IRC Tax Deductibility of Expenses, Autonomous Taxation & Payments to Low-Tax Jurisdictions – CAAD Case 576/2018-T

ARBITRAL TAX DECISION

Tax Arbitration Case Law

Process No. 576/2018-T

Decision Date:
2019-08-27
CIT

Value of Claim:
€ 707,090.56

Subject Matter:
CIT – Deductibility of expenses; Autonomous taxation; Payments to entities subject to more favorable tax regime; Formal defect.

ARBITRAL DECISION (consult complete version in PDF)

The Arbitrators José Pedro Carvalho (Arbitrator President), Marisa Isabel Almeida Araújo (member) and A. Sérgio de Matos (member), designated by the Deontological Board of the Center for Administrative Arbitration to form an Arbitral Court, hereby agree on the following:

I – REPORT

1. On 19 November 2018, A..., LDA., NIPC ..., with registered office at Rua ..., ... and ..., ...-... Lisbon, filed a petition for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), seeking a declaration of illegality of the act of additional assessment of CIT No. 2017..., referring to the year 2014, in the amount of €699,631.76, of the acts of assessment of compensatory interest No. 2017..., in the amount of €21.25 and No. 2017..., in the amount of €54,115.47, of the statement of account reconciliation No. 2017... from which results the amount payable of €707,090.56, as well as the decision to reject the administrative claim that had the aforementioned assessment acts as its object.

2. To substantiate its petition, the Petitioner alleges, in summary, the following:

i. The assessment acts suffer from a formal defect, by violation of the provisions of Articles 103, No. 2 and 268, No. 3 of the CRP and 77 of the LGT, due to the fact that they are not adequately reasoned in legal terms;

ii. The expenses incurred with commissions paid to entities with registered office in Hong Kong are deductible for tax purposes, as they correspond to operations actually carried out and do not have an abnormal character or an excessive amount;

iii. The commissions paid to entities with registered office in Hong Kong are not subject to autonomous taxation, as the requirements for the application of No. 8 of Article 88 of the Corporate Income Tax Code ("CITC") are not met;

1. On 20-11-2018, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the AT (Tax Authority).

2. The Petitioner did not proceed to appoint an arbitrator, therefore, pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph a) of No. 1 of Article 11 of the LRAT, the President of the Deontological Board of the CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable deadline.

3. On 10-01-2019, the parties were notified of these designations, having expressed no intention to refuse any of them.

4. In accordance with the provision of paragraph c) of No. 1 of Article 11 of the LRAT, the collective Arbitral Tribunal was constituted on 30-01-2019.

5. On 06-03-2019, the Respondent, duly notified for this purpose, filed its response defending itself by impeachment.

6. On 04-06-2019, the meeting referred to in Article 18 of the LRAT was held, where the witnesses presented by the Petitioner were examined.

7. Having been granted a deadline for the presentation of written submissions, they were presented by the parties, ruling on the evidence produced and reiterating and developing their respective legal positions.

8. It was indicated that the final decision would be notified by the end of the deadline provided for in Art. 21/1 of the LRAT, a deadline which was extended by order of 08-07-2019.

9. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, No. 1, paragraph a), 5 and 6, No. 2, paragraph a), of the LRAT.

The parties have legal personality and capacity, are legitimate and are duly represented, pursuant to Articles 4 and 10 of the LRAT and Article 1 of Regulation No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the case.

All considered, the following must be decided:

II. DECISION

A. FACTUAL MATTER

A.1. Facts taken as proven

1. The Petitioner was established in November 2012 and pursues, as a primary activity, the buying, selling and reselling of real estate acquired for that purpose, recovery and maintenance of real estate, leasing, promotion and real estate management, corresponding to CAE 68100.

2. In the year 2014, the Petitioner recorded the following values of revenue and gains:

• Sales - €7,202,000.00;
• Total revenues - €7,202,000.00;
• Cost of goods sold - €5,279,547.42;
• Supply and external services - €1,119,731.56;
• Other expenses - €265,898.17;
• Total expenses - €6,704,746.80;
• Result before tax/taxable profit - €497,253.20.

1. In the year 2014, the Petitioner recorded as an expense, under item 62.2.1.3 – specialized services in third countries, the amount of €1,119,731.56, referring to "Marketing Research Services in China", to companies with registered office in Hong Kong, identified in the following table:

2. In the year 2014, Portugal benefited from external support from the Troika, a period characterized by a strong financial constraint that prevented access to credit by companies and families.

3. The Petitioner became aware of the legal regime of "Gold Visas" created by Law No. 23/2007, of 4 July, as amended by Law No. 29/2012, of 9 August, with the intention of attracting foreign investment.

4. Faced with the growing demand for real estate in Portugal by clients residing outside the national territory, particularly from China, it decided to resort to fundraisers outside Portugal, namely in Hong Kong (China).

5. The prospecting of clients in the Chinese market implied command of the language, culture and knowledge of the market of origin of the potential customers of "Gold Visas" originating from that country.

