Process: 597/2014-T

Date: March 18, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

This CAAD tax arbitration case (No. 597/2014-T) involves two agricultural companies challenging additional IRC (Corporate Income Tax) assessments issued by the Portuguese Tax Authority for the years 2010 and 2011. The central dispute concerns eligibility for tax benefits relating to interioridade (inland/interior regions) under Article 43 of the Tax Benefits Statute (EBF). Both claimants, engaged in cereal cultivation and vegetable production, had applied a reduced 10% IRC rate on their tax returns, claiming entitlement to the inland areas incentive. The Tax Authority rejected these claims and issued additional assessments totaling €53,398.53 and €49,514.18 for Company A, and €5,512.58 and €2,342.81 for Company B. The companies received European Agricultural Guarantee Fund (EAGF) subsidies during the relevant periods. The legal framework evolved from Law No. 171/99, which established measures to combat rural depopulation and encourage inland area development, to Law No. 53-A/2006, which incorporated these benefits into the EBF. A critical issue involves Administrative Order No. 170/2002, which expressly excluded agriculture and fisheries from benefiting under the inland incentive regime. The CAAD accepted the joint arbitration request under Article 3 of the Legal Framework for Tax Arbitration (LFTA), finding that both cases depend on identical factual circumstances and legal interpretation. The tribunal was properly constituted with material competence under Article 2(1)(a) of the LFTA. The parties agreed to dispense with witness testimony and proceed with written arguments. The case centers on whether agricultural enterprises can access inland area tax benefits despite the agricultural sector exclusion in the implementing regulations, particularly considering the transitional provisions in the 2007 State Budget law.

Full Decision

CAAD: TAX ARBITRATION

Case No. 597/2014 - T

Subject Matter: Corporate Income Tax/Tax Benefits Statute - Benefits relating to Inland Areas

Arbitral Decision

I. REPORT

The companies A... – SOLE PROPRIETOR COMPANY, LTD., Claimant with Tax Identification Number … and B..., LTD., Claimant with Tax Identification Number …, filed a request for the establishment of a Collective Arbitral Tribunal (hereinafter Tribunal), pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of January 20 (Legal Framework for Tax Arbitration, hereinafter referred to as LFTA), in which the Tax and Customs Authority, hereinafter TA or Respondent, is the respondent, with a view to declaring illegal and consequently annulling the following additional corporate income tax assessment acts:

a) With respect to Claimant A..., corporate income tax assessment No. 2014 ... for 2010, dated 12.05.2014, and respective compensation adjustment No. 2014 ..., dated 19.05.2014, and corporate income tax assessment No. 2014 ... for 2011, dated 12.05.2014, and respective compensation adjustment No. 2014 ..., dated 26.05.2014;

b) With respect to Claimant B..., assessment No. 2014 ... for 2010, dated 12.05.2014 and respective compensation adjustment No. 2014 ..., dated 19.05.2014, and corporate income tax assessment No. 2014 ... for 2011, dated 12.05.2014 and respective compensation adjustment No. 2014 ..., dated 26.05.2014.

The request for establishment of the Tribunal was accepted by the Esteemed President of CAAD on 15.04.2014 and automatically notified to the TA.

In accordance with the provision in paragraph c) of Article 11, number 1 of Decree-Law No. 10/2011, of January 20, as amended by Article 228 of Law No. 66-B/2012, of December 31, the Tribunal was constituted on 28.10.2014.

On 8.01.2015, a meeting was held with the Parties as referred to in Article 18 of the LFTA, minutes of which are attached to the case file, and it was decided, given the substance of the matter contained in the file, to dispense with the production of witness testimony. The Tribunal notified the Claimant and Respondent to present written arguments in succession, within a period of 20 days.

The Tribunal is properly constituted and materially competent, pursuant to paragraph a) of Article 2, number 1 of the LFTA.

The parties have legal personality and capacity, are legitimate and are properly represented (Article 4 and Article 10, number 2 of the LFTA and Article 1 of Administrative Order No. 112-A/2011, of March 22).

Pursuant to Article 3 of the LFTA, both the joinder of Claimants and the cumulation of claims are admissible, considering that the merits of the claims depend essentially on the assessment of the same factual circumstances and on the interpretation and application of the same legal principles and rules.

No nullities, exceptions, or preliminary questions exist that would prevent immediate consideration of the merits of the case.

