Process: 585/2014-T

Date: February 13, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 585/2014-T) concerns the deductibility of supplementary capital contributions (prestações acessórias) under Article 23 of the Portuguese Corporate Income Tax Code (CIRC). The taxpayer, a real estate development company, challenged an additional IRC assessment of €314,940.03 for the 2010 tax year. The dispute arose from a complex transaction structure: the company acquired land in 2002 for €5 million to develop a luxury residential project, subsequently sold part of the land to B... SA in 2005 for €3.9 million with deferred payment terms, then acquired a 10% stake in B... in 2007. When B... resolved to require supplementary capital contributions totaling €3,541,500 from shareholders in 2007, the taxpayer made this contribution just two days after receiving the same amount as deferred payment for the land sale. The Tax Authority challenged the deductibility of costs related to these transactions. The taxpayer argued the assessment violated Article 23 CIRC's cost deductibility requirements and lacked legally required justification. The case illustrates key principles in Portuguese corporate taxation: costs must be indispensable for obtaining or guaranteeing taxable income, properly documented, and reflected in accounting records. Supplementary contributions to related entities require careful scrutiny to ensure they meet commercial substance requirements and are not disguised distributions or non-deductible liberalities. The arbitral tribunal procedure followed the Legal Regime of Arbitration in Tax Matters (LRAT), with parties waiving witness testimony and proceeding directly to written submissions. The case demonstrates CAAD's role in resolving complex corporate tax disputes involving timing of transactions, related-party dealings, and the interpretation of cost deductibility criteria under Portuguese tax law.

Full Decision

ARBITRAL DECISION

The arbitrators Mr. Counselor Jorge Lopes de Sousa (arbitrator-chairman), Dr. Maria da Graça Martins and Dr. Artur Maria da Silva, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 01.10.2014, agree as follows:

1. REPORT

On 30.07.2014, A... – TOURISM AND REAL ESTATE PROMOTIONS SA, a public limited company, with registered office at Rua …, with the sole registration and collective person number …, submitted a request for constitution of a collective arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to as LRAT), in which the Tax and Customs Authority (TA) is the respondent, having as its object the annulment of the additional corporate income tax (CIT) assessment No. 2014 ..., relating to the year 2010, which determined an amount payable of CIT (including compensatory interest and default interest) in the sum of €314,940.03.

The Claimant concludes, in summary, in its request for constitution of arbitral tribunal that the CIT assessment suffers from a defect of erroneous quantification and qualification of the tax fact and defect of legally required reasoning and, consequently, requests that:

i. The complete annulment of the contested assessment must be ordered based on its illegality due to violation of article 23 of the CIRC;

ii. If such understanding does not prevail, the same assessment must be completely annulled due to lack of legally required reasoning;

iii. Consequently, any and all assessments of compensatory or default interest related to the annulled CIT assessment must also be annulled.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 01.08.2014.

Pursuant to the provisions of subsection (a) of paragraph 2 of article 6 and subsection (b) of paragraph 1 of article 11 of the LRAT, the Deontological Council appointed the arbitrators of the collective arbitral tribunal: Mr. Counselor Jorge Lino Alves de Sousa, Ms. Dr. Maria da Graça Martins and Mr. Dr. Artur Maria da Silva, who communicated acceptance of their appointment within the applicable timeframe, and notified the parties of this appointment on 16.09.2014.

Thus, in accordance with the provisions of subsection (c) of paragraph 1 of article 11 of the LRAT, the collective arbitral tribunal was constituted on 01.10.2014.

On 06.11.2014, following notification of the TA's response and the appointment of the Illustrious Representatives of the TA, the Arbitral Tribunal ordered notification of the Taxpayer (TP) to clarify which alleged facts require witness evidence in its view, and of the TA to state whether it accepts as true all facts alleged by the TP.

Since the Parties did not request production of any evidence (TP declared waiver of witness evidence, by order of 29.11.2014), the meeting provided for in article 18 of the LRAT was dispensed with and it was determined that the proceedings would continue with written submissions.

None of the Parties submitted written submissions.

By order of 04.02.2015, the President of the Deontological Council, in view of the incapacity situation of Mr. Counselor Jorge Lino Alves de Sousa, appointed as Arbitrator-Chairman Mr. Counselor Jorge Lopes de Sousa.

The Arbitral Tribunal was properly constituted.

The parties possess legal personality and capacity and are entitled (articles 4 and 10, paragraph 2, of the same enactment and article 1 of Ordinance No. 112-A/2011, of 22 March).

No nullity is apparent.

