CAAD 593/2015-T: IRC Depreciation Rates for Renewable Energy

Process: 593/2015-T

Date: July 29, 2016

Tax Type: IRC

Summary

Process 593/2015-T before the Portuguese Administrative Arbitration Centre (CAAD) addressed a critical IRC (Corporate Income Tax) dispute concerning the appropriate depreciation rates for wind turbines and photovoltaic panels operated by renewable energy companies. The case involved a holding company challenging tax assessments totaling €643,915.51 for the 2010 tax year, relating to depreciation corrections made to three subsidiaries operating wind farms and solar installations. The central legal question concerned the interpretation of 'expected useful life period' under Article 31(2) of the IRC Code and Article 5 of Regulatory Decree No. 25/2009. The taxpayer argued for a 6.25% depreciation rate (16-year useful life), contending that economic useful life should be determined by the 15-year guaranteed remuneration period established in Decree-Law No. 33-A/2005 for renewable energy generation. After this period, remuneration becomes uncertain, making the equipment economically obsolete despite continued technical functionality. The claimant emphasized that depreciation should correlate asset costs with income generation capacity, not mere technical durability, arguing this interpretation aligns with the economic substance principle and taxation of actual profits. The Tax Authority rejected this approach, maintaining that expected useful life must be determined objectively based on technical durability information from equipment manufacturers and distributors. The TA argued that the concept of 'expected economic useful life' lacks legal foundation in Portuguese tax law and that Article 31(2) IRC Code provides a single criterion: reasonableness based on expected usefulness assessed technically, not commercially. The Authority conducted due diligence with equipment producers to establish objective useful life periods. The case also involved a claim for compensation related to undue bank guarantee provision. This arbitration highlights the tension between economic substance and technical form in determining depreciation for renewable energy assets, with significant implications for the Portuguese renewable energy sector's tax treatment and financial viability assessments.

Full Decision

ARBITRAL DECISION

The arbitrators, Fernanda Maçãs (President), Fernando Araújo, and Rodrigo Domingues, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, hereby agree as follows:

I. REPORT

The taxpayer A… – Sociedade Gestora de Participações Sociais, S.A., with the Tax Identification Number … (hereinafter "Claimant"), filed 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 January 20 (Legal Framework for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "TA" or "Respondent") is the defendant.
In such request, the Claimant seeks arbitral pronouncement on the illegality of the IRC assessment/2010 No. 2015…, of the statement of account adjustment No. 2015…, and of the interest assessment No. 2015…, relating to the tax year 2010, in the total amount of €643,915.51, and consequently formulates a request for partial annulment of such tax acts (regarding the correction of taxable income of three of its subsidiary companies) and for conviction to pay compensation for unjustified provision of bank guarantee, presenting three witnesses as evidence.
The request for constitution of the Arbitral Tribunal was accepted by the Esteemed President of CAAD and automatically notified to the TA on October 1, 2015.
Pursuant to the provisions of article 6(2)(a) and article 11(1)(b) of the RJAT, as amended by article 228 of Law No. 66-B/2012, of December 31, the Deontological Council designated the arbitrators of the Collective Arbitral Tribunal, who confirmed acceptance of the assignment within the applicable period, and notified the parties of such designation on November 13, 2015, without either party raising any objections.
The Collective Arbitral Tribunal was constituted on November 30, 2015, in accordance with the provisions of articles 2(1)(a), 5, 6(1), and 11(1) of the RJAT (as amended by article 228 of Law No. 66-B/2012, of December 31).
In the request for arbitral pronouncement, presented by the Claimant, the latter invokes, in summary, that:

a) The TA failed to consider the "specific peculiarities" of the activities of B…, C… and D…, the "economic rationale" that determined the adoption of a useful life period of 16 years for the equipment in question.

b) In the Claimant's view, such "useful life" is determined by the terms of sale of the electricity generated by such equipment, which are provided for in Decree-Law No. 189/88, of May 27 (amended, inter alia, by Decree-Law No. 33-A/2005, of February 16), which establishes "fixed and guaranteed" remuneration for renewable energy generation plants and defines a 15-year period as the duration for such remuneration (item 20 of Annex II to Decree-Law No. 33-A/2005, of February 16).

c) Once that period of certain remuneration ends, there would be no guarantees regarding how the energy generated would be remunerated, so that would be the horizon for assessing the economic viability of the wind farms and the solar plant.

d) Therefore, "depreciation" should be understood as referring, not to the durability of the equipment, but to its "economic usefulness" – and it would have been this semantic distinction, allegedly present in the ratio legis of the applicable rules, that would have "escaped" the TA. Moreover, the Claimant maintains that the "period of expected useful life" referred to in article 31(2) of the IRC Code and article 5 of Regulatory Decree No. 25/2009, of September 14, should not and cannot correspond to the durability period of a given asset.

e) Rather, in depreciation, it would be about "correlating the costs of use of an asset with the income it generates," focusing on the economic usefulness of assets, and not on "proper functioning" of an asset assessed in technical terms.

f) The Claimant acknowledges, moreover, that the depreciation rate of 6.25% presented precisely corresponds to the "reconciliation of accounts" between income generated and costs associated with installation and maintenance of the equipment of B…, C… and D… – suggesting, by parallel with examples it provides, that after that 15-year period the residual value of the equipment is nil.

g) The Claimant further establishes a connection between the concept of "reasonableness" of the depreciation rate and the period of fixed remuneration for electricity sales guaranteed by legislative choice, the aforementioned 15 years.

h) Then, resorting to various comparisons, the Claimant argues that the depreciation rate of 6.25% presented does not diverge substantially from that which would result from the congruent application of depreciation criteria within the legal framework, thus being "within the intervals considered reasonable," and possibly even below what would result from the more strict application of such criteria.

i) The Claimant even invokes a Directive from the IRC Management Services in which similar concepts are used to those to which it resorts, although it addresses different periods and situations (document No. 7 attached to the Initial Pleading).

j) Finally, the Claimant invokes violation of constitutional principles such as equality and taxation of actual profit – specifically because it would discriminate against the regime applicable to other energy sources (particularly hydroelectric energy).

The Claimant concludes, formulating requests for:

a) Partial annulment of the IRC assessment No. 2015…, the interest assessment No. 2015…, and the statement of account adjustment No. 2015…, relating to the tax period of 2010, in the portion corresponding to the corrections that the TA made to the taxable income computed under the Special Group Taxation Regime (RETGS) and which took as reference identical corrections made by it to the taxable income of the Claimant's subsidiary companies B…, C… and D… (which were based on the manner in which these companies recognized, for tax purposes, the depreciation expenses made, respectively, to wind turbines and photovoltaic panels), and

b) Conviction to pay compensation arising from unjustified provision of bank guarantee.

Pursuant to articles 17(1) and (2) of the RJAT, the TA was notified on December 2, 2015, to submit its reply.

The TA submitted its reply, accompanied by the Administrative File, where, in addition to presenting two witnesses, it sustained the total lack of merit of the Claimant's request, alleging, in summary, the following:

a) The TA maintains the view that the disputed assessments constitute a correct application of law, without any defect – and only at the level of legality control of the correction acts performed that the arbitral proceedings should be confined.

b) The TA emphasizes that from the combination of provisions of article 31(2) of the IRC Code and article 5 of Regulatory Decree No. 25/2009, of September 14, there does not result a multiplicity of criteria from which the TA could choose – but only one: the application of rates that the TA considers reasonable having regard to the period of expected usefulness.

c) In the absence of a legal criterion, the determination of the depreciation or amortization rate is thus entrusted to the TA itself, resorting to objective criteria for determining an expected usefulness – which the TA did, adopting all necessary and required diligences to reach an objective and rigorous determination of the useful life of the equipment in question, which it achieved through the convergence of information provided by producer and distribution companies of such equipment.

d) On the other hand, the TA disagrees with the concept of "expected economic useful life" upon which the Claimant's argumentation is based, both because it remains undefined and because it has no legal foundation.

e) Moreover, it argues that the Claimant could have availed itself of the provision of article 31-B of the CIRC (article 38 of the CIRC before Law No. 2/2014, of January 16), which allows exceptional depreciation of assets to have an effect on tax-relevant expenses – which the Claimant did not do, despite this being the way through which reflection of aspects of variation, or depreciation, of economic usefulness of assets could be found within the legal framework.

f) The TA emphasizes that the useful life of a good does not depend on its economic performance, which depends even on the characteristics of the person using it and the projects in which it is inserted (which may have the most diverse time periods); useful life is rather the period during which an asset will be available for use, for any user and for any project.