II. FACTUAL FINDINGS

Based on the elements contained in the arbitration proceedings and the administrative file attached to the case record, the following facts are deemed proven:

A) In compliance with Service Orders Nos. OI2014…, OI2014…, OI2014… and OI2014…, internal inspection actions were determined at the Claimants, carried out by the Finance Department of …;

B) From the inspection actions referring to the years 2010 and 2011, there resulted the arithmetical corrections contained in Chapter III of the respective inspection reports;

C) The Claimants marked field 5 of table 03.4 and field 245 of table 8.1 of Corporate Income Tax form 22, and benefited from the reduced rate of 10% pursuant to the provisions of Article 43 of the Tax Benefits Statute (TBS);

D) Claimant "A…" engages in agricultural activity listed in section A of the Portuguese Classification of Economic Activities (main CAE 01111 – Cereal Cultivation; secondary CAE 1130 Cultivation of vegetables, roots and tubers);

E) Claimant "B..." engages in agricultural activity listed in section A of the Portuguese Classification of Economic Activities (main CAE 01111 – Cereal Cultivation), specifically engaging in maize production;

F) The Claimants were beneficiaries of the European Agricultural Guarantee Fund (EAGF), as attested by documents extracted from the official website of the Institute for the Financing of Agriculture and Fisheries, which prove receipt of funds in the 2nd semester of 2010, in the amount of €30,329.65 for A... (page 14876) and €22,079.29 for B... (page 14886), and funds in the 2nd semester of 2011, in the amount of €27,416.38 for A... (page 10427) (Documents No. 1 and No. 2, attached with the response);

G) As a result of the arithmetical corrections contained in the Tax Inspection Report, the Claimants were notified, respectively, of the following assessments and account reconciliation statements of Corporate Income Tax, according to documents Nos. 1 to 8 attached with the request for establishment of the Arbitral Tribunal:

  1. Corporate income tax assessment No. 2014 ... for 2010 - in the amount of €53,398.53, dated 12.05.2014, and respective compensation adjustment No. 2014 ..., dated 19.05.2014;

  2. Corporate income tax assessment No. 2014 ... for 2011 - in the amount of €49,514.18, dated 12.05.2014, and respective compensation adjustment No. 2014 ..., dated 26.05.2014, resulting in a tax amount to be paid of €49,514.18;

  3. Assessment No. 2014 ... for 2010, in the amount of €5,512.58, dated 12.05.2014 and respective compensation adjustment No. 2014 ..., dated 19.05.2014;

  4. Corporate income tax assessment No. 2014 ... for 2011, in the amount of €2,342.81, dated 12.05.2014 and respective compensation adjustment No. 2014 ..., dated 26.05.2014.

H) The additional corporate income tax assessment acts identified above are based on the assumption that the Claimants do not meet the legal requirements to be able to benefit from the tax incentive relating to inland areas.

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

This tribunal formed its conviction based on the consideration of documents attached to the file, which were not contested by the parties.

III. LEGAL FINDINGS

The principal question that arises in the present case concerns whether the Claimants can or cannot benefit from the tax incentive enshrined in paragraph b) of number 1 of Article 43 of the TBS, as amended by Decree-Law No. 108/2008, of June 26.

III. A. Arguments of the Parties

To this end, the Claimants allege in their request for establishment of the Tribunal, in summary, the following:

  1. With the approval of Law No. 171/99, of September 18, it was intended to establish measures to combat rural depopulation and to encourage the accelerated recovery of inland areas, providing for tax incentives for entities whose principal activity is in the so-called beneficiary areas and according to the rules established by Decree-Law No. 310/2001, of December 10, and by Administrative Order No. 170/2002, of February 28;

  2. Pursuant to Article 2 of the aforementioned Administrative Order No. 170/2002, of 28/02, agriculture and fisheries are excepted from the economic activities that may benefit from the aforementioned incentives, and thus, the agricultural sector concerning enterprises located in inland areas, designated as "beneficiary areas," was excluded from the system of incentives;

  3. On the other hand, with the publication of Law No. 53-A/2006, of December 29 (State Budget for 2007), which repealed Law No. 171/99, of 18/09, and added the benefits relating to inland areas to the Tax Benefits Statute, it is recorded in Article 88, under the heading "Transitional Provisions relating to Tax Benefits," that paragraph l) of the said provision states:

"(… ) to the exemptions from social security contributions relating to net job creation in inland areas with inland regime status and to the tax benefits relating to inland areas provided, respectively, in Article 39 of the present law and in Article 39-B of the Tax Benefits Statute are applicable the rules established by Decree-Law No. 310/2001, of December 10, and by Administrative Order No. 170/2002, of February 28)."

  1. Decree-Law No. 55/2008, of March 26, regulated the provisions necessary for the proper implementation of Article 39-B (current Article 43) of the Tax Benefits Statute "Tax benefits relating to inland areas." In this decree, among other specifications, it states in number 1 of Article 8 that:

"The provisions that prove necessary to ensure, throughout the implementation period, full compliance with the decision of the European Commission regarding the incentives in question, in particular, as regards their application to different economic activities, shall be the subject of a joint administrative order of the members of the government in the areas of Finance and Labor and Social Solidarity."

