Process: 58/2017-T

Date: September 25, 2017

Tax Type: IRC IVA

Source: Original CAAD Decision

Summary

CAAD Decision 58/2017-T addresses the deductibility of consulting expenses under IRC and the right to IVA deduction when the Tax Authority challenges the materiality of services. The taxpayer (A…) paid €180,000 in 2011 and €140,000 in 2012 to service providers B… and C…, properly documenting and accounting for these transactions. The Tax Authority corrected both IRC and IVA, arguing the services were simulated or their necessity unproven. The arbitral tribunal ruled that article 75(1) LGT establishes a legal presumption of truthfulness for properly documented and accounted expenses. This presumption can only be rebutted by contrary evidence proving simulation, not mere doubt. Under article 74(1) LGT, the burden of proving simulation rests on the Tax Authority when invoking article 19(3) CIVA. The tribunal emphasized that VAT deduction embodies the neutrality principle—deduction is the rule, limitation the exception. Since the Tax Authority failed to prove with requisite certainty that services were simulated or unperformed, despite generating doubts, the IVA corrections were declared illegal. The decision reinforces that procedural doubts must be resolved against the Tax Authority when it bears the burden of proof, protecting taxpayers' rights when transactions are properly formalized and documented in compliance with commercial and tax legislation.

Full Decision

the present process essentially involves questions relating to proof of the materiality of the activity of provision of services to which the contracts concluded by A… with B… and C… refer.

As referred to in the reasoning of the decision on facts, the evidence produced did not make it possible to ascertain with certainty what concrete activity was developed by B… and C… within the scope of the aforementioned service provision contracts, there being serious reasons to doubt that activities had been developed in the number and quality corresponding to the payments made by A… .

In all situations in which, after the production of evidence, a situation of uncertainty is reached about the facts relevant to the decision of the case, one must resort to the rules of burden of proof.

The essential rules regarding burden of proof are contained in articles 74 and 75, no. 1, of the LGT.

The primordial rule regarding burden of proof is enunciated in article 74, no. 1, of the LGT which establishes that "the burden of proving the facts constitutive of the rights of the tax administration or of the taxpayers rests on whoever invokes them".

The application of this rule comes down to the fact that doubt about the reality of a fact is resolved against the party that invokes it, which is the party to whom the fact benefits (article 414 of the CPC).

Since it is the Claimants who invoke that work was carried out in the interest of A… within the scope of the aforementioned service provision contracts, the burden of proof rests, in principle, with them.

However, article 75 of the LGT establishes a legal presumption in favor of the taxpayer establishing that "the declarations of taxpayers presented in the manner provided by law are presumed to be true and in good faith, as well as the data and calculations entered in their accounting or accounts, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends".

Whoever has a presumption in his favor has to prove the facts that are its premises, but does not have to prove the fact to which it leads, as inferred from article 350, no. 1, of the Civil Code.

However, this presumption ceases in the cases provided for in no. 2 of the same article 75, namely when "the declarations, accounting or accounts reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent knowledge of the real taxable matter of the taxpayer" and "the taxpayer does not fulfill the duties incumbent on him to clarify his tax situation, except when, in accordance with the present law, the refusal to provide information is legitimate".

It is in this light that the corrections made by the Tax and Customs Authority are to be assessed, on which the challenged levies are based.

3.1. Corrections relating to VAT

The corrections made under VAT were based on article 19, no. 3, of the CIVA which, in the wording in effect in 2011 and 2012, established that "tax resulting from a simulated operation or in which the price contained in the invoice or equivalent document is simulated cannot be deducted".

As the documents corresponding to the services provided were issued and the respective accounting entries were made, the presumption of truthfulness provided for in article 75, no. 1, of the LGT applies, which establishes that "the declarations of taxpayers presented in the manner provided by law are presumed to be true and in good faith, as well as the data and calculations entered in their accounting or accounts, when these are organized in accordance with commercial and tax legislation, without prejudice to the other requirements on which the deductibility of expenses depends".