2. STATEMENT OF FACTS

2.1. Proven facts relevant to assessment of the exceptions

With regard to the factual matters of interest for proper decision of the case, given the allegations made by the parties and the documentary evidence attached, particularly the administrative file, the following facts reported by the Claimant shall be considered established for evidentiary purposes:

  • The Claimant is a company whose object is the purchase and sale of real estate for resale, promotion, management and operation of tourism and real estate projects, and may also acquire shareholdings in other companies, to the extent that this contributes to the better pursuit of its corporate purpose, as permitted by commercial law.

  • The Claimant is the contractor and developer of the ... project, located in ..., in the municipality of ....

  • This real estate project was launched in 2002 and corresponds to a luxury residential complex, integrated in a green area, composed of houses, terraces, gardens, swimming pools, golf course, tennis, multi-purpose lawn, club house, restaurant, bar, golf course, tennis, children's park and green area.

  • With a view to the implementation and overall construction of this real estate project the Claimant acquired in 2002 a set of land plots, all from the parish of ....

  • This operation was carried out through two purchase and sale deeds, both with extended payment terms for the price, as described below:

i. The first acquisition deed, corresponding to 24 real property registry items, involved a total amount of €1,296,889.00, with the transferors of the land receiving at the time of execution of the deed the amount of €324,222.25, with payment of another €324,222.25 stipulated for one year and the remaining €648,444.50 for 18 months.

ii. With regard to the second acquisition, corresponding to 31 real property registry items, for a total amount of €3,703,111.00, the transferors received immediately the amount of €925,777.75, with a term of one year stipulated for payment of another €925,777.75 and a term of 18 months for payment of the remainder (€2,777,333.25).

  • The total value of these purchases amounted to €5,000,000.00, of which the Claimant paid €1,250,000.00 in capital.

  • To guarantee the aforementioned payments, the Claimant opted to provide bank guarantees with Montepio Bank, in the amount of €3,750,000.00.

  • In order to settle the aforementioned bank guarantees, the Claimant contracted, on 27.03.2003, a loan with Caixa Económica Montepio Geral bank, for the amount of €3,750,000.00.

i. In March 2007, the Claimant contracted a new loan, this time with Banco Comercial Português, with a view to payment of the loan referred to in the previous point, which was extinguished.

j. On 4.03.2005, part of the land that the Claimant had acquired in 2002, corresponding to 29 real property registry items, is sold to the commercial company called "B... – …, SA" (hereinafter referred to as B...), for the total price of €3,935,009.00.

k. As to payment of the price, the Claimant received immediately the amount of €393,500.00 and payment was contracted with extended terms for the remainder of €3,541,500.00 (which was paid on 13.11.2007).

l. With this sale, the Claimant obtained a capital gain of €306,523.00.

m. The Claimant acquired on 08.01.2007, for €5,000.00, a 10% shareholding in the aforementioned company "B...".

  • In the context of this corporate relationship, at the General Meeting of "B..." held on 21.02.2007, a resolution was made to make supplementary capital contributions (in the form of supplementary contributions) to strengthen the own capital of this company, during the year 2007, for financing of its ongoing Investment Project. As a result of this resolution, the Claimant had to make supplementary capital contributions in the amount of €3,541,500.00.

  • Such contributions were made by the Claimant and paid to "B..." on 15.11.2007.

  • "B..." paid on 13.11.2007 to the Taxpayer the amount of €3,541,500.00, corresponding to the remainder of the price of the properties it had acquired from it.

  • The Claimant proceeded to capitalize the charges and costs it incurred with the ... project from 2002 until 2010, when according to the Claimant, it achieved financial return from this investment, beginning the sale of some of the houses whose construction had been completed in the meantime.

  • The Claimant was subject to an external general inspection regarding the exercise of 2010, pursuant to Service Order OI2013.., with inspection acts commencing on 22.04.2013 and ending on 18.02.2014, after two successive extensions of the deadline by three months each.

s. In the course of that inspection, the TA was able to establish the following:

i. The Claimant is contractor and developer of the ... project, a luxury residential complex located in ..., which commenced in 2002, the year in which it acquired various land plots from individuals, concluding the first houses and executing the first deeds in 2010;

Land Acquisition

ii. The costs incurred from 2002 with this project are being capitalized until the year 2010, whereby the costs that are only reflected in the results of 2010 are the costs incurred throughout the construction years of this project, in a total of €36,078,146.87, better detailed on p. 5 of the Final Report;

iii. With a view to the construction of the project, by deeds of 27.03.2002, the Claimant acquires land from individuals, at prices of €1,296,889.00 and €3,703,111.00, in a total of €5,000,000.00, of which it paid €1,250,000.00, remaining in debt the total amount of €3,750,000.00;

iv. In order to guarantee payment of the sums in debt, the Claimant provided bank guarantees with Caixa Económica Montepio Geral and, simultaneously, executed a deed of mortgage of the acquired land in favor of Caixa Económica Montepio Geral, for the value of €3,750,000.00;

