Process: 574/2016-T

Date: April 18, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD arbitral decision 574/2016-T addresses a critical jurisdictional question in Portuguese IRC tax arbitration. Three companies in a corporate group (A… S.A., B… S.A., and C… Lda.) challenged IRC assessments for the 2011 tax period under the RETGS (Special Taxation Regime for Groups of Companies). The Tax Authority raised a jurisdictional objection, arguing that Article 2(a) of Ordinance 112-A/2011 excludes claims regarding self-assessment acts not preceded by administrative appeal under Article 131 of the Tax Procedure Code. The arbitral tribunal analyzed whether this restriction validly limits tribunal competence. The decision emphasizes that Article 2(1)(a) of RJAT (Decree-Law 10/2011) grants arbitral tribunals unqualified competence over declarations of illegality of self-assessments, based on legislative authorization from Article 124 of Law 3-B/2010. The tribunal reasoned that if Ordinance 112-A/2011 is interpreted as redefining tribunal competence beyond what was legislated in RJAT, it lacks support in the legislative authorization law. The binding of the Tax Authority to arbitral jurisdiction may determine when taxpayers can sue, but cannot redefine the scope of tribunal competence already established by decree-law. This decision has significant implications for taxpayers seeking to challenge IRC self-assessments through CAAD arbitration without first exhausting administrative remedies, particularly in complex group taxation scenarios under RETGS.

Full Decision

ARBITRAL DECISION

The arbitrators Cons. Jorge Manuel Lopes de Sousa (arbitrator-president), Prof. Doctor Eduardo Paz Ferreira and Prof. Doctor Jorge Júlio Landeiro de Vaz (arbitrators members), designated by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, constituted on 03-01-2017, agree as follows:

1. Report

  • A…, S.A. (hereinafter designated as "A…"), legal entity number …, with registered office at Rua …, n.º …, …, … - … Lisbon;

  • B… S.A. (hereinafter designated as "B…"), legal entity number …, with registered office at …, …, …, …-… Lisbon, and

  • C… Lda. (hereinafter designated as "C…"), legal entity number …, with registered office at Rua …, n.º …, …, … - … Lisbon

(hereinafter designated jointly as "Claimants"), came, pursuant to the provisions of articles 2, no. 1, subparagraph a) and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters - RJAT), to submit a request for arbitral pronouncement, with a view to assessing the legality of the Corporate Income Tax (IRC) assessments of the Claimants, issued on 5 June 2012 (in the case of companies A… and B…) and 6 June 2012 (with respect to company C…), with reference to the taxation period of 2011, under the numbers 2012 … (Document no. 1), 2012 … (Document no. 2) and 2012 … (Document no. 3), based on the IRC Model 22 income returns, which were identified, respectively, with the identification codes …-… -… (Document no. 4), …-… -… (Document no. 5) and …-… -… (Document no. 6), documents which are attached to the request for arbitral pronouncement, whose contents are hereby reproduced.

The respondent is the TAX AND CUSTOMS AUTHORITY.

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 10-10-2016.

Pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the appointment within the applicable time period.

On 09-12-2016 the parties were duly notified of this designation, and did not express any intention to refuse the designation of the arbitrators, pursuant to the combined provisions of article 11 no. 1 subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 03-01-2017.

The Tax and Customs Authority raised the objection of incompetence of the Arbitral Tribunal and argued that the claim should be dismissed as unfounded.

By order of 13-02-2017 a hearing was dispensed with and it was decided that the proceedings would continue with written submissions.

The parties submitted their arguments.

The arbitral tribunal was duly constituted, in accordance with the provisions of articles 2, no. 1, subparagraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties are duly represented, possess legal capacity and standing, are eligible and are represented (articles 4 and 10, no. 2, of the same statute and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are free of defects of form.

It is necessary to assess the objection of incompetence as a matter of priority, in accordance with the provisions of article 13 of the CPTA, applicable to tax arbitral proceedings by virtue of the provisions of article 29, no. 1, subparagraph c), of the RJAT.

2. Issue of the Incompetence of the Arbitral Tribunals Operating at CAAD to Assess the Legality of Self-Assessment Acts Not Preceded by Gracious Appeal but by a Request for Revision of the Tax Act

The Tax and Customs Authority argues, in summary, that article 2, subparagraph a) of Ordinance 112-A/2011, of 22 March, through which the Tax and Customs Authority was bound by arbitral jurisdiction, excludes claims relating to a declaration of illegality of self-assessment acts that have not been preceded by recourse to the administrative remedy in accordance with article 131 of the Code of Tax Procedure and Process.

This issue has been the subject of contradictory arbitral decisions, so it is necessary to reconsider it, including from the perspective of constitutionality which the Claimant raises in its arguments.

Tax arbitration was created by the Government through Decree-Law no. 10/2011, of 20 January (RJAT), issued pursuant to the legislative authorization granted to it by article 124 of Law no. 3-B/2010, of 28 April.

In no. 4 of that article 124 it was established that the scope of the authorization provided for in this article comprises, in particular, the following matters:

a) The delimitation of the object of the tax arbitral process, which may include acts of assessment of taxes, including self-assessments, withholding at source and advance payments, determination of taxable income when they do not give rise to assessment, total or partial dismissal of gracious appeals or requests for revision of tax acts, administrative acts that involve assessing the legality of assessment acts, acts determining asset values and rights or legitimate interests in tax matters;

The legislative authorization was indispensable for the Government to legislate validly on this matter, since this concerns matters relating to taxpayers' guarantees, included in the relative competence reserve of the Parliament in accordance with articles 103, no. 2, and 165, no. 1, subparagraph i), of the CRP, and therefore the Government does not have its own legislative powers, as follows from articles 198, no. 1, subparagraphs a) and b), of the CRP.