This presumption does not apply to proof of the requirements for deductibility of expenses, by force of the final part of this rule, but does apply to proof of the facts recorded in the accounting.

Thus, the fact that the expenses relating to that service provision were properly recorded in the accounts, with support in receipts, with payment of the corresponding VAT, allows one to presume that the services referred to in the receipts were provided.

Being faced with a legal presumption, it can only be rebutted by contrary evidence (article 350, no. 2, of the Civil Code), and it is not sufficient to rebut it that, through mere counter-evidence (article 346 of the Civil Code), doubt is generated about the presumed fact.

In the case at hand, despite the doubts that were referred to regarding the performance of the contracted and paid services, there is no evidentiary support to assert with the certainty required of a judicial decision that none or some of the service provisions to which the contracts refer and were documented with the issuance of receipts were performed.

In fact, since it is the Tax and Customs Authority that claims that the operations were simulated or the prices were simulated (which are the premises of the application of no. 3 of article 19 of the CIVA), the burden of proof of this alleged simulation rests on it, in accordance with the rule of no. 1 of article 74 of the LGT.

Under VAT, the right to deduction is the rule, with limitations being the exception. In fact, the exercise of the right to deduction is the emanation of a nuclear principle under VAT, the principle of neutrality. Thus, limitations to this exercise may only occur exceptionally and duly justified, and this is the consensual orientation in European and national jurisprudence.

In these terms, doubts about the alleged simulation must be valued procedurally against the Tax and Customs Authority, which leads to considering the simulation not proven and, these being operations that confer the right to deduct the VAT supported, to conclude that the VAT levies are illegal due to error regarding the factual premises.

Given the above, the request for arbitral pronouncement proceeds regarding the declaration of illegality of the corrections made under VAT and respective levies.

3.2. Corrections relating to CIT

The Tax and Customs Authority made corrections under CIT, for the years 2011 and 2012, by understanding that "the amounts entered in the supply and external services account, sub-account 621113 - "Consulting" and which competed negatively for the taxable profit entered in the CIT income declaration, which totaled €180,000.00 in 2011 and €140,000.00 in 2012, relating to consulting services, whose support documents were issued by B… in 2011 and C… in 2012, are not susceptible to being accepted as tax deductible expense, pursuant to the provisions of article 23 of the CIRC".

In the reasoning for this conclusion, the Tax and Customs Authority invokes, among other things, that "no direct or indirect connection was established between those consulting expenses and the income obtained by the company, with clarification only that the income generated is not limited to the year in which the expense is incurred, but will have positive repercussions in the following years, not proving the indispensability of the value of those services".

In accordance with the provisions of article 17 of the CIRC, "the taxable profit of collective entities and other entities mentioned in subsection a) of no. 1 of article 3 is constituted by the algebraic sum of the net result of the period and of the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and eventually corrected in accordance with this Code".

Article 23, no. 1, of the CIRC, in the wording of Decree-Law no. 159/2009, of 13 July, establishes that "expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of production".

To assess whether certain expenses with service provision that were recorded in the accounts may have relevance as "expenses" it is essential to know what those services consisted of, as without that knowledge one cannot conclude regarding indispensability for the realization of income subject to tax or for the maintenance of the source of production.

The burden of proof that certain services were provided in the interest of the company rests on the taxpayer, who alleges this, regarding which services were actually provided (article 74, no. 1, of the LGT).

The receipt or invoice relating to the provision of services are means of proof that services referred to in them were provided. But, if from the description that appears in those documents, because it is generic, one cannot conclude which services were actually provided, the burden of proving which services those were rests on the Claimant, for the purpose of ascertaining the aforementioned indispensability, which must be proven, as results from the terms of no. 1 of article 23 of the CIRC, in the aforementioned wording.

The presumption of truthfulness of the data and calculations entered in the accounting or accounts of taxpayers, provided for in no. 1 of article 75 of the LGT, is limited, naturally, to data that can be ascertained on the basis of these elements and not to those not contained in them. In the case, the presumption allows one to conclude that consulting services were provided, but not which specific services were provided and the adequacy of the payments to the services provided.