g) Accordingly, the useful life of the assets in question does not result, nor can it result, from a legally established program, such as that set forth in Decree-Law No. 189/88, of May 27. The latter provides for a use of such equipment, but it is not within the law to establish limits to such use (namely preventing subsequent uses of equipment that would still be useful).

h) For this very reason, argues the TA, article 31(2) of the CIRC mandates assessing the reasonableness of the rate by the "period of expected usefulness" and not by profits or losses recorded in a given period – it is an objective assessment, not a subjective one.

i) The objective assessment, sustains the TA, is that which results from the convergence of information provided by those with know-how in the sectors; subjective is that which refers to the economic profitability that each business operator might derive from the use of the goods – which moreover would introduce insurable discrimination factors among taxpayers (which, in the TA's view, is further reinforced by the use, in the Claimant's argumentation, of inadequate examples and irrelevant studies, relating to very different realities).

j) The TA further calls attention to the fact that the Claimant's invocation of article 30(6) of the CIRC has the opposite effect of that intended, pointing to the possibility of depreciation or amortization rates being even lower (by half) than those used in the correction now in question – which would significantly increase the corrected assessment.

k) Moreover, the TA calls attention to the fact that, despite the Claimant pointing to various rules, among which stands out the regime of Decree-Law No. 189/88, of May 27, it does not even clarify what calculations it based itself on to arrive at a 16-year period and a 6.25% amortization rate.

l) Now Decree-Law No. 189/88, of May 27, and its Annexes do not regulate, nor even mention, any period of expected useful usefulness, they only regulate a remuneration. But moreover, it is implicit in them a period of expected useful life exceeding 15 years, since both in paragraph (a) and in paragraphs (c) and (d) of Annex II of Decree-Law No. 189/88, of May 27, reference is made to "the first 15 years," thus making quite clear the intention for remuneration to extend beyond that initial period (and it is implicit that the equipment may retain usefulness beyond that initial period, generating income to be remunerated).

m) The TA further clarifies that a document attached to the Initial Pleading (numbered 7) refers to licenses, intangible assets, so it is not legitimate to refer to it even to suggest an analogy with the present case – as was settled in a prior arbitral proceeding.

n) The TA further understands that there is no violation of any principle of equality constitutionally protected, since there was no discrimination between any situations that, being equal, could not be discriminated against without arbitrariness. In fact, insists the TA, nothing in its action was unjustified or disproportionate, arbitrary or discriminatory, having resorted to an objective notion of "reasonableness" that it had competence to fill, having done so in an objective manner.

The TA concludes by requesting that the action be judged without merit, unproven, dismissing the Respondent from the request, with the legal consequences thereof.

By request of February 1, 2016, the Claimant indicated the articles of its initial pleading, and those of the TA's reply, which would be the subject of evidence from the witnesses it presented. By request of February 2, 2016, the Respondent changed its list of witnesses and indicated the articles of its reply on which the evidence from its witnesses would focus.

By Arbitral Order of February 4, 2016, the Tribunal designated, pursuant to article 18 of the RJAT, February 25, 2016 as the date for the hearing, requesting from the parties an indication of preference for oral or written closing arguments.

In a request of February 16, 2016, the Claimant changed its list of witnesses and indicated its preference for written closing arguments.

On February 25, 2016, the hearing took place, where the witnesses presented by the Claimant (E…, F… and G…) and the witnesses presented by the Respondent (H… and I…) were examined. The Tribunal set May 30, 2016 as the deadline for rendering the Arbitral Decision. By order of the Tribunal of May 26, 2016, this deadline was extended for an additional two months, with July 30, 2016 being set as the deadline for rendering the decision.

At the end of the hearing, the Claimant and the Respondent were notified to submit written closing arguments in successive periods.

By order of the Tribunal of April 4, 2016, given the procedural relevance following the examination of witnesses, the Claimant's request to attach evidence documents to the case was granted.

The parties submitted their arguments, essentially defending the positions sustained in their initial pleadings.

II. CASE MANAGEMENT

a) The parties have legal standing and capacity and benefit from procedural legitimacy, pursuant to articles 4 and 10(2) of the RJAT and article 1 of Order No. 112-A/2011, of March 22.

b) The TA proceeded with the designation of its representatives in the case and the Claimant attached a power of attorney, with the parties thus being duly represented.

c) The case is not affected by any nullities.

d) With regard to the value of the case, it is noted that the claim contained in the initial pleading refers to the declaration of illegality of the IRC assessment act No. 2015…, in which the value of €514,311.11 is indicated. However, upon consultation of said assessment act and assessment statement, it is verified that the value in question is €643,915.51, a value which is consistent with the request for constitution of the arbitral tribunal submitted by the taxpayer's attorneys. Upon examination of said documents and the inspection report that was the basis for the assessment act, no reason for said difference is apparent.

The value of the case is therefore set ex officio at €643,915.51, in accordance with the provisions of article 97-A of the CPPT, applicable pursuant to article 29(1)(a) of the RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

e) No preliminary or subsequent issues, whether prejudicial or exceptions, have been raised that would prevent appreciation of the merits of the case, with the conditions being met for a final decision to be rendered.

III. MERITS

III.1 – FACTUAL MATTERS

§1. ESTABLISHED FACTS

With regard to the factuality having relevance for the decision of the case, the following facts are considered established:

The Claimant's purpose is the management of equity interests;
The Claimant has been, since 2006, the parent company of a group (the "Group J…") subject to the Special Group Taxation Regime (RETGS);
In 2010, in addition to the Claimant, the following companies were within the scope of the RETGS: K…, Unipessoal, Lda.; L…, Lda.; M…, Lda.; N…, Lda.; O…, Lda.; P…, Lda.; B… – Energias Renováveis, Lda. ("B…"); C… – Energias Renováveis, Lda. ("C…"); Q…, Lda.; R…, SGPS, S.A.; S…, S.A.; T…, S.A.; D… – Energias Renováveis Sociedade Unipessoal, Lda. ("D…"); U… – Energias Renováveis Sociedade Unipessoal, Lda.; V… – Energias Renováveis Sociedade Unipessoal, Lda.;
Under the rules of the RETGS, the Group declared, in 2010, taxable profit of €13,098,707.51, resulting from the algebraic sum of the tax results computed by each of the companies comprising the Group;
Pursuant to Service Order No. OI2014…, of October 6, 2014, the TA proceeded with an external inspection action in relation to IRC for the tax period of 2010;
This action was due to the TA's conclusion that there were inaccuracies in the computation of the taxable income of companies B… – Energias Renováveis, Lda. ("B…"), C… – Energias Renováveis, Lda. ("C…"), and D… – Energias Renováveis Sociedade Unipessoal, Lda. ("D…");
The corrections were justified, from the Respondent's perspective, on the basis of the following circumstances:

a. The companies in question registered in their tangible fixed assets equipment intended for electricity production (wind turbines and photovoltaic panels);

b. C… and B… are owners of wind farms and produce and sell electricity from such renewable energy sources, using wind turbines which they account for as elements of their tangible fixed assets;

c. D… operates a solar plant and produces and sells electricity from such renewable energy source, using photovoltaic panels.

d. Such equipment was classified, for tax purposes, under the code "… Hydroelectric Plant Equipment" (given the absence of specific reference in the tables appended to Regulatory Decree No. 25/2009, of September 14), and depreciated at the rate of 6.25%, which refers to an expected useful life period of 16 years;

e. Given that article 31(2) of the IRC Code and article 5 of Regulatory Decree No. 25/2009, of September 14 establish that, for depreciation rates not fixed, the TA shall accept those considered reasonable based on the expected useful life period, the TA contacted the suppliers of the equipment in question, and other sources, who informed that the periods were 20 years for wind turbines and 25 years for photovoltaic panels – and not 16 years as B…, C… and D… had indicated;

f. A 20-year period refers to a 5% depreciation rate, a 25-year period refers to a 4% depreciation rate – and never to a 6.25% rate as was actually used;

g. It was this discrepancy in depreciation periods that dictated the corrections applied by the TA, which were based on the application of depreciation rates of 5% for the wind turbines of B… and C… and 4% for the photovoltaic panels of D…;