Using this legislative authorization, the Government established in article 2, no. 1, subparagraph a), of the RJAT that "the competence of the arbitral tribunals comprises the assessment of the following claims: a) the declaration of illegality of acts of assessment of taxes, self-assessments, withholding at source and advance payments".

It is thus unequivocal that the Government, in the exercise of the legislative powers granted to it by the legislative authorization, attributed to the arbitral tribunals competence for the declaration of illegality of self-assessment acts, without any restriction.

In article 4 of the RJAT it was established, in its original wording, that "the binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of the present law depends on an ordinance of the Government members responsible for the areas of finance and justice", a rule pursuant to which Ordinance no. 112-A/2011, of 22 March, was issued, which included the rule invoked by the Tax and Customs Authority, through which the following are excluded from the competence of the arbitral tribunals: "claims relating to the declaration of illegality of self-assessment acts, withholding at source and advance payments that have not been preceded by recourse to the administrative remedy in accordance with articles 131 to 133 of the Code of Tax Procedure and Process".

However, on the one hand, it is manifest that if this rule of Ordinance no. 112-A/2011 is interpreted as redefining (restricting) the competence of the arbitral tribunals in relation to what was legislated, it has no support in the law of legislative authorization, since this does not even make the competence of the arbitral tribunals dependent on any binding.

From the binding, if constitutionally admissible, may depend the beginning and ending of the possibility of taxpayers suing the Tax and Customs Authority in the arbitral tribunals, but not the definition of the competence of these tribunals.

It is true that, after Ordinance no. 112-A/2011 was issued, Law no. 64-B/2011, of 30 December, came to establish that "the binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of the present law depends on an ordinance of the Government members responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

However, this Ordinance was issued pursuant to the original wording of the said article which is mentioned in article 2 of article 12 of the Civil Code, the validity of legal acts is assessed in light of the law in force at the time they are undertaken.

On the other hand, by virtue of the provisions of article 112, no. 5, of the CRP, "no law may create other categories of legislative acts or confer on acts of another nature the power to, with external effect, interpret, supplement, modify, suspend or repeal any of its provisions".

Therefore, article 4, no. 1, of the RJAT, in its original wording (which is relevant here), if interpreted as allowing the Ministers of Justice and Finance, through the binding (which does not even have support in the law of legislative authorization) to redefine, through a regulatory act, the competence of the tax arbitral tribunals, would be materially unconstitutional, due to violation of this principle of the hierarchy of normative sources, which is enshrined in article 112, no. 5, of the CRP.

In turn, Ordinance no. 112-A/2011, if interpreted as restricting the competence of the arbitral tribunals in relation to that which results from article 2 of the RJAT and the Law of legislative authorization on which it is based, in addition to being also materially unconstitutional due to violation of the aforementioned article 112, no. 5, would be organizationally unconstitutional, by innovatively regulating a matter included in the relative competence reserve of the Parliament, on which the Government is not permitted to issue rules in the exercise of its own competence.

It is in this light that the objection of incompetence raised by the Tax and Customs Authority must be assessed, having as its object the specific situation that appears in the case, since the abstract assessment of unconstitutionality is outside the competence of the arbitral tribunals.

In subparagraph a) of article 2 of Ordinance no. 112-A/2011, the following are excluded from the scope of the binding of the Tax Administration to the jurisdiction of the arbitral tribunals operating at CAAD: "claims relating to the declaration of illegality of self-assessment acts, withholding at source and advance payments that have not been preceded by recourse to the administrative remedy in accordance with articles 131 to 133 of the Code of Tax Procedure and Process".

The express reference to the preceding "recourse to the administrative remedy in accordance with articles 131 to 133 of the Code of Tax Procedure and Process" must be interpreted as referring to cases in which such recourse is mandatory, through gracious appeal, which is the administrative remedy indicated in those articles 131 to 133 of the CPPT, to whose terms reference is made. In fact, it would not be understood that, not being necessary prior administrative challenge "when its ground is exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration" (article 131, no. 3, of the CPPT, applicable to withholding cases, by virtue of the provision in no. 6 of article 132 of the same Code), the arbitral jurisdiction would be excluded because that administrative challenge, which is understood to be unnecessary, was not carried out.

In this article 2 of Ordinance no. 112-A/2011 there is no express reference to self-assessment acts that have been preceded by a request for ex officio revision, contrary to what occurs with the legislative authorization on which the Government based itself to approve the RJAT, which refers to acts of total or partial dismissal of "requests for revision of tax acts".

However, the formula "declaration of illegality of acts of assessment of taxes, self-assessments, withholding at source and advance payments", used in subparagraph a) of no. 1 of article 2 of the RJAT does not restrict, in a mere declarative interpretation, the scope of arbitral jurisdiction to cases in which a single act of one of those types is directly challenged. In fact, the illegality of self-assessment acts can be declared jurisdictionally as a corollary of the illegality of a second-level act that confirms a self-assessment act, incorporating its illegality.

The inclusion in the competence of the arbitral tribunals operating at CAAD of cases in which the declaration of illegality of the acts indicated there is made through the declaration of illegality of second-level acts, which are the immediate object of the challenging claim, results with certainty from the reference made in that rule to self-assessment acts, withholding at source and advance payments, which are expressly mentioned as included among the competence of the arbitral tribunals. Indeed, with respect to these acts, gracious appeal is imposed as a rule, in articles 131 to 133 of the CPPT, so that, in these cases, the immediate object of the challenging process is, as a rule, the second-level act that assesses the legality of the assessment act, an act that, if it confirms it, must be annulled in order to obtain the declaration of illegality of the assessment act. The reference made in subparagraph a) of no. 1 of article 10 of the RJAT to no. 2 of article 102 of the CPPT, which provides for the challenge of acts of dismissal of gracious appeals, removes any doubts that the competence of the arbitral tribunals operating at CAAD covers cases in which the declaration of illegality of the acts referred to in subparagraph a) of that article 2 of the RJAT must be obtained following the declaration of the illegality of second-level acts.