v. In order to make those payments, on 27.03.2003, the Claimant contracted a loan at Montepio for the amount of €3,750,000.00, subsequently contracting in March 2007 a new loan to pay off that one, also for the amount of €3,750,000.00;

vi. Since 27.03.2003 the Claimant bears all the financial charges of the loans contracted for payment of the aforementioned land;

vii. On 04.03.2005 the Claimant sells part of that land to B... – …, SA, (hereafter B...) with tax identification number …, which has as its corporate purpose the promotion, construction and management of golf courses and hotel units and other tourism, sports, physical fitness and leisure activities, and purchase of real estate for resale;

viii. The Claimant sells the land detailed on pages 11 and 12 of the Final Report to B... for the amount of €3,935,009.00, receiving as payment the amount of €393,500.00, with the remainder of €3,541,500.00 remaining in debt;

ix. Nevertheless, the Claimant continues to bear all the financial charges arising from the loan contracted for the acquisition of all the land, including those that were disposed of to B...;

x. On 08.01.2007 the Claimant acquires for €5,000.00 a 10% shareholding in the capital of B...;

Making of Supplementary Capital Contributions

xi. On 21.02.2007 B... resolves to approve the making of supplementary capital contributions necessary to strengthen the own capital by the now Claimant shareholder, up to the amount of €3,541,500.00, during the year 2007;

xii. On 13.11.2007 B... makes a bank transfer of €3,541,500.00 to the Claimant for payment of the land. It should be noted that this was the only amount received by the Claimant as payment of the price in debt from the disposal of said land, since B... never paid any amount as interest or charges.

xiii. On 15.11.2007 the Claimant makes a bank transfer of €3,541,500.00 to the account of B... as supplementary capital contributions;

Loans Extended

xiv. Since May 2006 the Claimant has been lending various amounts to B..., without proceeding to charge any amount relating to the extension of such sums. Simultaneously, the Claimant's indebtedness to financial institutions is maintained.

In view of the above facts, the TA concluded that: "part of the financial charges borne by the Claimant since March 2005, and reflected in the 2010 tax result, are not attributable to the sphere of the Claimant, for tax deductibility purposes, as they were incurred in the interest of and with a view to the exercise of the activity of B.... This is the case with the following charges incurred by the Claimant and which were not reflected in the sphere of B...:

  1. Charges relating to the bank loan contracted for acquisition of land, since a significant part of this land was disposed of in 2005 to B...;

  2. Charges relating to bank loans applied in the free financing of B..., through sums that the Claimant has been successively lending to it;

In summary, although B... paid on 15.11.2007 the amount in debt from the acquisition of the land, in a total of €3,541,500.00, the Claimant immediately transfers this financial availability to B..., as supplementary capital contributions.

However, the TA argues, "this is not the fact that supports the correction in question, since the Claimant can freely manage its business and make the management choices it sees fit. In truth, the reasoning for the correction is solely related to the fact that financial charges persist that are borne by the Claimant but that, however, are charges that would only be tax deductible in the legal sphere of B... if it had borne them, which, as we have seen, did not happen.

For this reason it concludes in the Final Report that "since 2005 A... has been assuming financial charges resulting from a loan relating to assets (land), over which it no longer holds any right, since it transferred its ownership to B..."

Moreover, "B... becomes owner of assets, without having needed to finance itself and incur expenses associated with any type of financing, nor with the provision of the corresponding financial means for their purchase, and has even been granted an incentive, under the SIVETUR Programme, by the Tourism Institute, with the expenses eligible for the grant of that incentive including the value of the land in question".

"That is, B... is enjoying a financial incentive on an investment in real property, for which it has not provided financial means nor borne any financing charges, such charges being borne by A..."

As for the remaining loans in favor of B..., these correspond to financial availabilities that the Claimant obtains through the contracting of loans, without charging B... the respective financial charges.

As it states as to the law, "the mere possibility of being able to have in the future gains resulting from the application of these capital in its associated company does not by itself determine that such investments can be framed in the concept of tax expenses", further adding that "the law does not prohibit the company A... from assuming the commitments according to the group of companies, if it chooses to for a matter of commercial management. However, if it does so, it should record the operations in the accounts", that is, it should increase the respective charges to the taxable income for CIT purposes.

Naturally, such charges are not deductible in the sphere of A... because they were not charged to the Claimant by the Requerente.

As for the quantification of the financial charges incurred by the Claimant, now under discussion, the quantification criteria are duly demonstrated in the Final Report and specifically evidenced as to their calculation in Annex 1 to the Final Report.

