Process: 586/2017-T

Date: June 20, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitral Process 586/2017-T addressed autonomous taxation under Article 88(13) of the Portuguese Corporate Income Tax Code (CIRC) concerning a severance payment of €611,289 made to a former director. The case involved A… S.A. challenging an IRC assessment of €297,998.14 issued by the Large Taxpayers Unit following a tax inspection for the 2013 tax period. The dispute centered on whether the payment made to Mr. D…, who served as both an employee and board director, qualified for autonomous taxation when the employment contract was terminated in July 2013. The Tax Authority had proposed corrections of €275,080.05 regarding autonomous tax assessments. A critical preliminary issue concerned the timeliness of the arbitration request. The Tax Authority argued the request was filed out of time, claiming notification occurred on August 4, 2017. However, the tribunal ruled that absent proof of receipt, Article 39(1) of the Tax Procedure Code (CPPT) established a legal presumption that registered mail notification occurs on the third business day following registration, which would be August 7, 2017. The tribunal cited Supreme Administrative Court precedent holding that only the recipient can rebut this presumption. Consequently, the arbitration request filed on November 6, 2017 was deemed timely, falling within the 90-day statutory period. This ruling underscores the importance of proper documentation in tax notification procedures and confirms taxpayers' access to CAAD arbitration for challenging autonomous taxation assessments issued by specialized units like the Large Taxpayers Unit.

Full Decision

ARBITRATION AWARD

The arbitrators José Baeta de Queiroz (chairman), Regina de Almeida Monteiro and Francisco Nicolau Domingos (members), appointed by the Deontological Board of the Centre for Administrative Arbitration to form the present arbitration tribunal, agree as follows:

1. REPORT

A…, S.A., taxpayer no. …, with registered office at Av…, no. …, Lisbon (hereinafter referred to as the "Claimant"), on 07-09-2017, under the terms of paragraph a) of article 2, paragraph 1, and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT"), submitted a request for an arbitration award seeking the annulment of the order of 01-08-2017 from the Head of the Division of Management and Tax Assistance of the Large Taxpayers Unit, which expressly rejected the administrative appeal in which annulment was requested of the corporate income tax assessment (IRC) no. 2016… in the part in which an amount to be paid of € 297,998.14 was determined.

The Claimant further requests payment of compensatory interest.

In the meantime, the Claimant merged by incorporation with the then designated B…, SGPS, S.A., currently C… S.A.

The respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY (AT).

The request for constitution of the arbitration tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 06-11-2017.

Pursuant to paragraph a) of article 6, paragraph 2, and paragraph b) of article 11, paragraph 1, of the RJAT, the Deontological Board appointed as arbitrators of the collective arbitration tribunal the signatories, who communicated their acceptance of the office within the applicable period.

On 04-01-2018, the parties were duly notified of such appointment and manifested no intention to refuse the appointment of the arbitrators, pursuant to the combined terms of article 11, paragraph 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

In accordance with the provisions of paragraph c) of article 11, paragraph 1, of the RJAT, the collective arbitration tribunal was constituted on 24-01-2018.

The AT responded, arguing the inadmissibility of the request for an arbitration award, defending itself by exception and by objection.

The parties submitted arguments.

2. PRELIMINARY EXAMINATION

The arbitration tribunal was properly constituted, in accordance with the provisions of articles 2, paragraph 1, paragraph a), and 10, paragraph 1, of Decree-Law no. 10/2011, of 20 January, and is competent to examine and decide on the request for an arbitration award.

The parties, who are duly represented, possess legal personality and capacity and have standing (articles 4 and 10, paragraph 2, of the same diploma and 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are not vitiated by any nullities.

Preliminary Question:

Timeliness of the Request for Arbitration Award (Peremptory Exception)

The Respondent presented its defense by exception, invoking that the Claimant presented the request for arbitration award out of time.

The request for an arbitration award is subsequent to the order rejecting the administrative appeal, which the Claimant filed against the tax assessment act of additional assessment made in the context of the tax inspection procedure which was based on service order no. 012015….

Based on this service order, the Tax Inspection Services of the Lisbon Tax Directorate conducted an inspection of the Claimant for the tax period of 2013.