To the computed results, the following corrections to taxable income were applied: B…, €1,442,267.29; C…, €124,201.97; and D…, €731,161.87. These corrections total an increase of €2,297,631.33 in taxable income;
This resulted in the additional IRC assessment, which, increased by interest, reached the amount of €643,915.51;
With a view to suspending the enforcement proceedings, the Claimant provided bank guarantee, pursuant to article 52 of the LGT and articles 169 and 199 of the CPPT, in the amount of €807,769.36 (see doc. 8 attached with the arbitral request);
The average technical or technological useful life of the photovoltaic panels in question in the case, considering normal use, is 25 years (per technical information provided by companies referenced in the tax inspection report attached to the case and testimony of the witness presented by the TA – Prof. H… and document presented by him at the hearing);
The maximum technical or technological useful life of wind turbines is between 20 and 25 years, considering normal use (study attached to the case, prepared by the Energy Analysis and Networks Unit of LNEG and signed by witness Prof. I…, as well as by W… and X…);
The Green Tax Reform Commission agreed with the fixing of amortization period for wind and photovoltaic equipment between 12.5 years and 25 years;
The photovoltaic panels are installed in modules of 22 panels, such that damage to one of the panels impacts the others, conditioning or preventing operation of the assembly (testimony of Eng. E…);
The profitability of the project, after the guaranteed tariff period expires, is very reduced (testimony of Engs. E… and F…);
The residual value of the panels becomes zero after 15 years. When they cease to be used, these equipment are not sold, they are dismantled, having no market value, either because they no longer function, or because, given the great technological advancement in this area, they have become obsolete (testimony of Engs. E… and F…);
Dismantling costs exist and are significant, and the second-hand market for these panels may be considered non-existent (testimony of Engs. E… and F…);
The references, relating to product quality and characteristics, provided by Z…, cannot be considered a valid parameter in the present case, given that only approximately 5 panels, out of a total of approximately 70,000, are of that brand (testimony of Eng. E…);
Equipment warranties are scarcely actionable in practice, either because some manufacturers have failed in the meantime, or because they imply substantial costs (testimony of Eng. E…);
Temperature conditions, thermal amplitudes, wind direction and intensity, and orographic characteristics existing in the majority of manufacturing countries (Germany, Netherlands and Poland) are different from those that predominate in Portugal (testimony of Prof. H… and of Engs. E… and F… and photographs presented at the hearing by the latter witness);
There are different types of wind turbines on the market (of distinct categories or classes), depending on wind intensity (testimony of Prof. I…);
In the wind farm of…, created approximately 22 years ago, only about two machines are in operation (testimony of Eng. F… and Prof. I…);
The others are stopped and, given the time elapsed, it is no longer possible to obtain replacement parts (testimony of Eng. F…);
In the generality of wind farms, worldwide, the trend is for equipment replacement to occur around 15 years after installation (testimony of Eng. F…);
As for the wind farm of…, installed in August 2003, an application for license to replace the wind turbines has already been made to the Directorate-General for Energy because the machines have become obsolete and maintenance is very costly (testimony presented by Eng. F… and document presented, attached to the case and read – in the introductory part – by this witness at the hearing);
The electricity produced by D… is sold according to the conditions provided for in D.L. 189/88, of May 27;
A… defined the 16-year amortization period taking as reference the guaranteed tariff period for hydroelectric energy because there was no reference for wind and solar energy (G…);
The Claimant projected its activity based on these assumptions;
If a 25-year period were chosen, it would become likely that the Claimant's expenses would exceed its revenue, which could jeopardize the viability of its business plan and the company's viability project, given that, after the guaranteed tariff period expires (in the case of 15 years – provided for in DL 189/88, of May 27 – for the supply of electricity to the electrical grid), the profitability of the activity developed by the claimant, in light of its economic-financial projections, would be reduced to a value much lower than that practiced in that period (testimony of Engs. E…, F… and witness G…);
The fact that the profitability of the Claimant's activity is reduced to a value much lower, in light of its economic-financial projections, after the guaranteed tariff period for the supply to the electrical grid expires, is mainly due to the circumstance that the tariff practiced in a liberalized market context is much lower (testimony of witness G…).

§2. FACTS NOT CONSIDERED ESTABLISHED

There are no facts of interest to the case that are judged as not established.

§3. REASONING ON FACTUAL MATTERS

The judgment on factual matters was based on critical analysis of the witness testimony produced at the hearing, as well as documentary evidence (which includes the administrative file) and technical studies attached to the case.

The witnesses testified, in essence, coherently, with sustaining arguments and demonstrating command of the reasons for knowledge relevant to the provision of information.

III.2 – LEGAL MATTERS

On the legality of the assessments

The legal issue at hand in the present action essentially reduces to determining whether the correction made by the Respondent was legally adequate, regarding the depreciation rate applicable to assets forming part of tangible fixed assets (photovoltaic panels and wind turbines for electricity production).

This means, consequently, evaluating whether the alteration that (based on this different selection of depreciation rate) was performed by the TA on the assessment made by the Claimant was legally adequate.

The question to be resolved in the case is therefore to determine (in light of the tax framework applicable at the date of the tax facts in question) what tax treatment should be granted in the matter of depreciation of the photovoltaic panels and wind turbines of the Claimant, identified in the case, specifically to determine their useful life period for tax purposes. From this will be inferred, finally, the depreciation rate to accept for tax purposes.

It is necessary to address this.

A.1. It is important, for this purpose, to determine first of all which legal rules are applicable.

At the date of the tax facts in question in the case, article 31 of the IRC Code provided as follows[1]:

1 – In the method of constant quotas, the annual depreciation or amortization quota that may be accepted as an expense of the tax period is determined by applying the depreciation and amortization rates defined in the regulatory decree that establishes the respective regime to the following values:

(...)

2 – Regarding elements for which depreciation or amortization rates are not fixed, those that by the Directorate-General for Taxation are considered reasonable, having regard to the period of expected usefulness of such elements, are accepted." (emphasis added)

A.2. As a preliminary matter, it is necessary to clarify what depreciation rates mean.

In fact, concerning the depreciation of certain tangible fixed assets, the accounting standard contained in the SNC addresses them extensively in Accounting and Financial Reporting Standard (NCRF) No. 7, designated "Tangible Fixed Assets."

Thus, in § 6 of NCRF 7 the following definitions appear:

"– Depreciation: is the systematic allocation of the depreciable amount of an asset during its useful life;

– Residual value: is the amount that an entity would currently obtain from the disposal of an asset, after deduction of the estimated costs of disposal, if the asset had already reached the age and conditions expected at the end of its useful life;

The result computed by the accounting of business entities results, as is known, from the confrontation between revenues and the expenses necessary to obtain them.

In the accounting sphere, this result is inevitably influenced by a broad set of estimates, particularly regarding the set of costs incurred. Thus, and by way of example, provisions and depreciation constitute important portions of costs shown in accounting whose recording is based on forecasts or estimates.

Recognizing this inevitability – that the result depends, in large part, on estimates – the Conceptual Framework (CF) of the Accounting Standards System (SNC), § 37 provides: "The preparers of financial statements, however, must contend with the uncertainties that inevitably surround many events and circumstances, such as…the probable useful life of facilities and equipment…"

At the date of the tax facts in question, the following articles 28, 29 and 30, all of the IRC Code – in the provisions considered relevant for the case – established:

"Article 29

1 – Accepted as expenses are depreciation and amortization of elements of assets subject to depreciation, considering as such the tangible fixed assets (…) which, systematically, suffer losses of value resulting from their use or the passage of time."

"Article 30

1 – The calculation of depreciation and amortization is made, as a rule, by the method of constant quotas.

(...)

Other depreciation and amortization methods different from those indicated in the foregoing numbers may be applied, provided that, by request, prior recognition by the Directorate-General for Taxation is obtained, except where this does not result in an annual depreciation or amortization quota exceeding that provided for in the following article.
Except in duly justified situations accepted by the Directorate-General for Taxation, the same depreciation or amortization method must be applied to each asset from its entry into operation or use until its total depreciation or amortization, transfer or disposal.
The foregoing provision does not prevent the variation of depreciation or amortization quotas according to more or less intensive use or with other conditions of use of the elements to which they relate, however the minimum quotas attributable to the tax period cannot be deducted for purposes of determining the taxable profit of other tax periods.
For purposes of the foregoing number, the minimum depreciation or amortization quotas are those calculated on the basis of rates equal to half of those fixed according to the method of constant quotas, except when the Directorate-General for Taxation previously grants authorization for the use of lower quotas than these, following submission of a request stating the reasons justifying them.

As explained in decision 75/2014-T of CAAD (whose sense and reasoning are followed closely), the straight-line method shall thus be the rule used in quantifying depreciation.

In such quantification, a criterion of flexibility is observed that, admitted in the consideration, as a fiscal cost of values resulting from minimum and maximum quotas. As Rui Morais states, "Even when the period of useful life of a good, for tax purposes, is fixed by law, there is no total rigidity. Only the consideration of a cost, in each of the periods corresponding to the useful life of the good, of the value corresponding to the minimum amortization quota is mandatory, in compliance with the principle of specialization of exercises. Such minimum quota is calculated by applying, to the depreciable value, a rate equal to half of that provided, for the case, in the applicable table. (...)