  1. In number 2 of the same article and decree, the Government maintains the rules established by Administrative Order No. 170/2002, of February 28, until the approval of a new administrative order, thus maintaining the exclusion of the agricultural sector from the regime of benefits relating to inland areas;

  2. The Claimants consider that number 2 of Article 8 of Decree-Law No. 55/2008, of March 26 is unconstitutional, insofar as what is advocated by the TBS regarding tax benefits relating to inland areas is entirely derogated by the decrees intended to regulate access to such benefits.

  3. Article 8, number 2 of Decree-Law No. 55/2008, by providing that "To the incentive measures regulated by the present decree-law are applicable the rules established by Administrative Order No. 170/2002, of February 28, until the approval of the administrative order referred to in the preceding number," creates a norm of incidence, in the exact sense that the Administrative Order (whose purpose would be only to regulate access to benefits – ex vi number 7 article 43 TBS) excludes, among others, agriculture from access to the benefits, and therefore, nothing, as to this point, regulates it, but instead creates, ex novo true norms of incidence.

  4. Such a norm of incidence, by being defined by mere Administrative Order, clearly violates the Principle of Reservation of Law (Article 165, number 1, paragraph i) CRP);

  5. The principle of fiscal legality requires that it be the law, or decree-law issued under legislative authority, that creates taxes and also defines their essential elements (Article 165, number 1, paragraph i), and number 2, of the Constitution).

  6. Now, the provision of number 2 of Article 8 of Decree-Law No. 55/2008, of March 26 does not have merely regulatory nature, and is therefore unconstitutional.

  7. The amendment introduced by number 2 of Article 8 Decree-Law 55/2008, of March 26, is therefore an innovative norm, in that it restored Administrative Order No. 170/2002, of February 28, which excludes from its scope of application activities such as those at issue in the case - agricultural; this constitutes an innovative law, since it did not limit itself to regulating the access conditions of beneficiary entities – as was proposed – but rather introduced into the legal order something that did not stem from it: the exclusion, among others, of agricultural activity with regard to benefits relating to inland areas;

  8. The Claimants further emphasize that, even if the provision of number 2 of Article 8 of Decree-Law No. 55/2008, of March 26, resulted from the obligation to transpose the Community directives, such transposition would still have to comply with the constitutional requirements of the fiscal law reservation;

  9. It should therefore be held to be organically unconstitutional, for violation of Articles 103, number 2, and 165, number 1, paragraph i), of the Constitution of the Portuguese Republic (CRP), the provision of number 2 of Article 8 Decree-Law 55/2008, of March 26, when interpreted in the sense that by ordering the regulation of the incentive measures by the rules established in Administrative Order No. 170/2002, of February 28, it extinguishes, in practice, the tax benefit that the Decree-Law intended to regulate instituted.

For its part, the TA alleges, in summary, the following:

  1. In the present arbitration proceeding, at issue is the application of the tax incentive relating to inland areas provided in paragraph b) of number 1 of Article 43 of the TBS (former Article 39-B, added to the TBS by Law No. 53-A/2006, of 29/12, originally enshrined in Article 7 of Law No. 171/99, of 18/09) and its implementation in accordance with the Treaty on the Functioning of the European Union (TFEU);

  2. The tax incentive relating to inland areas constitutes state aid with a framework at the community level in de minimis aid for the purposes of Articles 107 and 108 of the TFEU (former Articles 87 and 88 of the EU Treaty);

  3. It is Law No. 53-A/2006 which in its Article 83 adds to the Tax Benefits Statute the then Article 39-B (current Article 43) which provided the following:

"Article 39-B Benefits relating to inland areas

1 - To enterprises that exercise, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, hereinafter designated "beneficiary areas," the following tax benefits are granted:

a) (…);

b) In the case of establishment of new entities, whose principal activity is in beneficiary areas, the rate referred to in the preceding number is reduced to 15% during the first five fiscal periods of activity;

(…)

7 - The definition of criteria and the delimitation of beneficiary territorial areas, pursuant to the preceding number, as well as all regulatory provisions necessary for the proper implementation of this article, shall be established by administrative order of the Minister of Finance."

  1. It is also Law No. 53-A/2006 which in its Article 87, number 3 repeals Law No. 171/99, of August 18:

"Article 87 Repeal of provisions relating to tax benefits

3 - The following are also repealed:

g) Law No. 171/99, of August 18."

  1. And, also, it is Law No. 53-A/2006 which, in its Article 88, paragraph l), keeps in force Administrative Order No. 170/2002, of February 28.

