Process: 584/2017-T

Date: September 26, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 584/2017-T) examines whether a non-profit association operating a gym in Portugal qualifies for IRC (corporate income tax) exemption under Article 11 of the IRC Code and Article 54 of the Tax Exemptions Statute. The Portuguese Tax Authority (AT) conducted a 2016 inspection of the association's 2012 tax year and determined the entity operated commercially, disqualifying it from exemption. The AT cited several grounds: the association held approximately 30% shareholding in a commercial company (C... SA); an employee simultaneously served as director of both entities; members had employment relationships with the association; operating surpluses were not applied to statutory purposes; and certain member categories faced voting restrictions. The claimant argued it had benefited from exemption since its 2004 establishment and that the AT incorrectly applied bylaws amended in 2013 to the 2012 tax year. The association provided services to non-members through variable monthly fees and vouchers sold by external commercial entities, receiving commissions. Key facts included the purchase of luxury vehicles and the non-recorded sale of one vehicle to the association's president. The tribunal was tasked with determining whether all activities were commercial in nature, subjecting all income to taxation, or whether only specific income categories under Article 11(2) and (3) of the IRC Code should be taxed while maintaining partial exemption status for the non-profit entity.

Full Decision

ARBITRAL DECISION

A..., taxpayer no. ..., with registered office at ..., no. ..., ...-... ..., has requested the constitution of a collective arbitration tribunal with a view to annulling the tax act embodied in assessment no. 2016..., of 10 October 2016, and respective compensatory interest assessments, all relating to the year 2012; the Claimant further requests the award of indemnatory interest;

The Claimant appointed as arbitrator Professor Doctor Vasco Valdez;

The Respondent (hereinafter also the AT) appointed as arbitrator Doctor Nina Aguiar;

Retired Court of Appeal Judge Manuel Luís Macaísta Malheiro was chosen to preside over the Tribunal;

The Collective Arbitration Tribunal was constituted by order of the President of CAAD of 1 February 2018;

On 6 March 2018 the AT submitted its response and attached the administrative file;

By order of the Tribunal President of 14 March, pursuant to the provisions of subsection c) of Article 16 of RJAT, the holding of the meeting referred to in Article 18 of that instrument was waived;

The Claimant submitted written submissions on 12 April and the AT on 2 May;

By order of the Tribunal President of 16 May, it was determined that the decision be rendered by 31 July 2016.

The deadline was extended for two months by order of the Tribunal President dated 17 July.

POSITION OF THE PARTIES

The Claimant begins by demonstrating that the arbitration tribunal is competent to hear the dispute that opposes it to the AT, which tacitly rejected a gracious complaint relating to a tax assessment act, since it is this latter act that is at issue and not the rejection order that fell upon it;

The Claimant was subject to an inspection action by the AT relating to the year 2012, executed in 2016;

Following the inspection action, the AT proceeded to arithmetic corrections to the taxable matter under corporate income tax (IRC), considering that the Claimant develops its activity in a commercial manner, whereby its income should be subject to the general tax regime under IRC, established in Article 3, No. 1, of the respective Code;

To the contrary, the Claimant alleges that since its establishment in 2004, it has always benefited from the exemption regime established in Article 11 of the IRC Code and in Article 54, No. 1, of the Tax Exemptions Statute, and from the non-subjection to tax provided for in Article 54, No. 3, of the IRC Code;

The Claimant states that it is a non-profit association, which was established in December 2004 and whose bylaws were amended in August 2013, with the AT in the inspection action relating to 2012 considering the amended bylaws applicable rather than their version in force in 2012;

The AT considered, in relation to the year 2012, that the Claimant did not meet the requirements to be considered an entity exempt from IRC inasmuch as: it held shareholdings in a commercial company; a Claimant employee accumulated the functions performed by him with those of Director member of the Association of B...; some Claimant members had employment relationships with it; the Claimant did not make use of operating surpluses in pursuit of its statutory aims; within the Claimant there is a restriction of votes and electoral capacity of some categories of members;

PRELIMINARY EXAMINATION

The parties possess legal standing and capacity, are legitimate and are duly represented (Articles 4 and 10, No. 2 of RJAT and 1 of Ordinance No. 112-A/2011, of 22 March).