In summary, the following amounts were calculated on a monthly basis, from March 2005 (date of disposal of the aforementioned land) until December 2010 (exercise in which the charges were deducted):

  • Financial charges of the loan contracted for acquisition of the land for the amount of €3,750,000.00, in the part in which it financed the acquisition of land subsequently acquired by B..., in the amount of €2,721,364.50, considering that all the land was acquired for €5,000,000.00 and the part disposed of to B... was acquired from individuals for the value of €3,628,486.00, as duly explained in the Final Report;

  • Financial charges of loans extended to B... since May 2006 without the Claimant having proceeded to charge any amount relating to the extension of such sums.

Thus, the TA, in accordance with the calculations made, determined that the total amount of the increase to the taxable income amounted to €1,074,746.49, relating to financial charges borne that are not tax deductible by the Claimant under article 23 of the CIRC.

  • The Final Report was notified to the Claimant by letter No. …/… of 27.03.2014, which gave rise to the additional CIT assessment now contested.

  • Given the above statement, there is no factual matter in dispute, since the Claimant admits the facts that supported the correction.

2.2. Unproven Facts

There are no facts relevant to assessment of the exceptions that have not been proven.

2.3. Reasoning for the Decision on Factual Matters

The determination of factual matters was based on the documents indicated for each point.

With regard to proven factual matters, the Tribunal's conviction was based on the documents indicated in relation to each point and on the CAAD computer system, whose correspondence to reality was not questioned, on the statements made in the written pleadings, on the points indicated, in which the correspondence to reality was not challenged.

With factuality fixed, let us now examine the law from which emerges the solution to the dispute.

3. LEGAL GROUNDS

With regard to legal matters, it is necessary to assess whether or not the deductibility exists as tax-accepted cost of the financial charges borne by loans obtained in the amounts relating to the free financing of company B..., from the year 2005, in the result of the exercise of 2010 (during this period interest was capitalized), pursuant to article 23 of the CIRC.

Naturally, it is not incumbent on the tribunal to list and rebut one by one all the legal arguments presented by the parties to support their respective theses. This would constitute, rather, the reciprocal burden on the parties, for, having read and considered all arguments, the tribunal presents the decision with its own legal reasoning which, obviously may, wholly or partly, adhere to the legal arguments presented by the parties[1].

In the wording of article 23 of the Corporate Income Tax Code at the time of the facts, "Expenses shall be those which are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of income."

The core of the dispute thus consists essentially in determining whether, as the TA understands, the assessment act should be upheld due to the fact that financial charges persist that are borne by the Claimant but that, however, are charges that would only be tax deductible in the legal sphere of B... if it had borne them, which, as we have seen, did not happen. That is, "since 2005 A... has been assuming financial charges resulting from a loan relating to assets (land), over which it no longer holds any right, since it transferred its ownership to B..., as well as other loans extended to cover treasury needs", or whether, as the Claimant maintains, "the interest and other charges borne by Taxpayer A... for the financing obtained from banking institutions are, without question, costs with tax significance, deductible pursuant to article 23 of the CIRC."

Defect of Lack of Legal Reasoning

The legal requirement for reasoning of the disputed act is unquestionable and not called into question.

The issue raised boils down to knowing whether the elements contained in that TAI are or are not sufficient to meet the legal requirements of reasoning as regards CIT assessment through disregarding of certain charges.

Article 77 of the General Tax Law establishes in its paragraph 1 that "The decision on procedure is always reasoned by means of a brief statement of the facts and law that motivated it, and the reasoning may consist of a mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report" and in its paragraph 2 establishes that "The reasoning of tax acts may be effected in summary form, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determination of the taxable matter and the tax."

The reasoning referred to in this norm must therefore be based on facts and law that formally support the administrative decision.

As the Superior Administrative Court, 2nd Section, states in the Decision of 12.03.2014, Case No. 01674/13, which is followed here, "And, as is the consensus in case law, the requirements of reasoning are not rigid, varying according to the type of act and the concrete circumstances in which it was issued: the act will be sufficiently reasoned when the addressee, placed in the position of normal recipient - the bonus pater familiae of which article 487 paragraph 2 of the Civil Code speaks – can come to know the factual and legal reasons that are at its genesis, so as to allow him to choose, in an informed manner, between acceptance of the act or the activation of legal means of challenge, and so that, in the latter circumstance, the court can also exercise effective control of the legality of the act, assessing its legal correctness in light of its contextual reasoning. This means that the reasoning, even if made by reference or in summary form, cannot fail to be clear, coherent and contain the aspects of fact and law that allow knowledge of the cognitive and evaluative path pursued by the Administration in determining the act. And therefore, the insufficiency, obscurity and contradiction of the motivation are equivalent to lack of reasoning (article 125 paragraph 2 of the Code of Administrative Procedure), as they prevent a full apprehension of the volitional and cognitive path that determined the Administration to practice the act with the decisive sense it gave it.