  2. In addition to keeping it in force, it is Law No. 53-A/2006 which expressly determines that the tax benefits relating to inland areas provided for in Article 39-B of the TBS are applicable the rules established by Decree-Law No. 210/2001 (which would later be repealed by Decree-Law No. 55/2008) and by Administrative Order No. 170/2002, of February 28;

  3. Read then this provision of Law No. 53-A/2006:

"Article 88 Transitional Provisions relating to tax benefits

To the changes introduced by the present law to the Tax Benefits Statute applies the following transitional regime:

l) To the exemptions from social security contributions relating to net job creation in inland areas with inland regime status and to the tax benefits relating to inland areas provided, respectively, in Article 39 of the present law and in Article 39-B of the Tax Benefits Statute are applicable the rules established by Decree-Law No. 310/2001, of December 10 and by Administrative Order No. 170/2002, of February 28."

  1. Thus, and contrary to what the Claimants state in the PI, it is Law No. 53-A/2006 that keeps in force Administrative Order No. 170/2002 and that determines the maintenance of its application to Article 39-B of the TBS (current Article 43) until a new Administrative Order is approved;

  2. The application of Administrative Order No. 170/2002 does not result from mere referral by Decree-Law No. 55/2008, because before this Decree-Law came into force, Law No. 53-A/2006 already maintained the application of Administrative Order No. 170/2002, in the terms referred to above;

  3. Decree-Law No. 55/2008, of March 26 established the regulatory provisions necessary for the implementation of the incentive measures for the accelerated recovery of Portuguese regions suffering from inland area problems, as provided for in the TBS;

  4. To the tax benefits provided for in the decree in question, the rules previously established by Administrative Order No. 170/2002 remain applicable until the approval of a new one, with no repristination whatsoever occurring;

  5. Thus, and in light of the foregoing, the defect of illegality stemming from unconstitutionality for violation of Articles 103, number 3 and 165 i) of the CRP, as invoked by the Claimants, cannot proceed.

  6. Furthermore, proceeding with the legal framework of the matter under discussion, it must be noted that the incentives for the accelerated recovery of Portuguese regions suffering from inland area problems, being susceptible to being considered state aid, are subject to analysis by the European Commission, with a view to ascertaining their conformity with the Community guidelines on this matter, under the TFEU;

  7. With respect to agricultural activity, the Community regulation on this sector of economic activity is found in Regulation (EC) No. 1860/2004, of 06/10, and Regulation (EC), No. 875/2007, of 24/07;

  8. These regulations establish a de minimis rule for the agricultural sector, concerning aid that Member States may grant, provided that the necessary conditions of control and application are met, in particular, compliance with a de minimis limit per enterprise, in addition to a maximum global limit per Member State, which, in the case of Portugal is €17,832,000.00 for the agricultural sector;

  9. These regulations constitute an authorization given to Member States to, within the framework of the policies they deem necessary and appropriate, be able to grant state aid according to Community guidelines on this matter;

  10. Administrative Order No. 170/2002 excludes, from its scope of application, the aid granted to agricultural activity, by reason of its subject matter being limited only to the regulation of de minimis aid granted under Regulation (EC) No. 1998/2006, of 15/12, applicable to enterprises of all sectors of economic activity, with the exception of those provided for in Article 1 of this regulation, therein included agriculture;

  11. This means that Law No. 53-A/2006, which introduced Article 39-B of the TBS, current Article 43, by providing for the possibility of the reduction of the corporate income tax rate applying also to activities of the agricultural sector, established a provision whose feasibility was dependent on the approval of specific regulation, as established by its number 7, necessary to comply with Regulation (EC) No. 1860/2004 and, later, Regulation (EC) No. 875/2007;

  12. Thus, Decree-Law No. 55/2008, by referring to Administrative Order No. 170/2002 maintained the regulation already existing in the internal legal order for the implementation of de minimis aid to the generality of sectors of economic activity, with the exception, among others, of the agricultural sector;

  13. That is, Administrative Order No. 170/2002 is not illegal nor unconstitutional, since its scope of application concerns de minimis aid contemplated for the generality of economic activities, in accordance with Community guidelines on this matter;

  14. In these terms, the measure of tax incentive specifically concerning the reduction of the income tax rate, as is the case of paragraph b) of number 1 of Article 43 of the TBS, now under discussion, although established by the legislator in terms that admit its applicability to enterprises that exercise an economic activity of an agricultural nature, sees its feasibility dependent on the approval of the regulatory provisions necessary to ensure compliance with Community guidelines issued under the EU Treaty, by force of the primacy of Community law enshrined in Article 8 of the CRP;

  15. Bearing in mind the primacy of Community law, it is important to note that Regulation (EC) No. 1860/2004, later Regulation (EC) No. 875/2007, constitutes one of the legal acts enumerated in Article 288 of the TFEU, which integrates the legal order of the Union, characterized by being directly applicable in the legal order of Member States without the need for any act of internal transposition;

