Process: 568/2015-T

Date: May 16, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

Arbitral Decision 568/2015-T addressed a Corporate Income Tax (IRC) dispute concerning the interioridade tax benefit under Article 43 of the Tax Benefits Statute (EBF). The claimant, a hydroelectric energy producer, initially declared entitlement to a reduced 15% IRC rate for 2010, claiming its registered office qualified for the inland areas benefit. However, the Tax Authority's registry system showed the company's registered office and effective management were located in Porto. Following AT's challenge, the company filed a substitute declaration in April 2014 without claiming the benefit, resulting in additional assessment 2014 for €29,683.88 plus €3,441.82 in compensatory interest. The claimant argued the assessment expired under Articles 45(2)-(4) of the General Tax Law (LGT) and alternatively that it legitimately qualified for the benefit. The AT raised a procedural defense of untimeliness, arguing the arbitration request filed September 1, 2015 exceeded the 90-day deadline. The tribunal found that in 2010 the claimant's registered office was indeed in Porto, and it was not proven that effective management was elsewhere or that this could be detected from Form 22. Key issues included the implicit request doctrine, whether the deadline ran from the assessment date or gracious complaint dismissal, the burden of proof for tax benefits falling on the taxpayer, and whether evident errors in declarations justify reducing compensatory interest. The decision examined whether both registered office and effective management must be in inland areas to qualify for the Article 43 EBF rate reduction.

Full Decision

ARBITRAL DECISION

Report

A…, Ltd., NIPC…, with registered address at Av…, no. …, in…, filed a request for arbitral award pursuant to articles 2, no. 1, and 10, of the Legal Framework for Tax Arbitration approved by Decree-Law no. 10/2011, of 20 January (RJAT), as amended by Law 66-B/2012, seeking the annulment of the assessment of Corporate Income Tax (IRC) relating to the year 2010, in the amount of €29,683.88 (twenty-nine thousand, six hundred and eighty-three euros and eighty-three cents) and compensatory interest.

This request was filed with the Administrative Arbitration Center (CAAD) on 1 September 2015.

The Tax and Customs Authority (AT) is the respondent.

The claimant did not appoint an arbitrator. For this purpose, the President of the Deontological Council of the Administrative Arbitration Center appointed the undersigned, who expressly accepted this appointment. The parties were duly notified of this appointment and did not express any intention to refuse it.

The arbitral tribunal was thus constituted on 17 November 2015.

The AT attached the administrative case file and timely submitted its response, therein raising a plea of untimeliness of the request and, in the alternative, contesting the same request, upholding the legality of the tax act in question, with the corresponding total dismissal of the request and the consequent absolution of the respondent.

The meeting referred to in article 18 of the RJAT took place in due course and thereat the parties had the opportunity to pronounce themselves on that plea.

The parties submitted written arguments, with the claimant expressly responding to the aforementioned plea.

The Tribunal was duly constituted and is materially competent.

The parties have legal personality, procedural capacity, and are properly interested.

The proceedings are free from nullities.

Request and Position of the Parties

The claimant's request is based, first, on the alleged expiration of the tax act (article 45, nos. 2, 3, 4 of the LGT) and, in the alternative, on a defect consisting of violation of law, in that the rate reduction provided for in article 43 of the EBF was not applied to the IRC assessment in question. Alternatively, it petitions for a reduction in the period for calculating compensatory interest and its amount. Finally, it also petitions for indemnity interest.

The respondent defends itself by plea (untimeliness of the request) and also by substantive defense (in 2010 the claimant had its registered office and effective management in Porto).

Factual Matter

The following factual circumstances have been proven in the present proceedings, relevant to the decision of the case:

  1. In 2010 the claimant was engaged in the activity of producing electricity from hydroelectric sources.

  2. On the last day of the year 2010, the AT's System of Management of Registry of Taxpayers showed that its registered office and effective management were located at Rua…, … –…., …, …-… Porto.

  3. In that year it was there that its registered office was located.

  4. The claimant's tax year corresponds to the calendar year.

  5. On 20 May 2011, the claimant filed Form 22 (IRC Declaration) for the 2010 tax year.

  6. In the corresponding field 02 it stated that its registered office was located in….

  7. The claimant also declared, in field 245 of field 08 of that Form 22, the application of the rate reduction resulting from the tax benefit for inland areas provided for in article 43 of the Tax Benefits Statute (EBF).

