, since, as is a public fact, the great majority of companies, in that year and in earlier years, presented tax losses, although it paid IRC by other means.

In fact, according to statistics published by the Tax and Customs Authority, in the year 2011 (the last year whose data would be available when the Proposal on the State Budget for 2012 was presented, therefore, it is to be supposed that it was considered in the consideration of the scope of the tax benefit), more than half of the IRC declarations presented negative net value and in the taxation period of 2011 only 26% of taxpayers presented Assessed IRC (Table 7), and about 71% of taxpayers made IRC payments (Table 8), by way of Special Payment on Account, or other positive components of the tax (Autonomous Assessments, Municipal Surcharge, State Surcharge, IRC from earlier taxation periods, etc.).

Therefore, it is manifest that the applicability of the tax benefit to companies which, although presenting tax losses, paid IRC, including by way of autonomous assessments, very much broadened the number of companies potentially beneficiary and, consequently, is more compatible with the legislative intention underlying SIFIDE II than that defended by the Tax and Customs Authority.

On the other hand, as mentioned, one cannot ignore that autonomous assessments aim to protect or increase tax revenues and that the tax benefits granted are, by definition, "measures of an exceptional character instituted for the protection of relevant extrafiscal public interests which are superior to those of the taxation they prevent" (Article 2º, no. 1, of the EBF).

That is, in the case at hand, in establishing a tax benefit by deduction from the IRC collection, the legislator chose to dispense with the tax revenue which this tax could provide, to the extent of the granting of the tax benefit. For this consideration relative to the interests at stake (tax revenue versus strong incentive for investment) it is immaterial whether that revenue comes from calculations made on the basis of Article 87º or Article 88º of the CIRC.

In fact, whatever the form of calculation of that tax revenue, one is dealing with money the collection of which the legislator considered to be less important than the pursuit of the economic objective referred to. Of the two alternatives which presented themselves to the legislator regarding the incentive for the investments provided for in SIFIDE II, which were, on the one hand, maintaining intact the revenues from IRC (including those from autonomous assessments) and not seeing the incentive for investment realized, and, on the other hand, realizing that incentive with loss of IRC revenues, the consideration which necessarily underlies SIFIDE II is the option for the creation of the incentive with prejudice to revenues. And, naturally, the creation of the incentive for investment being better, from the legislative perspective, than the collection of revenues, it is not apparent how it could be relevant whether the IRC revenues which are foregone to realize the incentive come from the general taxation of IRC provided for in no. 1 of Article 87º or from special rate taxation provided for in nos. 4 to 6 of the same Article, or from autonomous assessments provided for in Article 88º: in all cases, the alternative is the same, between creation of the incentive and collection of IRC revenues and the relative consideration which can be made of the conflicting interests is identical, whatever the forms of determining the amount of IRC of which one dispenses to create the incentive.

And, in the case of the SIFIDE II tax benefit, the reasons of an extrafiscal nature which justify the incentive with loss of revenue are very strong, for it is considered that the investments incentivized are a decisive factor in the future competitiveness of the country.

Therefore, it is certain that one is dealing with a tax benefit whose justification is legislatively considered more relevant than the obtaining of tax revenues from IRC, whatever the basis of its calculation, for what is at stake is always to dispense or not with a certain amount of money to create an incentive for investment.

In this context, the nature of autonomous assessments and the solutions legislatively adopted, in general, regarding them, have no relevance whatsoever for the appraisal of this question, for it must be appraised in light of the specific interests which in its consideration are in conflict.

In fact, what is at stake is, exclusively, to determine the scope of SIFIDE II, which establishes a regime of an exceptional nature, which aimed to pursue certain public interests, and not to contribute to the decision of any conceptual question concerning the nature of autonomous assessments, a matter on which neither in the text of the law, nor in the Report on the Budget for 2011, is the least legislative concern apparent.

For the same reason that what is at stake is to interpret the scope of the legislation of an exceptional nature which is SIFIDE II, relevance cannot be attributed, for this purpose, to the norm of no. 21 of Article 88º of the CIRC, added by Law no. 7-A/2016, of 30 March, in the part in which it refers that there are not "made any deductions from the global amount computed", despite the alleged interpretive nature which has been attributed to it.