The Inspection Services, in the context of the aforementioned administrative inspection procedure, proposed a correction in the amount of € 275,080.05, regarding the autonomous tax assessments to be paid by the Claimant in respect of IRC.

After drawing up the "Final Report" arising from the aforementioned administrative procedure, the AT notified the now Claimant of the additional tax assessment act.

The Claimant filed an administrative appeal of that tax assessment, which was rejected, with the order of rejection being notified to the now Claimant by registered mail, sent on 03-08-2017.

In its response in the present arbitration proceedings, the Respondent states that the Claimant was notified on 04-08-2017 "as shown in the PA".

Upon analyzing the entire aforementioned administrative procedure, we were unable to find documentary evidence of the alleged receipt of the registered mail on 04-08-2017.

Corrections to the taxable matter that have been subject to notification for the purposes of the right to be heard are made by registered mail, as provided in paragraph 3 of article 38 of the Code of Procedure and Tax Process (CPPT).

And article 39, paragraph 1 of the CPPT provides that: "Notifications made under the terms of paragraph 3 of the preceding article are presumed to be made on the 3rd day following registration or on the 1st business day following that date, when such day is not a business day".

In the absence of proof in the administrative procedure of receipt on 04-08-2017, as the Respondent alleges, we must consider that the Claimant was notified on 07-08-2017.

It should also be noted that, according to the established case law of the Supreme Administrative Court, followed by arbitral jurisprudence, even if the Respondent had been able to prove that receipt of the registered mail occurred on 04-08-2017, before, therefore, the third day following registration, such would be of no consequence, since only the recipient can rebut the presumption of paragraph 1 of article 39 of the CPPT, as derives from its paragraph 2 – see, among many, the judgment of 15-06-2016 of the STA in process no. 139/2015.

We must therefore conclude that the request for an arbitration award presented on 06-11-2017 is timely and the alleged peremptory exception invoked by the Respondent is not valid.

3. FACTUAL MATTERS

3.1. Proven Facts

Based on the documentary evidence in the proceedings, in particular the attached administrative file, the following facts are considered proven:

A. Mr. D… was hired by E…, S.A. to exercise the functions of General Director on 01.01.1993.

B. Mr. D… entered into an employment contract with another entity of the same economic group, A… SGPS, S.A., on 16.03.2000, with seniority recognized as of 01.01.1993, also to exercise the functions of General Director.

C. Mr. D…, on 15.12.2003, was appointed, by resolution of the General Meeting of Shareholders of the Claimant, to its Board of Directors for the current three-year period and re-elected in 2004/2006.

D. Under article 398 of the Commercial Companies Code (CSC), as of 15-12-2003, Mr. D…'s employment contract with the Claimant was suspended.

E. By resolution of the General Meeting of Shareholders of the Claimant, held on 24-05-2007, Mr. D… was re-elected to the Board of Directors of that entity for the three-year period 2007/2009.

F. By resolution of the General Meeting of Shareholders of the Claimant, Mr. D… was once again re-elected to the Board of Directors of the Claimant, now for the three-year period 2010/2012.

G. Mr. D… ceased to exercise his functions on the Board of Directors of the Claimant, by resignation on 30-04-2013.

H. Mr. D… was not re-elected to that body for the following three-year period, 2013/2015.

I. Mr. D…, as of 01-05-2013, resumed the performance of the functions of General Director, to which he was obligated, under the employment contract concluded with A… SGPS, S.A., on 16-03-2000.

J. The Claimant, as an employer, on 01-07-2013 notified Mr. D… of the decision to eliminate his position, and consequently, the employment contract concluded between the Claimant and Mr. D… was terminated with effect as of that date.

L. The Claimant paid Mr. D… on 01-07-2013 the amount of € 611,289.00.

M. The Claimant did not subject this amount paid to Mr. D… to autonomous taxation.

N. Mr. D… also did not include this amount in his income tax return (IRS).

O. Mr. D… was the subject of an inspection for income tax purposes, with the AT considering that the aforementioned amount was subject to IRS and effecting an additional tax assessment.