  8. This declaration gave rise to the issuance of assessment 2011…, dated 22 December 2011.

  9. The claimant was notified, in accordance with the principle of cooperation, to submit a substitute declaration, because, allegedly, it did not meet the requirements to benefit from the application of the reduced rate of 15% that it had declared in said Form 22.

  10. The claimant accordingly proceeded to file a substitute declaration for the 2010 tax year, doing so on 23 April 2014.

  11. In this new declaration, in the corresponding field 02, it is stated that the claimant's registered office was located in…, and field 08 concerning the rate reduction was not completed.

  12. The filing of that substitute declaration resulted in the issuance of assessment no. 2014… for the year 2010, dated 23 April 2014.

  13. From this assessment results, with corresponding compensatory interest, an amount payable of €33,125.70 (thirty-three thousand, one hundred and twenty-five euros and seventy cents).

  14. The expiration of the corresponding voluntary payment period occurred on 11 July 2014.

  15. That amount was paid within the voluntary payment period.

  16. On 14 August 2014, the claimant submitted a gracious complaint against the assessment no. 2014… referred to above.

  17. This complaint was entirely dismissed by a decision dated 8 May 2015.

  18. This dismissal was notified to the claimant by means of registered mail with return receipt requested.

  19. The corresponding receipt was signed on 14 May 2015.

  20. Following that dismissal and its notification, the claimant filed the present request for arbitral award.

  21. This is directed against the additional assessment referred to above.

  22. In conclusion, the claimant petitions for the annulment of the "tax act subject to the present tax arbitral proceedings, relating to IRC/2010 and respective interest" and that the AT be ordered to return the tax paid increased by indemnity interest and, in the alternative, that the compensatory interest assessment be corrected to the amount of €585.00.

The following factual matter was not proven, which would be relevant to the decision of the case: that in 2010 the claimant had its effective management in a location different from that of its registered office, located in the city of Porto, nor that this fact could be detected by mere analysis of the Form 22 for the tax year.

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

The proven facts are based on the documents provided by the parties, their statements, and the administrative case file, whose correspondence to reality is not contested.

Legal Matter

As stated, the respondent begins by defending itself by plea, so it is appropriate to begin the analysis precisely with this plea.

The Plea Raised by the AT (Untimeliness of the Request) – The Request, the Cause of Action, and the Implicit Request

Regarding the Request

The object of the claimant's request for arbitral award consists of the "(self-)assessment of IRC (note no. 2014…), for the year 2010, (€29,683.88) and respective interest, (€3,441.82)". Furthermore, expressly and explicitly, the claimant "did not formulate/specify to the arbitral tribunal, in its initial petition, any request aimed at the annulment of the express dismissal of the gracious complaint submitted".

However, in the preamble of the Initial Petition the claimant states that it presents the request having been "… notified … of the dismissal … of the gracious complaint …" and in number two of the same procedural document makes a new reference to the dismissal of the Gracious Complaint ("… as already referenced in the Dismissed Complaint …").

Regarding Binding to the Request

It is well known that, as the respondent correctly emphasizes, article 10 of the RJAT establishes, for assessment or self-assessment acts, a period of 90 (ninety) days to file the request for arbitral award, and that the moment the counting of that period begins results, by reference, from the provisions of article 102, nos. 1 and 2 of the CPPT.

Now, if we consider that said 90-day period would have begun at the end of the voluntary payment period of the IRC assessment no. 2014…, which occurred on 11 July 2014, then the request to constitute the arbitral tribunal on 1 September following would be untimely, as having been submitted, in the words of the AT, "long after the expiration of the aforementioned 90-day period that the claimant had available for this purpose".

And this untimeliness finds foundation, for the AT, in the absence of any request formulated or specified to the arbitral tribunal in the claimant's initial petition, aimed at the annulment of the second-level act reflected in the express dismissal of the gracious complaint submitted. For the AT, the arbitral tribunal is, moreover, prevented from overcoming this supposed lacuna in the cause of action and the request, and it is therefore incumbent upon it to recognize the untimeliness of what is petitioned (given the principle of binding to the request - article 576, nos. 1 and 3 of the CPC).