In an example: Table II (generic rates) provides that the amortization quota for water and electricity installations is 10%. Which is to say that the law fixes that the period of amortization (minimum) of such installations is 10 years. It is just that the taxpayer may opt for an annual amortization quota lower, up to 5% (half of the rate provided in the table). Which is to say that the maximum amortization period could go up to 20 years."[2]

The depreciation to be recognized periodically as an expense related to the use of an asset depends thus on a set of estimates, specifically the useful life period and residual value. But these estimates should converge in a paramount objective: that of adequating the recorded depreciation to the actual deterioration of the good.

The intention is thus to provide to those who prepare financial information a set of directives so that the process of computing depreciation leads to expense values that properly reflect the deterioration of assets.

A.3. At the date of the acts in question, no depreciation or amortization rate was legally fixed for this exact type of assets. In fact, Regulatory Decree No. 25/2009, of September 14 (Regime for Depreciation and Amortization), does not contemplate, in its tables, this type of goods.

Consequently, the situation under analysis is governed by the regime provided for in article 31(2) of the cited IRC Code. From such legal rule (transcribed above) results, with an imperative character, that the applicable amortization rate must arise from the reconciliation of two aspects.

On the one hand, as a basic element, it is necessary to consider the notion of "period of expected usefulness."

On the other hand, once the period of usefulness of this type of goods is defined, it is important to determine an amortization rate that appears "reasonable" for such period.

A.3.1. Let us now consider each of these aspects separately.

In such analysis, due account must be taken of the necessary systematic perspective of the relevant legal rules.

Tax rules must be interpreted like any others, having overcome the conception that they would have an exceptional character that was once attributed to them. As the late Professor J.L. Saldanha Sanches stated, "the unity of the legal system and the essentially common nature of the problems that arise in Tax Law and in other branches of Law mean that the adoption of interpretive principles with application only in tax legal relations can hardly be compatible with systematic unity."[3]

Similarly, Sérgio Vasques tells us that "the interpretation of tax law does not have any specificity, being satisfied with the traditional criteria that among us appear in article 9 of the Civil Code. The interpreter should not therefore confine himself to the letter of the tax law, but reconstruct here too, from the texts, the legislative thought, taking into account the unity of the legal system, the circumstances in which the law was made and the specific conditions of the time in which it is applied. In sum, 'also the interpreter of tax laws, like that of any other rules, will have to fix the respective meaning, combining the 'grammatical element' with the 'logical' or 'teleological element', including the rational, systematic and historical aspects.'."[4]

It should be noted in this regard that article 9 of the Civil Code marks the prevalence of the spirit over the letter of the law, although it explicitly placed the letter as a limit to the search for the meaning. Without prejudice to considering that the matter of interpretation of laws is not of a nature to be imprisoned by the legislative route, we view [similarly to what also appears to be the position of Sérgio Vasques] article 9 of the Civil Code as the emanation of a general hermeneutic principle, with intrinsic validity. This provision states:

"1. Interpretation should not confine itself to the letter of the law, but reconstruct from the texts the legislative thought, having above all in mind the unity of the legal system, the circumstances in which the law was made and the specific conditions of the time in which it is applied.

However, the interpreter cannot consider legislative thought that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.
In fixing the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most appropriate solutions and knew how to express his thought in adequate terms."

For its part, the General Tax Law ("LGT"), in its article 11, came, in the specific field of tax laws, to establish a set of interpretation rules as follows:

In determining the meaning of tax rules and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.
Whenever tax rules employ terms proper to other branches of law, these should be interpreted in the same sense that they have therein, unless it otherwise clearly appears from the law.
When doubt persists about the meaning of the applicable rules of incidence, account should be taken of the economic substance of the tax facts.
Gaps resulting from tax rules covered by the reserved power of the National Assembly are not susceptible of analogical integration.

These are the interpretive rules to be observed in the interpretation of the rules applicable to the present case.

A.3.1.1. First, it is necessary to then define what is meant by "period of expected usefulness."

In fact, for good decision of the case, it will necessarily have to be analyzed which definition to adopt, for tax purposes, considering article 31(2) of the IRC Code, of the concept of "period of expected usefulness" of the goods in question in the case – the photovoltaic panels and wind turbines.

Useful life must thus be one of the central parameters in quantifying the rates in question. However, article 30(4) of the IRC Code, when addressing useful life does not explicitly define what it should be. It merely establishes that this should be calculated from the rates that article 30(1) and (2) determine. This rule produces, tendentially, reasoning in a "closed circuit," whereby useful life results, via the provision of article 31(4), from the rates provided for in article 31(1) and (2). However, we believe that from the combination of these rules with some provisions of Regulatory Decree No. 25/2009, a clearer reading key for the issue to be decided in the case may be found.

Two interpretations appear, in the abstract, applicable.

The interpretation of this concept ("period of expected usefulness" or "period of expected useful life") and the selection of one or the other interpretation must be made, as referred to, in the case under analysis, in light of the principles and nature of tax law, as this is the matter at issue in this dispute.

According to a first interpretation, the expression in question (period of expected usefulness) corresponds to the notion of period of economic useful life. According to a second interpretation, it corresponds to the notion of period of physical or technical duration expected.

We are thus facing a polysemous concept.

Let us see.

In § 6 of NCRF 7 the following definitions appear:

– Useful life is:

(a) The period during which an entity expects an asset to be available for use; or

(b) The number of units of production or similar that an entity expects to obtain from the asset.

In turn, §§ 56 and 57 of the same Standard establish:

"56 – The future economic benefits incorporated in an asset are consumed by an entity mainly through its use. However, other factors, such as technical or commercial obsolescence and normal wear while an asset remains idle, often give rise to diminution of the benefits that could have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset:

(a) Expected use of the asset. Use is assessed by reference to the expected capacity or physical output of the asset;

(b) Normal wear expected, which depends on operational factors such as the number of shifts during which the asset will be used and the repair and maintenance program, and care and maintenance of the asset while idle;

(c) Technical or commercial obsolescence arising from changes or improvements in production, or from a change in market demand for the service or product derived from the asset; and

(d) Legal or similar limits on the use of the asset, such as the dates of expiration of leases related to it.

57 – The useful life of an asset is defined in terms of the expected usefulness of the asset to the entity. The asset management policy of the entity may involve the disposal of assets after a specified period or after consumption of a specified proportion of the future economic benefits incorporated in the asset. For this reason, the useful life of an asset may be shorter than its economic life. The estimate of the useful life of the asset is a matter of judgment based on the entity's experience with similar assets."

(Underlining ours)

The cost that flows from the quantification of depreciation must thus have a systematic, or methodical character, and should emerge as a result of the application of a calculation rule that possesses internal logic. On the other hand, useful life and residual value of the goods will be essential parameters in determining such a calculation method, since the essence of the phenomenon that this cost seeks to translate consists of the allocation of the value of assets to various economic periods, during which these are employed in a given economic activity.

In fact, as well emphasized by António Borges, Azevedo Rodrigues and Rogério Rodrigues, in Elements of General Accounting, Áreas Editora, 2010, pp.697, "Fixed assets are not 'consumed' in a single economic period, but rather in principle in the number of years provided for their economic life. (...) In summary, goods as they are used in successive periods will depreciate, that is, lose value".

If this is so in the accounting sphere, it is understandable that also in the tax sphere, depreciation, especially in the IRC Code and supplementary legislation, has a developed treatment based on an economic perspective. Depreciation thus rests on an estimate of value loss, which is materialized in accounting and tax terms in a cost, affecting this, in turn, the result.

It results, moreover, from reading article 3 of Regulatory Decree No. 25/2009, according to which the useful life of a good is the "period during which its value is wholly reintegrated or amortized" and because, pursuant to article 29(1) of the IRC Code, reintegration or amortization consists of losses of value that tangible fixed asset elements suffer resulting from their use or the passage of time, then useful life, in a tax sense, should be assessed by the time during which such losses of value will be justified based on the causes mentioned in that article (use, technical progress or any others).

Reasons which, together, lead to the conclusion that the interpretation here applicable is thus that of period of economic useful life.

This shall thus be the notion of period of expected useful life to be considered in light of interpretation of the IRC Code, in the version applicable to the case, in its articles 29 to 31, where a broad set of rules is provided for the tax treatment of reintegration and amortization.

In fact, what is stated in the aforementioned article 29, implies that the phenomenon of depreciation, determined for tax purposes, is unequivocally founded in value loss, with a character of repetition or regularity, that assets suffer by virtue of use or the passage of time. It is a central and decisive point to emphasize that it is not because an asset is characterized by a long period of technical or technological life that necessarily the duration of its economic useful life will also automatically extend to that time period.