P. By arbitration award, already final and binding, this IRS assessment was annulled, for illegality, with the arbitration tribunal considering that the aforementioned amount was not subject to IRS.

Q. The Claimant was the subject of an inspection action for the tax period of 2013, under service order no. OI2015….

R. The Inspection Services proposed, insofar as it is relevant here, that a correction be made in the amount of € 275,080.05 regarding the autonomous tax assessments to be paid by the Claimant in respect of IRC.

S. The correction relating to the incidence of autonomous taxation on the expenses borne by the Claimant with compensation due for the cessation of the functions of director or manager allegedly exercised by Mr. D….

T. The Tax Inspection Services maintained, in the report, the aforementioned correction, resulting in IRC to be paid by the Claimant, as autonomous taxation, in the amount of € 275,080.05.

U. The Claimant was notified of the assessment of IRC and compensatory interest no. 2016…, as well as the statement of account adjustment, in the total amount of € 297,998.14, which it paid on 16-01-2017.

3.2. Unproven Facts

Nothing material to the decision remained unproven.

4. LEGAL MATTERS

The legislator, in article 88 of the Corporate Income Tax Code (CIRC), established a list of autonomous taxes relating to expenses borne by taxpayers that are not directly connected with the taxation of income subject to such tax.

In the teaching of SALDANHA SANCHES, Manual of Tax Law, 3rd edition, Coimbra, p. 407, autonomous taxes relate to expenses that are in the zone of intersection between the private sphere and the business sphere and which thus create difficulties in defining their tax treatment, and also aim to prevent companies from conducting disguised profit distribution through the incurrence of such expenses, having an anti-avoidance purpose.

Autonomous taxes have characteristics of their own that distinguish them from IRC; if IRC is based on contributory capacity as manifested by income, these, as a rule, are levied on the expense; IRC is a tax of a periodic nature, whereas autonomous taxes are part of the category of taxes with a single obligation, since they tax isolated facts, and while IRC has a fiscal purpose – revenue collection – autonomous taxes also have an extra-fiscal purpose, to discourage the practice of behaviors that fall within the various sources of autonomous taxation set forth in article 88 of the CIRC.

In summary, each autonomous tax generally aims to discourage the realization of behaviors that may obscure the fiscal transparency of taxpayers and reduce the amount of taxable income in IRC.

After establishing the legal nature of autonomous taxes, it is necessary to analyze the specific autonomous tax in question here, that provided for in article 88, paragraph 13 of the CIRC, which provides:

"The following are taxed autonomously at a rate of 35%:

a) Expenses or charges relating to indemnities or any compensation due not related to the achievement of productivity objectives previously defined in the contractual relationship, when there is cessation of functions of manager, director or partner, as well as expenses relating to the portion exceeding the value of remuneration that would be earned by the exercise of those positions until the end of the contract, when it is a matter of termination of a contract before the end date, regardless of the mode of payment, whether this is paid directly by the taxpayer or responsibility is transferred to another entity; (…)".

In the interpretation of the tax incidence rule it is possible to observe that:

- the tax is levied on the payment of indemnities or compensation not connected to productivity objectives initially defined;

- the taxable matter is the value of the indemnity and, if there is early termination of the contract, the amount exceeding the remuneration until the end of the contract.

That is, in paragraph a), paragraph 13 of article 88 of the CIRC, the objective incidence is found in the payment of indemnities or compensation unrelated to any productivity objectives previously defined, with the taxable matter of this autonomous tax consisting of the amount of the indemnity or compensation.

It is also important to state that in the interpretation of the normative language: "…when cessation of functions of manager, director or partner occurs…", the legislator intended to include holders of corporate bodies who have the capacity, through their actions, to influence the course of the activity of pursuing the social purpose of the legal entity, such as the general director.

And regarding the term "manager", a source of disagreement between the Claimant and the Respondent?

For legal scholars, the manager is: "…someone who develops the strategic and operational plans that he considers to be most effective in achieving the proposed objectives, who designs the structures and establishes the rules, policies and procedures most suited to the developed plans and, finally, implements and coordinates the execution of these plans through a certain type of command and control". Or, in other words, the concept is filled by those persons who, not being part of corporate bodies, have management power similar to that of directors and partners.