With regard to legal reasoning, the case law of this Court has decided that for it to be considered sufficient it is not always necessary to indicate the applicable legal provisions, the reference to relevant principles, the legal regime or a well-determined legal framework being sufficient, and the act must be considered legally reasoned when it fits within a legal framework. As noted in the decision of the Full Bench of this Section of 25.03.93, in Case No. 27387, the duty of reasoning is assured whenever, despite the absence of express reference to any legal provision or legal principle, the decision is placed within a determined and unequivocal legal framework, perfectly knowable from the point of view of a normal addressee, concluding that there will be legal reasoning whenever, in light of the text of the act, the legal reasons that determined it are perfectly intelligible.

Whence it follows that, even before this case law current which we endorse without reservation, only in very particular cases (as were, indeed, those analyzed in the cited decisions) can it be concluded that an act is legally reasoned despite no direct legal reference existing in the text of the act. And this only happens when, as explained in that decision of 27.05.2003, two conditions are shown to be met:

"- The first is that it can be asserted, unequivocally, in light of the objective data of the procedure, what legal framework was taken into account by the act;

  • The second is that it can be concluded that this legal framework was perfectly known or knowable by the addressee, hypothesizing that it would be by a normal addressee in the concrete position in which that party finds itself.

The second condition does not function without the first, as this integrates it. If it is not known what legal framework was actually taken into account by the act, it can never be carried out; and therefore, it is irrelevant that the addressee can know, and even knows, what legal framework should have been considered."

In the present case, in the opinion of the Tribunal, the Appellant has not succeeded in challenging what was decided on this matter.

One thing is to be able to disagree with the reasoning given for the assessment, another is to allege that the TAI does not allow the decision-making path of the act in question to be known.

It is to be understood in light of the evidence adduced that the reasoning contains the facts and law reasons that, for purposes of the correction made under article 23 of the CIRC, led to the selection of certain capital debts, as well as which criteria for the calculation of the corresponding financial charges.

This is what results from the Final Report: "(…) In view of the facts set out above, the question that arises is whether the financial charges borne by A..., since 2002, which were capitalized, only having repercussions on the result of the 2010 exercise, are effectively a fiscal cost framing under article 23 of the Corporate Income Tax Code" (see Final Report in points III.1 to III.5)

It cannot be overlooked that, given the detailed description of the facts and grounds of the corrections on pages 6 to 22 of the TAI, and as expressed in the case law also in the present case, "it appears to us that it allows its addressee to achieve the desideratum that lies behind the legal requirement for reasoning of tax acts and which is the apprehension of the facts and law reasons that justified the correction of the declared elements and the motivation of the additional assessment.

The Appellant was placed in a position to understand that the correction of the taxable profit was determined by the non-acceptance for tax purposes of financial charges.

It can also be said that the Appellant was in special conditions to understand the meaning of the act practiced by the Tax and Customs Authority, as it had full knowledge of the Tax Inspection Report that had supported the correction to the taxable profit of the 2010 exercise.

Finally, the very terms in which the appellant frames the present request for arbitral pronouncement sufficiently demonstrate that it fully understood the sense of the decision and its reasoning, as appears in particular from articles 21° and 54° of the learned initial petition.

In truth, it is clear from the content of the Final Report which amounts were obtained by B... via the now Claimant, which, as they constitute free financing of that company, are not tax deductible, in light of the provisions of article 23 of the CIRC.

In these terms, the formal defect of lack of reasoning is held to be without merit.

Erroneous Quantification and Qualification of the Tax Fact

As to these grounds invoked by the Appellant, it is important to state the following:

The question to be decided lies in determining whether the financial expenses borne by the Claimant can or cannot be accepted for tax purposes for purposes of article 23 of the CIRC, which contracted loans for: i) the acquisition of real property (land for construction) and which, despite the disposal of the same (on 04.03.2005) to another entity (B..., the company in which it held a 10% stake only as of 08.01.2007) continued to register in its accounts the aforementioned interest without having reflected it in the beneficiary entity (B...), and ii) other loans for treasury needs.

Thus, what is relevant for this decision is to determine whether the interest on bank loans incurred in the sphere of the Claimant should be considered as tax-accepted expenses for purposes of article 23 of the CIRC from the date of disposal of the land (04.03.2005), both those related to the sold land and those arising from loans extended to support B...'s treasury.

Let us see:

Pursuant to the cited article 23 of the Corporate Income Tax Code (at the time of the facts) it read as follows: "Expenses shall be those which are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the source of income."

Indispensability emerges as a determining factor for the admissibility of costs. Its delimitation is therefore fundamental to ascertain whether charges were incurred in the interest of the participating company.

The possibility of deduction of investment costs of companies in their subsidiaries should not always be excluded.

The concept of indispensability contained in article 23 of the CIRC must correspond to costs incurred in the interest of the company, to expenses borne within the framework of activities covered by its statutory purpose, in the case of a company.

