Process: 577/2017-T

Date: May 7, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 577/2017-T) addresses the indispensability requirement for tax-deductible costs under Article 23 of the Portuguese Corporate Income Tax Code (CIRC). The case involves A... LDA., which challenged an additional IRC assessment of EUR 57,653.44 for the 2013 fiscal year. The Portuguese Tax Authority (AT) disallowed interest expenses on a EUR 69.5 million shareholder loan from F..., arguing these costs were not indispensable for generating taxable income. The Claimant had acquired 100% of C... SA shares for EUR 118.5 million, financing the purchase through two loans: EUR 69.5 million from its sole shareholder F... and EUR 90.7 million from Bank G.... The Tax Authority accepted the bank loan interest as deductible but rejected the shareholder loan interest, claiming it financed C...'s underlying real estate asset (the D... commercial centre) rather than the share acquisition itself. The arbitral tribunal, constituted on 17 January 2018 under arbitrator Nuno Cunha Rodrigues, examined whether the shareholder loan interest satisfied Article 23 CIRC's indispensability test. The case illustrates CAAD's jurisdiction over IRC assessment challenges under the RJAT (Legal Regime of Arbitration in Tax Matters), the procedural requirements for requesting arbitral tribunal constitution, and the substantive criteria AT applies when denying corporate expense deductions based on business purpose and economic substance principles.

Full Decision

ARBITRAL DECISION

Nuno Cunha Rodrigues, arbitrator designated by the Deontological Council of the Centre for Administrative Arbitration (CAAD) to form the present Arbitral Tribunal, constituted on 17.01.2018, decides in the following terms:

REPORT

A..., LDA., (hereinafter designated as the Claimant), with the unique registration and tax identification number ..., with registered office at ..., no. ..., ..., ..., ..., ...-... requested, in accordance with subparagraph a) of article 2.1, subparagraph a) of article 5.3, subparagraph a) of article 6.2, and subparagraph a) of articles 10.1 and 10.2, all of the Legal Regime of Arbitration in Tax Matters (RJAT) and articles 1 and 2 of Ministerial Order no. 112-A/2011, of 22 March, the constitution of an arbitral tribunal in tax matters with a view to the annulment of the act of additional assessment of Corporate Income Tax (IRC) no. 2017 ... of 01.06.2017, the act of assessment of compensatory interest no. 2017 ... and the respective statement of account adjustment no. 2017 ... of 05.06.2017, all issued with reference to the 2013 fiscal year and from which a tax liability of EUR 57,653.44 resulted;

The request for constitution of the arbitral tribunal, presented on 2 November 2017, was accepted by the President of CAAD and automatically notified to the Respondent AT on 9 November following.

Pursuant to subparagraph a) of article 6.2 and subparagraph b) of article 11.1 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the assignment within the applicable deadline, and notified the parties of that designation on 27 December 2017.

Duly notified of that designation, the parties did not manifest any intention to challenge the arbitrator's designation in accordance with articles 11.1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with subparagraph c) of article 11.1 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the single arbitral tribunal was constituted on 17 January 2018.

Duly constituted, the arbitral tribunal is materially competent, in accordance with article 2.1, subparagraph a) of the RJAT.

The parties have legal personality and capacity and have standing (cfr. articles 4 and 10.2 of the RJAT, and article 1 of Ministerial Order no. 112-A/2011, of 22/03).

The Respondent filed its reply on 9 February 2018;

By order dated 12 February 2018 the Tribunal notified the parties for the holding of the meeting provided for in article 18 of the RJAT;

By agreement between the parties, the meeting provided for in article 18 of the RJAT was held on 12 March 2018, at 14:30, and on that date the witness put forward by the Claimant, B..., was examined;

In the minutes of the hearing, 1 June 2018 was set as the deadline for pronouncement of the arbitral decision;

The Claimant filed written submissions on 23 March 2018 and the Respondent filed written submissions on 6 April 2018;

The Arbitral Tribunal was duly constituted and is materially competent.

The Parties have legal personality and capacity, and are configured as having legitimate standing.

The proceedings do not suffer from any nullities and no other issues have been raised that would prevent consideration of the merits of the case, with conditions being met for a final decision to be pronounced.

II – SUBMISSIONS OF THE PARTIES:

2.1. To substantiate the arbitral request, the Claimant argues that:

(a) The Claimant had as its corporate purpose, among others, the leasing, operation and management of "D...", as well as any other acts or transactions directly related to the aforementioned activity.

(b) Within the scope of its activity, in October 2007, the Claimant decided to acquire the entirety of the share capital of C..., S.A. (hereinafter designated as C...).

(c) C... had, and still has, as its corporate purpose, the purchase and sale of real property, as well as the simple or mere administration of its sole property, maintained for enjoyment and intended for the establishment of the Commercial Centre named "D...", including the leasing thereof, as well as any other acts or transactions directly related to the aforementioned activity.

(d) For the purposes of the acquisition of the aforementioned shareholding and prior thereto, the property – the commercial centre D... – which was its sole asset, was evaluated at market prices by an independent entity, the company E..., and it was found that its value was EUR 171,677,000.

(e) From the result of the aforementioned evaluation, the value of the liabilities of C..., corresponding to a bank debt of EUR 55,000,000 – which had been obtained to finance the acquisition of the property where, by means of the lease agreement concluded, the commercial centre "D..." was established – was deducted, thus evaluating the shareholding in C... at EUR 116,677,000 (EUR 171,677,000 – EUR 55,000,000).

(f) Other balance sheet adjustments were made to that value which determined that the final acquisition price of the shareholding in C... was set at EUR 118,522,228.97, in accordance with the Claimant's report and accounts as at 31 December 2007.

(g) Following the acquisition of the shareholding in C..., the same was recorded in the Claimant's assets at the aforementioned value, that is, EUR 118,522,228.97.