On the other hand, this presumption does not extend to the indispensability of expenses for purposes of that article 23, no. 1, of the CIRC, as results from the final part of no. 1 of article 75 in referring that the presumption does not prejudice "the other requirements on which the deductibility of expenses depends".

As has been understood by the Central Administrative Court of the South, if the Tax and Customs Authority, "acting submitted to the principle of legality, with reasoning, triggers doubt about the justified relationship of a certain expense with the taxpayer's activity, necessarily and logically, being better equipped for this, it is incumbent on the latter to provide an explanation about the "economic congruence" of the operation, which is not fulfilled by abstract and conclusive allegation that the expense is in the interest of the company and/or the existence of a justified relationship with the activity developed, demanding instead that the taxpayer alleges and proves concrete, reviewable facts, capable of demonstrating the reality, truthfulness, of the business activities causing the recorded expenses, in order that, among other things, the tax control function of AT is not made impossible" ([3]).

In the case at hand, the Claimant A…, was specifically notified, during the inspection, to "detail and specify the services performed by those providers", but neither through the contracts concluded nor through the clarifications provided is it possible to ascertain which services were actually provided, nor how the values of the contracted and paid services were calculated.

To be able to prove that the paid services were indispensable for the realization of income subject to tax or for the maintenance of the source of production it would be necessary for facts to be ascertained that would make it possible to know which services were provided and how the global values fixed in the contract were calculated, namely, as the Tax and Customs Authority refers, some unit of measure such as "hours, commission based on the value of contracts obtained, recruitment of new clients, number of interviews for hiring personnel or other".

Furthermore, as the amounts were fixed globally in the contracts before services were provided, their fixing was carried out without ascertainment of the quality and quantity of the services that were to be provided, so that from this fixing of global amounts no inference can be made about the actual provision of services that should be remunerated in the contracted manner.

The Tax and Customs Authority presented certain indicators, on the basis of which it sustained with reasonableness an argument that questioned the necessity of contracting B… and C… for obtaining A…'s results, and, consequently, the indispensability of the costs inherent in those contracts.

The considerations produced by the Tax and Customs Authority were not effectively contradicted by the Claimants, to whom the burden of proof of the indispensability of the costs legally rests. In fact, on the one hand, they did not bring to the process probative material attesting to the existence of specific services performed by B… and C…, namely, emails and reports sent to the Claimant by them or other relevant documentary evidence to justify the debits made as consulting. On the other hand, they limited themselves to the production of statements from the interested parties themselves, without any confirmation of testimonial evidence outside the family and business circle.

Thus, as it is necessary to know which services were actually provided to assess whether or not they should be considered "demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of production", for purposes of article 23, no. 1, of the CIRC, the infeasibility of this proof, which results from the lack of evidence of facts whose burden of proof rests on the taxpayer, must be valued against him, leading to a negative judgment regarding indispensability.

In this context, it cannot be considered demonstrated that the corrections made under CIT are affected by any defect, so the request for arbitral pronouncement is dismissed in the respective part.

4. Request for Reimbursement of Amounts Paid by A…

The Claimant A…, requests the reimbursement of the amount of €183,209.63, which it paid.

For what was said, only the corrections under VAT and respective levies are illegal, so the Claimant A…, only has the right to reimbursement of the amounts paid relating to those levies.

This request thus proceeds, only in the part relating to the VAT levies.

5. Requests for Consideration for Offsetting the Tax Owed by the Claimant A… as title of VAT and CIT of Values Already Paid Personally by the also here Claimants C… and B…

This request is formulated by the Claimant A…, on a subsidiary basis, so that, proceeding the request for arbitral pronouncement regarding the VAT levies, it need only be assessed with respect to CIT.

In fact, the amounts received by C… and B… are subject to IRS and not CIT and, being their income, it is by them due the corresponding IRS.

Therefore, there is no legal support for considering the IRS paid by them to offset the CIT owed by the Claimant A…, for having deducted from its taxable profit expenses that cannot be relevant for this purpose.