  16. Thus, it is verified that paragraph b) of number 1 of Article 43 of the TBS established the applicability of a tax benefit to an economic activity, in the case agricultural activity, which, by force of Community law, is obliged to comply with the conditions established by Regulation (EC) No. 1860/2004, of 06/10 and, later, Regulation (EC) No. 875/2007, of 24/07;

  17. The non-feasibility of paragraph b) of number 1 of Article 43 of the TBS, for the purposes intended by the Claimants, removes any sustenance from the thesis they propound that number 2 of Article 8 of Decree-Law No. 55/2008 or Administrative Order No. 170/2002 would be derogating the tax benefit enshrined in that paragraph b) and, consequently, violating the provision of number 2 of Article 103 of the CRP and paragraph i) of number 1 and number 2 of Article 165 of the CRP;

  18. In truth, at issue is not the derogation of that provision, all the more so since the scope of application of Administrative Order No. 170/2002, being distinct from that intended by the Claimants, by not concerning de minimis aid to agriculture, does not prove minimally apt to produce the derogation that the Claimants allege;

  19. Administrative Order No. 170/2002 does not exclude or derogate the benefit sought by the Claimants, it simply does not regulate it because the same does not form part of its scope of application;

  20. In this way, taking into account the primacy of Community law over internal law, one cannot consider there to be any unconstitutionality here, nor any illegality whatsoever, in that the national legislation merely gave effect to Community legal acts, binding on the Portuguese State;

  21. Number 2 of Article 8 of Decree-Law No. 55/2008, as well as the Administrative Order to which it refers, do not constitute innovative norms that extinguish a tax benefit created by the law they are intended to regulate;

  22. The right to the tax benefit enshrined in Article 43 of the TBS is dependent on the verification of prerequisites whose definition is not contained in the more general rule contained in this provision;

  23. Thus, without the regulation that specifies and concretizes the remaining prerequisites on which the benefit enshrined there in generic terms depends, it is not even admissible to speak of any right to a tax benefit, since the prerequisites on which that right depends are not yet established;

  24. In these terms, it is not legitimate to conclude that Article 43 of the TBS has enshrined a tax benefit relating to inland areas also for enterprises that exercise agricultural activity and that this right was later derogated by the decrees intended to regulate it;

  25. What exists is an omission of regulation as to the application of that benefit also to agricultural activity, which appears perfectly legitimate and in accordance with Community norms which, not requiring the granting of de minimis aid to agriculture, do however impose conditions to be observed should the same be granted;

  26. Number 1 of Article 43 of the TBS cannot be interpreted as granting the tax benefits in question to all enterprises, merely by their exercising some economic activity of a commercial, industrial or agricultural nature, without further conditions;

  27. Such would be patently unconstitutional, since it is not verified in the present case the justification for the granting of the tax benefit to all enterprises that exercise an activity of those types, which would be equivalent to the granting of a fiscal privilege, expressly prohibited by the principle of equality constitutionally enshrined;

  28. On the other hand, not conforming within the justifying reasons for the granting of the benefit, the application of the reduction of taxation would also not be in accordance with the principle of protection of competition, since it would end up functioning as state aid contrary to the Community legal order.

In light of the foregoing, regarding the position of the Parties and the arguments presented, to determine whether the Claimants can or cannot benefit from the tax incentive enshrined in paragraph b) of number 1 of Article 43 of the TBS, applicable to the date of the facts, it will be necessary to verify whether number 2 of Article 8 of Decree-Law No. 55/2008, of March 26 is or is not unconstitutional.

III. B. Tribunal's Assessment

Let us see what should be understood.

a) On the interpretation of Article 43 of the TBS

At the date of the occurrence of the tax facts under analysis (2010 and 2011), Article 43 of the TBS provided, as amended by Decree-Law No. 108/2008, of June 26, the following:

Article 43 Tax benefits relating to inland areas

1 - To enterprises that exercise, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, hereinafter designated "beneficiary areas," the following tax benefits are granted:

a) The corporate income tax rate provided for in number 1 of Article 80 of the respective Code is reduced to 15% for entities whose principal activity is in beneficiary areas;

b) In the case of establishment of new entities, whose principal activity is in beneficiary areas, the rate referred to in the preceding number is reduced to 10% during the first five fiscal periods of activity;

c) Reintegrations and depreciations relating to investment expenses up to €500,000, with the exclusion of those relating to the acquisition of land and light passenger vehicles, of corporate income tax taxpayers who carry out their principal activity in beneficiary areas may be deducted, for the purposes of determining taxable profit, with a 30% increase;

d) Mandatory social charges borne by the employer entity relating to net job creation, for an indefinite term, in beneficiary areas are deducted, for the purposes of determining taxable profit, with a 50% increase, only once per worker admitted in that entity or in another entity with which there are special relationships, in accordance with Article 58 of the Corporate Income Tax Code;

e) Tax losses determined in a given fiscal period in accordance with the Corporate Income Tax Code are deducted from taxable profits, should they exist, from one or more of the seven subsequent fiscal periods.