(h) Considering the value at which the shareholding in C... was evaluated, the Claimant did not have sufficient available funds to carry out its purchase and for that reason resorted to borrowing from third parties, having obtained the following loans:

(i) EUR 69,473,566.83, from the sole shareholder F... and

(ii) EUR 90,670,000.00 from Bank G... – Branch in Portugal;

(i) The Claimant paid for the acquisition of the shareholding in C... in the following terms:

EUR 69,473,566.83 - corresponding to the total amount of the loan contracted with F...;

EUR 48,006,200.00 - corresponding to part of the loan contracted with Bank G... (which was granted for the total amount of EUR 90,670,000.00); and

EUR 1,042,462.14 - paid by the Claimant through the use of available funds;

in the total amount of EUR 118,522,228.00;

(j) The calculation of the market value of acquisition of 100% of the shareholding in C... and the respective payment were carried out in the following terms:

[table showing calculation details]

(l) With reference to the 2013 fiscal year, the Claimant was subject to an external general scope tax inspection determined by Service Order no. OI2016..., of 14.09.2016, issued by the Financial Administration of Lisbon, and was notified of the Final Inspection Report, which corrected the tax matter for the 2013 fiscal year in the amount of EUR 352,192.37, as a result of disregarding, for the purposes of determining taxable income for IRC purposes, the expense corresponding to the interest borne by the Claimant on the loan contracted with F..., on the basis that such charges were not indispensable for the realization of profits subject to tax or for the maintenance of the income-producing source, in accordance with article 23 of the IRC Code, in the wording applicable at the time of the facts.

(m) To that end, the Tax Inspection Services invoked that:

"(…) we are faced with two financings:

  • G... AG, in the amount of 90,255,097.56€, intended to finance the acquisition of 100% of C..., and,

  • F... (parent company), in the amount of 69,473,566.83€, intended to finance the acquisition of the property "Commercial centre and shopping park designated D...", property of C... (…)."

(n) With respect to the financing obtained by the Claimant from Bank G... AG, in the amount of EUR 90,255,097.56, the Tax Inspection Services understood that the same "(…) is intended for the pursuit of its [Claimant's] commercial activities, namely the financing of the operation to acquire 100% shareholding in the company C... S.A., NIF ... (…)", therefore, the respective financial charges meet the requirements of article 23 of the IRC Code and, to that extent, the deductibility thereof was accepted.

(o) As regards the financing agreement between the Claimant and F..., the Services understood – having as its sole basis the wording of the recitals of the financing contract – that the aforementioned loan was intended "(…) to finance the acquisition of the property" which, in accordance with the contract, would be "(…) the commercial centre and shopping park designated D..., located at ..., Portugal".

(p) However, as the Tax Inspection Services themselves admitted "(…) C... holds in its assets a property designated "Commercial centre and shopping park designated D..., constructed using financing obtained in the amount of 55,000,000.00€, for which it has been bearing financial charges that, in 2013, amounted to 1,064,878.19€ (…)".

(q) Under these circumstances, the Tax Inspection Services concluded that "(…) the company (A...) is bearing not only the financial charges associated with the loan contracted to finance the acquisition of 100% of the shareholding in the capital of the subsidiary company (C...) that it holds, but also the financial charges associated with the loan contracted to indirectly finance the acquisition of the property "Commercial centre and shopping park designated D..." owned by C... . We are, therefore, faced with a duplication of financial charges related to the aforementioned property."

(r) In summary, the Tax Inspection Services understood that, given the purpose of the loan agreement with F..., the respective financial charges could not be deductible for tax purposes, since they did not meet the requirements of article 23 of the IRC Code.

(s) Furthermore, the Tax Inspection Services stated that the respective financial charges could not be tax deductible because "(…) to these charges are added indirectly through tax transparency, the financial charges borne by company C... with the financing for the same property (…)" concluding that "(…) the singular element that characterizes the situation under analysis and that gives rise to the double deduction of financial charges has to do with the concentration, in the same company – the taxpayer – of financial charges, all related to the same property, which causes to accumulate in the company a set of expenses and which subverts the objectives, namely that of neutrality and combating tax evasion, pursued by the tax transparency regime."

(t) As a consequence of the conclusions drawn by the Tax Inspection Services, the Claimant was notified of the statement of additional IRC assessment no. 2017..., the statement of assessment of compensatory interest no. 2017... and, likewise, the statement of account adjustment no. 2017..., in which the amount of EUR 57,653.44 was found to be payable.

**2.2. For the foregoing, the Claimant requests that the present arbitral decision be "judged totally meritorious and, in consequence:

(i) The correction to the taxable income for IRC in 2013 be annulled, on the grounds that such correction incurs the vice of violation of law, through error in legal and factual assumptions, expressed in the erroneous application of article 23 of the IRC Code;

(ii) The tax acts identified above and issued with reference to the 2013 fiscal year be annulled, on the grounds that they suffer from the vice of violation of law, proceeding with the reimbursement of the amounts, in the meantime unduly paid by the Claimant plus indemnificatory interest accrued and accruing, calculated at the maximum legal rate, until full and complete payment, all with the legal consequences."

2.3. For its part, AT alleges in its reply that:

From the analysis carried out on the accounting items for the 2013 fiscal year, the tax inspection services (SIT) verified that the Claimant resorted to financing through third-party capital, namely bank financing, which was recorded in a sub-account of SNC account 25 (Financing obtained), which presented the following closing balance:

[table showing financing details]

The Claimant bore the following charges:

[table showing interest charges]

(c) In addition to the loans it contracted and for which it bore the interest referred to above, the Claimant presents, in the 2013 fiscal year, a debtor balance in the shareholders' account, sub-account 2681 – H... Lda., for which it obtained interest, as described below:

[table showing shareholder account details]

(d) Having analyzed the revenue accounts, it was found that the Claimant obtained the following profits with respect to the financing granted:

[table showing profit details]

(e) The Claimant resorted to two financing operations with companies of the Group in which it is included, one of which is its parent company, which holds its capital at 100%:

G... AG, in the amount of 90,255,097.56€.

F... (parent company), in the amount of 69,473,566.83€;

(f) Having analyzed the contracts corresponding to the aforementioned financing operations, it was possible to ascertain that the financing obtained from G... AG, in the amount of 90,255,097.56€, is "intended for the pursuit of its commercial activities", namely the financing of the operation to acquire a 100% shareholding in the company "C... S.A.", NIF....

(g) In accordance with the information taken from the transfer pricing file it is stated (on page 15) that "in October 2007 the group decided that A... would acquire 100% of the shareholding in C... SA (hereinafter designated C...), NIF...".

(h) With this decision, the Claimant came to hold a 100% shareholding in the share capital of C....

(i) The loan obtained from F... was in the amount of 69,473,566.83€.