In support of this thesis it cites Jorge Lopes de Sousa, the Guide to Tax Arbitration, Almedina, 2013, pages 121 and 122, and the Tax Procedural and Process Code, Annotated and Commented, Áreas Editora, 6th Edition, Volume II, 2011, p. 319 and also José Lebre de Freitas, Annotated Code of Civil Procedure, Coimbra Editora, Volume 2, 2nd Edition, pp. 681 and 682; as well as various jurisprudence (Arbitral Awards from proceedings nos. 261/2013-T, 38/2015-T, 55/2015-T and the Awards from the Supreme Administrative Court of 2007-05-07, process no. 0358, and the Supreme Court of Justice no. 9/2015 - DR 1st series, no. 121 of 24 June 2015).

Regarding the Claimant's Understanding

The claimant contends that in its Initial Petition it contests the dismissal of the Gracious Complaint (which would be the immediate object of the request) and therefore the assessment (only mediately), adding that if this is not explicit, it should always be considered that it is so under the concept of "implicit request", under pain of excessive and unsuitable formalism.

Along these lines it invokes the Awards of the STA of 27 May 2015, of 7 January 2016 (in process 1265/13), of 16 April 2008 (in appeal 51/08), of 4 February 2009 (in process 925/08), of 11 February 2009 (in appeal 924/08), and of 7 July 2010 (in appeal 366/10).

Regarding the Useful Effect of the Request

The two (scarce, certainly) references to the dismissal of the Gracious Complaint made in the petition cannot (nevertheless) leave any doubt that the claimant intends to react against the dismissal of that Complaint and that this reaction derives from understanding that the defect of the first-level act remains, which was not remedied by the second-level act, a defect that is therefore communicated to the second-level act that the claimant clearly identifies. In effect, where a first-level act is illegal, the second-level act that confirms it without more, as happens in the case at hand, will always suffer from the same defect of the first.

That is, given that the second-level act wholly adhered to the first, the claimant does not intend to attribute to it any defect other than that adherence, precisely for the reasons for which it contests the validity of the first-level act. For which reason, possibly for reasons of economy, it limits itself to reiterate the defects it perceives in the first-level assessment act. Precisely the act that had been the subject of the gracious complaint and whose dismissal triggered the arbitral request. This is because, not remedying the defect of the first-level act, but rather maintaining it unaltered in the legal order, the act confirming this ends up suffering from the same defect.

But this means concluding that one should consider that the claimant contests (immediately) the second-level act and, mediately, the first-level act. Moreover, no other understanding could be given to the request (and the cause of action) of the claimant. Its near silence regarding the dismissal act (but, nonetheless, being mentioned by it expressly twice) can only be understood as conceding that this, by itself, does not suffer from any autonomous or additional defect, beyond the defects already attributed to the first-level act in question (additional IRC assessment relating to the year 2010 confirmed by the dismissal of the Gracious Complaint) and its maintenance in the legal order.

To understand otherwise would be to elevate total and absolute procedural formalism to a central rule of the arbitral process, in direct contradiction with its purpose. It being certain that said intention of the claimant clearly flows from the formulation of the initial petition.

And this understanding in no way conflicts with the principle of due process, since the respondent was able to sustain the validity of both acts (first and second levels). Quite the contrary, a different understanding would completely annul, in this case, the principle of effective judicial protection.

For this reason the plea of untimeliness raised by the respondent is judged to be unfounded.

Evident Error in the Declaration and Expiration of Rights

The claimant contends that "given an evident error in the declaration … expiration of the right to assess occurred on 31.12.2013, (which in this case is reduced to 3 years in accordance with nos. 2 and 4 of article 45 of the LGT)".

As was seen, in the first Form 22 (IRC Declaration) relating to the 2010 tax year the claimant indicates having its registered office or effective management in…, subsequently applying, for that reason, the reduced IRC rate corresponding to the inland areas regime.