The Arbitration Tribunal is regularly constituted and is materially competent to know the claim (Article 2, No. 1, a) of RJAT).

The proceedings do not suffer from any nullity.

There are no issues that should be decided prior to the decision.

QUESTIONS TO BE DECIDED

The question posed to the Tribunal is to decide whether the activity developed by the Claimant is of a commercial nature, as the AT maintains, with its income taxed without any exemption, or whether only some of its income is subject to taxation by falling within the scope of the provisions in Nos. 2 and 3 of Article 11 of CIRC.

PROVEN FACTS

The Claimant was established on 10 December 2004 in the form of a non-profit association;

The Claimant's corporate purpose is the promotion and development of sports, cultural and recreational activities;

The Claimant amended its initial bylaws, with that amendment entering into force in August 2013;

The Claimant in 2012, in relation to IRC, was in the general taxation regime - not subject;

The place where the Claimant develops its activity was granted to it in 2005 by C... SA, for operation of the sports facilities (Gym/X...), through the payment of an annual amount;

The company C... has its registered office at the same address;

On 30-12-2005, the Claimant became a shareholder of C..., S.A. through the subscription of an increase in capital in cash.

In 2012 the Claimant held approximately 30% of the capital of C... SA, which allowed it to have significant influence in that commercial company;

The Claimant did not earn capital income derived from the shareholding held by it in 2012.

In 2012 the balance of Account 4141 "Capital Participations", contained in the analytical trial balance of the year 2012, amounted to €940,000.00, being €21,000.00 in cash deposits and €919,000.00 in issue premiums;

Since 2011, C... SA has as its sole Administrator, B..., who has had an employment relationship with the Claimant since 2006 and has also been its member since 2011;

The AT made no corrections based on the question of the interest of members of the corporate bodies in the results of the Claimant;

The Claimant provides services to individuals and legal entities that are not its members;

The consideration owed by users of the gym that the Claimant operates corresponds to variable monthly amounts or to vouchers and gift/check vouchers and not to a fixed fee;

The marketing of vouchers and gift/check vouchers is open to non-members and carried out by a commercial company external to the association (D...) that received commission for sales;

All persons engaged by D... became members of the Claimant;

Registration for use of the Claimant's facilities is generally carried out through completion of a "semi-annual membership" form, which is nothing more than a contract, with the registration number coinciding with the member number;

In 2012 all members of the Claimant (with the exception of honorary members) had the right to participate in general assemblies and to vote therein;

In 2012 all members of the Claimant (with the exception of honorary members) with fees paid up could join the corporate bodies;

The Claimant acquired two light passenger vehicles with the following registrations:

"...", brand ..., model ..., acquired in 2008, for the price of €80,000.00;

"...", brand ..., model 221, acquired in 2012, for the price of €60,000.00 through a financial leasing contract with Bank E... (E...)

The vehicle with the registration "..." was sold on 12-02-2012, for the price of €37,500.00, to F... (member no. ... and President of the Board), such sale being made to account for the reduction of the Claimant's debt to him on that date;

Accounting-wise, this sale was not recorded, with the balance of account "2782193 – F...", remaining at €295,796.38, from the beginning to the end of the year.

DECISION

Following the inspection action that the AT executed in 2016 on the Claimant's accounting, relating to the year 2012, it proceeded to several arithmetic corrections within the scope of IRC, arising from the circumstance of considering that the Claimant did not meet the requirements on which the law makes the exemption depend, specifically those established in Nos. 2 and 3 of Article 11 of CIRC.

According to the AT, the Claimant exercises its activity in a commercial manner like any other commercial entity, consequently falling outside the scope of application of the IRC exemption enshrined in No. 1 of Article 11 of CIRC. However, if the AT intended to disregard the activity of A..., subsuming it to a mere vehicle, it would have to state so expressly and appeal, for example, to the general anti-abuse clause enshrined in Article 38 of LGT, which it did not do.

Before, however, analyzing the requirements on which the law makes the IRC exemption depend, it must be clarified that it is not the entities provided for in that Article that are exempted, but the income generated by them. In other words, it is not a provision intuitu personae, but the incidence on the income earned by a particular category of legal entities.

Let us now look at the requirements on which the law makes the referred IRC exemption depend.