In fact, there is no sign, neither in Law no. 7-A/2016, nor in the Report on the Budget for 2016, nor in its discussion, that with the addition to Article 88º of the CIRC of a general norm prohibiting deductions from the global amount computed of autonomous assessments, it was intended to restrictively interpret the expression "deduct from the amount computed under the terms of Article 90º of the Corporate Income Tax Code" which appears in a special provision of a separate legislation, such as SIFIDE II.

And, in the absence of an unequivocal intention to the contrary, the rule applies that general law does not alter special law (Article 7º, no. 3, of the Civil Code), which has its justification in the fact that "the general regime does not include the consideration of the particular conditions which justified precisely the emission of the special law". (footnote 4)

Furthermore, the said rules of SIFIDE II aim to incentivize IRC taxpayers to make investments in the period between 01-01-2011 and 31-12-2015, whereby, being the tax benefit a consideration for the adoption of the legislatively desired and incentivized behavior, it would be incompatible with the constitutional principle of trust, inherent in the principle of the democratic state of law (Article 2º of the CRP), not to recognize to those behaviors the favorable tax effects provided for in the law in force at the moment when they occurred. Therefore, if, hypothetically, Law no. 7-A/2016 intended to eliminate, wholly or partially, the favorable tax effects which SIFIDE II promised to taxpayers who, with justified trust, adopted the behavior provided for therein, it would be materially unconstitutional, by violation of that principle.

By the foregoing, converging the literal and rational elements of the interpretation of Article 4º of SIFIDE II to the effect that the investment expenses therein provided for are deductible from "the amount computed under the terms of Article 90º of the Corporate Income Tax Code, and to the extent thereof", it is to be concluded that they are deductible from the entirety of that collection, which encompasses, beyond that derived from the taxation of profits in each fiscal period, autonomous assessments, state surcharge and IRC from earlier taxation periods.

Accordingly, the request for arbitral pronouncement proceeds as to this question.

Compensatory Interest

Beyond the reimbursement of the improperly paid tax, the Claimant seeks that a declaration be made of the right to payment of compensatory interest.

This right is enshrined in Article 43º of the General Tax Law, which has as its prerequisite that it be determined, in administrative appeal or judicial challenge - or in tax arbitration – that there was error attributable to the services from which results payment of the debt in an amount greater than that legally due.

The recognition of the right to compensatory interest in the arbitral process results from the provision in Article 24º, no. 5 of the RJAT.

In the case at hand, error attributable to the Tax Authority in the assessment in dispute did in fact occur, in dismissing the administrative appeal (preliminary) presented by the Claimant.

Whereby the Claimant is entitled to the requested payment of compensatory interest.

IV. DECISION

Now therefore this Arbitral Tribunal agrees to rule entirely in favor of the request for arbitral pronouncement and, in consequence,

  1. Declare the illegality of the act which decided the administrative appeal submitted by the Claimant;

  2. Annul the act of self-assessment impugned;

  3. Condemn the Tax Authority to the payment of compensatory interest, calculated on € 501,759.05, from one year after submission of the administrative appeal request until reimbursement, at the supplementary legal rate, in accordance with the terms of Articles 43º, nos. 1, and 35º, no. 10 of the General Tax Law, 24º, no. 1, of the RJAT, 61º, nos. 3 and 4, of the CPPT, 559º of the Civil Code and Regulation no. 291/2003, of 8 April (or such other Regulation(s) as may alter the legal rate);

  4. Condemn the Tax Authority to the costs of the proceedings.

V. VALUE OF THE CASE

The value of the case is fixed at € 501,759.05, in accordance with Article 97º-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of no. 1 of Article 29º of the Legal Regime for Arbitration in Tax Matters and of no. 2 of Article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

Pursuant to Article 22º no. 4 of the RJAT and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 7,956.00.

Notify.

Lisbon, 1 June 2017.

The Arbitrator-President

(José Baeta de Queiroz)

The Arbitrator-Member

(António Alberto Franco)

The Arbitrator-Member

(Fernando de Jesus Amado dos Santos)

(1) Currently only with regard to some autonomous assessments can the nature of anti-abuse norms be found, for, as teaches CASALTA NABAIS, Tax Law, 7th edition, page 543, "it is, however, evident that the broadening and aggravation of such autonomous assessments have presently a clear purpose of obtaining more tax revenues".