The same accounting law points, providing paragraph 57 of NCRF 16 that "the useful life of an asset is defined in terms of the expected usefulness of the asset to the entity. (...) the useful life of an asset may be shorter than its economic life. The estimate of the useful life of the asset is a matter of judgment based on the entity's experience with similar assets."

In the same sense, and consulting the Proposal of the Commission for Green Tax Reform appointed by the XIX Constitutional Government, it is verified that the same addressed the depreciation rate that DR 25/2009 should contemplate in relation to photovoltaic panels and air, thus recognizing its omission regarding this type of assets.

It is true that the rates do not apply to the tax facts in question in the case, but it is considered of great utility to refer to the understanding endorsed by this commission of specialists in a subject which, as we have seen, is not yet expressly regulated by the legislator.

In this manner, the Commission recommends, in its preliminary draft (available at the following link[5] on page 110), a tax life of 12.5 years, as a minimum, up to 25 years, as a maximum, which would represent tax rates between 8% and 4%.

Going through the aforementioned preliminary draft, the concern of this Commission is noted, when it states:

"It is generally considered that a photovoltaic system ceases to have interesting performance from an economic point of view (useful life) when its power falls below 80% of the initial power, although depending on the type of system it may continue to be useful for its owner."

The Commission suggests that "The rates to be used should follow technical reasonableness and economic efficiency."

(Underlining ours)

The case of computers is, in this respect, illustrative. Its technical life is today, naturally, greater than it was 20 years ago, but its useful life (depending on economic aspects, obsolescence, etc.) will not necessarily accompany the extension of its technical or technological life.

In fact, the useful life of each generation of photovoltaic panels and wind turbines has been increasing, so technology tells us, but this does not necessarily mean that their economic usefulness, for a given company, will accompany that technological life.

The Claimant's subsidiary companies depreciated the goods in question, with reference to the 2010 exercise, considering a useful life period of 16 years, and for such purpose the Claimant took as criterion, correctly, the notion of period of economic useful life.

The adequacy of the period of (economic) life defined by the Claimant reveals itself in various aspects.

First, such period reveals itself in harmony with the economic conditions (regarding the period of selling energy at a price that guarantees balanced operation of the activity) and market conditions (estimated residual value nil after the 16-year period).

It was established, in fact, that the Claimant is encompassed within a contractual regime of selling electricity at a price previously fixed during a 15-year period (period during which fixed and guaranteed remuneration for renewable energy generation plants is established) after which the panels will have negligible residual value, insofar as there is no used market for this type of equipment.

Thus prominent is the established factuality that the Claimant has a quite specific period, legally contracted, for selling energy in profitable conditions. After that period, the panels will have no usefulness, in an economic-financial sense (although they may in a merely physical durability sense).

And, being certain that the economic, financial, legal and obsolescence constraints will be felt in this type of equipment, in light of the economic activity developed, the useful life relevant for tax purposes will, as a general rule, be shorter than the purely physical (technical) life.

If "useful" means, according to the Universal Dictionary of the Portuguese Language, Texto Editora, Lisbon, 1995, something "profitable, advantageous." In the economic-legal sphere, a good will have a useful life while it is economically profitable or advantageous. One may thus estimate a long technical or physical life, without such being incompatible with the fixing of a shorter economic useful life. This is the case in the instant case.

Moreover, the TA did not refute (neither documentarily nor at final hearing) in a sufficient and substantiated manner that the residual value of the goods in question is negligible at the end of the useful life invoked by the Claimant.

Differently, the Respondent resorted to a "catalog" useful life, based on technical tests, which assess a technologically efficient life, without taking into account the legal, economic and financial conditions that a given entity faces in a concrete situation, which departs from what is imposed by the tax normative, namely the IRC Code (particularly in its article 31(2)) and indeed DR 25/2009, in its article 5(3), as we have seen, in the interpretation now endorsed.

Proceeding from an incorrect concept regarding the adequate interpretation of the notion of "period of expected useful life" (which did not consider it in an economic and accounting sense) did not thereby the TA achieve, to demonstrate that the period of useful life, relevant for this purpose, of photovoltaic panels and wind turbines, is of, respectively, 25 and 20 years. In fact, if it had attended to the correct criterion, the Respondent would have necessarily arrived at much shorter periods. Consequently, the argument sustained by the Respondent in the tax inspection report and in the present case is wanting in merit when it asserts that these are the periods to be fixed.

It should be noted, moreover, that the content of studies, opinions or expert reports that the parties may invoke in court do not bind, by themselves, in court, rather such information being subordinate to the Tribunal's power of free assessment. Thus, and notwithstanding the TA shielding itself with information of such nature to defend that it should be fixed a period of expected life (of the equipment in question) different from that sustained by the Claimant, the conclusions it derives from such elements do not appear compatible with the legal-tax and accounting rules relevant for the case. It should be reserved, moreover, that it does not fall to such technical judgments to formulate conclusions on matters of law. They yield only specialized information, whose propriety the Tribunal analyzes critically, it being incumbent on it, with exclusive character, to subsequently form the conclusive legal proposition that appears adequate.

A.3.1.2. Having reached this first point of judgment, it is necessary to move to the second, within which it will be determined whether the amortization rate fixed by the Claimant is or is not reasonable and therefore whether the rate correction made by the Respondent is correct.

The Claimant considered, as the amortization rate, 6.25%. The Respondent understood that such rate should correspond to 4%, regarding photovoltaic panels and 5% regarding wind turbines.

According to the Universal Dictionary of the Portuguese Language, Texto Editora, Lisbon, 1995, "reasonable" means: "in accordance with reason, with law; moderate; acceptable."

This common definition of the concept, however, considered by itself does not allow us to reach the criterion that the tax legislator intended to define. Rather, the solution to be adopted in the concrete case must be anchored in law, and must be acceptable in light of the set of factors that legally should be taken into consideration in pursuing the solution of the concrete case.

It is necessary to clarify what should be understood by such concept for purposes of tax densification.

Regulatory Decree No. 25/2009 established the tax rates to be used for a quite large and diversified set of assets.

Through it, the tax legislator sought, thereby, to regulate the tax acceptance of depreciation.

Otherwise (in the absence of such provision), and constituting these accounting costs estimates of value losses in long-duration assets, the granting to the taxpayer of total freedom in the consideration of such costs as negative elements of taxable profit could result in undesirable situations of manipulation of the tax result.

Not being provided, in said Regulatory Decree 25/2009, any rate for the depreciation of photovoltaic panels and wind turbines in question in the case, it is deemed appropriate to take as a supporting standard the parallel place which is the depreciation rate legally fixed, in said Regulatory Decree, regarding hydroelectric power generation equipment[6].

As attested by a study attached to the case by the Claimant, never could the useful life of photovoltaic panels and wind turbines be greater than that of equipment for hydroelectric power generation. The useful life of equipment for hydroelectric power generation is, on the other hand, the longest within the range of equipment for power generation.

Accordingly, and if the depreciation rate legally fixed for such equipment is 6.25%, it appears reasonable that such be the depreciation rate adopted regarding photovoltaic panels and wind turbines, and should thus be accepted.

There is yet, regarding this aspect, a relevant point that it is necessary to underscore: the evaluation that may be made regarding the reasonableness of a certain depreciation rate assumed by a taxpayer cannot take as a premise any business plan, rather it should be assessed concretely.

If, in these circumstances (absence of a rate provided for in law) a given company were to sustain that being, for example, two or five years the period envisioned for the exploitation of a given business this would imply depreciation rates of assets of 50% or 20%, respectively, such would not, ipso facto, be a reasonable useful life, for the reasons set forth in this decision.

In the case sub iudice, the Tribunal's judgment regarding the reasonableness of the rate fixed is thus anchored in legal and financial factors (electricity sales contract at fixed prices), technological and market factors (estimated residual value nil at the end of that period). Facts established as proven.

That is, the reasonableness of the depreciation rate fixed must be assessed in a case-by-case manner, not automatically flowing from projections or estimates of companies. Such estimates must be supported on bases or grounds that possess an appreciable degree of objectivity and controllability.

Criteria which, contrary to what should have occurred, the TA did not consider in the decision it rendered, not explicitly stating them, consequently, in the reasoning of the correction of the assessment to which it proceeded. It is thus considered that the criterion of reasonableness that the TA used does not reveal itself convincingly founded.

In light of all that has been set forth above, it is considered that, given what is provided for in tax law, the TA, in having considered a usefulness that was merely technical or technological of photovoltaic panels and wind turbines, disconnecting it, moreover, from the conditions of actual use by the Claimant, in the concrete case, departed from the criterion of reasonableness that is legally adequate.