Moreover, it was precisely in this sense that the Government, in Ordinance no. 112-A/2011, of 22 March, interpreted the competence of the arbitral tribunals operating at CAAD, by excluding from the scope of that competence the "claims relating to the declaration of illegality of self-assessment acts, withholding at source and advance payments that have not been preceded by recourse to the administrative remedy in accordance with articles 131 to 133 of the Code of Tax Procedure and Process", which has the effect of restricting its binding to cases in which that recourse to the administrative remedy was used, in keeping with the provision in these rules of the CPPT.

Having reached the conclusion that the formula used in subparagraph a) of no. 1 of article 2 of the RJAT does not exclude cases in which the declaration of illegality results from the illegality of a second-level act, it will also cover cases in which the second-level act is that of dismissal of a request for revision of the tax act, since there is no reason to see any reason to restrict it, especially since, in cases in which the request for revision is made within the period of gracious appeal, it should be equated to a gracious appeal. ( [1] )

The express reference to article 131 of the CPPT made in article 2 of Ordinance no. 112-A/2011 cannot have the decisive scope of ruling out the possibility of assessing claims of illegality of acts of dismissal of requests for ex officio revision of self-assessment acts.

In fact, the interpretation exclusively based on the literal wording which the Tax and Customs Authority defends in the present proceedings cannot be accepted, since in the interpretation of tax rules the general rules and principles of interpretation and application of laws are observed (article 11, no. 1, of the LGT) and article 9 no. 1, expressly prohibits interpretations exclusively based on the literal wording of the rules by establishing that "interpretation should not be confined to the letter of the law", but should rather "reconstruct from the texts the legislative thought, taking above all into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied".

As for the correspondence between the interpretation and the letter of the law, it is sufficient to have "a minimum of verbal correspondence, even if imperfectly expressed" (article 9, no. 3, of the Civil Code), which will only prevent the adoption of interpretations that cannot in any way be reconciled with the letter of the law, even acknowledging therein imperfection in the expression of the legislative intention.

Therefore, the letter of the law is not an obstacle to declarative interpretation, which clarifies the scope of the literal wording, nor even extensive interpretation, when it can be concluded that the legislator said less than what, coherently, it would have intended to say, that is, when it imperfectly said what it intended to say. In extensive interpretation "it is the very valuation of the rule (its "spirit") that leads to the discovery of the need to extend its text to the hypothesis that it does not cover", "the expansive force of the very legal valuation is capable of leading the provision of the rule to cover hypotheses of the same type not covered by the text". ( [2] )

Extensive interpretation is thus imposed by the evaluative and axiological coherence of the legal system, erected by article 9, no. 1, of the Civil Code as a paramount interpretative criterion through the imposition of observance of the principle of unity of the legal system.

It is manifest that the scope of the requirement of prior gracious appeal, necessary to open the contentious avenue for challenging self-assessment acts, provided for in no. 1 of article 131 of the CPPT, has as its only justification the fact that with respect to this type of acts there is no taking of position by the Tax Administration on the legality of the legal situation created with the act, a position that could even turn out to be favorable to the taxpayer, avoiding the need to resort to the contentious avenue.

In fact, beyond no other justification being envisaged for this requirement, the fact that an identical necessary gracious appeal is provided for the contentious challenge of withholding acts and advance payments (in articles 132, no. 3, and 133, no. 2, of the CPPT), which have in common with self-assessment acts the circumstance that there is also no taking of position by the Tax Administration on the legality of the acts, confirms that this is the reason for that necessary gracious appeal.

Another unequivocal confirmation that this is the reason for the requirement of necessary gracious appeal is found in no. 3 of article 131 of the CPPT, by establishing that "without prejudice to the provisions of the preceding numbers, when its ground is exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration, the period for the challenge does not depend on prior appeal, and the challenge should be submitted within the period of no. 1 of article 102". In fact, in situations of this type, there was a prior generic statement by the Tax Administration on the legality of the legal situation created with the self-assessment act and it is this fact that explains why the necessary gracious appeal ceases to be required.

Now, in cases in which a request for ex officio revision of a tax act is formulated, the Tax Administration is afforded, with this request, an opportunity to pronounce on the merits of the claim of the taxpayer before the latter resorts to the jurisdictional avenue, so that, in keeping with the solutions adopted in nos. 1 and 3 of article 131 of the CPPT, it cannot be required that, cumulatively with the possibility of administrative assessment within the scope of that ex officio revision procedure, a new administrative assessment through gracious appeal be required. ( [3] )

On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from formulating requests for ex officio revision in cases of self-assessment acts, since these were expressly referred to in no. 2 of article 78 of the LGT and, despite the repeal of this rule by Law no. 7-A/2016, of 30 March, the possibility of revision of tax acts, ex officio or at the initiative of the interested parties, continues to be referred to in article 54, no. 1, subparagraph c), of the LGT, with express reference in its no. 2 that "the guarantees of taxpayers provided for in the present chapter also apply to self-assessment", to the extent not incompatible with the nature of this figure.

In this context, since the law expressly permits taxpayers to opt for gracious appeal or for ex officio revision of self-assessment acts and the request for ex officio revision formulated within the period of gracious appeal is perfectly equatable to a gracious appeal, as was mentioned, there can be no reason that would explain why access to the arbitral avenue cannot be had by a taxpayer who has opted for revision of the tax act rather than gracious appeal.