2 - The following are conditions to benefit from the tax benefits provided for in the preceding number:

a) Determination of taxable profit is effected using direct evaluation methods;

b) Tax situation is regularized;

c) No wage arrears;

d) They do not result from a split effected in the two years prior to the benefit of the benefits.

3 - The following acquisitions are exempt from the payment of municipal tax on onerous transfers of real estate:

a) By young people, aged between 18 and 35 years, of real property or autonomous fraction of urban real property located in beneficiary areas, intended exclusively for first own and permanent residence, provided that the value on which the tax would fall does not exceed the maximum values of housing at controlled costs, increased by 50%;

b) Of real properties or autonomous fractions of urban real properties, provided that they are located in beneficiary areas and permanently allocated to the activity of enterprises.

4 - The exemptions provided for in the preceding number only apply if acquisitions are duly reported to the tax service of the area where the real estate to be acquired is located, by means of a declaration stating that the declarant has not previously benefited from an identical benefit.

5 - The exemptions provided for in number 3 are dependent on authorization of the deliberative body of the respective municipality.

6 - For the purposes of this article, beneficiary areas are delimited in accordance with criteria that take into account, in particular, low population density, the compensation index or fiscal shortage and inequality of social, economic and cultural opportunities.

7 - The definition of criteria and the delimitation of beneficiary territorial areas, pursuant to the preceding number, as well as all regulatory provisions necessary for the proper implementation of this article, shall be established by administrative order of the Minister of Finance.

8 - The tax benefits provided for in this article are not cumulative with other benefits of an identical nature, without prejudicing the option for another more favorable one.

It is relevant to the assessment of the questions submitted to this Tribunal to interpret the provision in number 1 b) of Article 43, as well as numbers 6 and 7 of the said article.

Since, in order to grasp the meaning of the Law, the interpretation of fiscal law must be effected bearing in mind the general principles of interpretation, as results from Article 11 of the General Tax Law (GTL), we will interpret the provisions in question bearing in mind the elements of interpretation of Law, namely: the literal element, the historical element and the teleological/systematic element (Article 9 of the Civil Code, hereinafter CC). Thus:

· Literal Element

Considering the literal element it will be important, first, to reconstruct the legislative thought through the words of the law. It is stated in paragraph b) of number 1 of Article 43 of the TBS that "1- To enterprises that exercise, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, hereinafter designated "beneficiary areas," the following tax benefits are granted:

b) In the case of establishment of new entities, whose principal activity is in beneficiary areas, the rate referred to in the preceding number is reduced to 10% during the first five fiscal periods of activity;"

For its part, number 6 of Article 43 establishes what are the criteria that should preside over the determination of beneficiary areas, referring to criteria that take into account, in particular, low population density, the compensation index or fiscal shortage and inequality of social, economic and cultural opportunities.

In number 7 of Article 43, the legislator refers the definition of criteria and the delimitation of beneficiary territorial areas and of all regulatory provisions necessary for the proper implementation of this article, to an administrative order of the Minister of Finance.

Thus, according to a literal interpretation of the provisions in question, the tax benefit relating to inland areas is granted: To enterprises that exercise, directly and as their principal activity, an economic activity of an agricultural, commercial, industrial or service provision nature in inland areas, referring the definition of beneficiary areas and all regulatory provisions necessary for the proper implementation of the tax benefit to a Regulatory Administrative Order.

Fundamentally, Article 43 of the TBS establishes a tax benefit, using the technique of legislative referral to densify the concept of beneficiary areas and establish the regulatory provisions necessary for the proper implementation of the tax benefit.

As a result, Decree-Law No. 55/2008, of March 26 and Administrative Order No. 170/2002, of February 28, came to establish "the conditions of access of beneficiary entities, the entities responsible for granting the incentives, the obligations to which beneficiary entities are subject, as well as the consequences in case of non-compliance."

Furthermore, the said Decree-Law establishes, in number 2 of Article 8, that "To the incentive measures regulated by the present decree-law are applicable the rules established in Administrative Order No. 170/2002, of February 28, until the approval of the Administrative Order referred to in the preceding number."

At the date of the relevant facts for the purposes of assessing the legality of the assessment acts under review, Administrative Order No. 170/2002, of February 28, was in force, and therefore, there is no repristination of that Administrative Order, since only repealed norms are repristinated (See Article 7 of the CC).