If the depreciation rates for these types of equipment were, at the date, defined in law, all of this would naturally be superfluous. However, as it is not, the criterion of reasonableness, moderation or acceptability, implies that account be taken of more than simple technical or technological usefulness and that attention also be paid to other factors, which indeed were expressed in the (then) article 29(1) of the IRC Code, which contained the general rule on depreciation accepted for tax purposes.

Inadequate thus reveal themselves the reasoning and conclusion reached by the TA.

By force of law and for determination of the reasonable depreciation rate to be applied, the TA was called upon to make a complex exercise of judgment, having to take into account, on the one hand, the period of expected useful life and, on the other hand, the notion of reasonableness. By force of the latter, it would be incumbent on it to consider the concrete circumstances of the business plan in question and the actual use of the goods in question by the Claimant. With regard to the first aspect, the TA disregarded that a polysemous concept was at issue, reducing its analysis to a notion purely physical or technical.

In that exercise of judgment, the TA did not obey the criterion that flows from the relevant legal-tax and accounting rules regarding the notion of period of expected useful life, as it conducted an exercise of judgment disconnected from the concrete circumstances of the case. It disregarded, in summary, the criteria that are imposed in light of the relevant legal-tax and accounting rules.

The TA's exercise of judgment regarding reasonableness thus suffers from error, not only because it chooses a parameter of expected useful life that is not the adequate one, but also because the concept of reasonableness is not assessed in light of the circumstances of the case.

It is verified, in these terms, that there took place a gross violation of the parameters that the TA was bound to assess for purposes of determining the applicable depreciation rate and, consequently, of the assessment due.

A.3.2. Upon determining such elements, it is concluded that, for the reasons set forth above, the decision-making procedure to which the TA resorted does not coincide with that legally imposed, having incurred (by the foregoing) in gross error and, consequently, in "manifest error of appreciation" in the exercise of discretionary power (Fernanda Paula Oliveira, José Eduardo Figueiredo Dias, "Fundamental Notions of Administrative Law, 2016, 4th Edition, Almedina p. 142).

A.3.3. Judicial review of this administrative decision irregularity is required, insofar as there is no matter withdrawn from the Law.

It should be noted, in fact, that this is not a case of what is termed technical discretion, when understood in the sense long surpassed doctrinally and jurisprudentially – as power outside the Law and judicial review. It is adopted today, "(…) a broad concept of discretionality as a space of evaluation and decision proper to, of the responsibility (authorship) of the Administration (…)", which may arise both from direct action faculties, spaces of appreciation in the application of imprecise concepts of type and, still, of administrative prerogatives of evaluation (cf. Vieira de Andrade, Lessons in Administrative Law, 2nd Edition, Coimbra, 2011, p.47.)

Precisely what is at issue here is the resort, by the legislator, to indeterminate concepts – notions of "expected useful life" and "reasonableness." As a rule, the concept of reasonableness confers on the Administration a wide margin of appreciation, although limited by the exercise of judgment required by the circumstances of the case and fundamental legal principles. It happens that, in the concrete case, this concept encounters, still, the limitations that must result from the densification of the concept of period of expected useful life, whose filling flows, in the case, not only from the teachings of physical sciences, but also from the interpretation of legal-tax and accounting rules.

As referred to by Fernanda Paula Oliveira and José Eduardo Figueiredo Dias, "judicial review of the conformity or compatibility of such administrative action with legal rules and legal principles is the responsibility of the courts". They also emphasize that it is unquestionable that "the exercise of discretionary powers is susceptible to judicial review" (cf. ob. cit., pp. 137 and 140).

Clear, in this regard, is revealed Vieira de Andrade, when explicitly teaches that "discretionality continues to be a zone of indeterminacy, but (already) is not a zone of normative indifference. The discretionary choice, even at its most distant frontier, does not represent for the Law a free choice of the Administration, cannot be conceived as a manifestation of psychological will of the agent, legitimized by legal reenvoy to choose freely (according to extra-legal rules) by any of the solutions supported by the enabling rule; just as discretionary power does not necessarily mean an originary power exterior to law and to the Law and limited only by this."

The same administrative scholar further states that "even when it exercises a power of choice of content", the Administration "develops a functionally legal activity: beyond respecting the legal 'external' conditions of exercise of its power (competential, procedural, formal, substantive relating to prerequisites) it must conduct itself in the itinerary of its choice by pursuing the legal purpose", concluding that "the exercise of discretionary power is also a materially legal activity", having to "deliberate, in the internal procedure of formation of its will, according to criteria of impartiality, of justice, of equality of treatment and, even, of proportionality. It thus becomes unavoidable the affirmation that all administrative activity, even that portion that is not predetermined in law, corresponding to a domain of public autonomy of the Administration, is subject to legal rationality, under the terms of the total reserve of legality that characterizes the Rule of Law", emphasized (The duty of express reasoning of administrative acts, Coimbra, 1992, pp. 373, 374 and 375).

The TA does not thus benefit from the possibility of deciding according to its own criteria (by it fixed) and withdrawn from the Tribunal's review. Review which it will conduct considering, not only the sense of the decision, but also the reasoning thereof, where the decision-maker must have known how to adequately express its reasoning, thus making it accessible, specifically, to judicial review.

A.3.4. Vieira de Andrade explains that "The defects in the use of discretionary powers – when the motives invoked by the author of the act are proven non-existent, deficient, false, deviated, wrong, irrelevant, contradictory, incongruous or illegitimate – are defects in the end-content relationship (functional defects of the decision), normally associated with the violation of legal principles (impartiality, justice, equality, proportionality, rationality, truthfulness, and good faith) that cause, in the generality of cases, the voidability of the act", italics ours (Lessons in Administrative Law, 2nd Edition, Coimbra, 2011, p. 181).

In the case, considering the reasoning invoked by the TA, it is verified, as we have seen, that this not only incurs in a deficiency of judgment regarding the factual circumstances of the case (economic and financial conditions of the project, technological and market factors, etc.), but opted for an improper notion of the period of expected useful life, disconnecting it from the legal-tax and accounting rules in question. Everything which results in manifest error of interpretation, either of the facts or of the applicable legal rules, which generates the voidability of the act (corresponding to the tax correction made) and determines that the correction in question be annulled, as illegal.

A.3.5. It should finally be noted that knowledge of this defect precludes the necessity of knowledge of the others.

As referred to, in Commentary to the Code of Administrative Court Procedure, Almedina, 2005, Mário Aroso de Almeida and Carlos Cadilha, in annotation to article 95 of that statute, p. 483 (applicable by reenvoy of article 2(c) of the CPPT and article 29(1)(a) and (c) of the RJAT) "If the tribunal judged the main request as having merit, judicial power regarding a subsidiary request or one formulated in the alternative is precluded; and, in the same terms, if the pronouncement adopted regarding a question consumes or prejudices other aspects of the case that correlate with it."

In these terms, given the material interpretation espoused, knowledge and appreciation of the other defects imputed to the additional assessment act is precluded.

This occurs, for example, regarding the alleged violation of the constitutional principles of equality and taxation of actual profit, invoked by the Claimant. Knowledge of such questions is, in summary, precluded by the declaration of illegality of the additional assessment act in question, based on the circumstances invoked, so decisions shall not be rendered thereon.

B. Compensation for Unjustified Provision of Bank Guarantee

As was established (point 10 of the established facts) the Claimant provided bank guarantee in the amount of €807,769.36 to suspend the tax enforcement proceedings.

By understanding that, in the concrete case, there was error attributable to the TA, the Claimant formulates a request for compensation for unjustifiedly provided guarantee, in order to be compensated for the losses resulting from the provision of that guarantee, without dependence on the period for which it is maintained.

It is necessary to address this.

In harmony with the provision of article 24(b) of the RJAT, the arbitral decision on the merits of the claim regarding which no appeal or challenge lies binds the tax administration from the expiration of the period provided for appeal or challenge, with this, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the expiration of the period provided for spontaneous execution of judicial tax tribunal sentences, to "restore the situation that would exist if the tax act subject to the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose."

In the legislative authorization on which the Government based itself to approve the RJAT, granted by article 124 of Law No. 3-B/2010, of April 28, this is proclaimed, as a primary directive of the institution of arbitration as an alternative form of judicial resolution of tax disputes, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters."

Although article 2(1)(a) and (b) of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in the CAAD and does not make reference to constitutive (annulling) and condemnatory decisions, it should be understood, in harmony with the said legislative authorization, that its competences comprehend the powers that in judicial challenge proceedings are attributed to tax tribunals in relation to acts whose appreciation of legality falls within its competence.