Therefore, it must be concluded that the Government members who issued Ordinance no. 112-A/2011, in making reference to article 131 of the CPPT with respect to claims for declaration of illegality of self-assessment acts, expressed themselves imperfectly in what they intended, since, intending to impose prior administrative assessment to the contentious challenge of self-assessment acts, they ended up including reference to article 131 which does not exhaust the possibilities of administrative assessment of those acts.

Moreover, it should be noted that this interpretation not being confined to the literal wording is even particularly justified in the case of subparagraph a) of article 2 of Ordinance no. 112-A/2011, because its imperfections are evident: one is to associate the comprehensive formula "recourse to the administrative remedy" (which references, besides gracious appeal, hierarchical appeal and revision of the tax act) to the "expression in accordance with articles 131 to 133 of the Code of Tax Procedure and Process", which has potential restrictive scope to gracious appeal; another is to use the formula "preceded" by recourse to the administrative remedy, referring to "claims relating to the declaration of illegality of acts", which, obviously, would fit much better with the feminine word "preceded".

Therefore, in addition to the general prohibition of interpretations limited to the letter of the law that is in article 9, no. 1, of the Civil Code, in the specific case of subparagraph a) of article 2 of Ordinance no. 112-A/2011 there is a special reason for not being greatly enthusiastic about a literal interpretation, which is the fact that the wording of that rule is manifestly defective.

Furthermore, since revision of the tax act ensures the possibility of assessing the claim of the taxpayer before access to the contentious avenue that is intended to be achieved with the necessary administrative challenge, the most correct solution, because it is the most coherent with the legislative design of "strengthening the effective and efficacious protection of the rights and legally protected interests of taxpayers" manifested in no. 2 of article 124 of Law no. 3-B/2010, of 28 April, is the admissibility of the arbitral avenue to assess the legality of assessment acts previously assessed in a revision procedure.

And, because it is the most correct solution, it must be presumed to have been normatively adopted (article 9, no. 3, of the Civil Code).

On the other hand, in that subparagraph a) of article 2 of Ordinance no. 112-A/2011 containing an imperfect formula, but which contains a comprehensive expression "recourse to the administrative remedy", which potentially also references the revision of the tax act, there is found in the text the minimum of verbal correspondence, albeit imperfectly expressed, required by that no. 3 of article 9 for the viability of the adoption of the interpretation that enshrines the most correct solution.

It must be concluded, thus, that article 2 subparagraph a) of Ordinance no. 112-A/2011, duly interpreted on the basis of the criteria for interpretation of law provided for in article 9 of the Civil Code and applicable to substantive and procedural tax rules, by virtue of the provision in article 11, no. 1, of the LGT, enables the submission of requests for arbitral pronouncement with respect to self-assessment acts that have been preceded by a request for ex officio revision.

Moreover, this interpretation, to the effect that Ordinance no. 112-A/2011 does not restrict the competence of the arbitral tribunals operating at CAAD, will be the only one that is compatible with the aforementioned principle of hierarchy of rules and with the relative competence reserve of the Parliament, that is, the only interpretation that ensures the constitutionality of that Ordinance.

The Tax and Customs Authority argues that it is constitutionally forbidden, by virtue of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of legality (cf. articles 3, no. 2, and 266, no. 2, both of the CRP), as a corollary of the principle of indisposability of tax credits inherent in article 30, no. 2 of the LGT, the interpretation, even if extensive, which expands the binding of the TA to arbitral protection fixed legally, since this necessarily presupposes the consequent expansion of the situations in which it is necessarily submitted to such regime, renouncing to that extent recourse to full jurisdictional remedy [cf. article 124, no. 4, subparagraph h) of Law no. 3-B/2010 and articles 25 and 27 of the RJAT, which imposes a restriction of remedies of the arbitral decision].

However, the Constitution does not impose that the interpretation of normative diplomas be confined to the literal wording and, in the case at hand, as explained, duly interpreted the rules of article 2, no. 1, of the RJAT and article 2 of Ordinance no. 112-A/2011, of 22 March, it is concluded that the binding of the Tax and Customs Authority to the arbitral tribunals operating at CAAD covers cases in which self-assessment acts have been preceded by requests for ex officio revision. Therefore, the interpretation made did not increase the binding of the Tax and Customs Authority in relation to what is regulated, but rather defined exactly the binding that results from the regulatory provision, duly interpreted.

On the other hand, in interpreting and applying legal rules, this Arbitral Tribunal is performing the function that is constitutionally attributed to it (articles 202, no. 1, 203 and 209, no. 2, of the CRP), so that nor is it discerned how there could be a violation of the principles of separation of powers, the Rule of Law and legality, since what is decided by this tribunal evidences, precisely, its perfect concretization: the Parliament authorized the Government to legislate (article 124 of Law no. 3-B/2010, of 28 April); the Government, in the exercise of legislative powers, issued the RJAT; the Administration, through two Government members, issued Ordinance no. 112-A/2011, of 22 March; the Arbitral Tribunal interpreted and applied the aforementioned normative diplomas. It is, manifestly, the concretization of the principle of separation of powers.

As for the invocation of the principle of indisposability of tax credits, defined in article 30, no. 2, of the LGT, which refers to the fact that "the tax credit is indisposable, being able to fix conditions for its reduction or extinction only with respect for the principle of equality and tax legality", it will certainly be a lapse, since in deciding on its competence the Arbitral Tribunal is not practising any act of disposition of any credit. On the other hand, nor is it seen to what credit the Tax and Customs Authority will be referring, since in the present proceedings, in which self-assessment acts of IRC that has been paid are at issue, there is no question of the collection of any tax credit.