6. The Petitioner entered into contracts with the companies B..., C..., D..., E... and F..., Ltd., entities with registered office in Hong Kong, with a view to prospecting clients from third countries, namely from China.

7. Clause 1 of the aforementioned contracts provides as follows:

"1- By way of this agreement, NP hires the consultancy services of AGENT for the purposes of obtaining clients in China interested in buying properties in Portugal.

2- The services to be provided by AGENT under the terms of this agreement will include, among others, the marketing and promotion of NP's properties, internet advertising, contacts with Chinese immigration companies, contacts with Hong Kong property investors and other means that AGENT deems adequate, in its absolute discretion, for the purposes of this contract.

3- Within the scope of its services, AGENT shall introduce the potential investors ("the clients") interested in acquiring NP's properties.

4- By the way of this agreement, NP will provide to AGENT multiple property investment opportunities, property information and marketing details and other additional information that might be necessary for AGENT to advertise and promote NP's properties to their clients and potential investors in Hong Kong."

1. With respect to remuneration, Clause 2 of the aforementioned contracts provides as follows:

"1- The services to be rendered by AGENT to NP within the scope of this agreement will be remunerated only if the clients introduced by AGENT effectively make property investments in Portugal through an acquisition of one or more of NP's properties.

2- For the purposes of the previous number of this clause, NP shall pay AGENT a fee for its services that shall be agreed between the parties, according to each case.

3- It is expressly agreed between the Parties that the payment of the fee mentioned in the previous number of this clause shall become due and shall be paid by NP at the time of the granting of the Deed/Contract of Purchase and Sale of the property (is) purchased by each of the granting of the Deed/Contract of Purchase and Sale of this property (is) purchased by each of the clients introduced by AGENT.

4- For the purposes of the payment of the fee mentioned in number two of this clause, AGENT shall provide the NP with the corresponding invoice".

1. The prospecting entities based in Hong Kong demanded commissions that could reach approximately 17% of the property value.

2. The agreements entered into between the Petitioner and the entities based in Hong Kong established an obligation of results, that is, the payment of the commission was exclusively dependent on the sale of the promoted properties.

3. The entities based in Hong Kong incurred expenses related to travel to Portugal, hotel stays, personalized accompaniment of potential clients throughout the entire process, among other expenses associated with travel from abroad to visit properties in Portugal.

4. To these costs were added those relating to the disclosure of the real estate marketed by the Petitioner in the market of origin of the potential clients.

5. The services provided by the prospecting entities allowed the Petitioner, in the year 2014, to obtain sales whose value amounted to €7,202,000.00.

6. The Petitioner was subject to an external tax inspection procedure, of general scope, for the year 2014, in compliance with Service Order No. OI2016..., resulting from the control of taxpayers with high-value real estate sales, following the analysis and control of the real estate promotion and mediation sector.

7. In order to analyze the fiscal acceptance of the incurred expenses, the Petitioner was notified to present proof documents on the effective compliance with the requirements set out in Article 23-A, No. 1, paragraph r) and Nos. 7 and 8 of the CIT Code.

8. In response, the Petitioner informed the following:

9. With a view to demonstrating the actual carrying out of the operations, the Petitioner, within the scope of the tax inspection, presented the following proof elements:

• Deeds of acquisition and sale of the real estate;
• Contracts with each of the Hong Kong companies, relating to the services provided "Cooperation and Consultancy Agreement";
• Invoices relating to the services provided;
• Documents proving the payments for the services provided, consisting of bank transfers to a national account as regards the service provider D... and international transfers for the others;

1. By Official Letter... of 30-05-2017, the Petitioner was notified of the draft inspection report and to, if so willing, exercise the right to a hearing.

2. By Official Letter No...., of 12-07-2017, the Petitioner was notified of the tax inspection report, from which resulted a correction to the taxable profit of CIT of €1,119,731.56, relating to the non-deductibility of advertising and marketing expenses paid to non-resident entities with registered office in countries with more favorable tax regime, to which was added taxation at the rate of 35% of the amount of €391,906.04.

3. The tax inspection report contained the following:

4. Following the tax inspection, the Petitioner was notified of the additional assessment of CIT No. 2017..., referring to the year 2014, in the amount of €699,631.76, of the acts of assessment of compensatory interest No. 2017..., in the amount of €21.25 and No. 2017..., in the amount of €54,115.47, and of the statement of account reconciliation No. 2017....

5. The Petitioner did not proceed to pay the aforementioned assessments within the voluntary payment deadline.

6. On 10-10-2017, the Petitioner was cited for fiscal enforcement proceedings No. ...2017..., instituted for forcible collection of the debt of CIT and compensatory interest, referring to the year 2014, in the amount of €707,090.56, plus default interest in the amount of €1,154.44 and costs in the amount of €2,424.75, for a total amount of €710,669.75.