Pursuant to the said Administrative Order, in particular, its Article 2, relevant to the assessment of the questions posed to this Tribunal, "All economic activities may benefit from the incentives mentioned in the preceding number, with the exception of the following: a) Agriculture and fisheries, identified, respectively, in sections A and B of the Portuguese Classification of Economic Activities - CAE, revised by Decree-Law No. 182/93, of May 14;"

Thus, bearing in mind the literal element, paragraph b) of number 1 of Article 43 of the TBS can only be interpreted in the sense that, the tax benefit provided for therein is only applicable to economic activities that are not excluded, such as agricultural activity.

· Historical and Teleological Element

Article 43 of the TBS as currently in force has its origin in a complicated negotiation process between the Portuguese State and the European Commission. In fact, following notification processes relating to several regimes in force in national territory, including the one now under analysis, contacts and information exchanges had been developing with the European Commission regarding its application, after January 2007. As a result of the change in the Community framework on State Aid, the Commission (DG Competition) considered that the said decrees had ended their period of validity, which led, at the national level, to the suspension of the analysis and processing of the respective proceedings.

To this end, Law No. 53-A/2006, of December 29 (State Budget for 2007), came to repeal Law No. 171/99, of 18/09, and add the benefits relating to inland areas to the Tax Benefits Statute, with a perspective of changing the regime. According to that same Law (paragraph l) of Article 88), however, with respect to the regulatory provisions for proper implementation, a transitional regime was established in which the rules established by Decree-Law No. 310/2001, of December 10 continue to be applicable. According, also, to the said Law (the same paragraph l) of Article 88) the rules established by Administrative Order No. 170/2002, of February 28, in which the rules necessary to ensure full compliance with the decision of the European Commission regarding the incentives are fixed, in particular, the economic activities that are beneficiaries, the eligible expenses and the limit of the incentives, would continue to be applicable.

However, and to ensure some legislative stability and legal security and to ensure that the European Commission was in a position to accept the change of the existing regime, it was only in 2008 that the regime was regulated by Decree-Law No. 55/2008, of March 26, which clarified in its Article 8 the following:

  • According to number 1: "The provisions that prove necessary to ensure, throughout the implementation period, full compliance with the decision of the European Commission regarding the incentives in question, in particular, as regards their application to different economic activities, shall be the subject of a joint administrative order of the members of the government in the areas of Finance and Labor and Social Solidarity";

According to number 2: "To the incentive measures regulated by the present decree-law are applicable the rules established by Administrative Order No. 170/2002, of February 28, until the approval of the administrative order referred to in the preceding number."

Given that it is a Decree-Law, and bearing in mind that Administrative Order No. 170/2002, of February 28, was still in force by virtue of the then number 7 of the then Article 39-B of the TBS, this Article 8 number 2, merely clarified that until the approval of the new Administrative Order the previous Administrative Order, never before repealed, would remain in force, as indeed already resulted from paragraph l) of Article 88 of Law No. 53-A/2006, of December 29 (State Budget for 2007). In the same year, it should further be explained that, through the approval of Decree-Law No. 108/2008, of June 26, the Tax Benefits Statute, approved by Decree-Law No. 215/89, of July 1, was amended and re-published, which came to bring together in its Article 43 (former Article 39-B) the set of tax benefits relating to inland areas, maintaining the regime unchanged.

In this sense, and resorting to the historical element, we understand that between January 2007 and March 2008 not only Decree-Law No. 310/2001, of December 10, but also Administrative Order No. 170/2002, of February 28, was in force. The opposite would make the regime inapplicable by virtue of the article inserted in the TBS concerning inland areas, being notable that the Administration has always applied this article, it suffices to consult the declarations of Corporate Income Tax form 22, in the fields concerning the inland areas regime.

· Systematic Element

As taught by Baptista Machado, in Introduction to Law and Legitimizing Discourse, p. 183, Almedina, 1991, "the systematic element comprises "the consideration of other provisions that form the complex of norms of the institute in which the matter to be interpreted is integrated, that is, that regulate the same matter (context of the law), as well as the consideration of legal provisions that regulate parallel normative problems or related institutes (parallel places)."

Now, the provision contained in Article 43, number 1 b) of the TBS cannot be analyzed without also taking into account the purposes that serve the creation of tax benefits.

In fact, right in Article 2 of the TBS it is established that tax benefits are "measures of an exceptional character instituted for the protection of relevant non-fiscal public interests that are superior to those of taxation itself that they prevent."

In this sense, it does not seem at all defensible that the provision in question can be interpreted in the sense that it grants the tax benefits provided for to taxpayers that may be contemplated by the body of number 1 of Article 43, when it results, clearly, that the implementation of the tax benefits provided for therein depends on its later regulation.

Such interpretation would lead to the violation of the principle of equality constitutionally enshrined.

Moreover, the later regulation of the tax benefit came clearly to exclude agricultural activity, for reasons that relate to the public interest in obtaining another type of aid, in the case of Community origin, for agricultural activity.