(j) The financing contract was executed on 31 October 2007, and the loan has a term of 10 years, that is, maturing on 31 October 2017. The parties agreed on the payment of a fixed annual interest rate of 7.25%, calculated on a daily basis and on a 360-day/year basis. However, in 2013 the agreed annual interest rate changed to 0.5%. The average daily amount to be paid is 978.31€.

(l) The financing obtained from F... was carried out so as to be used "to finance the acquisition of the property", which according to the same contract, "Property" means the commercial centre and shopping park designated D..., located at ..., Portugal".

(m) In these terms, the Respondent AT considers that there are two financings:

G... AG, in the amount of 90,255,097.56€, intended to finance the acquisition of 100% of C..., and,

F... (parent company), in the amount of 69,473,566.83€, intended to finance the acquisition of the property "Commercial centre and shopping park designated D...", property of C..., which was the subject of analysis throughout the inspection report.

(n) Indeed, the analysis of the financial investments item made it possible for the inspection services to verify and confirm that as of 31/12/2013, the Claimant held a 100% shareholding in company C... S.A., NIF..., acquired on 31 October 2007.

(o) Since this company is covered by the tax transparency regime as it is a company for the simple administration of assets, in accordance with article 6 of CIRC, it imputes to its shareholders the taxable income it determines annually.

(p) Thus, and since the Claimant holds 100% of the Company "C...", it follows that 100% of the taxable income of the latter is imputed to the Claimant.

(q) Being "C..." covered by the tax transparency regime, in accordance with article 6 of CIRC, it follows that all of its taxable income should be imputed to the Claimant and taxed in the sphere of the latter, which is what happens in the case at hand.

(r) "C..." holds in its assets a property, designated "Commercial Centre and Shopping Park designated D...", constructed using financing obtained in the amount of 55,000,000.00€, for which it has been bearing financial charges that, in 2013, amounted to 1,064,878.19€.

(s) From the analysis of the Balance Sheet and Income Statement contained in the IES – Annual Declaration of Accounting Information it was possible to confirm the recording of the aforementioned financing, the corresponding financial charges, as well as the value of the property, recognized accountingly in the Investment Properties account and which present the following chronological evolution:

[table showing property details]

(t) Since "C..." is the owner of the commercial centre, it concluded with "A...", now Claimant, a contract for the transfer of operation of the aforementioned commercial centre, the value of which rents amounted in 2013 to the total amount of €4,200,000.00, which constitutes a profit of C... and a cost of the Claimant.

(u) Since 2007, the company "C..." has been presenting positive accounting results, as well as taxable results, as detailed below:

[table showing C... results]

(v) Since it is a company for the simple administration of assets, as aforementioned, the taxable profits were integrated into company A..., now Claimant.

(x) Despite the taxable income of "C..." being increased in Table 07 of model 22 of the Claimant, through tax transparency, as aforementioned, the accounting and tax results determined by A... present the following chronological evolution:

[table showing A... results]

(z) It results from this table that from 2007 to 2012, the Claimant ceased to present Taxable Income, even with the integration of the positive taxable result of "C...", through tax transparency, concluding that the taxable income imputed by "C..." to the taxpayer in the context of tax transparency is absorbed by the losses that the company under analysis determines in its activity. In 2013, although A... has already presented taxable income, the net result for the period continued to be negative.

(aa) From the analysis carried out on the Claimant's IES, the SIT verified that the negative net results, and the tax results, are essentially due to the high financial charges borne from 2007 onwards, with the financing contracted for the purchase of 100% of the shareholding in the share capital of C..., as well as the loan for the acquisition of the property "Commercial Centre and Shopping Park designated D...", assets of "C...". This situation is proven by the direct relationship that is verified between the significant decrease in financial charges in 2013 and the determination of taxable income in that same year.

(bb) On the other hand, it was verified that, for the determination of the Claimant's negative net results, the accounting recognition of impairment losses of the financial participation held in C... also contributed, which in 2013 amounted to approximately 4,500 million euros.

(cc) The Claimant contracted two financings: one to acquire 100% of the shares of C... and another to acquire the property "Commercial Centre and Shopping Park designated D...", property of C....

(dd) Accountingly, the financial charges resulting from these loans, which in the 2013 fiscal year reached the amount of 5,423,340.28€, were recognized as expenses in accounts 6911 and 6913.

(ee) The Respondent AT further considered that, if the operations and their impact on results are analyzed, in conjunction with the framework for IRC taxation purposes of each entity, indirectly, there is a duplication of financial charges in the sphere of the Claimant.

(ff) The singular characteristics of the Claimant's tax situation result from the combination of the following facts:

Holding a 100% shareholding in a company covered by the tax transparency regime – C...;

Such shareholding having been acquired from a group company using borrowing from other companies in the same group; and

Having contracted financing for the acquisition of a property owned by C..., whose shares are held 100% by A....

(gg) The Respondent AT concludes that the company (A...), Claimant, is bearing not only the financial charges associated with the loan contracted to finance the acquisition of the shareholding in the capital of the subsidiary company (C...) that it holds, but also the financial charges associated with the loan contracted to finance the acquisition of the property "Commercial Centre and Shopping Park designated D..." owned by C..., being therefore faced with a duplication of financial charges related to the aforementioned property.

(hh) And that to these charges are added indirectly through tax transparency, the financial charges borne by the company "C..." with the financing for construction of the same property.

It concludes that the Respondent AT, whether through the acquisition of the property or through the acquisition of the shares of C... that holds the property, we are faced with a duplication of financial charges in the sphere of the Claimant, since C... is covered by the tax transparency regime, and imputes to A... its taxable income.

2.4. AT concludes, in summary, that, "with the corrections made, factually and legally, properly substantiated, and no defect or illegality being able to be alleged, the present arbitral action should be judged devoid of merit, with the Respondent being absolved of the claim, with the legal consequences."

III. LEGAL REASONING

A. MATTERS OF FACT

A.1. Proven Facts

According to the principle of free assessment of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings and in accordance with its experience of life and knowledge of persons (cfr. article 607.5 of the Civil Code, as amended by Law no. 41/2013, of 26/6).

Critical analysis of the testimonial evidence produced at the meeting referred to in article 18 of the RJAT was also taken into account. The witness B... testified in a coherent manner, sustained and revealing mastery of the grounds of knowledge relevant to the provision of information.