However, it is manifest that if this does not correspond to reality, the detection of this discrepancy between what was declared and reality will never result, solely, from mere analysis of the income declaration submitted. In fact, for that conclusion it will always be necessary to identify the location of the registered office or effective management contained in the entry in the corresponding commercial registry (as regards the registered office), or analyze the facts and circumstances of the concrete case to conclude about the location of real exercise of management and administration of the company (as regards the location of effective management). In this regard, it is important to note that the location of effective management is not confused with the location of exercise of activity (production of electricity from hydroelectric source). In effect, effective management corresponds to the location where the business activity is managed, where the most important decisions of the company's life are taken. In short, where administration exercises its activity, which will frequently coincide with the location of exercise of the company's activity, but not always so.

In this case, then, it is a matter of knowing whether there is a discrepancy between reality and what is mentioned in the income declaration regarding the location of the company's effective management. And that possible confirmation or infirmation of that possible discrepancy could never result from simple analysis of the elements contained in that declaration.

It does not appear therefore that article 45, no. 2 of the LGT can be invoked with the consequent expiration of the right to assess. Correctly, regarding the interpretation of the concept of evident error in the declaration, the respondent cites Diogo Leite Campos, Benjamin Silva Rodrigues and Jorge Lopes de Sousa, who understand that such error encompasses, only, the error "detectable by simple analysis of the declaration" (cf. General Tax Law, Commented and Annotated, Vislis Editores, 3rd Edition, 2003, p. 208) and Lima Guerreiro who also understands by evident error in the declaration for purposes of that norm, only "the error that the AT can detect by mere examination of the coherence of its elements, without recourse to any other external documentation, even when this is in the possession of the tax administration, and obtained by internal or external inspection or by means of any other nature" (General Tax Law, Annotated, Rei dos Livros, Note 2 to article 45, p. 214). With the same purpose, the respondent also cites the Award rendered in process no. 01001/09, of 28 April 2010.

Thus, the applicable expiration period is the normal period of 4 years (article 45, no. 1 of the LGT), it being certain that the assessment was made and notified within that period.

The claimant therefore has no merit in this respect, so the request for annulment of the tax act in question on the grounds of untimeliness of the assessment, due to expiration of the corresponding right, is dismissed.

Tax Benefit (Inland Areas) – Burden of Proof

In 2010, article 43, no. 1 of the EBF then provided that enterprises "which directly and principally engage in an economic activity of an agricultural, commercial, industrial or services nature in inland areas, hereinafter referred to as 'beneficiary areas', are granted the following tax benefits: a) The IRC rate provided for in no. 1 of article 80 of the respective Code is reduced to 15%, for entities whose principal activity is located in the beneficiary areas" and no. 7 of the same article provided that the "definition of the criteria and delimitation of the beneficiary territorial areas, in accordance with the preceding number, as well as all the regulatory norms necessary for the proper implementation of this article, shall be established by ministerial order of the Minister of Finance". Decree-Law no. 55/2008 had carried out this regulation, determining "the conditions for access of beneficiary entities, the entities responsible for granting the incentives, the obligations to which the beneficiary entities are subject, as well as the consequences in case of non-compliance".

By no. 2 of article 2 of that Decree-Law it was considered that "the principal activity is located in the beneficiary areas when the subjects have their registered office or effective management in those areas and more than 75% of their respective payroll mass is concentrated there". In turn, article 6, no. 1, of the same Decree-Law established that for this purpose "are considered as beneficiary territorial areas for facts occurring in 2007 and 2008, those which are identified in Order no. 1467-A/2001, of 31 December", adding in its no. 2 that "For subsequent years, it is incumbent upon the Minister of Finance, together with the members of the Government responsible for the areas of local authorities and regional development, to regulate by order the beneficiary territorial areas, which shall be identified on the basis of the indicators defined in this decree-law, constructed with the latest statistical data made available by the National Institute of Statistics".

Finally, for the 2010 tax year, the regions covered by incentives for inland areas were defined in the annex to Order no. 1117/2009, of 30 September. And in that list the Municipality of Porto was not included, where the claimant had its registered office on 31 December 2010, more specifically at Rua…, … –…., …, -…-… Porto.

Nevertheless, the claimant mentioned in Form 22 (IRC Declaration) for the 2010 tax year that its registered office was located in…. This is because "despite its registered office being located, in 2010, in the city of Porto, it was in the municipality of … that it had (and has) its effective management and developed (develops) all of its activity".