The judicial challenge process is a procedural means that has as its object an act in tax matters, aiming to appreciate its legality and decide whether it should be annulled or its nullity or non-existence declared, as flows from article 124 of the CPPT.

By analysis of articles 2 and 10 of the RJAT, it is verified that only questions of the legality of assessment acts or acts of fixing the taxable base and second-instance acts having as their object the appreciation of the legality of acts of those types, acts whose appreciation falls within the scope of judicial challenge proceedings, as results from subsections (a) to (d) of article 97(1) of the CPPT, are included in the competences of the arbitral tribunals functioning in the CAAD.

That is, it is verified that the legislator did not implement in the legislative authorization regarding the part in which the extension of the competences of the arbitral tribunals to questions that are appreciated in tax tribunals through action for recognition of a right or legitimate interest was provided.

But, in harmony with the intention underlying the legislative authorization of creating an alternative means to the judicial challenge process, it should be understood that, regarding requests for declaration of illegality of acts of the types referred to in its article 2, the arbitral tribunals functioning in the CAAD have the same competences that they have in judicial challenge proceedings, within the limits defined by the commitment that the Tax and Customs Authority came to make through Order No. 112-A/2011, of March 22, pursuant to article 4(1) of the RJAT.

Although the judicial challenge process has as its primary object the declaration of nullity or non-existence or annulment of acts of the types referred to, it has been peacefully understood that therein may be rendered convictions of the Tax Administration to pay indemnificatory interest and compensation for unjustified guarantee.

In fact, despite the non-existence of any express provision to such effect, it has been peacefully understood in tax tribunals, since the entry into force of the codes of the fiscal reform of 1958-1965, that in judicial challenge proceedings a request for conviction to pay indemnificatory interest may be cumulated with the request for annulment or declaration of nullity or non-existence of the act, in that such codes refer that the right to indemnificatory interest arises when, in administrative recourse or judicial proceedings, the administration is convinced that there was error of fact attributable to the services. This regime was subsequently generalized in the Code of Tax Procedure, which established in article 24(1) thereof that "there shall be a right to indemnificatory interest in favor of the taxpayer when, in administrative recourse or judicial proceedings, it is determined that there was error attributable to the services," subsequently in the LGT, in whose article 43(1) it is established that "indemnificatory interest is due when it is determined, in administrative recourse or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due" and finally in the CPPT in which it was established, in article 61(2) (which corresponds to (4) in the version given by Law No. 55-A/2010, of December 31), that "if the decision that recognized the right to indemnificatory interest is judicial, the payment period is counted from the beginning of the period for its spontaneous execution".

Thus, similarly to what occurs with tax tribunals in judicial challenge proceedings, this Arbitral Tribunal is competent to appreciate requests for reimbursement of the amount paid and for payment of indemnificatory interest.

Regarding the request for conviction to pay compensation for unjustified bank guarantee provision, article 171 of the CPPT establishes that "compensation in case of unjustifiedly provided bank guarantee or equivalent shall be requested in the proceedings in which the legality of the enforceable debt is disputed" and that "compensation should be requested in the recourse, challenge or appeal or if its basis is subsequent within 30 days after its occurrence."

Thus, it is unequivocal that the judicial challenge process encompasses the possibility of conviction to pay unjustified guarantee and indeed is, in principle, the appropriate procedural means for formulating such request, which is justified by evident reasons of procedural economy, as the right to compensation for unjustified guarantee depends on what is decided regarding the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal has as a corollary that it is in the arbitral proceedings that the "legality of the enforceable debt" will be discussed, so, as flows from the express tenor of that article 171(1) of the cited CPPT, the arbitral proceedings are also the appropriate one for appreciating the request for compensation for unjustified guarantee.

Indeed, the cumulation of requests relating to the same tax act is implicitly presupposed in article 3 of the RJAT, when speaking of "cumulation of requests even if relating to different acts," which makes clear that cumulation of requests is also possible regarding the same tax act and requests for compensation for indemnificatory interest and conviction for unjustified guarantee are susceptible of being encompassed by that formula, so an interpretation in this sense has, at least, the minimum of verbal correspondence required by article 9(2) of the Civil Code.

The regime of the right to compensation for unjustified guarantee provision is contained in article 53 of the LGT, which establishes the following:

"Article 53

Guarantee in case of unjustified provision

The debtor who, to suspend enforcement, offers bank guarantee or equivalent shall be compensated totally or partially for the losses resulting from its provision, if he maintained it for a period exceeding three years in proportion to the ruling in administrative recourse, challenge or opposition to enforcement that have as their object the debt guaranteed.
The period referred to in the foregoing number does not apply when it is determined, in administrative recourse or judicial challenge, that there was error attributable to the services in the assessment of the tax.
The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest provided for in this law and may be requested in the administrative recourse or judicial challenge process itself, or autonomously.
Compensation for unjustified provision of guarantee shall be paid by deduction from the revenue of the tax of the year in which payment was made."

In the case at hand, the IRC assessment acts No. 2015…, the interest assessment No. 2015…, and the statement of account adjustment No. 2015…, relating to the 2010 period, in the portion corresponding to the corrections made by the TA, are illegal.

Moreover, the referred assessment acts of tax and compensatory interest were the exclusive initiative of the Tax Administration, with the Claimant contributing in nothing to their being performed and, much less, in the terms in which they were.

In this framework, the provision of the aforementioned bank guarantee, by the Claimant, with a view to obtaining the suspension of the mentioned tax enforcement proceedings, appears unjustified, so the Claimant has the right to be compensated for the losses it may effectively suffer with the provision of that bank guarantee. As the Claimant itself states "during the entire period that mediates between the provision of guarantee and the conclusion of this procedure, it will incur in costs"; that is, it will be in enforcement of judgment that such losses will be determined and the compensation due to the Claimant will be fixed.

IV. DECISION

For the reasons set forth, this Arbitral Tribunal decides:

a) Annul the IRC assessment No. 2015…, the statement of account adjustment No. 2015…, and the interest assessment No. 2015…, relating to the year 2010, in the portion corresponding to the corrections that the Tax Administration made to the taxable income computed under the Special Group Taxation Regime and which took as reference identical corrections made by it to the taxable income of the Claimant's subsidiary companies B…, C… and D…;

b) Condemn the Respondent to pay compensation to the Claimant, for unjustified provision of bank guarantee, in the amount to be determined in execution of judgment.

V. VALUE OF THE CASE

The value of the case is set at €643,915.51, in accordance with the provisions of article 97-A of the CPPT, applicable pursuant to article 29(1)(a) of the RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. COSTS

Costs to be borne by the Respondent, given that the present requests were judged to have merit, in the amount of €9,486.00, pursuant to Table I of the RCPAT, and in compliance with the provisions of articles 12(2) and 22(4), both of the RJAT.

Notify the parties.

Lisbon, July 29, 2016.

The Arbitrators,

Maria Fernanda dos Santos Maçãs
(President)

Fernando Araújo (dissenting as per attached dissenting opinion)

Rodrigo Domingues

DISSENTING OPINION

SUMMARY

The legal path for fixing amortization rates
Objective and not subjective assessment
The irrelevance of subsequent legal regimes
From administrative discretion to technical discretion
Technical discretion
Technical discretion "stricto sensu"
The impugnability of technical rules
The concrete case
Conclusion

1. THE LEGAL PATH FOR FIXING AMORTIZATION RATES

Given that article 31(2) of the IRC Code and article 5 of Regulatory Decree No. 25/2009, of September 14, establish – and establish – that, for amortization rates not fixed, the Tax and Customs Authority (TA) shall accept those considered "reasonable, having regard to the period of expected useful life of such elements," the TA contacted the suppliers of the equipment in question, and other sources, as specialists in these technical and scientific areas, who informed that the relevant amortization periods were 20 years for wind turbines and 25 years for photovoltaic panels – and not 16 years for both pieces of equipment, as the companies in the group of the Claimant (B…, C… and D…) had indicated.

The TA acted in accordance with what those provisions imposed upon it.

In fact, from the combination of article 31(2) of the IRC Code and article 5 of Regulatory Decree No. 25/2009, of September 14, there does not result a multiplicity of criteria within reach of the TA to choose, but only one: the application of rates that the TA considers reasonable having regard to the period of expected usefulness.

The TA availed itself of independent technical and scientific information to reach the determination of reasonableness in the case; and, pursuant to article 31(2) of the IRC Code and article 5 of Regulatory Decree No. 25/2009, of September 14, rejected the 16-year amortization period that had been used, adopting instead the amortization periods of 20 years for wind turbines and 25 years for photovoltaic panels – resulting thereby in an amortization rate of 5% for the 20-year period and an amortization rate of 4% for the 25-year period, different from the rate of 6.25% that had been applied by the companies in the group of the Claimant.