Only when the probative force of certain means is pre-established in Law (e.g., full probative force of authentic documents - cfr. article 371 of the Civil Code) does the principle of free assessment of evidence not prevail in the evaluation of the evidence produced.

Based on the elements in the file (administrative proceedings, facts consensualized by the parties, documents incorporated in the record that were not challenged and examination of the witness), the following facts relevant to the decision are considered proven:

The Claimant had, at the time of the facts, as its corporate purpose the purchase and sale of the real property of the commercial centre designated as "D...", the leasing, operation and management of D..., as well as any other acts or transactions directly related to the aforementioned activity;

In October 2007 the Claimant acquired the entirety of the share capital of C...;

At the time of acquisition of C... its shareholding was valued at market prices by an independent entity – E... – in the context of which it was assigned the value of EUR 171,677,000 (cfr. Document 4 attached with the arbitral request);

From the result of the aforementioned evaluation, the value of the liabilities of C..., corresponding to a bank debt of EUR 55,000,000 – which was obtained for the acquisition of the D... commercial centre – was deducted, thus valuing the shareholding in C... at EUR 116,677,000 (EUR 171,677,000 – EUR 55,000,000) (cit. Documents 4 and 5 attached with the arbitral request);

Other balance sheet adjustments were made to the aforementioned value which determined that the acquisition price of the shareholding in C... was EUR 118,522,228.97, in accordance with the Claimant's report and accounts as at 31 December 2007 (cfr. Document 5 attached with the arbitral request);

Considering the value of the shareholding in C..., the Claimant had to resort to borrowing from third parties, having obtained the following loans:

EUR 69,473,566.83, from the sole shareholder F... (cfr. Document 6 attached with the arbitral request);

EUR 90,670,000.00 from Bank G... – Branch in Portugal (cfr. Document 7 attached to the arbitral request);

The loan agreement concluded with the sole shareholder F... had as its sole purpose financing the aforementioned acquisition of the shareholding in C..., although in the recitals of the contract it is generically stated that the purpose thereof is the "(…) acquisition of the property Commercial centre and shopping park designated D..." (cfr. Document 6 attached with the arbitral request);

In turn, the loan agreement concluded with Bank G... – Branch in Portugal had as its main purpose financing the acquisition of the shareholding in C..., with part thereof (EUR 42,663,800.00) having been used in the context of a loan agreement concluded between the Claimant and the company I..., Lda. (cfr. Document 8 attached with the arbitral request);

Neither of the loan contracts considered individually would be sufficient to acquire the C... shareholding;

Thus, the Claimant paid for the acquisition of the shareholding in C... in the following terms:

EUR 69,473,566.83 - corresponding to the total amount of the loan contracted with F...;

EUR 48,006,200.00 - corresponding to part of the loan contracted with Bank G... (which was granted for the total amount of EUR 90,670,000.00);

EUR 1,042,462.14 - paid by the Claimant through the use of available funds, in the total amount of EUR 118,522,228.00;

In summary and as stated above, the calculation of the market value of acquisition of 100% of the shareholding in C... and the respective payment were carried out in the following terms:

[calculation table]

The loans granted to the Claimant were secured with the pledge of rents resulting from shop use contracts arising from the operation of D... (carried out by the Claimant) and with the pledge of the quota corresponding to 100% of the share capital of C... (owner of the property D...);

Following the acquisition, the company C... continued to operate passively (bare walls) the commercial centre D..., specifically maintaining a lease agreement of the property with the Claimant which continued to manage the commercial centre through the execution of shop use contracts with shopkeepers;

The property designated as "D..." is owned by the company C...;

The aforementioned property was – and currently is – registered in the urban property matrix with the number ... in the name of C..., as owner of full ownership of that property (cfr. Document 9 attached with the arbitral request);

The Claimant was subject to an external general scope tax inspection determined by Service Order no. OI2016..., of 14.09.2016, issued by the Financial Administration of Lisbon (cfr. Documents 10 and 11 attached with the arbitral request);

The Claimant was notified of the Final Tax Inspection Report, which corrected the taxable income for the fiscal year in EUR 352,192.37, as a result of disregarding the financial charges deducted by the company with reference to the loan made by its sole shareholder, F... (cfr. Document 12 attached with the arbitral request);

The Tax Inspection Services considered, in essence, that the financial charges relating to that loan were not indispensable for the realization of profits subject to tax or for the maintenance of the income-producing source, in accordance with article 23 of the Corporate Income Tax Code ("IRC Code"), in the wording applicable at the time of the facts (cfr. Document 12 attached with the arbitral request);

To that end, the Tax Inspection Services invoked that "(…) we are faced with two financings:

  • G... AG, in the amount of 90,255,097.56€, intended to finance the acquisition of 100% of C..., and,

  • F... (parent company), in the amount of 69,473,566.83€, intended to finance the acquisition of the property "Commercial centre and shopping park designated D...", property of C... (…)." (cfr. Document 12, pages 11 and 12 attached with the arbitral request);

With respect to the financing obtained by the Claimant from Bank G... AG, in the amount of EUR 90,255,097.56, the Tax Inspection Services understood that the same is "(…) intended for the pursuit of its [Claimant's] commercial activities, namely the financing of the operation to acquire 100% shareholding in the company C... S.A., NIF... (…)", therefore, the respective financial charges meet the requirements of article 23 of the IRC Code and, to that extent, the deductibility thereof was accepted (cfr. Document 12, page 11, attached with the arbitral request).