As has already been said, it is irrelevant to know where the claimant was developing its activity, but rather to conclude where it had its effective management. It happens that notwithstanding the claimant having transferred its registered office to … in 2011 and invoking that it already had its effective management there in 2010, it adduces no proof in that regard.

However, according to article 74, no. 1 of the LGT, the "burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers rests upon whoever invokes them", which is consistent with the provisions of no. 1 of article 342 of the Civil Code which determines that "it is upon the one who invokes a right" that "it falls to prove the constitutive facts of the alleged right", adding further in no. 2 of the same article that the "proof of the facts that impede, modify or extinguish the invoked right is incumbent upon the one against whom invocation is made".

In this sense, the Award of the TCA South, process no. 08350/15, of 19-03-2015, correctly cited by the respondent, concludes that "Tax benefits, as measures of an exceptional character instituted for the protection of extra-fiscal public interests significantly superior to the taxation to which they constitute an obstacle, are, from the perspective of the tax legal relationship, facts which, being subject to taxation, are preventative of the birth of the tax obligation or, at least, of it arising in its fullness, so that their cessation or lack of application prerequisites has as an immediate effect the automatic restoration of that same taxation (cf. articles 2, no. 1 and 12, no. 1 of the Tax Benefits Statute)", for which reason "It is incumbent upon the passive subject of the tax, by virtue of the provisions of article 74, no. 1 of the General Tax Law, to prove the prerequisites for subjection to the regime of a particular tax benefit, as a preventative fact of the rule taxation", concluding that "not having the appellant succeeded in demonstrating that certain income resulted effectively from applications realized abroad, it cannot claim to see applied to it, even if it existed, a tax benefit which in that alleged origin was supported".

Now, the claimant alleges that the exercise of management and the meetings and most important decisions of the company's life took place in…, with the registered office being a mere convenience post office box. However, it alleges it, but does not demonstrate it, when such was incumbent upon it in accordance with the aforementioned division of the burden of proof, for which reason "it cannot claim to see applied to it … a tax benefit which … was supported", precisely in the location of its effective management.

This is sufficient for the request to be dismissed in this respect, which is decided.

Evident Error in the Declaration and Compensatory Interest

For the eventuality of the request being dismissed, the claimant alleges that the compensatory interest is incorrectly calculated, because it could not be counted for more than 180 days, given that the error is evident in the declaration.

However, as has already been seen, the error giving rise to the assessment is not evident in the declaration, contrary to what the claimant alleges.

For which reason the request of the claimant must also be dismissed in this respect.

Indemnity Interest

Given that all requests of the claimant are dismissed as unfounded, there are no grounds for attributing to the respondent any responsibility for proceeding with the payment of indemnity interest.

Conclusion

In these terms, the tax act in question does not suffer from any of the defects attributed to it, and should remain unaltered in the legal order.

Operative Part

As a result of the foregoing, it is decided to judge the plea of untimeliness of the petition completely unfounded and to dismiss, as not proven, the requests for annulment of the tax act relating to IRC and corresponding compensatory interest, whether on the grounds of expiration of the right to assess, or on the grounds of defect consisting of violation of law (principal request), or on the grounds of excess in the period for calculating compensatory interest (subsidiary request), the respondent being consequently absolved of all requests.

Value

The assessment which is the object of the request (IRC and compensatory interest) amounts to the total value of €33,125.70, which is therefore the value of the action and of the request.

Accordingly and in harmony with the provisions of articles 306, nos. 1 and 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the said value of €33,125.70 (thirty-three thousand, one hundred and twenty-five euros and seventy cents) is fixed as the value of the proceedings.

Costs

Pursuant to article 22, no. 4, of the RJAT, the amount of costs is fixed at €1,836.00 (one thousand, eight hundred and thirty-six euros), in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, entirely at the charge of the claimant.

Lisbon, 16 May 2016

Text prepared by computer, in accordance with the Code of Civil Procedure (CPC), applicable by reference to article 29, no. 1, paragraph e) of the RJAT, with blank lines, reviewed and signed by the undersigned arbitrator.