It is not, therefore, necessary to have a link to income, an obligatory nexus of causality between expenses and income. On the other hand, for that purpose, the evaluations of the Tax Administration regarding the correctness of management decisions are not relevant, it being sufficient that the same are taken within the framework of the company's interest.

The Central Administrative Court - South, in Case No. 06754/13 CT- 2nd Court of 16.10.2014, points to the following solution: "It is the understanding of case law and doctrine that the TA cannot evaluate the indispensability of costs in light of criteria relating to the opportunity and merit of the expense. A cost is indispensable when it relates to the activity of the company, costs being foreign to the activity of the company being only those in which it is not possible to discern any causal nexus with the income or gains (or with the income, in the current expression of the code - see art. 23, no. 1, of the C.I.R.C.), explained in terms of normality, necessity, congruence and economic rationality (see Decision S.T.A. -2nd Section, of 21.04.2010, appeal no. 774/09; Decision S.T.A. -2nd Section, of 13.02.2008, appeal no. 798/07; Decision T.C.A. South -2nd Section, of 17.11.2009, case 3253/09).

Now, an "asset is a resource controlled by the entity as a result of past events and from which it is expected that future economic benefits will flow to the entity" - point 49 (a) of the Conceptual Framework of the System of Accounting Standardization endorsed by the Order published in Notice No. 15 652/2009, Official Gazette, II Series, of 7 September.

Thus, the "activity" of a company is not exhausted in the set of productive or operational operations. "Activity" is also the set of operations that are intended for the realization of investments or the disposal of assets, the acquisition of financial interests and their subsequent disposal, the application of liquidity in short-term investments or securities and its management, the receipts and payments resulting from operational or non-operational income and expenses, and many others. It will be activity the management of a physical asset, as well as that of an intangible asset, as well as that of a non-current asset held for sale, as well as that of a financial asset.

The business activity that generates deductible costs must be that which results in operations that have a purpose, an intention to obtain income or the purpose of maintaining the potential of a source that produces income.

In cases of investment by a company in its subsidiary, the financing coming from the investor company will be done in the interest thereof if it serves for the expectation of future income to flow directly therefrom.

The deductibility of interest borne by the investor company will depend on the fact that the financings contribute, according to normal management rules, to increase the expectation of future benefits or to maintain the source of income (financial asset).

The fact that decisions taken in the sphere of the investor company influence the assets of the subsidiary does not mean that they are made in the interest of third parties. They are taken from the interest of the investor company in ensuring the operation and profitability of its investment in the subsidiary.

The subsidiary uses funds that are contributed to it, but that contribution of funds is made in the interest of the investor company, that is, in the context of normal management acts that can be encompassed in its scope or profit-making purpose.

In situations in which the investor company holds all the capital of the subsidiary and therefore holds the full possibility of intervening in the management of the subsidiary and ensuring that the investment is used in its interest, the investment in the subsidiary is reduced to management of the interest and constitutes indirect exercise by the investor company of the economic activity that the subsidiary carries out, whose positive or negative effects end up being reflected entirely in the legal sphere of the investor company through the appreciation or depreciation of its interest, so that the charges necessary to ensure the investment enhancing the obtaining of future benefits fit within the concept of economic indispensability, with the mentioned meaning of expenses entirely made in the interest of the company.

In cases in which there is a situation of holding by the investor company of part of the capital of the subsidiary, one can only consider that the costs are "demonstrably" indispensable, as required by article 23, no. 1, of the CIRC, in the wording in effect before Law No. 2/2014, of 16 January, if the possibility of influence of the investor company in the subsidiary company is assured, because if that possibility does not exist, if the investment is made without any possibility of the investor company influencing its outcome, it cannot be considered assured (proven) that it will be used in its interest.

In assessing this interest of the investor company and its measurement should apply the accounting rules, as they should guide the fixing of the taxable matter of CIT, pursuant to article 17, no. 1, of the CIRC.

Thus, NCRF 13 addresses this matter of determining whether an investment in a subsidiary falls within the scope of the interest of the investor company, and does so in the following terms:

"Associate: is an entity (here including entities not constituted in the form of a company, such as, for example, partnerships) over which the investor has significant influence and which is neither a subsidiary nor an interest in a joint venture.

Subsidiary: is an entity (here including entities not constituted in the form of a company, such as, for example, partnerships) that is controlled by another entity (designated as parent company).

Control: is the power to manage the financial and operational policies of an entity or economic activity in order to obtain benefits from it.

  1. If the investor holds, directly or indirectly (for example, through subsidiaries), 20 % or more of the voting power in the investee, it is presumed to have significant influence, unless the contrary can be clearly demonstrated. If the investor holds, directly or indirectly (for example, through subsidiaries), less than 20 % of the voting power in the investee, it is presumed not to have significant influence, unless the contrary can be clearly demonstrated. The existence of another investor holding a majority or substantial interest does not necessarily prevent the exercise of significant influence.