There are several expenses that companies bear that, even if they are properly recorded in the accounts, are not relevant for the formation of taxable profit, such as those that are not demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of production and those specifically indicated in article 45, no. 1, of the CIRC, in the wording of Decree-Law no. 159/2009.

In all these situations, CIT is owed based on taxable profit, cumulatively with IRS or other taxes that may eventually be owed by whoever enjoys the proceeds corresponding to those expenses.

Thus, there is no legal support for this offsetting request, so it is to be judged dismissible.

6. Request for Return to Claimants C… (2012) and B… (2011) of Amounts Paid by Them, as Title of VAT and IRS for Services Rendered to A… or Return of Amounts Paid Relating to the Challenged Levies

Claimants C… and B… base these requests "in accordance with the general terms of law, which impose the return of what was provided on the basis of the transaction considered null and on the violation of legal norms that prevent double taxation".

It is manifest that neither of these premises is verified.

In fact, on the one hand, the contracts they concluded are not null, as the only ground advanced for their nullity is simulation and, as referred to, it was not proven that the contracts were simulated.

On the other hand, even if the contracts were affected by nullity, there would be no ground for excluding taxation under IRS, as, by force of the provision in article 38, no. 1, of the LGT, "the invalidity of legal transactions does not prevent taxation, at the moment when this should legally occur, if the economic effects intended by the parties have already been produced".

Furthermore, there is no situation of double taxation, as Claimants C… and B… are taxed only once under IRS, for the income they earned and the Claimant under CIT is taxed for the taxable profit it obtained, determined in accordance with article 17 and following of the CIRC.

As to the cumulation of taxation of those who receive income with the taxation of company that makes payments that are not relevant for the formation of taxable profit, it results directly from the law, being justified by the legislative intention to prevent companies from making unnecessary expenses, reducing the tax base.

There is no illegality in this cumulative taxation, so the request for offsetting of tax or its return is dismissed, beyond what relates to the VAT levies.

As regards the legality or otherwise of withholding at source of IRS and respective rates, this is a matter foreign to the inspection procedure as inferred from what is referred to on page 32 of the Tax Inspection Report:

"Taking into account that difference and given the scope of the current inspection procedure (CIT and VAT) no correction will be proposed in the present procedure regarding withholding at source of IRS, which however is shown to be owed".

De rest the Claimants are not identified in the request for arbitral pronouncement any acts of withholding at source or IRS levy that they intend to challenge.

Therefore, there is nothing to decide on this matter, namely on the correction or otherwise of the IRS withholding rates applied or on the nature of the income earned by Claimants C… and B… for purposes of taxation under IRS, as this is a matter not included in the scope of the present process.

7. Decision

In these terms the Arbitral Tribunal agrees on:

  • To judge the request for arbitral pronouncement procedible regarding the VAT levies and respective compensatory interest, to declare those levies and the corrections relating to them illegal and to condemn the Tax and Customs Authority to reimburse the Claimant A… of the amounts it paid relating to those levies;

  • To judge the request for arbitral pronouncement as not proceeding with respect to the corrections and levies of CIT and to absolve the Tax and Customs Authority of the requests;

  • To judge the request for offsetting of CIT levied on the Claimant A… with amounts paid by Claimants B… and C… as title of IRS as not proceeding;

  • To judge the request for return to Claimants C… and B… of the amounts they paid as title of VAT and IRS as not proceeding.

8. Value of the Process

In accordance with the provisions of article 306, no. 2, of the CPC and 97-A, no. 1, subsection a), of the CPPT and 3, no. 2, of the Regulation of Fees in Tax Arbitration Proceedings the value of the process is fixed at €183,209.63.

Lisbon, 25-09-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(António Carlos dos Santos)

(Américo Brás Carlos)

[1] In the table that appears in point 5 of the Tax Inspection Report it is indicated, by error, the average monthly remuneration of Claimant B… as being €13,207.55, based on the remuneration of €140,000, in the year 2011, but the remuneration received in that year was €180,000.00, so the average monthly remuneration, in 10.6 months, is €16,981.13.