7. The Petitioner filed a petition for exemption from provision of security, which was granted by Order of the Head of the Finance Division of the Lisbon Finance Authority of 20 December 2017.

8. On 09-11-2017, the Petitioner filed an administrative claim concerning the aforementioned assessments.

9. By Official Letter No...., of 17 August 2018 from the Finance Authority of Lisbon, the Petitioner was notified of the decision to reject the administrative claim.

A.2. Facts taken as not proven

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

A.3. Justification of the proven and unproven factual matter

With respect to the factual matter, the Tribunal does not have to pronounce itself on everything that was alleged by the parties; rather, it has the duty to select the facts that are important for the decision and to distinguish the proven from the unproven matter (cf. Art. 123, No. 2, of the Code of Tax Procedure and Process ("CTPP") and Article 607, No. 3 of the Code of Civil Procedure ("CCP"), applicable pursuant to Article 29, No. 1, paragraphs a) and e), of the LRAT).

Thus, the facts relevant for the judgment of the case are chosen and cut according to their legal relevance, which is established with attention to the various plausible solutions of the legal issue(s) (cf. former Article 511, No. 1, of the CCP, corresponding to the current Article 596, applicable pursuant to Article 29, No. 1, paragraph e), of the LRAT).

Thus, taking into account the positions assumed by the parties, in light of Article 110, No. 7 of the CTPP, the documentary evidence and the PA attached to the file, as well as the witness evidence produced, the facts listed above were considered proven, with relevance for the decision, considering that, as stated in the Judgment of the TCA-South of 26-06-2014, issued in process 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

Specifically, the facts given under points 5 to 7, 11, 13, 14, are based on the depositions made, in coherence with the available documentary evidence.

No allegations made by the parties, and presented as facts, consisting of strictly conclusive statements, incapable of proof and whose truth must be assessed in relation to the concrete factual matter above consolidated, were taken as proven or not proven.

B. ON THE LAW

As already stated, the following are the issues raised by the Petitioner:

i. The assessments of CIT and compensatory interest suffer from a formal defect, due to lack of reasoning;

ii. The expenses incurred with commissions paid to entities with registered office in Hong Kong are deductible for tax purposes, as they correspond to operations actually carried out and do not have an abnormal character or an excessive amount;

iii. The commissions paid to entities with registered office in Hong Kong are not subject to autonomous taxation, as the requirements for the application of No. 8 of Article 88 of the CITC are not met;

Let us examine each one.

i.

The Petitioner begins by arguing that the assessments of CIT and compensatory interest suffer from a formal defect, due to lack of reasoning.

As is well known, reasoning is a requirement of tax acts in general, being a constitutional requirement (Article 268 of the Constitution of the Portuguese Republic) and legal (Article 77 of the LGT).

Briefly, it can be said that it is today established in national doctrine and jurisprudence that the reasoning required must have the following characteristics:

1. Officiousness: it must always proceed from the initiative of the administration, reasoning on request not being admissible;

2. Contemporaneity: it must be coexistent with the performance of the act, reasoning cannot be deferred;

3. Clarity: it must be understandable by an average recipient, avoiding polysemic or highly technical concepts;

4. Completeness: it must contain all essential elements that were decisive in the decision taken. This characteristic is divided into two requirements, namely: the duty of justification (legal norms and factuality – domain of legality) and motivation (domain of discretionality or opportunity, when evaluation is needed).

Now, if reasoning is, as stated above, necessary and mandatory, this cannot and should not be understood in an abstract and/or absolute manner, that is, the reasoning required of a concrete tax act must be that which is functionally necessary for it not to appear to the taxpayer as a pure demonstration of arbitrariness. This will – it is believed – be the touchstone of compliance with the duty of reasoning: when, before an average recipient placed in the position of the actual recipient, the tax act appears, from a standpoint of reasonableness, as a product of pure arbitrariness on the part of the Administration, because the reasons of fact and/or law on which it rests are not discernible, the act will suffer from lack of reasoning.

Article 77, No. 1 of the LGT thus states: "The decision of procedure is always reasoned by means of a brief exposition of the reasons of fact and law that motivated it, with the reasoning being able to consist of a mere declaration of agreement with the grounds of earlier opinions, information or proposals, including those that form part of the tax inspection report."

Descending to the concrete case, it is verified that the assessment acts in question are reasoned exclusively on the basis of the final tax inspection report carried out on the Petitioner for the year 2014.

Now, as stated in the Judgment of the TCA-South of 03-12-2015, issued in process 07854/14:

"The reasoning of tax acts or acts 'practiced in tax matters' that 'affect the rights or legally protected interests of taxpayers' was established in Articles 19, paragraph b), 21, 81 and 82, of the Tax Procedure Code (cf. currently Article 77 of the General Tax Law).