  2. The existence of significant influence by an investor is generally evidenced by one or more of the following ways:

(a) representation on the board of directors or equivalent management body of the investee;

(b) participation in decision-making processes on policies, including participation in decisions on dividends and other distributions;

(c) material transactions between the investor and the investee;

(d) interchange of management personnel; or

(e) provision of essential technical information."

Therefore, it should be understood that there is interest of the investor company in the investment in the subsidiary when the latter holds significant influence in the management of the subsidiary, at least, the participation of the investor company in the definition of the operating and financial policies of the subsidiary.

Provided this influence is proven, the financing of the subsidiary by the investor will be of its interest or economic-legal purpose, fitting within the scope of the normal management operations of the investor company.[2]

In the case in question, the Claimant held 10% of the capital of B..., so there is no presumption of significant influence of the Claimant in the management of this company, nor was it proven in any way.

Moreover, even long before acquiring that interest the Claimant had been extending loans to the future subsidiary.

Therefore, it cannot be understood that the costs of the investment are demonstrably indispensable, for purposes of article 23, no. 1, of the CIRC.

As regards the financial charges resulting from loans contracted for the acquisition of the land that were disposed of on 4.03.2005, it is therefore the conviction of this Tribunal that, as to the sold assets, even though in the context of deferred payment of the price, the respective charges borne from that date are not capable of generating income subject to tax or for the maintenance of the source of income in the sphere of the Claimant and as such are not deductible for purposes of the provision of article 23 of the Corporate Income Tax Code.

Any eventual gains or capital gains with the said land will always occur in the acquiring company (B...).

As for the remaining financial charges, they arose from loans extended to B... (related entity) without the claimant having proceeded to charge any interest, whether before or after the constitution of the supplementary capital contributions made with the acquisition of the minority 10% interest in said company.

Also in light of the foregoing, the argument advanced by the Claimant fails, in stating that the supplementary capital contributions made in the company held 10% "B..." constitute an investment aimed at obtaining future economic benefits and maintenance of the productive source, namely through the obtaining of dividends and capital gains possibly resulting from the disposal of invested capital, and that thereby, the indebtedness incurred contributes to the strengthening of a financial asset - the increase in the value of the interest in the associated company.

As to the Claimant's reference to the content of the Decision of the Tax Section of this CAAD", Case No. 12/2013-T, we understand that it does not apply to the present case. Indeed, in this Decision the deductibility of charges borne by a company managing shareholdings was under discussion, whose activity and operation is based exclusively on the management of its subsidiaries. The case of the present proceedings is manifestly distinct, and the same consequences cannot be drawn.

Finally, also the error in the quantification of the tax fact does not hold as the criteria for quantification adopted by the TA are evident in the TAI, not only in points 4.2.24 to 4.2.26 of the TA'S RESPONSE, but also in the calculation itself in Annex 1 also of the TAI.

For all that has been stated, the request for annulment of the assessment act in question cannot proceed.

The request for annulment of the assessment of compensatory or default interest also fails, as this request is based on the alleged illegality of the CIT assessment.

4. DECISION

In these terms, they agree on:

a) Hold the request for annulment of the CIT assessment No. 2014 ... to be without merit and, consequently, absolve the Tax and Customs Authority of that request;

b) Hold the request for annulment of the assessment of compensatory or default interest to be without merit and absolve the Tax and Customs Authority of the respective request;

c) Condemn the Claimant in the costs of the proceedings, taking into account payments made in the meantime.

5. VALUE OF THE CASE

In accordance with the provisions of article 306, no. 2, of the Code of Civil Procedure and 97-A, no. 1, subsection (a), of the Code of Tax Procedure and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €314,940.03.

6. COSTS

Costs of the arbitration proceedings in the amount of €5,508.00, at the charge of the Claimant, in accordance with the provisions of articles 12, no. 2 and 22, no. 4, of Decree-Law No. 10/2011, of 20 January, and article 4, no. 3, of the Regulation of Costs in Tax Arbitration Proceedings.

Notify.

Lisbon, 13.02.2015

The Arbitrators

(Jorge Lopes de Sousa)

(Maria da Graça Martins)

(Artur Maria da Silva)

[1] Courts do not have to assess the arguments formulated by the parties – this has been repeatedly stated by case law (See inter alia, Decision of the Full Bench of the 2nd Section of the Superior Administrative Court, of 7 June 95, case DR – appendix of 31 March 97, pages 36-40 and Decision SAC – 2nd Section – 23 April 97, DR/AP of 9 October 97, p. 1094.

[2] In some respects, this closely follows the decision of CAAD of 15-01-2015, issued in Case No. 587/2014-T.