[2] In the table that appears in point 5 of the Tax Inspection Report it is indicated, by error, the average monthly remuneration of Claimant C… as being €25,471.70, based on the remuneration of €180,000, in the year 2012, but the exact remuneration was €140,000.00, so the average monthly remuneration, in 7.07 months, is €19,801.98.

[3] Decisions of the Central Administrative Court of the South of 27-03-2012, case no. 05312/12, and of 09-03-2017, case no. 05458/12.

Frequently Asked Questions

Automatically Created

What are the rules for deductibility of business expenses under Portuguese IRC (Corporate Income Tax)?
Under article 23(1) CIRC, business expenses are deductible when demonstrably indispensable for generating taxable income or maintaining the production source. The expense must be properly documented, accounted for in accordance with commercial and tax legislation, and connected to the company's activity. Article 75(1) LGT creates a legal presumption favoring expenses properly recorded in compliant accounting, though the Tax Authority may rebut this by proving the expense fails to meet statutory deductibility requirements. The taxpayer bears the initial burden of proper documentation; the Tax Authority must prove non-compliance with deductibility criteria.
How does the right to IVA (VAT) deduction apply when expense legitimacy is challenged by the Portuguese Tax Authority?
When the Tax Authority challenges IVA deduction legitimacy, article 75(1) LGT presumes properly documented and accounted transactions are truthful and made in good faith. This legal presumption applies to facts recorded in accounting, including VAT-bearing expenses. To deny deduction under article 19(3) CIVA (simulated operations or prices), the Tax Authority bears the burden of proving simulation with contrary evidence—mere doubt or counter-evidence is insufficient to rebut the presumption per article 350(2) Civil Code. The VAT neutrality principle establishes deduction as the rule and limitation as the exception, requiring the Tax Authority to justify restrictions. Procedural doubts are resolved against the party bearing the burden of proof.
Who bears the burden of proof in tax arbitration proceedings before the CAAD regarding expense deductibility?
Article 74(1) LGT establishes that the burden of proving facts constitutive of rights rests on whoever invokes them—whether Tax Authority or taxpayer. However, article 75(1) LGT creates a legal presumption favoring taxpayers: declarations, accounting data, and calculations in compliant books are presumed truthful and made in good faith. This presumption shifts the evidentiary burden—taxpayers prove the presumption's premises (proper documentation/accounting), while the Tax Authority must prove contrary facts through rebuttal evidence. The presumption ceases under article 75(2) LGT when accounting reveals omissions, errors, or well-founded indications preventing knowledge of real taxable matter, or when taxpayers fail clarification duties.
Can amounts paid individually under IRS and IVA be offset against IRC and IVA liabilities of a company in Portuguese tax law?
The text excerpt does not directly address offsetting individual IRS and IVA amounts against corporate IRC and IVA liabilities. Generally, Portuguese tax law treats different taxpayers (individuals vs. companies) and tax types separately. IRS is personal income tax owed by individuals, while IRC applies to corporate entities. Offsetting typically requires the same taxpayer and compatible tax obligations. Special rules may apply in specific contexts like group taxation regimes or liquidation proceedings, but cross-taxpayer or cross-tax-type offsetting is not a standard procedure without specific legal authorization.
What is the procedure for challenging multiple tax assessment notices through CAAD arbitration in Portugal?
To challenge multiple tax assessment notices through CAAD arbitration, taxpayers file a unified arbitration request under article 10 RJAT (Legal Regime of Tax Arbitration) covering all contested acts, provided they relate to the same taxpayer and can be jointly decided. The request must be filed within 90 days of notification of the final decision in the administrative proceeding or hierarchical review refusal (article 10(1) RJAT). The petition identifies all challenged acts, legal grounds, and factual basis. CAAD can consolidate related proceedings for efficiency. Taxpayers pay a single initial fee covering multiple assessments when they form a unified dispute. The arbitral tribunal issues a single decision addressing all challenged levies, examining legality under applicable substantive and procedural law.