Such need for reasoning already derived, both from Article 1, No. 1, paragraphs a) and c), of Decree-Law 256-A/77, of 17 June, and from Article 268, No. 3, of the Constitution of the Portuguese Republic, as drafted by Constitutional Law No. 1/89 (cf. Gomes Canotilho and Vital Moreira, Annotated Constitution of the Portuguese Republic, 1993, p. 936 et seq.; Vieira de Andrade, The Duty of Express Reasoning of Administrative Acts, 1990, p. 53 et seq.).

Reasoning is a relative concept that may vary depending on the legal type of administrative act we are examining.

It has been the constant understanding of jurisprudence and doctrine that a given act (in the case of a tax administrative act) is duly reasoned whenever it is possible, through the same, to discover what cognitive path its author used to arrive at the final decision (cf. Judgment of the STJ of 26/4/95, C.J.-STJ, 1995, II, p. 57 et seq.; A. Varela and others, Manual of Civil Procedure, Coimbra Publisher, 2nd edition, 1985, p. 687 et seq.; Alberto dos Reis, Annotated Code of Civil Procedure, Coimbra Publisher, 1984, V, p. 139 et seq.). That is, Using the language of several judgments of the STA (cf. for all, Judgment STA-1st Section, 6/2/90, A.D., No. 351, p. 339 et seq.) the administrative act is only reasoned if a normally diligent or reasonable recipient – a normal person – placed in the concrete situation expressed by the reasoning declaration and before the concrete act (which will determine, according to its diverse nature or type, a greater or lesser requirement of the density of the reasoning elements) is in a position to know the functional (not psychological) cognitive and evaluative itinerary of the author of the act. It will further be said that reasoning may be express or consist of a mere declaration of agreement with an earlier opinion, information or proposal, which, in this case, forms an integral part of the respective act (this is the so-called reasoning "per relationem" – cf. Article 125 of the Administrative Procedure Code).

If the reasoning does not specifically clarify the motivation of the act, by obscurity, contradiction or insufficiency, the act is considered not reasoned (cf. Article 125, No. 2, of the Administrative Procedure Code). There will be obscurity when the statements made by the decision-maker do not make clear what the reasons are why he decided as he did. In other words, the grounds of the act must be clear, so that the sense of the reasons that determined the performance of the act can be perfectly understood, thus not being permissible the use of dubious, vague and generic expressions. Contradiction of the reasoning will occur when the reasons invoked to decide would justify not the decision issued, but a decision of opposite sense (contradiction between grounds and decision), and when grounds are invoked that are in opposition to others. In other words, the grounds of the decision must be congruent, that is, they must be premises that inevitably lead to the decision that functions as the logical and necessary conclusion of the motivation adduced. Finally, the reasoning is insufficient if its content is not sufficient to explain the reasons why the decision was taken. In conclusion, the reasoning must be sufficient, in the sense that no reasons are left unsaid that would conveniently explain the final decision (cf. Marcello Caetano, Manual of Administrative Law, vol. I, Almedina, 1991, p. 477 et seq.; Diogo Freitas do Amaral, Course of Administrative Law, vol. II, Almedina, 2001, p. 352 et seq.; Diogo Leite de Campos and Others, Annotated and Commented General Tax Law, 4th Edition, 2012, p. 675 et seq.; Judgment TCA-South-2nd Section, 2/12/2008, process 2606/08; Judgment TCA-South-2nd Section, 10/11/2009, process 3510/09; Judgment TCA-South-2nd Section, 29/3/2011, process 4489/11).

In the concrete case, it must be concluded, in agreement with the "court a quo", that the assessment identified in No. 1 of the proven facts is duly reasoned, reasoning that may have summary characteristics, given that it is a legal consequence of the declaration of income presented by the appellants, all as already examined above to which reference is made, with the law expressly providing for such possibility in Article 77, No. 2, of the LGT (cf. José Maria Fernandes Pires and Others, Commented and Annotated General Tax Law, Almedina, 2015, p. 835 et seq.).

Moreover, if the appellants did not consider themselves duly clarified on the reasoning of the tax act object of the present process, they should have made use of the provision contained in Article 37, No. 1, of the Code of Tax Procedure.

In view of the above, without need for further extensive considerations, it is considered that this ground of appeal is unfounded, also confirming the decision appealed in this portion."

With respect to the assessments of compensatory interest, it has been understood that "Compensatory interest functions as a penalty clause for the delay in the assessment of tax, attributable to the taxpayer, being integrated into the assessment thereof, where it derives part of its reasoning, in addition to also requiring a segment of its own reasoning".

In the same judgment, it can be read, among other things that:

"Returning, again, to the prerequisites of the assessment of compensatory interest, as an autonomous assessment, although integrated in the assessment of tax, it is evident that it must have a minimum of its own reasoning with respect to, from the outset, the basis of calculation, the rate applied, the period to which it refers (4), but, also and equally, with respect to the guilt necessary for its attribution to the taxpayer; And it will be by reference to this same reasoning that the compliance of the power/duty of the AF to grant the taxpayer the right to a prior hearing must be assessed.