The legal scholarship continues: "…the legislator may also have intended to include in the notion of managers those whose activity has a determining impact on the definition of operational and strategic objectives of companies, regardless of their size or line of activity. Those who, in fact, play a preponderant role in defining the strategies followed by the company would be included in this notion. This conclusion can be drawn from the analysis of the statement of reasons in Legislative Proposal no. 294/X, which originated this rule, which aimed to "ensure that the principles of good remuneration policy for professional categories whose activity has a determining impact on the definition of operational and strategic objectives of companies are applied". Thus, we think that if, for example, a commercial or financial director has responsibilities beyond mere implementation of directives emanating from the administration, they should be considered covered within the scope of this rule, in recognition of the constitutional principle of equality". Or, in other words, workers whose functional content goes beyond mere implementation of normatives produced by the administration are "managers" for the purposes of application of the rule.

In this way, the first interpretive task is to determine whether Mr. D… is a "manager" for the purposes of the disputed rule.

The evidence in the proceedings does not permit the conclusion that we are dealing with a true manager, given the absence of elements that would allow us to sustain, concretely, that, as general director, he operationalized the Claimant's activity by establishing rules for such purpose, beyond the directives emanating from the administration.

In summary, in the absence of proof, we cannot conclude that we are dealing with a manager for the purposes of the incidence described in article 88, paragraph 13, paragraph a) of the CIRC.

In this way, and if such is the case, it is difficult to see how the general director would have had the capacity to set disproportionate indemnities in conflict of interest between the business sphere and the personal sphere, the teleological basis for the provision of this autonomous tax.

Consequently, it is necessary to annul the decision rejecting the administrative appeal and the IRC assessment no. 2016….

As for the compensatory interest requested, paragraph b) of article 24, paragraph 1, of the RJAT provides that the arbitration award on the merits of the claim, as to which no appeal or objection is available, binds the Tax Administration from the end of the period provided for appeal or objection, and the latter must – in the exact terms of the admissibility of the arbitration award in favor of the taxpayer and until the end of the period provided for the spontaneous execution of judgments of judicial tax courts – restore the situation that would have existed if the tax assessment act that is the subject of the arbitration award had not been performed, adopting the acts and operations necessary for that purpose.

Such provision is in line with the provisions of article 100 of the General Tax Law (LGT), applicable in this case by virtue of the provisions of paragraph a) of article 29, paragraph 1, of the RJAT, according to which: "The tax administration is obliged, in case of total or partial admissibility of administrative appeals or court proceedings in favor of the taxpayer, to the immediate and full restoration of the situation that would have existed if the illegality had not been committed, including the payment of compensatory interest, in accordance with the terms and conditions provided by law."

Article 43, paragraph 1 of the LGT, in turn, provides that: "Compensatory interest is due when it is determined, in an administrative appeal or court challenge, that there was error attributable to the services, resulting in payment of the tax debt in an amount higher than legally due."

Now, it flows from the proceedings that the Respondent, by effecting the assessment here questioned and by maintaining it, rejecting the administrative appeal with which the Claimant reacted, incurred an error regarding the factual and legal presuppositions, an error attributable to it.

Accordingly, in view of the provisions of article 61 of the CPPT and considering that the prerequisites for the right to compensatory interest are met, that is, the existence of error attributable to the services from which resulted payment of the tax debt in an amount higher than legally due, as provided in paragraph 1 of article 43 of the LGT, the Claimant is entitled to compensatory interest, at the statutory rate, calculated on the amounts it paid, from the date it paid them, until their full reimbursement.

5. DECISION

In these terms, this Arbitration Tribunal agrees to:

a. Find the request for arbitration award well-founded;

b. Annul the IRC assessment no. 2016…, for the tax year 2013, in the amount of € 297,998.14;

c. Order the Tax and Customs Authority to reimburse the Claimant the sum of € 297,998.14, plus compensatory interest calculated from 16-01-2017 until the date the reimbursement is made.

6. VALUE OF THE CASE

In accordance with the provisions of articles 306, paragraph 2 of the Civil Procedure Code, 97-A, paragraph 1, paragraph a), of the CPPT and 3, paragraph 2 of the Regulation on Costs in Tax Arbitration Proceedings (RCPAT), the value of the case is set at € 297,998.14.