Frequently Asked Questions

Automatically Created

What are the conditions for cost deductibility under Article 23 of the Portuguese Corporate Income Tax Code (CIRC)?
Under Article 23 of the Portuguese Corporate Income Tax Code (CIRC), costs are deductible when they meet three cumulative conditions: (1) they must be indispensable for obtaining or guaranteeing taxable income (incurred for business purposes and not mere liberalities); (2) they must be properly documented with supporting invoices or equivalent documents; and (3) they must be reflected in the taxpayer's accounting records for the relevant tax period. Additionally, costs must not fall within specific exclusions listed in Article 23-A CIRC, such as fines, penalties, certain entertainment expenses, or excessive costs. The Tax Authority may challenge deductibility if costs lack business substance, are not at arm's length in related-party transactions, or serve purposes other than income generation. The burden of proving that costs meet these criteria generally rests with the taxpayer.
How does the CAAD assess the tax treatment of ancillary services (prestações acessórias) for IRC purposes?
The CAAD (Administrative Arbitration Centre) assesses the tax treatment of supplementary capital contributions (prestações acessórias) by examining whether they constitute deductible business costs under Article 23 CIRC or non-deductible equity transactions. Key factors include: the commercial substance and business purpose of the contribution; whether it was made to support genuine business operations or disguise profit distributions; the timing and economic circumstances surrounding the contribution; the relationship between the contributing company and the recipient entity; and whether the contribution generates a reasonable expectation of taxable return. Contributions made to related entities shortly after receiving payments from those same entities may face heightened scrutiny. CAAD tribunals analyze whether supplementary contributions represent genuine financing costs incurred to obtain taxable income or merely represent investments in equity instruments that should be treated as non-deductible under corporate tax principles. Documentation supporting the business rationale is essential.
What grounds can be used to challenge an additional IRC tax assessment before the CAAD arbitral tribunal?
Taxpayers can challenge additional IRC assessments before CAAD arbitral tribunals on several grounds: (1) substantive illegality - violation of tax law provisions such as incorrect application of Article 23 CIRC regarding cost deductibility, erroneous qualification of taxable income, or misapplication of exemptions and deductions; (2) procedural defects - lack of legally required justification (fundamentação), violation of taxpayer rights to prior hearing, or failure to follow assessment procedures; (3) quantification errors - mathematical mistakes or incorrect calculation of taxable income or tax due; (4) violation of constitutional principles - breach of legality, proportionality, or legitimate expectations; and (5) prescription - assessments made outside applicable limitation periods. The request must be filed within 90 days of notification of the contested act, identify the specific assessment challenged, present legal and factual grounds, and specify the relief sought (partial or complete annulment). Supporting documentation from the administrative file should be referenced.
When can a taxpayer claim annulment of an IRC assessment based on lack of legally required justification (falta de fundamentação)?
A taxpayer can claim annulment of an IRC assessment based on lack of legally required justification (falta de fundamentação) when the Tax Authority's decision fails to adequately explain the factual and legal grounds supporting the assessment. Portuguese tax law requires assessments to include: (1) identification of the factual basis - specific facts and circumstances justifying the correction or additional assessment; (2) legal grounds - citation of applicable tax law provisions and explanation of how they apply to the specific case; and (3) calculation methodology - demonstration of how the tax liability was quantified. Justification must enable the taxpayer to understand the reasons for the assessment and prepare an effective defense. Generic or conclusory statements without specific factual support, failure to address taxpayer arguments presented during administrative proceedings, or absence of explanation for rejecting documented costs constitute defects in justification. This procedural defect constitutes grounds for annulment independent of substantive illegality, as it violates fundamental taxpayer rights and principles of administrative law.
What is the arbitral procedure for disputing corporate tax (IRC) liquidation decisions at the CAAD in Portugal?
The arbitral procedure for disputing IRC liquidation decisions at CAAD follows the Legal Regime of Arbitration in Tax Matters (LRAT - Decree-Law 10/2011). The process begins when the taxpayer files a request for constitution of an arbitral tribunal within 90 days of notification of the contested act, paying the required initial fee. The request must identify the contested assessment, present factual allegations and legal grounds, and specify requested relief. CAAD's President accepts the request and notifies the Tax Authority, which has 30 days to respond. The Deontological Council appoints three arbitrators (for collective tribunals) or one arbitrator (for singular tribunals) who must accept within 5 days. The tribunal is constituted when arbitrators communicate acceptance. Parties may request witness testimony, document production, or expert reports; if no evidence is requested, written submissions proceed directly. The tribunal issues a decision within 6 months (extendable to 12 months). Decisions are binding, equivalent to court judgments, and subject to limited appeal to the Court of Appeal on points of law. The procedure emphasizes efficiency, specialized expertise, and faster resolution compared to traditional judicial review.