• Now, with respect to the rate, basis of calculation and period to which compensatory interest refers, no margin of configuration is granted to the AT, which only has and can concretize what is expressly provided in the law, that is, with respect to those prerequisites, the action of the AF consists of a strictly bound procedure, so that its action, in such domain, is not susceptible to being influenced by any arguments that the appellant could raise, in order to influence the assessment act, by requesting the application of a different rate, or of a different period of time or basis of calculation, since these cannot be other than those determined by the applicable legal system.

• It is evident that the assessing entity, by oversight or for another reason, may attend, with respect to such prerequisites, to elements that it should not attend; But such possible circumstantiality does not constitute grounds for the exercise of the right to prior hearing, but rather only that express and clear reference to it must form part of the reasoning of the assessment for its recipient to be able to react against it, due to violation of law.

• Consequently and with respect to these grounds, what is understood is that the taxpayer has no right to prior hearing before the assessment of compensatory interest, which means that, in this domain, the fact that it was not afforded the exercise of such a right does not constitute, even, any procedural irregularity and, much less, with invalidating effects on the final assessment act.

• Already with respect to guilt, as a prerequisite of the interest in question, it is understood that, being a subjective judgment, it implicitly means that the taxpayer, in the exercise of hearing, may bring to the procedure, elements not previously available to the AT, which may dispel it, in light of the elements relevant to its assessment, as stated above; That is why one cannot conclude that the mere fact of knowledge of the delay of the tax, by the taxpayer, the applied rate and the period of time, necessarily implies the inevitability of the act of its respective assessment, so that, in this ambit, it is understood, on the one hand, as an essential formality to be observed, the notification of the recipient of the final tax act, to exercise, if willing, the right to a hearing, and, on the other, that the omission of such power/duty is not susceptible to degrading into a non-essential formality.

• But what has just been said does not mean/imply that reason lies with the appellant.

• For, as noted above, guilt is a concept of law to be extrapolated from the adequate and pertinent factuality, so the departure from it passes through the demonstration of the lack of adherence to the reality of that which the assessing entity bases that conclusive judgment, by its inadequacy for such purpose, from the outset by the relevant justification capable of excluding it.

• Now, in the case of compensatory interest and following what was referred to above, the factuality on which the judgment of guilt must rest, cannot be other than that which underlies the determination of tax understood as missing, in the exact measure that it is integrated in this, pursuant to No. 8 of Article 35 of the LGT.

• But, if this is the case, on the one hand it is inexorable that the taxpayer must be afforded the exercise of the right to a hearing, before the assessment of compensatory interest, under penalty of invalidity of this final act, it is equally axiomatic that the exercise of such right is satisfied, with respect to guilt, with the granting him the exercise of such right before the assessment of the tax to which the CIs refer, since it is there that he will have to contest the adherence to reality, or justification, of the circumstances of fact that may constitute the grounds of that judgment of censure(5).

• Now, "in casu", it is demonstrated that, the appellant was afforded the right to a hearing, with the notification made to him of the draft report of the inspection action and from which appear, as stated in the decision appealed, all the circumstances of fact that led the AT to tax him by resorting to indicative methodology, as well as the calculation criteria of the "quantum", which means, in line with what was referred to above, no other notification had to be made to him to afford him the exercise of prior hearing, by reference, specifically, to the assessment of compensatory interest, be it because such a formality must be considered observed with the notification that, for such purpose, was made to him with reference to the tax, be it because, as for the remaining assessment prerequisites of CIs, they consist of a strictly bound conduct of the AT."

This understanding was sanctioned by the STA, which understood that:

"The truth, however, is that the assessment of compensatory interest cannot be considered a 'new fact' for purposes of the right to a hearing, particularly because they vary according to the period of time to be considered.

By 'new fact' should be understood that which may determine the alteration of the tax, corrections, etc. The assessment of interest is merely an arithmetic operation so that by itself it does not justify the right to a hearing.

Thus, even though at the time of the invitation to exercise the right to a hearing the compensatory interest were not yet assessed, the Tax Authority was not obliged to hear the appellant again merely because compensatory interest were assessed".

Moreover, as stated in the Judgment of the STA of 04-12-2013, issued in process 01111/13, "The reasoning of an assessment of compensatory interest must make known, on the factual level, the amount of the tax on which the interest accrues, the rate or rates applied and the period of its calculation.", and the reconciliation statement certainly contains all the elements referred to.

Thus, and in view of the above, the formal defect due to lack of reasoning alleged by the Petitioner must be unfounded.

ii.

Subsequently, the Petitioner alleges that the expenses incurred with commissions paid to entities with registered office in Hong Kong are deductible for tax purposes, and that they are not subject to autonomous taxation, as they correspond to operations actually carried out and do not have an abnormal character or an excessive amount.