First, the income must be generated by associations legally established for the exercise of certain activities (cultural, recreational and sports), which is the case with the Claimant.

Then, the law prohibits that the results obtained be distributed, as well as that members of the corporate bodies have, by themselves or through an intermediary, any direct or indirect interest in the results of exploitation of the activities pursued.

Finally, the necessity of the existence of accounting or records that cover all activities is enshrined, and that the same be made available to the tax authorities.

From the analysis of the case file it emerges that the Claimant has the legal form required by law and has as its corporate purpose the development of cultural, recreational and sports activities. This means that formally the Claimant complies with what is established in Article 11 of CIRC to benefit from the taxation exemption regime in relation to profits generated directly by those activities. The case may be different if some of the income generated by the Claimant meets the requirements indicated in Nos. 2 and 3 of Article 11 of CIRC.

The AT bases part of its argument to defend the commercial nature of the Claimant's activity on the circumstance that it provided services in 2012 to persons who were not its members. However, the Tribunal understands that this fact alone is not relevant to qualify the activity as commercial, since the same services can be provided at the same prices to both members and non-members. The AT failed to prove that members were privileged relative to non-members.

Different, however, would be the fact that the Claimant provides services through payment in vouchers or gift/check vouchers marketed by a commercial company in competition in the market. But this aspect was not proved by the AT. To the contrary, the Claimant proved that all persons who used the said vouchers became its members.

A quite exploited argument by the AT to defend the commercial character of the activity developed by the Claimant is based on the allegation that decisions relating to the Claimant belong to a minority of members and not to the generality of shareholders, inasmuch as, according to the AT, only founder members and effective members can participate in general assemblies and only these same members can be elected to the corporate bodies of the Claimant.

Regarding this aspect, the Claimant defended itself once again by saying that the AT in conducting the inspection action on its 2012 accounts proceeded as if the statutory amendments that the Claimant would introduce to its bylaws to come into force from August 2013 were already in effect in that year.

In this respect, the Claimant is correct, since the AT always refers to the amended bylaws, whose validity began, as stated, in 2013. For this reason, the AT considered it proved that the Claimant in 2012 was governed by a minority of members (the founders and the effective members), when in reality, in accordance with what was established in the initial wording of the bylaws, specifically in Articles 13 to 15, all members could participate in general assemblies and vote therein, and could also join the corporate bodies, provided their fees were paid up.

Another argument brought by the AT is related to the fact that in the year analyzed (2012) the Claimant held approximately 30% of the capital of the commercial company C... SA, but the Claimant proved that in that year it did not earn income derived from that participation in the capital of that company.

The AT proved that in the year 2012 the Claimant owned two motor vehicles with the registrations ... and ..., purchased for the amounts of €80,000.00 and €60,000.00 respectively.

In that year, the vehicles identified in the preceding number were included in the Claimant's Depreciation and Amortization Schedule.

Regarding the purchase of these vehicles, the Claimant failed to prove their indispensability for the exercise of its activity. It is not that the Tribunal considers that a non-profit association cannot own vehicles for the performance of its statutory purposes, rather it is a matter that, on the one hand, as stated, no proof was made of their necessity and, on the other, one is dealing with vehicles of quite high price, whose models, according to common experience, are not normally used for use in the manner the Claimant alleges to use them.

In this respect, the Tribunal considers it should follow the understanding of the Supreme Administrative Court contained, for example, in the decision of 28 June 2017 (proc. no. 0627/16), according to which a cost or loss will be accepted fiscally if, in a judgment carried out at the moment it was made, it is adequate to the productive structure of the company and to the obtaining of profits, even if it proves to be an unfruitful or economically ruinous economic operation, and the AT can only disregard those that do not fall within the scope of the taxpayer's activity and were incurred, not in the interest of the latter, but for the pursuit of alien interests (when it is to be concluded, in light of the rules of common experience, that they did not have the potential to generate benefits).

In February 2012 one of the vehicles was sold for €37,500.00, whereby this operation should be subject to taxation as it is covered by what is established in No. 3 of Article 11 of CIRC.