The credits that existed, following the self-assessments, are already extinguished by payment, and it is not discerned that any other exists.

Different from this, is naturally the eventual annulment of illegal collection, but that has nothing to do with the availability of any credit, but rather with the right to contentious challenge of lesive acts, which is constitutionally assured (article 268, no. 4, of the CRP) and is a fundamental right of taxpayers in a Rule of Law State (articles 2 and 20, no. 1, of the CRP).

Thus, the interpretation of subparagraph a) of article 2 of Ordinance no. 112-A/2011 adopted here, rather than being materially unconstitutional, is the only one that ensures its constitutionality, in light of the provision in articles 103, no. 2, 112, no. 5, 165, no. 1, subparagraph i), and 198, subparagraph b), of the CRP, as was mentioned above. That is, it is this interpretation in conformity with the Constitution, in which a sense is recognized in the rule "which, although not apparent or not resulting from other interpretation elements, is the necessary sense and what becomes possible by virtue of the shaping force of the Fundamental Law. And there are diverse routes that, for that purpose, are followed and diverse results that are achieved: from extensive or restrictive interpretation to reduction (eliminating the unconstitutional elements of the provision or act)". ( [4] )

The objection of incompetence invoked by the Tax and Customs Authority is therefore unfounded.

3. Factual Matters

3.1. Proven Facts

Based on the elements contained in the file and the administrative file attached to the case, the following facts are considered proved:

a) The Claimants are companies under Portuguese law, subject to the general regime of taxation for IRC purposes, whose taxation period coincides with the calendar year;

b) With reference to the taxation period of 2011, the Claimants proceeded to submit the corresponding Model 22 IRC income returns (Documents nos. 4, 5 and 6 attached to the request for arbitral pronouncement, whose contents are hereby reproduced);

c) A… and B… both determined taxable income in the amounts of Euro 3,572,939.78 (three million, five hundred and seventy-two thousand, nine hundred and thirty-nine euros and seventy-eight cents) and Euro 55,180.90 (fifty-five thousand, one hundred and eighty euros and ninety cents);

d) C… determined a tax loss in the amount of Euro 3,983,664.77 (three million, nine hundred and eighty euros and three thousand, six hundred and sixty-four euros and seventy-seven cents);

e) The capital of the Claimants, in the fiscal year 2011, was held indirectly by D…, a company under Italian law and tax resident in Italy, through E… S.A., and F…, entities with tax residence in Member States of the European Union, on the terms as follows:

f) The configuration of the group remained unchanged since 2003 (article 30 of the request for arbitral pronouncement, not questioned);

g) In 2011, the Claimants were not part of a group taxed in Portugal under the special regime for taxation of groups of companies (RETGS), and no request for this was submitted, since D… is not tax resident in Portuguese territory;

h) The Claimants were taxed in IRC as individual companies with respect to the fiscal year 2011;

i) Following the entry into force of Law no. 82-C/2014, of 31 December, and in accordance with the provisions of articles 69 and 69-A of the IRC Code, in 2015, D… and the present Claimants submitted a request to the Tax and Customs Authority to be taxed with application of the RETGS, with D… being the dominant company of the group (document no. 7 attached to the request for arbitral pronouncement, whose contents are hereby reproduced);

j) In points 12 and 13 of the aforementioned request the Claimants stated the following:

Additionally, it should be noted from now on that the Claimants intend to have the provisions of article 69 of the IRC Code applied to them for previous taxation periods, through a different procedural means from this request and to be submitted for this purpose, to the extent that the amendment provided for under article 69-A reiterates that, the impossibility of consolidation at the level of the parent company, as a non-resident company, provided for until then, constituted a restriction to the freedom of establishment, resulting in a significant disadvantage for the Claimants.

Thus, notwithstanding this request being made with reference to the taxation period of 2015, it is important to note that the other requirements have already been met in previous years, so the option for application of the RETGS should not be disregarded for those periods, in accordance with article 69 of the IRC Code, with the submission of the present request.

k) The Tax and Customs Authority pronounced itself on the aforementioned request in the terms contained in document no. 12 attached to the request for arbitral pronouncement, whose contents are hereby reproduced, in which, among other things, the following is referred to:

  1. Finally, with respect to what is mentioned in points 12 and 13 of the request, to the effect that the option for application of the RETGS should not be disregarded, in accordance with article 69 of the CIRC with respect to taxation periods prior to 2015, it is informed that this possibility cannot arise, since the options were not made within the period established in subparagraph a) of no. 7 of article 69 of the CIRC, nor was any request submitted, to this effect, in due time.

l) On 24-02-2016, the Claimants submitted to the Tax and Customs Authority three requests for revision of the tax act, relating to the taxation period of 2011 (Documents nos. 9, 10 and 11 attached to the request for arbitral pronouncement, whose contents are hereby reproduced);

m) The requests for revision of the tax act were not decided until 22-09-2016, the date on which the request for arbitral pronouncement was submitted that gave rise to the present proceedings.

3.2. Unproven Facts

There are no facts relevant to the decision of the case that have not been proved.

3.3. Grounds for the Determination of Factual Matters

The proven facts are based on the documents attached by the Claimant to the request for arbitral pronouncement.

There is no controversy over the facts invoked by the Claimants.

4. Matters of Law

4.1. Issues Raised

In the year 2011, article 69 of the CIRC was in force in the wording of Decree-Law no. 159/2009, of 13 July in which the following on the scope and conditions of application of the RETGS is established:

1 – Where a group of companies exists, the dominant company may opt for application of the special regime for determining the collective taxable matter in relation to all companies of the group.