At issue in this part is therefore the application of Articles 23-A, Nos. 1/r), 7 and 8, of the CITC, in the wording of Law No. 2/2014, of 16 January (in force in 2014), and 88, No. 8 of the same Code, which provided the following, to the extent relevant to the case:

"Article 23-A

Non-deductible expenses for tax purposes

1 - The following expenses are not deductible for purposes of determining taxable profit, even if recorded as expenses for the tax period: (...)

r) Amounts paid or owed, in any capacity, to natural or legal persons resident outside the Portuguese territory, and there submitted to a tax regime identified by regulation of the government member responsible for the finance area as a regime of taxation clearly more favorable, unless the taxpayer proves that such expenses correspond to operations actually carried out and do not have an abnormal character or an excessive amount. (...)

7 - The provision of paragraph r) of No. 1 equally applies to amounts indirectly paid or owed, in any capacity, to natural or legal persons resident outside the Portuguese territory and there submitted to a clearly more favorable tax regime, when the taxpayer has or should have knowledge of their destination, such knowledge being presumed to exist when there are special relations, pursuant to No. 4 of Article 63, between the taxpayer and the aforementioned natural or legal persons, or between the taxpayer and the agent, trustee or interposed person who proceeds to payment to the natural or legal persons.

8 - The Tax Authority and Customs notifies the taxpayer to produce proof referred to in paragraph r) of No. 1, and for this purpose, a deadline not less than 30 days must be fixed."

"Article 88

Autonomous taxation rates

(...)

8 - The following are subject to the regime of No. 1 or No. 2, as the case may be, with the applicable rates being, respectively, 35% or 55%, expenses corresponding to amounts paid or owed, in any capacity, to natural or legal persons resident outside the Portuguese territory and there submitted to a regime of taxation clearly more favorable, as defined under the Code, unless the taxpayer can prove that they correspond to operations actually carried out and do not have an abnormal character or an excessive amount. (...)

14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points with respect to taxpayers who present a fiscal loss in the period to which any of the tax facts referred to in the previous numbers related to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from CIT."

The territory of Hong Kong was included, in 2014, in the "list of countries, territories and regions with privileged tax regimes, clearly more favorable", which appears in Regulation No. 292/2011, of 8 November, which amended Regulation No. 150/2004, of 13 February.

At issue in the case sub iudice is the proof, imposed by both of the above-cited rules, regarding the effectiveness of the operations and the normal or non-excessive character of the operations, proof whose burden, pursuant to the applicable rules, rests with the Petitioner.

As stated in the Judgment of the TCA-South of 05-11-2015, issued in process 07022/13, we are faced with the "application of the rule of non-acceptance of deductible expenses when it comes to payments made to natural persons or companies established in tax havens, unless the taxpayer proves the vectors identified above:

a- That we are dealing with operations actually carried out;

b- That they do not have an abnormal character or that the amount in question is not excessive."

And further in the same judgment:

"More should be said that the law does not require any formalism in these proofs, thus the system of free proof applies to them and the taxpayer can resort to all means of proof allowed by law (cf. e.g. Articles 352 et seq. of the Civil Code). With respect to proof of the truthfulness of the operation, it will not suffice to exhibit written documents, namely contracts entered into between the parties, as these are presumed to be simulated, nor the demonstration of payment of the price, as such is not questioned. What must be the subject of proof is rather the actual provision of services, (...) or that is, the commercial fact that gave rise to the payment of the same price that appears as a cost to be deducted for CIT purposes. As for the proof of the absence of an abnormal character or of excessive expenses, this must pass through the demonstration that the contract, whose truthfulness was proven, presents itself as balanced. For this purpose, the taxpayer should demonstrate what the real importance of the advantages obtained from the contract in question is, as well as prove that the expenses established constitute the fair remuneration of those advantages, particularly, by comparison with the costs of similar services on the market."

It will therefore be in light of the criterion indicated that the legality of the tax acts sub iudice must be assessed.

Let us see, then.

Pursuant to the rules in question, and the judicial interpretation that is made of them, and which was previously exposed, it is necessary to determine whether:

a. We are dealing with operations actually carried out; and that

b. They do not have an abnormal character or that the amount in question is not excessive.

Regarding the first of these circumstances, the AT considers, in summary, that "there is no evidence whatsoever of the material carrying out of the provision of services by the companies based in HONG KONG".

With due respect, there is no justification, in concrete, for any doubt, regarding the occurrence of the operations in question.

Indeed, as results from the proven facts, the Petitioner had an exponential increase in the volume of sales in the year 2014, provided by the increase in sales of real estate to citizens from China.

On the other hand, there is verification of the circumstance – not disputed – that the real estate in question were actually sold to citizens from China, without it being ascertained or indicated any circumstance that points to them having come into contact with the Petitioner and its real estate, except through the intermediation of the entities based in Hong Kong.

Therefore, from a standpoint of normality, there should be no reasonable doubts that the services that were invoiced by the entities with registered office in Hong Kong, in conformity with the contract entered into with the Petitioner, were actually provided.