In accordance with and on the grounds set out, the Arbitration Tribunal decides to grant partial allowance of the Claimant's claim, with the corresponding partial annulment of assessment no. 2016..., of 10 October 2016, and respective compensatory interest assessment, with a new assessment to be issued as follows:

In the year 2012 the Claimant generated income subject to taxation under IRC, derived from the sale of a motor vehicle for the amount of €37,500.00;

The Claimant is entitled to indemnatory interest, at the legal rate and date, from the date of payment made by it until the date of issue of the altered assessment in accordance with what was referred to previously.

Amount: 54,364.24 (fifty-four thousand three hundred sixty-four euros and twenty-four cents)

Lisbon, 26 September 2018

The Arbitrators

Manuel Luís Macaísta Malheiros, Retired Court of Appeal Judge

Professor Doctor Nina Aguiar (dissenting as per the declaration that follows)

Professor Doctor Vasco Valdez (dissenting as per the declaration that follows)

DECLARATION OF VOTE

I dissented from the decision that prevailed for the following reasons:

Exemption Regime for Cultural, Recreational and Sports Associations

The legislature chose to create, within the taxation regime of the income of non-profit legal entities, a special regime for cultural, recreational and sports associations, which is established in Article 11 of CIRC.

When compared to the regime for other non-profit entities, it appears that the regime for cultural, recreational and sports associations is much more flexible, with respect to the requirements to which such entities are obliged to benefit from exemption, than the regime of Article 10, applicable to other non-profit persons.

The requirements necessary for a sports association (or recreational or cultural) to enjoy IRC exemption are only the following (Article 11 CIRC):

That the entity be an association legally established for the exercise of cultural, recreational or sports activities;

That in no case the association distribute results;

That members of the corporate bodies do not have, by themselves or through an intermediary, any direct or indirect interest in the results of exploitation of the activities pursued;

That the association have accounting or records that cover all its activities and make them available to the tax authorities, namely for verification of what was referred to in the preceding subsection.

Meeting the association cumulatively these requirements, the following are not, however, exempted from taxation on income: income that is not "directly derived from the exercise" of cultural, recreational or sports activities, nor those from any commercial, industrial or agricultural activity exercised, even if accessorily, in connection with these activities, and in particular those from advertising, transmission rights, real property, financial applications and bingo gaming.

It is not disputed in the case file that the Claimant is an association legally established for the exercise of cultural, recreational or sports activities.

It is important to analyze whether the Claimant meets the remaining requirements.

Allocation of Financial Results

The Parties, certainly by reason of professional duty, raise and debate some issues which, once analyzed, end up proving not relevant to the appreciation of the legality of the impugned act, in light of the applicable rules. It is important to begin by removing such issues from the discussion.

One of these issues is the manner in which the Claimant allocates financial results.

An association is a legal entity of personal substratum and non-profit purpose. Unlike a foundation, an association has as its substratum a group of persons who come together to carry out an activity; contrary to companies, in an association persons do not come together to obtain profit, but to directly satisfy the interests of members (even if those interests are altruistic).

These two characteristics of the association are reflected both in the purpose of the association and in the manner in which that purpose is pursued.

The purpose of the association must necessarily consist of activity or activities through which the interests of members are directly satisfied (even if those interests are altruistic); the purpose of the association cannot be developed or carried out in a way that generates profit, although it must be developed in a financially sustainable manner. The performance of activities unrelated to the purpose of the association with the sole objective of generating income will, in turn, be contrary to the principle of specialization of legal entities.

In light of these characteristics, which result from the law, it is not normal for an association to generate important positive financial results.

However, since associations need revenue to finance their activities, it is normal for small surpluses to be generated regularly.

If there are surpluses, small in amount, and such surpluses cannot be distributed to members, having such surpluses been obtained either at the expense of members (if they come from activity developed with members) or at the expense of secondary fundraising activities conducted to carry out the purpose, such surpluses can only be allocated to carrying out the purpose of the association. All of this flows from the nature of the associative scope.

Thus, it is permissible to state that the allocation of results by an association to purposes unrelated to its purpose is illegal, because contrary to the associative scope, just as it is illegal for companies to pursue altruistic purposes.

However, the specific tax regime for cultural, recreational and sports associations, contrary to what is verified for other associations, does not provide that such associations lose the income tax exemption by reason of allocating results to purposes unrelated to the associative purpose.

As such, it is not relevant to evaluate the legality of the impugned act the allocation that the Claimant makes of its results.