(2) In this sense, see the decision of the Supreme Administrative Court of 15-11-2000, case no. 025446, published in the Bulletin of the Ministry of Justice no. 501, pages 150-153, in which abundant jurisprudence of the Supreme Administrative Court and the Supreme Court of Justice is cited.

This Bulletin of the Ministry of Justice is available at:

http://www.gddc.pt/actividade-editorial/pdfs-publicacoes/BMJ501/501_Dir_Fiscal_a.pdf

(3) BAPTISTA MACHADO, Introduction to Law and the Discourse of Legitimation, page 186.

(4) OLIVEIRA ASCENSÃO, Law – Introduction and General Theory, page 260.

Frequently Asked Questions

Automatically Created

How is the international double taxation credit calculated under Article 91 of the IRC Code?
Under Article 91 of the IRC Code, the international double taxation credit is calculated as the lesser of: (a) the foreign tax actually paid, or (b) the fraction of Portuguese IRC corresponding to income taxable in the source country, calculated before deduction. The fraction is determined by applying the Portuguese tax rate to the net income (after expenses) derived from the foreign source. This credit mechanism prevents double taxation when Portuguese companies earn income abroad that is taxed both in the source country and Portugal.
Can double taxation conventions override domestic IRC rules on tax deduction limits?
Yes, Double Taxation Conventions (CDT) can override domestic IRC rules as they constitute international treaties with hierarchical superiority over ordinary domestic legislation. However, the scope of this override is contested. While claimants argue CDT provisions allow broader tax credit calculations based on gross income, tax authorities maintain that CDT implementation must harmonize with international accounting standards requiring net income calculations. Portuguese courts generally recognize CDT supremacy but interpret provisions consistently with the overall tax system's coherence and the CDT's purpose of eliminating—not aggravating—double taxation.
What is the procedure to challenge an IRC self-assessment through tax arbitration at CAAD?
To challenge an IRC self-assessment through CAAD arbitration, taxpayers must: (1) file a request for arbitral tribunal constitution under Decree-Law 10/2011 (RJAT) and Article 102 CPPT within the legal deadline; (2) identify the contested assessment act and grounds for illegality; (3) optionally appoint an arbitrator or allow the CAAD Ethics Council to designate the arbitral panel; (4) await notification of arbitrator appointments (parties can raise impediments); and (5) participate once the tribunal is constituted. The process offers an alternative to judicial court appeals, with specialized arbitrators deciding tax disputes with binding effect.
How do autonomous taxations interact with international double taxation relief in Portugal?
Autonomous taxations under Article 90 CIRC are separate IRC assessments on specific expenses (company cars, gratuitous transfers, etc.) calculated independently from profit-based IRC. Regarding international double taxation relief, the key issue is whether these autonomous assessments benefit from foreign tax credits or tax benefit deductions. The Tax Authority argues autonomous assessments serve distinct policy purposes unrelated to profit, maintaining conceptual separation from the main IRC calculation. Consequently, international tax credits under Article 91, designed to relieve double taxation on profit-generating income, do not apply to autonomous assessments, which tax domestic expenses regardless of their connection to foreign-sourced income.
What fiscal benefits deductions apply to IRC when income is taxed in countries like Brazil, Greece, and Algeria?
For fiscal benefits deductions when income is taxed in countries like Brazil, Greece, and Algeria, the application depends on the benefit type and assessment category. Investment tax benefits (SIFIDE - R&D tax credit, RFAI - investment tax relief) traditionally deduct from IRC calculated on profit under Article 87-88 CIRC rates. The dispute centers on whether these benefits can also reduce autonomous IRC assessments. Tax authorities contend that investment benefits must maintain conceptual coherence with profit-based objectives, limiting deductions to the profit-related IRC component. The foreign tax credit under Article 91 and CDT provisions operates separately, crediting actual foreign withholding taxes against the Portuguese tax attributable to foreign-source income, subject to limitations ensuring the credit does not exceed Portugal's taxable claim on that income.