As written in arbitral process 198/2017T, in terms transposable to the present case:

"Indeed, the fact, which is not contested, that the Petitioner sold a large quantity of real estate to Chinese citizens is an indirect, but convincing, proof that there was efficient prospecting activity, because without it one cannot see how they could have known that the Petitioner had real estate for sale. On the other hand, the fact that the remuneration of B… was paid only if it resulted in the realization of the sales, ensures that there were no payments that did not have underlying prospecting activity.

For this reason, it is not justified that it not be considered proven that the expenses incurred by the Petitioner with payments to B… correspond to operations actually carried out.

In this context, it appears manifestly unjustified to require, for proof of the effectiveness of the activity developed by B…, the 'identification of human resources involved, hours applied and hourly rates per consultant', evidence of 'meetings, surveys'; 'knowing whether the person who executed it has professional experience', because, in addition to being information that normally will not be accessible to whoever contracts with a foreign company for prospecting services, there will be little concern of the purchaser when it comes to payments that are made only based on results.

It must even be said that the requirement for 'identification of human resources involved' and the determination of their professional experience in an activity with the scope described goes beyond the limits of reasonableness, because, in its literal meaning, it will encompass the identification of all those who provided the services of air transportation, services in restaurants and hotels, taxi drivers, etc."

Thus, it is to be considered that there is sufficient proof that the payments in question correspond to operations actually carried out.

In this context, it is necessary to assess whether the operations in question do not have an abnormal character or whether the amount in question is not excessive, in light of the jurisprudential understanding, previously referenced, according to which "the taxpayer should demonstrate what the real importance of the advantages obtained from the contract in question is, as well as prove that the expenses established constitute the fair remuneration of those advantages, particularly, by comparison with the costs of similar services on the market."

Regarding the verification, or otherwise, of operations with an abnormal character or excessive amount, the AT states, in summary, that:

• "not having the taxpayer produced any material proof that allows assessment of the intrinsic nature of the expense, or of its consonance with the business activity, it is not possible to assess the normal character in relation to the activity developed";

• "the payments are adequate to the real value of the services provided (...) provided that revenues compensate for the respective expenses, that is, that the revenues obtained are such as to justify the respective expense, and the service inherent to the expense was actually carried out".

Now, and from the outset, both of the criteria stated are unable to assess the verification of the prerequisites in question.

Indeed, and with respect to the non-abnormal character, it is verified or not, depending on whether there is material proof "that allows assessment of the intrinsic nature of the expense", that is, of the effectiveness of the operations.

With respect to the excessive or non-excessive character, the criterion stated by the AT is rooted in a very outdated understanding, by current doctrine and jurisprudence, that refers the business adequacy of expenses to the results of that same activity. Now, as is well known, the business nature of expenses, as, in what matters to the case, the excessive or non-excessive character thereof, should be assessed at the moment in which the same are incurred, and not at the moment in which the gains that they intend to generate are verified (or not).

Given this, and having regard to the evidence produced, and the facts given as proven, it must be concluded that both of the aforementioned criteria are met.

Indeed, in concrete, it is ascertained that in the year 2014 the Petitioner obtained sales whose value amounted to €7,202,000.00, all of them, as results from the RIT itself, to customers of Chinese nationality.

From this it will result, without any reasonable doubt remaining, that:

• the service of prospecting foreign clients interested in acquiring real estate in order to meet the prerequisites for benefiting from the Gold Visa regime, at the time of the tax facts, was a service habitually practiced and used in the business activity to which the Petitioner was dedicated, with the objective of effectively achieving the statutory objectives; and that

• the payments are appropriate to the real value of the services provided and the cost-benefit relationship is appropriate.

Thus, and with respect to the first of the aspects indicated, one can even take as a matter of public knowledge that, in the years following the institution of the Gold Visa regime and, moreover, in line with what was the intent underlying that institution, the companies operating in the real estate field made use of the services of companies specialized in intermediation between such companies and foreign citizens interested in acquiring real estate to meet the prerequisites for benefiting from the Gold Visa regime.

With respect to the second of the aspects indicated, in concrete, payments are at issue that can reach values representative of up to 17% of the price of sale of the real estate.

Now, whether taking into account the value – equally a matter of public knowledge – of around 5% practiced by national/traditional real estate mediation, whether taking into account the values practiced by the aforementioned intermediation companies that emerged to operate in the Gold Visa market, which, in the case, is ascertained to reach values up to 17%, one cannot mark as abnormal or excessive the value practiced by the entities based in Hong Kong, especially in light of the circumstances and the risk inherent to the services in question, which involve, on the one hand, the prospecting and accompaniment of persons interested in acquiring real estate, originating from geographies and cultural contexts very distant, and, on the other, the risk inherent to such services being reimbursed only in the event of the effective completion of the business and based on the value thereof.

Therefore, there are no doubts that the values in question correspond, in their context, to normal operations and do not have an excessive character.