Note that, pursuant to article 31(2) of the IRC Code and article 5 of Regulatory Decree No. 25/2009, of September 14, such amortization rates became the applicable ones "ex lege," insofar as those provisions attributed to the TA a discretionary power of fixing the rates – within a specific framework of "technical discretion," as we shall see better below.

This suffices to settle the question specifically raised by the omission of express amortization rates for the equipment in question: those provisions point the path to resolve that issue, and that path was the one followed. There came to be amortization rates defined in accordance with law, and those were the ones applied.

2. OBJECTIVE AND NOT SUBJECTIVE ASSESSMENT

Note further that that path is one of objective assessment of amortization rates, and not the path of subjective assessment, as the Claimant intended, when it alleged that the "period of expected usefulness" would be the period of profits generated by the subsidized tariff regime for the 15-year period, provided for in Decree-Law No. 189/88, of May 27, and in item 20 of Annex II to Decree-Law No. 33-A/2005, of February 16.

A "rate" subjectively calculated with the specific and assumed objective of coinciding with a subsidized tariff period is not a true amortization rate of a piece of equipment, it is a mere accounting expedient that aims to ensure a kind of "reconciliation of accounts" after that period.

3. THE IRRELEVANCE OF SUBSEQUENT LEGAL REGIMES

Note also, moreover, that the subsequent enactment of another legal regime [truncated due to length]

Frequently Asked Questions

Automatically Created

What depreciation rates apply to wind turbines and photovoltaic panels under Portuguese IRC tax law?

Under Portuguese IRC tax law, depreciation rates for wind turbines and photovoltaic panels are determined based on the 'period of expected useful life' pursuant to Article 31(2) of the IRC Code and Article 5 of Regulatory Decree No. 25/2009. The Tax Authority maintains that these rates must be established objectively based on technical durability information from equipment manufacturers, rather than guaranteed remuneration periods. In Process 593/2015-T, the taxpayer applied a 6.25% rate (16-year life) based on economic usefulness, while the TA challenged this as insufficiently aligned with technical useful life standards.

How is the 'expected useful life period' defined for renewable energy equipment in Portugal?

The 'expected useful life period' for renewable energy equipment in Portugal is defined under Article 31(2) of the IRC Code and Article 5 of Regulatory Decree No. 25/2009. The Tax Authority interprets this as the technical durability period determined through objective criteria from equipment producers and distributors. However, taxpayers in the renewable energy sector have argued that it should reflect 'economic useful life' - the period during which equipment generates economically viable returns, particularly the 15-year guaranteed remuneration period under Decree-Law No. 33-A/2005. The legal framework does not explicitly define whether useful life is technical or economic in nature.

Can companies use accelerated depreciation for wind and solar energy assets based on guaranteed remuneration periods?

Portuguese tax law does not explicitly permit accelerated depreciation for wind and solar energy assets based solely on guaranteed remuneration periods. In Process 593/2015-T, the claimant argued that the 15-year fixed remuneration period established in Decree-Law No. 33-A/2005 should determine economic useful life, justifying a 6.25% depreciation rate (16 years). The Tax Authority rejected this approach, asserting that 'expected economic useful life' lacks legal foundation and that depreciation rates must be based on objective technical useful life determined from equipment specifications, not commercial or regulatory remuneration frameworks. The dispute centers on whether Article 31(2) IRC Code permits economic versus technical interpretations.

What did CAAD rule in Process 593/2015-T regarding IRC depreciation and amortization of energy equipment?

Process 593/2015-T concerned IRC depreciation and amortization disputes for wind turbines and photovoltaic panels operated by three subsidiaries of a holding company for tax year 2010, involving €643,915.51 in contested assessments. The case addressed whether 'expected useful life' under Article 31(2) IRC Code should be interpreted as economic useful life (based on the 15-year guaranteed remuneration period in Decree-Law No. 33-A/2005) or technical useful life (based on equipment durability). The taxpayer advocated for 6.25% depreciation rates aligned with economic viability horizons, while the Tax Authority defended corrections based on technical durability criteria obtained from equipment manufacturers. The complete arbitral decision outcome is not provided in the available excerpt.

Is compensation for undue bank guarantee provision available in Portuguese tax arbitration proceedings?

Yes, compensation for undue bank guarantee provision is available in Portuguese tax arbitration proceedings under CAAD jurisdiction. In Process 593/2015-T, the claimant specifically requested conviction of the Tax Authority to pay compensation arising from unjustified provision of bank guarantee, in addition to seeking partial annulment of IRC assessments and interest assessments. This claim relates to guarantees required to suspend tax collection during the dispute period. The Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law No. 10/2011) allows arbitral tribunals to adjudicate such compensation claims when bank guarantees are provided to secure contested tax debts that are subsequently annulled or reduced.

IRC Depreciation Rates for Wind Turbines and Solar Panels – CAAD Ruling 593/2015-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. REPORT

II. CASE MANAGEMENT

III. MERITS

III.1 – FACTUAL MATTERS

§1. ESTABLISHED FACTS

§2. FACTS NOT CONSIDERED ESTABLISHED

§3. REASONING ON FACTUAL MATTERS

III.2 – LEGAL MATTERS

On the legality of the assessments

A.1. It is important, for this purpose, to determine first of all which legal rules are applicable.

A.2. As a preliminary matter, it is necessary to clarify what depreciation rates mean.

A.3. At the date of the acts in question, no depreciation or amortization rate was legally fixed for this exact type of assets. In fact, Regulatory Decree No. 25/2009, of September 14 (Regime for Depreciation and Amortization), does not contemplate, in its tables, this type of goods.

A.3.1. Let us now consider each of these aspects separately.

A.3.1.1. First, it is necessary to then define what is meant by "period of expected usefulness."

A.3.1.2. Having reached this first point of judgment, it is necessary to move to the second, within which it will be determined whether the amortization rate fixed by the Claimant is or is not reasonable and therefore whether the rate correction made by the Respondent is correct.

A.3.3. Judicial review of this administrative decision irregularity is required, insofar as there is no matter withdrawn from the Law.

A.3.5. It should finally be noted that knowledge of this defect precludes the necessity of knowledge of the others.

B. Compensation for Unjustified Provision of Bank Guarantee

IV. DECISION

V. VALUE OF THE CASE

VI. COSTS

DISSENTING OPINION

SUMMARY

1. THE LEGAL PATH FOR FIXING AMORTIZATION RATES

2. OBJECTIVE AND NOT SUBJECTIVE ASSESSMENT

3. THE IRRELEVANCE OF SUBSEQUENT LEGAL REGIMES

Frequently Asked Questions

Tags

FRESH Legal Group

Table of Contents

IRC Depreciation Rates for Wind Turbines and Solar Panels – CAAD Ruling 593/2015-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. REPORT

II. CASE MANAGEMENT

III. MERITS

III.1 – FACTUAL MATTERS

§1. ESTABLISHED FACTS

§2. FACTS NOT CONSIDERED ESTABLISHED

§3. REASONING ON FACTUAL MATTERS

III.2 – LEGAL MATTERS

On the legality of the assessments

A.1. It is important, for this purpose, to determine first of all which legal rules are applicable.

A.2. As a preliminary matter, it is necessary to clarify what depreciation rates mean.

A.3. At the date of the acts in question, no depreciation or amortization rate was legally fixed for this exact type of assets. In fact, Regulatory Decree No. 25/2009, of September 14 (Regime for Depreciation and Amortization), does not contemplate, in its tables, this type of goods.

A.3.1. Let us now consider each of these aspects separately.

A.3.1.1. First, it is necessary to then define what is meant by "period of expected usefulness."

A.3.1.2. Having reached this first point of judgment, it is necessary to move to the second, within which it will be determined whether the amortization rate fixed by the Claimant is or is not reasonable and therefore whether the rate correction made by the Respondent is correct.

A.3.3. Judicial review of this administrative decision irregularity is required, insofar as there is no matter withdrawn from the Law.

A.3.5. It should finally be noted that knowledge of this defect precludes the necessity of knowledge of the others.

B. Compensation for Unjustified Provision of Bank Guarantee

IV. DECISION

V. VALUE OF THE CASE

VI. COSTS

DISSENTING OPINION

SUMMARY

1. THE LEGAL PATH FOR FIXING AMORTIZATION RATES

2. OBJECTIVE AND NOT SUBJECTIVE ASSESSMENT

3. THE IRRELEVANCE OF SUBSEQUENT LEGAL REGIMES

Frequently Asked Questions

Tags

FRESH Legal Group

Related Articles

Table of Contents