With respect to the financing agreement between the Claimant and F..., the Services understood that the aforementioned loan was intended "(…) to finance the acquisition of the property" which, in accordance with the contract, would be "(…) the commercial centre and shopping park designated D..., located at ..., Portugal" (cfr. Document 12, page 11);

The Tax Inspection Services understood that "(…) the company (A...) is bearing not only the financial charges associated with the loan contracted to finance the acquisition of the shareholding in the capital of the subsidiary company (C...) that it holds, but also the financial charges associated with the loan contracted to finance the acquisition of the property "Commercial centre and shopping park designated D..." property of C... . We are, therefore, faced with a duplication of financial charges related to the aforementioned property." (cfr. Document 12, page 15, bold and underlined in the original, attached with the arbitral request);

Furthermore, the Tax Inspection Services stated that the respective financial charges could not be tax deductible because "(…) to these charges are added indirectly through tax transparency, the financial charges borne by company C... with the financing for the same property (…)" concluding that "(…) the singular element that characterizes the situation under analysis and that gives rise to the double deduction of financial charges has to do with the concentration, in the same company – the taxpayer – of financial charges, all related to the same property, which causes to accumulate in the company a set of expenses and which subverts the objectives, namely that of neutrality and combating tax evasion, pursued by the tax transparency regime." (cfr. Document 12, page 15 attached with the arbitral request);

As a consequence of the conclusions drawn by the Tax Inspection Services, the Claimant was notified of the statement of additional IRC assessment no. 2017 ... of 01.06.2017, the act of assessment of compensatory interest no. 2017 ... and the respective statement of account adjustment no. 2017 ... of 05.06.2017, all issued with reference to the 2013 fiscal year, in which the amount of EUR 57,653.44 was found to be payable (cfr. Documents 1, 2 and 3 attached with the arbitral request);

A.2. Unproven Facts

There are no facts unproven that are relevant to the decision of the case.

IV – ON THE LAW

A. The present proceedings present great similarities with the facts underlying the decision rendered in case no. 133/2017-T.

In that case, already decided, identical facts to those of the present record were at issue, although in that case relating to the 2012 fiscal year.

On the other hand, the legal grounds invoked by both parties in that other case were also very identical to those now invoked.

In this regard, the Claimant states, in point 11 of the written submissions presented, that "(…) based on the idea that a single dispute – of fact or law – should correspond to a single action and a single tribunal decision, the doctrine in question understands that it will be admissible to invoke the exception of res judicata, both in situations of prohibition of repetition of the decided (in which the object of the second action is equal to the object of the first action), and in situations of prohibition of contradiction with the decided (that is, where the object of the second action is contradictory to the object of the first action or where the object of the second action is dependent on the object – that is, prejudicial to – the first action)."

The Claimant refers to the existence of doctrine – without, however, citing it – apparently seeking to invoke the exception of res judicata.

Let us examine this.

The prerequisites for the admissibility of the res judicata exception are met when, after the finality of a given action, an identical action is filed, such identity of actions being verified if the subjects, claims and cause of action are identical.

In the words of Antunes Varela, Miguel Bezerra and Sampaio and Nora, the res judicata exception "consists of the allegation that the same issue was already raised in another proceeding and decided therein by a decision on the merits, which does not admit ordinary appeal" (cfr. Manual of Civil Procedure, 2nd Edition, p. 307).

However, it does not appear that such prerequisites are met in the present case since different fiscal years are at issue. In the already decided action, the 2012 fiscal year and, in the present action, the 2013 fiscal year.

It is understood, however, that the grounds accepted in the decision rendered in case no. 133/2017-T should be accepted in the present proceedings, which is why the grounds contained in that decision are cited below, and to a great extent.

Thus, also in the present case under analysis, there are three disputed legal issues:

  1. Whether there is duplication of financial charges related to the same property, as claimed by the Respondent AT;

  2. Whether the charges borne by the Claimant are justified in light of the provisions of article 23 of CIRC; and

  3. Whether indemnificatory interest is due to the Claimant.

Let us examine each of these issues.

B.1. The Respondent, in its reply, alleges that "the Claimant contracted two financings. One to acquire 100% of the shareholding in C... and another to acquire the property "Commercial centre and shopping park designated D...", property of C..., and that, "if the operations and their impact on results are analyzed, in conjunction with the framework for IRC taxation purposes of each entity, we conclude that, indirectly, there is a duplication of financial charges in the sphere of the Claimant." (cfr. articles 41 to 43 of the reply).

The Respondent AT further adds that such conclusion stems from the "singular characteristics of the Claimant's tax situation [resulting] from the combination of the following facts: (i) Holding a 100% shareholding in a company covered by the tax transparency regime – C...; (ii) Such shareholding having been acquired from a group company using borrowing from other companies in the same group; and (iii) Having contracted financing for the acquisition of a property owned by C..., whose shares are held 100% by A.... (cfr. article 44 of the reply)

In light of the proven facts and the documentary elements brought to the record, it is verified, indeed, that the additional IRC assessment at issue results from a correction to the taxable income for IRC purposes for the 2013 fiscal year made by AT's SIT, in the amount of EUR 352,192.37, as a result of disregarding, for the purposes of determining taxable income for IRC purposes, the expense corresponding to the interest borne by the Claimant with a loan contracted from F..., on the grounds that such charges were not indispensable for the realization of profits subject to tax or for the maintenance of the income-producing source, in accordance with article 23 of the IRC Code, in the wording applicable at the time of the facts.

It is also verified that, in the context of the operation to acquire company C..., carried out in October 2007, the Claimant obtained the two loans in the total amount of EUR 117,479,766.83: (a) EUR 69,473,566.83 relating to the loan agreement executed with F... and (b) EUR 48,006,200 relating to the loan agreement executed with Bank G....

The Claimant also had an additional amount of the loan obtained from Bank G... (EUR 42,663,800.00, part of the total borrowed of EUR 90,255,097.56) which was used in a loan agreement executed between the Claimant and I..., Lda.

The central question turns on whether, as claimed by the Respondent AT, the loan contracted from F... was carried out so as to be used "to finance the acquisition of the property "Commercial centre and shopping park designated D..." or whether this did not occur, despite the text of the contract executed with F....

In this regard, the now Claimant argues that "it should be considered that, the fact that the loan agreement executed between the Claimant and F... establishes that the borrowed amount is intended for the acquisition of the property owned by C..." should not be affirmed, "it being verified that, accountingly and materially, the aforementioned loan was intended, indeed, for the acquisition of the shareholding in C..." which is why "the Tax Inspection Services should have considered this situation for all legal purposes." (cfr. article 74 of the initial petition).

Despite the wording of the loan agreement executed between the Claimant and F... pointing to the direct purchase of the "Commercial centre and shopping park designated D..." (and not to the indirect acquisition, by means of the acquisition of the entire shareholding in C...), owned by C..., the truth is that the values recorded in the Claimant's accounts (which were not challenged) do not permit the conclusion that the aforementioned loan was intended for the acquisition of the aforementioned property.

It thus appears pertinent to take into account the settled doctrine and case law which points in the direction of making prevail, in the field of Tax Law, substance (economic) over form (legal).