Labor Relations with Members

The second issue debated by the Parties and which, once analyzed, does not appear relevant to the analysis of the legality of the impugned act, is that of employment relationships that a group of members has with the Claimant.

There is no provision in civil or tax law that prevents members of an association from providing work therein under employment contracts. It must therefore be concluded that the issue is not, in itself, relevant.

It is certain, also in connection with this issue, that, for the association to enjoy income tax exemption, the members of the corporate bodies (board and supervisory board – Article 170, No. 1 of the Civil Code) cannot have an interest in the results of the association, and if the member of the body at the same time has an employment relationship with the association, they cannot fail to have a direct interest therein.

But it was not proved in the case file that the members who have employment relationships with the Claimant are or were members of its corporate bodies.

It is a documented fact in the proceedings that there is a nucleus of members, formed by the founders of the association and which later expanded to effective members (who, in turn, can only become members by proposal of the former) that maintain, by force of the bylaws, since the beginning of the association, control thereof.

For, since the beginning of the association, the majority of the board was necessarily formed by founder members; and currently, the board can only be formed by founder members or effective members (who can only become members by proposal of the former). And it is also certain that the members who work in the association belong to this nucleus of members that has statutory assurance of control of the association. But "having assured control" is not the same as being a member of the corporate bodies. And Article 11, in subsection a) of No. 2, speaks only of "members of the corporate bodies".

And therefore, also considered in this indirect dimension, of the interest of those holding the bodies of the association in their respective results through employment relationships, the employment relationship of some members with the association does not prove relevant.

Relationship with C... SA

A third issue also debated by the Parties is that of the relationship between the Claimant and the joint-stock company C... SA.

It is evident that there is a relationship of close proximity between the two entities, to the point that the activity of the two practically merge.

The Claimant was created on 10/12/2004, with registered office at ..., on the street..., no... . Twenty-four days after its creation (03-01-2005), the Claimant entered into, in the capacity of assignee, with the company C... SA, a contract for the assignment of operation of a gym/X... (which, however, had not yet been formally created).

The gym taken for operation is located, precisely, on the street ..., no... in ..., that is, at the place of the registered office of the company and the association.

The Claimant not only became a shareholder of the company C... SA, but also subscribed shares in capital increases thereof, in two consecutive years, in 2005 and 2006, with an issue premium of 27 euros for each euro of nominal value in 2004 and with an issue premium of 49 euros for each euro of nominal value in 2005.

Thus:

  • In 2005, the Claimant subscribed capital in the amount of 5,000.00 euros, delivering to the company the amount of 135,000.00 euros;

  • In 2016, the Claimant subscribed capital in the amount of 16,000.00 euros, delivering to the company the amount of 784,000.00 euros.

In total, the Claimant transferred to its associated company, in the two years in question, the total amount of 919,000.00 euros, in exchange for capital in the amount of 21,000.00 euros.

The Claimant also made with the company a contract for assignment of operation of the commercial establishment that is its gym and X.... Through the rent paid for this contract, the association continues to this day to transfer income to the company. In fact, the assignment contract, in its second version, even provides for an upward adjustment of the rent, based on the results of the association.

Indeed, it is read there:

"[the value of the rent] May be increased by 15%, if the actual collection of fees from Members of A... has the value of at least 80% of the fees collected in 2009".

Whereby it could not be more evident that the operation contract of the establishment serves the function of transferring financial results (profits) from the association to the company.

And, finally, the employees of the Claimant work for the company, whether in the sale of products or in the reception of customers, without the company paying the Claimant any remuneration for this.

It is true that the Claimant claims that the company pays for the electricity of the gym.

In fact, the company C... SA assumed, through the contract for assignment of operation of the gym, the obligation to pay the electricity consumed therein during the years 2012 and 2013.

But even that fact would have to be weighed, because, on the one hand, it is not clarified whether the electricity bill relates to the total consumption of the facilities of street..., no..., which include the places operated by the company itself, and on the other hand, there is a commercial exchange between the payment of electricity and the supply of labor.

In the face of these facts, one conclusion is inescapable: whoever the shareholders of company C... SA are, it is unquestionable that such persons have an interest in the results of the Claimant.