Repeating what was written in the already-mentioned arbitral judgment issued in process 198/2017T:

"To decide whether or not there is exaggeration cannot take as comparison terms the percentages of commissions that the Tax Authority and Customs says are charged habitually by real estate companies, between 3% and 5%, because the activity developed by B… is not limited to what is normally carried out in real estate mediation, which does not involve expenses of the order of those proven to be borne by B… (payment for air travel, accommodation, food, transport, interpreters, etc.).

On the other hand, the assessment of the requirement of non-exaggeration should be carried out taking into account the situation of the taxpayer, seeking to determine whether the payment should be considered excessive, from its perspective, in the context in which it had to decide to pay for the services.

From this perspective, the payment will be excessive when it is demonstrated that the taxpayer could obtain what the same service for a lower amount.

The evidence produced shows that the Petitioner intended to sell the properties as quickly as possible, as it was planned that the process of construction and sale of the properties would be completed by 2010, five years after the beginning of the construction process, and had still not managed to sell them by 2013 and 2014, due to the situation of economic and financial crisis that affected Portugal.

The evidence produced is also to the effect that the Petitioner could not obtain prospecting of clients with payment of commissions lower than those of B…, neither would B… accept lower ones, nor to other providers of prospecting services, because none of them provided clients that would pay the sales prices that the Petitioner intended to obtain for itself.

Under these circumstances, the payment cannot be considered excessive, as it is justified by the need to obtain prospecting services and there being no alternative at a lower price.

The reasonableness of the payments made to B… is further reinforced by the fact that the Petitioner was not affected by the payments it made to it, because it only paid it when it completed the sale of the real estate and what it paid to B… was added to the sale price that the Petitioner itself set and intended to obtain for itself.

Based on the foregoing, it is concluded that the Petitioner proved that the payments made to B… were not abnormal or excessive."

As referred to in the cited judgment, it is considered that the assessment of the normal and non-excessive character of the operations must be reported to the concrete case, taking into account the specific situation in which such operations took place, and that no "tables" or formulas a priori can be formulated, which exclude mechanically certain types of operations from the scope of reasonableness, or remit them to the plane of exaggeration.

In the case, the commissions in question arise in the scenario of acute economic crisis, in which the market was practically at a standstill, and in which the services remunerated by those commissions bring a significant added value to the product sold, from the outset, and in the case, by allowing its sale, releasing funds for the reduction of liabilities and corresponding associated financial charges.

On the other hand, with the service being paid, solely based on results, there is an added risk for the service provider, which has to bear – notoriously – substantial costs to bring clients "from the other side of the world", and additional security for the purchaser of the services, who only incurs the obligation to pay, having ensured the return resulting from the completion of its sales, and it should be noted, moreover, that the activity in question allowed accommodating the additional cost, ensuring a profit margin for the seller.

Finally, in the case there is detected, nor is it substantiated by the AT, any concrete indication of fraud or tax evasion.

Therefore, the commissions paid to entities with registered office in Hong Kong should be considered deductible for tax purposes, and the corresponding payments are not subject to autonomous taxation, as they correspond to operations actually carried out and do not have an abnormal character or an excessive amount.

Thus, and in view of all the above, it is considered that, in the part now in question, the tax act object of the present arbitral action suffers from error in the factual presumptions, and consequent error of law, and must therefore be annulled, and correspondingly, in this part, the arbitral petition should succeed.

In view of all the above, the arbitral petition filed should wholly succeed, regarding:

a) The tax assessed resulting from non-consideration as deductible expenses of payments made to entities with registered office in Hong Kong;

b) The tax relating to autonomous taxation applied to payments made to entities with registered office in Hong Kong;

Consequently, the tax assessments and compensatory interest corresponding thereto, as well as the decision on the administrative claim that maintained the aforementioned tax acts, should be annulled.

C. DECISION

By which the Arbitral Tribunal hereby decides that the arbitral petition filed is wholly well-founded and, in consequence:

a) Annuls the act of additional assessment of CIT No. 2017..., referring to the year 2014, in the amount of €699,631.76, of assessment of compensatory interest No. 2017..., in the amount of €21.25 and No. 2017..., in the amount of €54,115.47, and the statement of account reconciliation No. 2017... from which results the amount payable of €707,090.56.

b) Annuls, consequently, the decision to reject the administrative claim that maintained the aforementioned assessment acts, now annulled;

c) Condemns the Respondent to costs as fixed below.

D. Value of Proceedings

The value of the proceedings is fixed at €707,090.56, pursuant to Article 97-A, No. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29 of the LRAT and No. 3 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €10,404.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the petition was wholly well-founded, pursuant to Articles 12, No. 2, and 22, No. 4, both of the LRAT, and Article 4, No. 5, of the said Regulation.

Notify.

Lisbon, 27 August 2019

The Arbitrator President

(José Pedro Carvalho)

The Arbitrator Member

(Marisa Isabel Almeida Araújo)

The Arbitrator Member

(A. Sérgio de Matos)