2 – A group of companies exists when a company, referred to as dominant, holds, directly or indirectly, at least 90 % of the capital of another or other companies referred to as dominated, provided that such participation confers on it more than 50 % of the voting rights.

3 – The option for application of the special regime for taxation of groups of companies may only be formulated when the following requirements are met cumulatively:

a) The companies belonging to the group all have their registered office and effective management in Portuguese territory and the totality of their income is subject to the general regime of taxation in IRC, at the highest normal rate;

b) The dominant company has held the participation in the dominated company for more than one year, with reference to the date on which the application of the regime begins;

c) The dominant company is not considered dominated by any other company resident in Portuguese territory that meets the requirements to be qualified as dominant.

d) The dominant company has not renounced application of the regime in the three years prior to the date on which the application of the regime begins.

4 – The following companies cannot be part of the group:

a) Are inactive for more than one year or have been dissolved;

b) Has had a special recovery or bankruptcy proceeding instituted against them in which a decree for the continuation of the action has been issued;

c) Register tax losses in the three fiscal years prior to the start of application of the regime, except, in the case of dominated companies, if the participation has already been held by the dominant company for more than two years;

d) Are subject to an IRC rate lower than the highest normal rate and do not renounce its application;

e) Adopt a taxation period not coinciding with that of the dominant company;

f) The required level of participation of at least 90 % is obtained indirectly through an entity that does not meet the legal requirements to be part of the group;

g) Do not adopt the legal form of limited liability company, joint stock company or limited partnership by shares, except as provided for in no. 12.

In accordance with the provisions of subparagraph a) of no. 3 and subparagraph f) of no. 4, the Claimants could not opt to be taxed under this regime, as the dominant company and the holders of the capital do not have their registered office or effective management in Portuguese territory.

The CJEU, in a judgment of 12-06-2014, delivered in the joined cases nos. C-39/13, C-40/13 and C-41/13, decided as follows:

  1. In cases C‑39/13 and C‑41/13, articles 49 TFEU and 54 TFEU must be interpreted to the effect that they preclude legislation of a Member State by which a resident parent company may constitute a fiscal unit with a resident subsidiary where it holds it through one or more resident companies, but may not constitute that fiscal unit where it holds the subsidiary through non-resident companies that do not have a permanent establishment in that Member State.

  2. In case C‑40/13, articles 49 TFEU and 54 TFEU must be interpreted to the effect that they preclude legislation of a Member State by which the fiscal unit regime may be granted to a resident parent company holding resident subsidiaries, but not to resident sister companies whose common parent company is not established in that Member State, nor has a permanent establishment there.

With the wording given to the CIRC by Law no. 82-C/2014, of 31 December, the rules of article 69 of the CIRC came to have the following wording:

1 - Where a group of companies exists, the dominant company may opt for application of the special regime for determining the collective taxable matter in relation to all companies of the group.

2 - A group of companies exists when a company, referred to as dominant, holds, directly or indirectly, at least 75 % of the capital of another or other companies referred to as dominated, provided that such participation confers on it more than 50 % of the voting rights.

3 - The option for application of the special regime for taxation of groups of companies may only be formulated when the following requirements are met cumulatively:

a) The companies belonging to the group all have their registered office and effective management in Portuguese territory and the totality of their income is subject to the general regime of taxation in IRC, at the highest normal rate;

b) The dominant company has held the participation in the dominated company for more than one year, with reference to the date on which the application of the regime begins;

c) The dominant company is not considered dominated by any other company resident in Portuguese territory that meets the requirements to be qualified as dominant;

d) The dominant company has not renounced application of the regime in the three years prior to the date on which the application of the regime begins.

4 - The following companies cannot be part of the group:

a) Are inactive for more than one year or have been dissolved;

b) Has had a special recovery or bankruptcy proceeding instituted against them in which a decree for the continuation of the action has been issued;

c) Register tax losses in the three fiscal years prior to the start of application of the regime, except, in the case of dominated companies, if the participation has already been held by the dominant company for more than two years;

d) Are subject to an IRC rate lower than the highest normal rate and do not renounce its application;

e) Adopt a taxation period not coinciding with that of the dominant company;

f) (Repealed.)

g) Do not adopt the legal form of limited liability company, joint stock company or limited partnership by shares, except as provided for in no. 11. (Corrected by Rectification Statement 18/2014, of 13 March)

Furthermore, the same Law no. 82-C/2014 added to the CIRC article 69-A, with the following wording:

Article 69-A

Dominant Company with Registered Office or Effective Management in Another Member State of the European Union or the European Economic Area

1 – May likewise opt for application of the special regime for taxation of groups of companies provided for in the present subsection the dominant company, as such qualified under the terms of no. 2 of the previous article which, not having its registered office or effective management in Portuguese territory, fulfils cumulatively the following conditions:

a) Is resident of a Member State of the European Union or the European Economic Area that is bound by administrative cooperation in the tax field equivalent to that established within the framework of the European Union;

b) Has held the participation in the dominated companies for more than one year, with reference to the date on which the application of the regime begins;

c) Is not held, directly or indirectly, at least 75 % of the capital by a company resident in Portuguese territory that meets the requirements provided for in the previous article to be qualified as dominant, provided that such participation confers on it more than 50 % of the voting rights, in accordance with no. 6 of the previous article;

d) Has not renounced application of the regime in the three years prior to the date on which the application of the regime begins;

e) Is subject and not exempt from a tax referred to in article 2 of Directive no. 2011/96/EU, of the Council, of 30 November, or from a tax of identical or similar nature to IRC;

f) Takes the form of a limited liability company;

g) When it holds a permanent establishment in Portuguese territory through which the participations in the dominated companies are held and with respect to it none of the situations provided for in subparagraphs a), c), d) or e) of no. 4 of the previous article is verified, with the necessary adaptations.