However, it was not proved in the case file that any shareholder of C... SA was, prior to 2013, a member of any corporate body of the Claimant, and therefore, once the facts have been analyzed, the issue of the relationship between the Claimant and the company ends up also becoming irrelevant.

And thus it must be concluded that no fact is proved in the case file that implies concluding that the requirements established in No. 2 of Article 11 of CIRC for the Claimant to enjoy exemption are not met.

Qualification of the Claimant's Income as "Commercial Activity Income"

Let us now see whether the Claimant's income should be considered income from a commercial activity, pursuant to No. 3 of Article 11 CIRC, which, if confirmed, would have as a consequence that such income be taxed.

The IRC Code does not clarify what should be understood as commercial activity. Article 3, No. 4 states that "all activities that consist of the performance of economic operations of an entrepreneurial character, including the provision of services" are "considered of a commercial, industrial or agricultural nature", which cannot be said to be very clarifying.

The concept, however, has long been developed by the courts and there is today firm case law from the Supreme Administrative Court in the sense of identifying commercial activity with activity developed with a profit-making purpose, as can be seen from the following excerpts, presented in chronological order:

Decision of STA of 04-12-1991 (proc. no. 13398, reporter Cons. Jesus Costa): "In order to say that an activity is commercial or industrial, and in the absence of a legal definition of the concept, recourse must be had to the economic concept of mediation between supply and demand or incorporation of new utilities, with the objective of obtaining profits".

Decision of STA of 12-03-1997 (proc. no. 13254, reporter Cons. Santos Serra): "In the matter of industrial tax, the existence of profits, indispensable to taxation, arises within the determination of taxable matter, whereas the profit-making purpose, essential to commercial or industrial activity, is to be located in the field of tax incidence."

Decision of STA 03-05-2000 (proc. no. 22608, reporter Cons. Jorge de Sousa): "To determine the legal concept of commercial or industrial activity, for the purposes of the Industrial Tax Code, recourse must be had to the economic concept of commercial or industrial activity, which encompasses activity of mediation between supply and demand and activity of incorporation of new utilities in matter, in both cases with speculative purposes, that is, with the objective of obtaining profits."

Decision of STA, of 02-02-2005 (proc. no. 371/04, reporter Cons. Pimenta do Vale): "To determine the legal concept of commercial or industrial activity, for the purposes of Personal Income Tax, recourse must be had to the economic concept of commercial or industrial activity, which encompasses activities of mediation between supply and demand and activity of incorporation of new utilities in matter, in both cases with speculative purposes, that is, with the objective of obtaining profits."

Decision of STA of 17-06-2008 (proc. no. 2290/08, reporter Cons. Eugénio Sequeira): "The concept of commerce adopted by the legislature is a concept of its own, of an economic nature, falling within it any activity (expressed even in just one act) that has as its objective purpose a profit;

Finally:

Decision of STA of 24-02-2016 (proc. no. 580/15, reporter Cons. Ana Paula Lobo): "Tax law does not define what constitutes the exercise of a commercial or industrial activity, and the case law of the Supreme Administrative Court long established has accepted that commercial activity is revealed in an action of mediation between supply and demand with susceptibility to generate profits, gains, income for those engaged therein, a susceptibility that may not ultimately be realized and may even generate losses, whereas industrial activity is an activity of construction or alteration of goods. The concept of commerce adopted by the legislature is not identified with the private legal-commercial concept of the Commercial Code, being a concept of its own, of an economic nature where any activity is inscribed (even if expressed in just one act) that has as its objective purpose a profit."

There is no doubt, therefore, that if an entity in associative form develops an activity of provision of services and through that activity objectively pursues the profit-making purpose, that activity is a commercial activity.

In the case at hand, it is unquestionable that the Claimant develops an activity of service provision, equal to that developed by numerous commercial companies that operate gyms, so we only have to assess whether that activity is developed with profit-making purpose.

For this, it is crucial to understand whether the users of the Claimant's gym pay "fees" or "market prices" for the services they use.

Accounting-wise, the Claimant's revenues are recorded in a single account - account 7214 – Provision of Services – User Fees – Gym".

However, there appear 28 different fee amounts, which are precisely fixed according to the use, in kind and in intensity, to which the user/payer of the "fee" is entitled.