It is therefore justified, in the present case, to verify whether the accounts (as a translation of economic reality) of the now Claimant confirm or rather rebut the suspicion of economic reality that the Respondent raises in light, essentially, of the legal appearance given by the wording of the loan agreement executed with F... (an appearance that is not denied or contradicted by the Claimant).

Let us examine this.

From careful reading of the record, it is concluded that the accounting documents of the now Claimant (accounts whose veracity is not challenged by the Respondent) belie the legal appearance given by the reading of the above contract.

These are the elements that permit reaching such conclusion (vd., also, points 1.6 to 1.11 of the proven facts):

The total amount of the loan contracted from F... (EUR 69,473,566.83) and part of the loan contracted from Bank G... (EUR 48,006,200.00) were used for the acquisition of the entirety of the shareholding in C..., whose acquisition price amounted to €118,522,228.97, in accordance with the Claimant's report and accounts as at 31/12/2007;

The acquisition value of €118,522,228.97 corresponds to the value of the (sole) asset of C... (the 'Commercial centre and shopping park designated D...'), – whose market value was, according to an evaluation made by the independent entity company E..., €171,677,000.00 – from which the value of a bank debt of €55,000,000.00 was deducted and minor balance sheet adjustments were added;

According to the Claimant's balance sheet as at 31/12/2007, the 100% shareholding in the share capital of C... was acquired by the now Claimant for the aforementioned amount of €118,522,228.97, which was paid using the two aforementioned loans (with F... and Bank G...).

Despite the wording of the loan agreement executed between the Claimant and F... pointing to the direct purchase of the property 'Commercial centre and shopping park designated D...', (and not to the indirect acquisition, by means of the acquisition of the entire shareholding in C...), owned by C..., the values recorded in the Claimant's accounts (which were not challenged) do not permit the conclusion that the aforementioned loan was intended for the acquisition of the aforementioned property. On the contrary: only by adding the value of the loan granted by F... to the Claimant to the value (of part) of the loan granted by Bank G... could the Claimant (as indeed came to achieve) acquire the entirety of the share capital of C..., since the total value of this latter loan (€90,670,000.00) would be insufficient to materialize the operation to acquire C... (€118,522,228.97).

It should be noted, further, that, if the acquisition of the aforementioned property had occurred directly, using the loan granted by F... (as emerges from the Respondent's argumentation), then there should be (and there is not) an accounting trail (namely, at the level of cash) of that significant amount in the sphere of the Claimant (€69,473,566.83) – since the transaction did not materialize.

But, as stated, this does not occur.

On the contrary, all accounting documents end up confirming that the (real) intention underlying the contract executed between the Claimant and F... was to enable the indirect acquisition of the property through the direct acquisition of the entire shareholding in C.... If the (real) intention had not been this latter (but rather to acquire the property directly), then it would also have to be concluded that the amount loaned by F... was not, by itself, sufficient for such purpose (as can be read above, the market value of the property was, according to an evaluation made by the independent entity company E..., €171,677,000.00).

From the foregoing, it is concluded that the aforementioned loan was intended (in its entirety and together with part of the loan that was contracted from Bank G...) for the acquisition of the entirety of the shareholding in C....

And, being thus, the deduction of the charges relating to these loans by the now Claimant does not configure (nor is it demonstrated that it aimed at) the duplication of charges that was invoked by AT, nor, consequently, the also alleged "[subversion of] the objectives [...] of neutrality and combating tax evasion, pursued by the tax transparency regime." (cfr. article 52 of the reply).

The Respondent AT alleges, in this regard, that, "given the purpose of the financing of €69,473,566.83 [«for acquisition of the property 'Commercial centre and shopping park designated D..., which is property of C..., whose shares were acquired by A..., Lda.»], it should be stressed, as stated in the respective contract, and was duly demonstrated in the inspection report, it was verified not to be in compliance with the provisions of article 23 of CIRC, whereby the corresponding financial charge, in the amount of 352,192.37€, was not considered an expense for the fiscal year for tax purposes, having been added to the taxable result of 2013". (cfr. article 55 of the reply).

However, as noted previously, the financing requested from F... was not intended for the acquisition of the property owned by C..., it was rather intended for the acquisition of the entirety of the shares representing the capital of C....

It does not, consequently, have foundation to understand – as the Respondent AT does – that the aforementioned financing aimed at the acquisition of a property that was already owned by the Claimant (as stated, the acquisition of C... was only possible through the use – together with another – of this financing and exhausted, by itself, the need to acquire the property held by C...).

B.2. The Respondent AT further understands, echoing the Inspection Report, that such charges would not be indispensable for the realization of profits subject to tax or for the maintenance of the income-producing source, in accordance with article 23 of CIRC.

It adds, to that end, that, "in the situation sub judice, doubt is raised about the existence of a direct connection between the financial charges borne by the Claimant and the realization of income or gains subject to tax, since, by virtue of the application of the tax transparency regime to the subsidiary company, the income that contributed to the determination of the taxable income imputed to A... are cancelled by the expenses borne by this, with the financial charges for property acquisition" (cfr. article 47 of the reply).

Here too the Respondent is not correct, for two reasons:

i) Because, as noted previously, there is no deduction of financial charges related to the acquisition of the property, but rather with the acquisition of the entirety of the shareholding in C...; and

ii) Because the operations at issue (the loans contracted by the Claimant from F... and Bank G...) generated financial charges that were borne by the now Claimant within the scope of its purpose and activity, not resulting from those any indication (nor having been presented evidence to the effect) that the expenses resulting therefrom did not have the potential to positively influence the profits or gains of the Claimant, or that they did not aim at the realization of the company's purposes (taking into account here the broad margin of discretion allowed to corporate activity under the principles of freedom of economic initiative and tax neutrality). It should be noted that these conditions – expenses, actually or potentially, adequate to the realization of profits or gains (or indispensable to the maintenance of the company's productive source), and identification of the operation with the activity developed by the taxpayer – are essential to assess the indispensability of the charges at issue in light of article 23 of CIRC.

It should also be noted that the economic results of the operations at issue are not a requirement to be considered for purposes of tax acceptance thereof.