2 – The option provided for in the preceding number determines the application of the special regime for taxation of groups of companies with respect to all dominated companies with registered office and effective management in Portuguese territory with respect to which the conditions established in nos. 3 and 4 of the previous article are verified, as well as to the permanent establishment of the dominant company located in this territory through which the participations are held.

3 – The option for the regime under the terms of the present article depends on the notification to the Tax and Customs Authority, in the return referred to in no. 7 of the previous article, of which company with registered office and effective management in this territory belonging to the group is designated to assume responsibility for the fulfilment of all obligations incumbent on the dominant company under the terms of the present Code, without prejudice to the joint liability of the dominant company and the other companies belonging to the group for payment of the tax, in accordance with article 115.

4 – In cases in which the dominant company has a permanent establishment in Portuguese territory through which the participations in the dominated companies are held, the provision in the preceding number must be necessarily observed by it.

5 – In all that is not provided for in the present article, the provisions of the previous article apply, with the necessary adaptations.

The Claimants, in light of the cited CJEU case law, already met in 2011 the requirements to be taxed under the RETGS.

The issue raised by the Claimants is whether the self-assessments relating to the fiscal year 2011 should be declared illegal, because in that period they had "the right to opt to integrate a group taxed by the RETGS, in accordance with the case law emanating from the CJEU in the context of the said joined cases C-39/13, C-40/13 and C-41/13 and in strict compliance with European Union law".

The Tax and Customs Authority, however, raises, as a preliminary issue, that of the verification of the prerequisites for revision of the tax act, invoking the absence of error attributable to the services.

4.2. Issue of the Verification of the Prerequisites for Revision of the Tax Act

The regime for revision of tax acts is contained in article 78 of the LGT which, in the wording in force in 2011, established the following, in its nos. 1 and 2, which are relevant here:

1 - Revision of tax acts by the entity that performed them may be effected at the initiative of the taxpayer, within the period of administrative appeal and on the ground of any illegality, or at the initiative of the tax administration, within four years after the assessment or at any time if the tax has not yet been paid, on the ground of error attributable to the services.

2 - Without prejudice to the legal burden of appeal or challenge by the taxpayer, error in self-assessment is considered attributable to the services for purposes of the preceding number.

In the case at hand, the request for revision of the tax act was submitted outside the period of gracious appeal for self-assessment acts, fixed at two years after the submission of the return, by no. 1 of article 131 of the CPPT.

Therefore, revision of the tax act is only admissible on the ground of error attributable to the services, as results from no. 1, considering that error in self-assessment is attributable to the services.

In the case at hand, no error is invoked in the individual self-assessments made by each of the Claimants, but rather that, if there had not been a legal restriction on the application of the special regime for taxation of groups of companies, there could have been an option for its application, which would be reduced to a single self-assessment based on a group return.

This situation does not fall within article 78 of the LGT, since there is no error attributable to the services of the Tax and Customs Authority for purposes of no. 1 nor any error in self-assessments, which would be fictionally attributable to it, under no. 2.

In fact, "the determination of taxable income shall be made on the basis of the declarations of the taxpayers, provided that they submit them in accordance with the terms provided for in law and provide the tax administration with the indispensable elements for the verification of their tax situation" (article 59, no. 2, of the CPPT) and that is precisely what occurred.

The application of the RETGS to the fiscal year 2011 does not depend only on the verification of the legal requirements for its application, as it is an optional regime, only applicable following an option by the dominant company, formulated in advance in relation to the end of the first fiscal year in which its application is intended.

The admissibility of the option by IRC taxpayers for application of the RETGS, with the possibility of obtaining fiscal advantages for these and consequent loss of tax revenues, is justified by purposes outside of tax, namely to facilitate "the restructuring of the business fabric and the recovery of economic groups, through the promotion of synergies between companies integrated in a group, strengthening and consolidating the business fabric, to thereby achieve greater competitiveness and favor competition", not being justifiable for achieving "exclusively fiscal purposes" (judgment of the Supreme Administrative Court of 29-12-2012, case no. 021/12).

In this light, the imposition of the obligation to opt for application of this regime before being aware of the results of its application, harmonizes with this legislative design of making it difficult to use the regime for exclusively fiscal purposes, which would be viable with the possibility of retroactive application, with determination first of the fiscal results and only subsequent choice of the most advantageous fiscal regime.

Thus, that option within the prescribed period must be manifested by the dominant company (and not by some or all of the dominated companies), being that manifestation indispensable because, among other things, it implies for that company the assumption of fiscal responsibilities (article 115 of the CIRC), in addition to declarative obligations.

In the case at hand, no request for option for taxation under the RETGS was submitted in 2011, neither by D…, the dominant company of the group, nor by any of the Claimants.

On the other hand, A…, S.A. and B… S.A. could have opted for taxation under the RETGS, in light of the relationship of dominance of one over the other, on the assumption that the remaining required conditions were met (as the Claimants affirm in the present proceedings).

Therefore, it cannot even be concluded that, in 2011, the Claimants intended to be taxed under the RETGS and simply did not request it because of the legal obstacle that they invoke, derived from the wording then in force of article 69 of the CIRC.