For example:

  • Swimming fee 1 x 30'
  • Swimming fee 1 x week 45'
  • Swimming fee 2 x week
  • Swimming fee 2 x 30'
  • 2x Swimming + cardio fee
  • Etc.

Now, it is not understandable that, in an entity that has no profit-making purpose, 28 fees of different amount are fixed, with the amounts differentiated to the point of distinguishing whether the swimming session exceeds 30 minutes or not. These fees are clearly fixed exactly like prices and not like fees.

But furthermore, and above all, the referred accounting of all revenues as "fees" is in contradiction with the supporting documents.

When the documents of payment receipts are considered, it appears that the payment receipt document may be:

  • An invoice/receipt
  • A voucher/receipt

The invoices identify the member who made the payment, through their respective name and member number.

As for the "vouchers", they contain no indication of the member or reference to the quality of member of the service user or to "fee payment".

From the outset, if the voucher were a "fee" payment receipt document, it would have to give this indication to the accounting, so that it was credited to the account of the member with unpaid fees.

Furthermore: if the voucher does not indicate the quality of member or non-member of the payer, the person preparing the "Global income map", previously referred to, has no way of knowing whether what was paid was a fee or a price paid by a non-member. And therefore, the accounting classification as "fees" that appears in that map is an arbitrary exercise, since it has no documentary support.

Now, the "vouchers" – which do not refer to "fee" payment and do not identify the member - represent 99% of the payment receipt documents issued concerning the receipt of service prices.

Which allows us to conclude, sampling being a valid method of analysis and its application to the case being uncontested, that 99% of the service provisions are not documented as fee collections.

These payment receipt documents – or rather, each of the payments contained therein – are in turn entered in a listing (page 3 of Annex VI) – which is another preparatory document of the accounting, in which it could still be admitted that a recognition could be made of what is charged to members and non-members, with recourse to information other than that in the "vouchers" and that had not been referred to.

But it appears that this also does not happen. The listing in question contains no separation between what is charged to members and non-members.

Therefore, the conclusion stands: 99% of service provisions are not documented as having been provided to members.

Thus, we must take as valid the conclusion of the RIT (page 21) that "no payment receipt document relating to fee payment is presented". And therefore it is not proved that gym users pay fees and not prices.

And it is also not possible to prove, through the accounting, that gym users are members.

Furthermore, the Claimant markets its services through the company "D...". When selling the Claimant's services to its customers, D... does not require them to become Claimant members first. Which means that consumers acquire the Claimant's services through "D...", without being members. This only reinforces the previous conclusion, that nothing in the accounting or supporting documents allows the conclusion that gym users are members.

It is thus concluded, on the one hand, that the Claimant does not prove that its revenues come from fees paid by members and not from prices. And on the other, given the absence of such proof, and the existence of profits associated with the manner in which prices are fixed for the use of services, that the activity of the Claimant, generating the income in question, is a commercial activity.

The Arbitrator

Nina Aguiar

DECLARATION OF VOTE

I agree with the arbitral decision, which I signed, with the caveat that I do not subscribe to the conclusion contained in subsection a) at the end thereof in determining taxation on capital gains resulting from the sale of the motor vehicle by the Claimant. It is based on the viewpoint expressed by the AT of not considering as indispensable to the activity of the association the existence of a vehicle with those characteristics at its service. In my view, the association demonstrated the indispensability of the existence of a vehicle, justified why it opted for that particular vehicle (cf., inter alia, articles 310 et seq. of the Claimant's p.i.) and this is not contradicted by the AT, which appears to have only considered the brand of the vehicle. Now, with due respect, proven that the cost is indispensable, it is not for the AT to freely assess, based on a merely subjective judgment, that the vehicle is not necessary to the activity of the association, and then it would have to say very clearly in the RIT why such a cost was not indispensable to the activity and, in my opinion, it does not do so in an adequate manner, disrespecting the letter of the law and the jurisprudential understanding given to all this subject matter. I permit myself, moreover, to cite arbitral decision no. 528/2016-T, because in the same a thorough analysis of the doctrine and jurisprudence is made, in particular on pages 6 to 9 thereof, to which, with due deference, I permit myself to refer and which justify my understanding that such a cost was indispensable, there being no reason to disregard it.