In the same sense that has been presented here, see, for example, the following court decisions and arbitral decisions, also noted in the CAAD decision no. 133/2017-T:

  • "In the understanding that doctrine and case law have come to adopt for purposes of ascertaining the indispensability of a cost (cfr. art. 23 of CIRC in the wording in force in 2001), AT cannot review the soundness and appropriateness of management's business decisions, under pain of intruding upon the freedom and autonomy of management of the company. Thus, a cost or loss will be accepted for tax purposes if, in a judgment made as of the time it was incurred, it is adequate to the productive structure of the company and the obtaining of profits, even if it proves to be an economically unfruitful or economically ruinous transaction, and AT can only disregard those that do not fall within the scope of the taxpayer's activity and were incurred, not in the interest thereof, but for the pursuit of objectives alien (when it can be concluded, based on the rules of common experience, that it did not have the potential to generate profits). [...]. [the] requirement of a necessary and direct causal relationship between costs and profits has long [been] rejected by doctrine and case law." (Decision of the Supreme Administrative Court of 28/6/2017, case 0627/16);

  • "[...] the concept of indispensability of costs is an indeterminate concept, and it has fallen to case law to fill it, but in a case-by-case manner, and no concrete definition thereof has emerged from such labor. But that indeterminacy does not permit the Tax Administration to consider it under the criterion of its reasonableness or even necessity or convenience. [...] The power that the Industrial Contribution granted to the DGCI in article 26 of CI and that permitted it to reject the deductibility of certain costs ceased to exist. The rule in accordance with CIRC is that correctly recorded expenses are tax costs. As also stated in the same court decision … «the criterion of indispensability was created by the legislator not to allow the Tax Administration to interfere in company management dictating how it should apply its means but to prevent the fiscal consideration of expenses that, even if known as costs, are not within the scope of the company». Rui Duarte Morais argues, in Notes to IRC, Almedina Coimbra, 2007, p. 87, that the cost should be considered indispensable whenever the charge that originates it derived from «a genuine business motivation – the understanding of the shareholders and/or managers of the company, the only ones to whom it falls to decide on the social interest». Following, moreover, António Moura Portugal who, in The Deductibility of Costs in Portuguese Tax Case Law, Coimbra Editora, 2004, pp. 133 et seq., argues that «indispensability must be interpreted in light of the corporate purpose. It being no longer tolerable to use the criterion of reasonableness as a basis for quantitatively limiting the charges incurred by taxpayers. Indispensability should be assessed based on a positive judgment of subsumption in corporate activity which by nature should not be reviewed by Tax Law which should not interfere, let alone assess, the taxpayer's business decisions. Indispensable costs thus equate to expenses incurred in the interest of the company. The tax deductibility of the cost should depend only on a justified relationship with the company's productive activity and this indispensability is verified whenever, by operation of the doctrine of specialization of legal entities, corporate operations fall within its capacity by subsumption to their respective corporate purpose and in particular whenever they connect with the obtaining of profit, albeit in a direct or indirect manner»." (Decision of the Supreme Administrative Court of 5/11/2014, case 0570/13);

  • "The legal interpretation of the concept of «indispensability», as provided for at the time in art. 23 of CIRC, has been, as doctrine and case law show, equated to costs incurred in the interest of the company; to expenses borne within the scope of activities arising from its corporate purpose. Only when expenses result from decisions that do not meet such requirements should they be disregarded. Now, given that corporate entities have a scope or corporate objective defined in their bylaws, with a view to the realization of the purpose for which such corporate entities are formed – the obtaining of a surplus to be distributed among shareholders – then acts of management that contribute to such purpose shall constitute the activity of enterprises. Productive activity should not be understood in a restrictive sense, but rather a broad one, meaning activity related to an income-producing source of the entity bearing the expenses. [...]. [...] the «activity» of an enterprise does not, as often seems to emerge from some interpretations, exhaust itself in the set of operational acts. «Activity» is also the set of operations that have as purpose the realization of investments or the alienation of assets, the acquisition of financial holdings and their subsequent alienation, the application of liquidity in investments or short-term securities and their management, receipts and payments resulting from operational or non-operational income and expenses, and many others not expressly referred to here. The management of enterprises has, in essence, as purpose obtaining a surplus from the use of assets held by economic-business entities. Such assets are, even through their normative-accounting classification, divided into different types: tangible fixed assets/immobilized assets (e.g., machinery allocated to production), intangible (e.g., manufacturing patents), financial assets (e.g., shareholdings), non-current assets held for sale (e.g., machinery that ceased to be allocated to production and is intended to be sold in the short term), inventories/stocks (e.g., raw materials) and so on. Constituting this vast array of assets the means that management has at its disposal to generate income and surpluses, it is natural that the purchase of physical assets for investments and its eventual alienation (disinvestment), the purchase and sale of financial holdings, the application of liquidity, receipts and payments from activity, all this forms part of what are considered normal or appropriate acts of the management of an enterprise." (Arbitral Decision of 8/4/2017, case 480/2016-T);

  • "Article 23, no. 1, of CIRC establishes the rule that «expenses are those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income-producing source». [...]. According to Tomás Tavares, «the legal notion of indispensability thus cuts across, on an economic-business perspective, by filling, directly or indirectly, the ultimate motivation for obtaining profit. Indispensable costs equate to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumable in a profit-making profile. (...) Indispensability subsumes every and any act performed in the interest of the company... The legal notion of indispensability thus represses acts at odds with the purpose of the company, not insertable in the social interest, especially because they do not aim at profit»." (Arbitral Decision of 6/12/2016, case 341/2016-T).

From all the foregoing, the reasoning of the contested additional assessment incurs in error of fact and law, with the Claimant being correct.

In these terms it is necessary to proceed with the present arbitral request, with the consequent annulment of the additional IRC assessment no. 2017 ... of 01.06.2017, the act of assessment of compensatory interest no. 2017 ... and the respective statement of account adjustment no. 2017 ... of 05.06.2017, all issued with reference to the 2013 fiscal year and in accordance with which a tax liability of EUR 57,653.44 was determined.

B.3. The Claimant couples with the request for annulment of the act of additional assessment at issue in the present record, the condemnation of AT to pay indemnificatory interest for the unduly paid tax liability relating to the tax act under analysis.

Pursuant to article 43.1 of the General Tax Law (LGT), indemnificatory interest is due when it is ascertained, in administrative reclamation or judicial challenge, that there has been error attributable to the services from which resulted payment of the tax liability in an amount greater than legally due.