The Arbitrator

(Jaime Carvalho Esteves)

Frequently Asked Questions

Automatically Created

What is the IRC Interioridade tax benefit under Article 43 of the EBF and how does it reduce corporate tax rates?
The IRC Interioridade tax benefit under Article 43 of the Tax Benefits Statute (EBF) is a fiscal incentive designed to promote economic development in Portugal's inland regions. It provides a reduced Corporate Income Tax rate of 15% (compared to the standard rate) for qualifying companies. To benefit from this reduced rate, a company must have both its registered office (sede) and effective management located in designated inland areas. In Case 568/2015-T, the claimant, a hydroelectric energy producer, initially declared this benefit for the 2010 tax year in field 245 of field 08 of Form 22. However, the Tax Authority challenged this claim because its registry system showed the company's registered office and effective management were in Porto, which is not an inland area. The benefit significantly reduces tax liability but requires strict compliance with geographical location requirements.
When does the right to assess IRC expire under Articles 45(2), (3), and (4) of the Portuguese General Tax Law (LGT)?
Under Articles 45(2), (3), and (4) of the Portuguese General Tax Law (LGT), the right to assess IRC is subject to specific time limitations to provide legal certainty. The claimant in Case 568/2015-T argued the assessment had expired (caducidade) under these provisions. While the full reasoning is not included in the excerpt, the case involved a substitute declaration filed on April 23, 2014 for the 2010 tax year, which generated assessment 2014. The general rule is that tax authorities must complete assessments within four years from the end of the year when the tax return should have been filed. However, when a taxpayer files a substitute declaration correcting errors, this can affect expiration calculations. The case examined whether the substitute declaration filed in 2014 for 2010 fell within permissible timeframes and whether the original declaration's errors affected the expiration period.
What burden of proof must a taxpayer meet to claim the Interioridade tax benefit in Portugal?
Under Portuguese tax law, the burden of proof (ónus da prova) for claiming the Interioridade tax benefit falls on the taxpayer. In Case 568/2015-T, this issue was central to the dispute. The taxpayer must demonstrate that both its registered office (sede estatutária) and effective management (direcção efectiva) are located in designated inland areas as defined by Article 43 of the EBF. The evidence typically includes corporate registry documents, actual location of management activities, and where key business decisions are made. In this case, the Tax Authority's registry system showed the company's registered office in Porto in 2010, and the tribunal found it was NOT proven that effective management was in a different location or that any qualifying inland location could be detected from Form 22. The strict burden on taxpayers reflects the principle that tax benefits are exceptions to general tax rules and must be clearly established by those claiming them.
Can compensatory interest be reduced when an error is evident in the tax return declaration?
Portuguese tax law recognizes the concept of 'evident error in the declaration' (erro evidenciado na declaração) which can affect compensatory interest calculations. In Case 568/2015-T, the claimant alternatively petitioned for reduction of compensatory interest from €3,441.82 to €585.00, arguing the error was evident. Compensatory interest (juros compensatórios) compensates the State for delayed tax collection and is calculated from when tax should have been paid until actual payment. When an error in the taxpayer's declaration is evident - meaning clearly detectable from the declaration itself without requiring external investigation - this may justify reducing the interest period or amount, as the Tax Authority could have identified and corrected it promptly. However, the burden of proving the error was truly evident typically falls on the taxpayer. The case title specifically mentions this issue ('erro evidenciado na declaração e juros compensatórios'), indicating it was a disputed point requiring tribunal analysis.
How does the CAAD handle disputes over a company's effective place of management for IRC purposes?
The Administrative Arbitration Center (CAAD) handles disputes over a company's effective place of management for IRC purposes through careful factual analysis and application of the burden of proof rules. In Case 568/2015-T, the tribunal examined whether the claimant's effective management (direcção efectiva) for 2010 was in Porto or an inland area. The tribunal's factual findings distinguished between registered office (sede estatutária) and effective management - the latter referring to where actual strategic decisions are made and core management activities occur. The decision noted that it was NOT PROVEN that in 2010 the claimant had effective management in a location different from its registered office in Porto, nor that this could be detected by mere analysis of Form 22. The CAAD requires concrete evidence of where management actually operates, not just statutory declarations. This approach ensures tax benefits tied to geographical location are only granted when genuinely merited, preventing companies from claiming inland benefits while actually operating from urban centers like Porto.