On the other hand, as the Tax and Customs Authority rightly points out in its Response, "as to the inclusion of company C… in the scope of the RETGS, if the Claimants, as they now come to allege, were convinced that the national legislation was illegal and non-compliant with community law, by not permitting horizontal fiscal consolidation, later embodied in articles 69 and 69-A of the IRC Code through Law no. 82-C/2014 it will always be said that nothing prevented them from raising such inclusion with the TA, which necessarily would have to pronounce itself on the subject matter" and "in case of eventual refusal by the TA they could always contest it before the national judicial bodies, raising the primacy of community law before a Portuguese court, on the ground of the eventual non-compliance of that provision of the IRC Code with articles 49 and 54 of the Treaty on the Functioning of the European Union".

In any event, since the application of the RETGS is not automatic and no option for its application was made, the individual self-assessments do not suffer from any error, whether as to the factual premises or as to the legal premises, so the prerequisite required by nos. 1 and 2 of article 78 of the LGT for revision of the tax act is not verified.

On the other hand, the Tax and Customs Authority could not, following the requests for revision of the tax act, as nor can this Arbitral Tribunal, fictionally presume that an option for application of the RETGS had been made by the dominant company.

Finally, it is clear that the new regime provided for in article 69-A of the CIRC, introduced by Law no. 82-C/2014 is applicable only to taxation periods that begin on or after 01-10-2015, as is expressly established in no. 1 of its article 5, in keeping with the basic principle on the application in time of tax rules, enunciated in no. 1 of article 12 of the LGT.

From the foregoing, it is concluded that one of the prerequisites of the revision of the tax act requested outside the period of administrative appeal is not verified, which is the existence of an error in the assessment acts, so the request for arbitral pronouncement must be dismissed as unfounded.

4.3. Issues of Precluded Consideration

An obstacle to the upholding of the claim being verified, the consideration of the other issues of legality raised by the Claimants and by the Tax and Customs Authority remains precluded.

5. Decision

In these terms, the Arbitral Tribunal agrees to:

a) Dismiss the request for arbitral pronouncement as unfounded;

b) Acquit the Tax and Customs Authority of the claims.

6. Value of the Case

In accordance with the provisions of article 306, no. 2, of the CPC and 97-A, no. 1, subparagraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 901,391.40.

7. Costs

Pursuant to article 22, no. 4, of the RJAT, the amount of costs is fixed at € 12,852.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimants.

Lisbon, 18-04-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Eduardo Paz Ferreira)

(Jorge Júlio Landeiro de Vaz)

[1] As understood in the cited judgment of the Supreme Administrative Court of 12-6-2006, delivered in case no. 402/06.

[2] BAPTISTA MACHADO, Lessons in Private International Law, 4th edition, page 100.

[3] Essentially in this sense, see the judgments of the Supreme Administrative Court of 12-7-2006, delivered in case no. 402/06, and of 14-11-2007, case no. 565/07.

[4] JORGE MIRANDA, Manual of Constitutional Law, Volume II, 4th ed., Coimbra, 2000, pages 267/268.

Frequently Asked Questions

Automatically Created

What is the RETGS special taxation regime for groups of companies under Portuguese IRC law?
The RETGS (Regime Especial de Tributação dos Grupos de Sociedades) is the Special Taxation Regime for Groups of Companies under Portuguese IRC law. It allows qualifying corporate groups to be taxed on a consolidated basis, where the dominant company can aggregate the taxable profits and losses of group members. This regime is designed to provide tax neutrality for intra-group transactions and reflect the economic reality of integrated corporate groups operating as a single economic unit.
Can taxpayers challenge IRC tax assessments through CAAD arbitral proceedings under the RJAT framework?
Yes, taxpayers can challenge IRC tax assessments through CAAD arbitral proceedings under the RJAT framework. Article 2(1)(a) of Decree-Law 10/2011 grants arbitral tribunals competence to assess declarations of illegality of tax assessments, including self-assessments, without restrictions. While Ordinance 112-A/2011 attempted to require prior administrative appeal, Decision 574/2016-T questions whether this restriction validly limits tribunal competence, as it may exceed the scope of the legislative authorization that created the RJAT framework.
How does the CAAD arbitral tribunal assess its jurisdiction over IRC group taxation disputes?
The CAAD arbitral tribunal assesses its jurisdiction by examining whether the claim falls within Article 2(1)(a) of RJAT, analyzing any jurisdictional objections as a priority matter under Article 13 CPTA, and determining whether implementing regulations (like Ordinance 112-A/2011) validly restrict competence or exceed the legislative authorization. The tribunal distinguishes between the scope of competence (defined by decree-law) and the binding of the Tax Authority to arbitral jurisdiction (which may affect when taxpayers can sue but cannot redefine tribunal competence itself).
What are the legal requirements for filing a collective arbitral claim involving multiple companies in a corporate group?
For a collective arbitral claim involving multiple group companies, each claimant must have proper legal capacity, standing, and representation as required by Articles 4 and 10(2) of RJAT and Article 1 of Ordinance 112-A/2011. The request must comply with Articles 2(1)(a) and 10 of RJAT, identify each company's tax assessments being challenged with specific reference numbers and dates, attach relevant documentation (assessment notices and tax returns), and ensure proceedings are free of formal defects. All companies must be properly represented by legal counsel.
What was the outcome of CAAD Process 574/2016-T regarding the IRC liquidations for the 2011 tax period?
While the complete outcome is not provided in the excerpt, Decision 574/2016-T primarily addresses a preliminary jurisdictional objection raised by the Tax Authority. The arbitral tribunal, constituted on January 3, 2017, with three arbitrators, was analyzing whether it had competence to hear the claim despite the assessments not being preceded by administrative appeal under Article 131 of the Tax Procedure Code. The tribunal appears inclined to affirm its jurisdiction, reasoning that Ordinance 112-A/2011's restrictions may be invalid as they exceed the legislative authorization that granted arbitral tribunals unqualified competence over self-assessment challenges under RJAT.