The Arbitrator

(Vasco Valdez)

Frequently Asked Questions

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Can a non-profit association in Portugal lose its IRC tax exemption if it conducts commercial activities?
Yes, a non-profit association in Portugal can lose its IRC tax exemption if the Portuguese Tax Authority determines it operates in a commercial manner similar to for-profit entities. Under Article 11 of the IRC Code, exemption requires meeting specific statutory conditions. In this case, the AT concluded the association conducted commercial activities by operating a gym with variable fees to non-members, holding significant corporate shareholdings (30% in a commercial company), employing staff who simultaneously held director positions in related entities, and purchasing luxury vehicles. The tribunal examined whether these activities constituted full commercial operation (losing all exemption) or partial commercial activity (taxing only specific income under Article 11(2) and (3) while maintaining exemption for other income).
What are the requirements under Article 11 of the Portuguese IRC Code for non-profit entity tax exemption?
Article 11 of the Portuguese IRC Code establishes specific requirements for non-profit entity tax exemption. Entities must not operate in a commercial manner comparable to for-profit businesses. Key requirements include: statutory purposes limited to permitted non-commercial objectives; no distribution of operating surpluses to members; application of all surpluses to statutory purposes; no direct or indirect interest of corporate body members in the entity's results; and compliance with formal obligations. Additionally, Article 54 of the Tax Exemptions Statute prohibits activities organized commercially. The AT evaluates multiple factors including shareholdings in commercial companies, employment relationships between members and the entity, service provision to non-members at market rates, voting restrictions among member categories, and whether the entity competes with commercial operators in the same sector.
How does the Portuguese Tax Authority (AT) determine whether a non-profit organization operates commercially for IRC purposes?
The Portuguese Tax Authority determines commercial operation of non-profit organizations through comprehensive analysis of operational, financial, and governance factors. In this decision, the AT examined: (1) shareholdings in commercial companies and influence over their operations; (2) dual employment/directorship arrangements creating conflicts of interest; (3) service provision to non-members at commercial rates rather than fixed membership fees; (4) marketing through external commercial entities receiving commissions; (5) acquisition of luxury assets (€80,000 and €60,000 vehicles); (6) internal governance restrictions limiting member voting rights; (7) employment relationships between members and the association; and (8) failure to demonstrate application of surpluses to statutory purposes. The AT applies substance-over-form analysis, examining whether the entity's actual operations resemble commercial businesses regardless of its legal non-profit structure.
Can CAAD arbitral tribunals review tax assessments resulting from tax inspections of non-profit entities?
Yes, CAAD (Centro de Arbitragem Administrativa) arbitral tribunals have material competence to review tax assessments resulting from tax inspections of non-profit entities under Article 2(1)(a) of RJAT (Legal Regime of Tax Arbitration). In this case, the tribunal confirmed its jurisdiction despite the claimant's tacit rejection of a gracious complaint (hierarchical appeal). The tribunal clarified that the challenged act was the underlying tax assessment itself, not the rejection decision. CAAD tribunals exercise full review powers over substantive tax determinations, including whether non-profit entities meet IRC exemption requirements under Article 11 of the IRC Code and Article 54 of the Tax Exemptions Statute. The tribunal conducted preliminary examination of legal standing, capacity, legitimacy, and representation before proceeding to substantive analysis of whether the association's activities warranted exemption or full taxation.
Does holding corporate shares disqualify a Portuguese non-profit association from IRC exemption under Article 54 of the Tax Benefits Statute?
Holding corporate shares does not automatically disqualify a Portuguese non-profit association from IRC exemption, but it constitutes a significant factor in determining commercial operation. Under Article 54 of the Tax Exemptions Statute and Article 11 of the IRC Code, the critical analysis focuses on whether shareholdings evidence commercial activity organization. In this case, the association held approximately 30% of C... SA's capital, providing 'significant influence' over a commercial company operating at the same address. Problematically, the association's employee simultaneously served as the commercial company's sole administrator, creating governance overlap. The AT considered this shareholding—acquired through €940,000 cash subscription (€21,000 cash plus €919,000 issue premiums)—as evidence of commercial operation, particularly combined with other commercial indicators. However, the association earned no capital income from the shareholding in 2012, potentially supporting non-commercial characterization if held for statutory purposes rather than investment returns.