It is therefore a necessary condition for the attribution of the aforementioned interest the demonstration of the existence of error attributable to the Tax Administration.

In that sense, vd., for example, the following court decision: "The right to indemnificatory interest provided for in no. 1 of art. 43 of LGT [...] depends on it having been demonstrated in the record that this act is affected by error in the presuppositions of fact or law attributable to AT." (Decision of the Supreme Administrative Court of 30/5/2012, case 410/12).

In the case at hand, it is manifest that, in the sequel to the illegality of the contested additional assessment, for the reasons pointed out previously, the requirements for the right to indemnificatory interest are met.

Although the judicial challenge proceedings is essentially a pure annulment proceedings – as provided for in articles 99 and 124 of the Code of Administrative Tax Procedure (CPPT) – a judgment for condemnation of the tax administration to pay indemnificatory interest may be pronounced therein.

On the other hand, there is ground for reimbursement of the tax paid by the Claimant, by force of the provisions of articles 24.1, subparagraph b), of the RJAT and 100 of the LGT, since this is essential to "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been undertaken".

Consequently, the now Claimant is entitled to indemnificatory interest, on the amount that was unduly paid, in accordance with article 43.1 and 3, subparagraph c), of the LGT and article 61 of the CPPT.

Indemnificatory interest is due and calculated based on the amount unduly paid, until its full reimbursement to the Claimant, at the legal rate, in accordance with the articles, articles 43.1, nos. 1 and 4, and 35.10, of the LGT, 61 of the CPPT and 559 of the Civil Code and Ministerial Order no. 291/2003, of 8 April (without prejudice to any subsequent changes in the legal rate).

V – DECISION

In these terms, the Arbitral Tribunal decides:

  1. To judge the present request for arbitral pronouncement meritorious and, in consequence, to annul the additional IRC assessment for 2013 that is being challenged;

  2. To judge the request meritorious also with respect to the payment of indemnificatory interest accrued and accruing, calculated at the maximum legal rate, until full and complete payment.

VI – Value of the Case

The value of the case is fixed at €57,653.44 (fifty-seven thousand six hundred fifty-three euros and forty-four cents) in accordance with article 32 of the Administrative Court Procedure Code (CPTA) and article 97-A of the Code of Administrative Tax Procedure (CPPT), applicable by force of the provisions of article 29.1, subparagraphs a) and b), of the RJAT, and article 3.2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VII – COSTS

Costs to be borne by the Respondent AT, in the amount of €2,142.00 (two thousand one hundred forty-two euros), in accordance with Table I of the RCPAT, and in compliance with the provisions of articles 12.2 and 22.4, both of the RJAT as well as the provisions of article 4.4 of the cited Regulation.

Notify accordingly.

Lisbon, 7 May 2018

The Arbitrator

(Nuno Cunha Rodrigues)

Frequently Asked Questions

Automatically Created

What is the indispensability requirement for tax-deductible costs under Article 23 of the Portuguese IRC Code (CIRC)?
Under Article 23 of the Portuguese IRC Code (CIRC), tax-deductible costs must be indispensable for realizing taxable profits or maintaining the income-producing source. This requirement demands a direct, necessary connection between the expense and the company's business activity generating taxable revenue. The Portuguese Tax Authority applies a substantive analysis examining whether costs genuinely serve business purposes rather than merely formal compliance, considering economic substance over legal form when evaluating financing structures and related-party transactions.
How did the CAAD arbitral tribunal rule on the additional IRC tax assessment for the 2013 fiscal year in case 577/2017-T?
The CAAD arbitral tribunal in case 577/2017-T was constituted on 17 January 2018 to review an additional IRC assessment of EUR 57,653.44 for fiscal year 2013. The Tax Authority had disallowed interest expenses on a EUR 69.5 million shareholder loan, arguing these costs failed Article 23 CIRC's indispensability requirement. The tribunal held hearings on 12 March 2018, examined witness testimony, and received written submissions from both parties, with a decision deadline set for 1 June 2018. The case centered on whether financing costs for acquiring a subsidiary's shares constituted indispensable expenses under Portuguese corporate tax law.
Can a company challenge an additional IRC tax assessment and compensatory interest through CAAD tax arbitration in Portugal?
Yes, companies can challenge additional IRC tax assessments and compensatory interest through CAAD tax arbitration in Portugal. Under Article 2(1)(a) of the RJAT (Legal Regime of Arbitration in Tax Matters) and Ministerial Order 112-A/2011, taxpayers may request arbitral tribunal constitution to dispute tax assessments. The procedure requires submitting a request to CAAD, which designates an arbitrator from its Deontological Council. Parties have standing under Articles 4 and 10(2) RJAT, and the tribunal provides an alternative to judicial courts for resolving tax disputes efficiently.
What criteria does the Portuguese tax authority (AT) use to deny corporate expense deductions under Article 23 of the CIRC?
The Portuguese Tax Authority (AT) denies corporate expense deductions under Article 23 CIRC when costs fail the indispensability test, meaning they lack necessary connection to generating taxable income or maintaining income sources. AT examines economic substance, scrutinizing whether financing arrangements serve genuine business purposes or constitute tax-motivated structures. In related-party transactions, AT may recharacterize the true beneficiary of financing, particularly when shareholder loans appear to fund underlying assets rather than stated purposes. AT applies anti-avoidance principles, analyzing whether expenses align with the company's actual business operations and commercial rationale.
What is the legal procedure for requesting arbitral tribunal constitution under the RJAT to dispute IRC tax assessments in Portugal?
The legal procedure for requesting arbitral tribunal constitution under RJAT involves: (1) submitting a written request to CAAD under Articles 2(1)(a), 5(3)(a), 6(2)(a), and 10(1)-(2) RJAT, identifying the contested tax assessment; (2) CAAD President accepts and notifies the Tax Authority automatically; (3) the Deontological Council designates an arbitrator within statutory deadlines per Article 6(2)(a) and 11(1)(b) of Decree-Law 10/2011; (4) parties may challenge the arbitrator designation under Articles 6-7 of the Deontological Code; (5) tribunal constitutes formally, confirming material competence, legal personality, capacity and standing; (6) proceedings follow Article 18 RJAT, including hearings and written submissions, culminating in a binding arbitral decision.