7. COSTS

As provided in articles 22, paragraph 4 of the RJAT and 4, paragraph 4 of the RCPAT and in Table I attached to the same, the amount of costs is set at € 5,202.00, to be borne by the Respondent, given its dismissal.

Let notification be made.

Lisbon, 20 June 2018

The arbitrators

(José Baeta de Queiroz)

(Regina de Almeida Monteiro)

(Francisco José Nicolau Domingos)

Frequently Asked Questions

Automatically Created

What are autonomous taxations (tributações autónomas) under Article 88(13) of the Portuguese Corporate Income Tax Code (CIRC)?
Autonomous taxations (tributações autónomas) under Article 88(13) CIRC are special tax levies applied to certain corporate expenses regardless of whether the company has taxable profits. Article 88(13) specifically addresses payments made to employees, directors, or related parties that may trigger additional taxation at specified rates. These autonomous taxes function as definitive levies on particular expense categories, operating independently from the standard IRC calculation, and are designed to discourage certain corporate behaviors or ensure minimum tax collection on specific transactions.
Can a taxpayer challenge an IRC autonomous taxation assessment through arbitral proceedings at CAAD?
Yes, taxpayers can challenge IRC autonomous taxation assessments through arbitral proceedings at CAAD (Centro de Arbitragem Administrativa). Process 586/2017-T confirms this jurisdiction. Under Decree-Law 10/2011 (RJAT - Legal Framework for Tax Arbitration), taxpayers may request arbitration to contest tax assessment acts, including those involving autonomous taxation under Article 88 CIRC. The arbitration request must be filed within 90 days of notification of the decision rejecting the administrative appeal, as established in Article 10 RJAT. CAAD provides an alternative dispute resolution mechanism to traditional judicial tax courts for resolving IRC assessment disputes.
What was the outcome of CAAD arbitral process 586/2017-T regarding the IRC tax assessment of €297,998.14?
While the complete outcome is not provided in the excerpt, CAAD arbitral process 586/2017-T ruled favorably on the preliminary timeliness issue, allowing the case to proceed. The tribunal rejected the Tax Authority's peremptory exception claiming the arbitration request was filed out of time. The substantive dispute concerned whether a €611,289 severance payment to Mr. D… should be subject to autonomous taxation under Article 88(13) CIRC, which the Tax Authority assessed at €297,998.14. The case involved complex factual circumstances where Mr. D… served simultaneously as an employee and board director before his employment termination in July 2013.
How does the timeliness (tempestividade) of an arbitral request affect tax dispute proceedings at CAAD?
Timeliness (tempestividade) is a critical procedural requirement in CAAD tax arbitration proceedings. Under Article 10 RJAT, arbitration requests must be filed within 90 days of notification of the administrative decision being challenged. In Process 586/2017-T, the tribunal applied Article 39(1) CPPT, which establishes a legal presumption that registered mail notifications occur on the third business day following registration, unless the recipient proves earlier receipt. This presumption can only be rebutted by the recipient, not the Tax Authority. Failure to meet the 90-day deadline results in dismissal for untimeliness, preventing substantive review. Proper calculation of notification dates is therefore essential for preserving taxpayers' arbitration rights.
What role does the Large Taxpayers Unit (Unidade de Grandes Contribuintes) play in IRC tax assessment disputes in Portugal?
The Large Taxpayers Unit (Unidade de Grandes Contribuintes - UGC) is a specialized division of the Portuguese Tax Authority responsible for managing tax compliance and conducting inspections of Portugal's largest corporate taxpayers. In Process 586/2017-T, the UGC's Division of Management and Tax Assistance issued the contested decision rejecting the administrative appeal. The UGC conducts targeted tax inspections based on service orders, as occurred here with inspection order 012015… for the 2013 tax period. These inspections often involve complex IRC issues including autonomous taxation assessments. Decisions by the UGC can be challenged through administrative appeals and subsequently through CAAD arbitration, providing specialized oversight for high-value tax disputes involving major corporations.