Another interpretation of the provision would lead to the granting of a tax benefit that would violate the principle of protection of competition, by functioning as state aid contrary to the Community legal order.

In sum: from the interpretation of the provision in paragraph b) 1 of Article 43 of the TBS, in conjunction with the complementary provisions, which make feasible the right provided for therein results clearly that the Claimants did not meet the conditions to benefit from that tax benefit.

b) On the Unconstitutionality of number 2 of Article 8 of Decree-Law No. 55/2008, of March 26

The Claimants allege in their request for arbitral determination, the illegality of the assessment acts in question stemming from unconstitutionality, for violation of Articles 103, number 2 and 165, number 1, paragraph i) of the CRP, of the provision of number 2 of Article 8 of Decree-Law No. 55/2008.

To this end, the Claimants understand that the provision provided for in paragraph b) of number 1 of Article 43 of the TBS, when interpreted in the sense of by ordering the regulation of the incentive measures by the rules of Administrative Order No. 170/2002, of 28/02, is "extinguishing, in practice, the tax benefit that the Decree-Law intended to regulate establishes" and that the referral itself to Administrative Order No. 170/2002, while a hierarchically inferior norm, "provides innovatively in relation to the content of the norm that it intends to regulate, thereby creating a norm of incidence."

Regarding the alleged unconstitutionality for violation of number 2 of Article 103 and paragraph i) of number 1 of Article 165 of the CRP stemming from the extinction of the tax benefit by Administrative Order No. 170/2002, of 28.02 it will be said the following:

Article 43 of the TBS does not establish any provision that is per se self-executing, since it results from its numbers 6 and 7 that the criteria and delimitation of territorial beneficiary areas, as well as all regulatory provisions necessary for the proper implementation of the right established (tax benefit, in particular) shall be fixed by Administrative Order.

It came to pass that, number 2 of Article 8 of Decree-Law No. 55/2008, of March 26, referred to Administrative Order No. 170/2002, of February 28 the determination of the applicable rules which, for its part, excluded agricultural activity from the scope of application of paragraph b) of number 1 of Article 43 of the TBS, by force of Community law.

It does not thus seem defensible to affirm that number 2 of Article 8 of Decree-Law No. 55/2008, of March 26, extinguished the tax benefit established by Article 43, number 1 b) of the TBS, when, in truth, by force of the referral operated by its provisions, that right never existed, in the concrete case under analysis.

It should also be noted that, given the exceptional character of tax benefits, in no way can it result that a tax relief not self-executing is granted.

Furthermore, one cannot invoke any organic unconstitutionality stemming from the creation of a norm of incidence by the Administrative Order in question, since the application of the Administrative Order to the tax benefit established in Article 43 of the TBS originates from Law No. 53-A/2006, as explained in III. a) of the present decision.

In truth, it was Law No. 53-A/2006, which introduced Article 39-B of the TBS, current Article 43, providing for the possibility that the reduction of the corporate income tax rate apply also to activities of the agricultural sector, but establishing its feasibility dependent on the approval of specific regulation, necessary to comply with Regulation (EC) No. 1860/2004 and, later, Regulation (EC) No. 875/2007.

As a consequence, the tax exclusion contained in the Administrative Order in question has as its source Law No. 53-A/2006 and Decree-Law 55/2008, of March 26, being respected the principle of fiscal legality constitutionally enshrined.

But even if it were not understood this way, it has been repeatedly held by the Courts that "The constitutional principles of fiscal legality, typicality and the reservation of formal law do not require that fiscal law contain all of the decision-making criterion of elements relevant for the purposes of tax incidence, requiring only that the interested parties be assured "sufficient densification that serves as a guiding criterion for administrative activity and that of the courts themselves, when called to control the use of such concepts by the Administration." (See, for example, the Judgment of the Supreme Administrative Court, issued in case No. 24738, of 12.04.2000).

Without further delay, it does not seem to us that the position of the Claimants can proceed on this basis.

Nor does it seem to us that the argument invoked by the Claimants can proceed that Administrative Order No. 170/2002, as a hierarchically inferior norm, "provides innovatively in relation to the content of the norm that it intends to regulate, thereby creating a norm of incidence."

In truth, bearing in mind the arguments already explained above, we do not consider that the Administrative Order regulates innovatively, since the tax benefit created by Law No. 53-A/2006 constitutes a conditional benefit.

In any case, and even if it were not understood this way, we cannot forget that Community law has prevalence over internal law, as results from Article 8 of the Constitution of the Portuguese Republic, according to which:

Article 8
International Law

  1. The norms and principles of general or common international law form an integral part of Portuguese law.

  2. The norms contained in international conventions regularly ratified or approved are in force in the internal order after their official publication and while they bind the Portuguese State internationally.

  3. The norms emanating from the competent bodies of international organizations of which Portugal is part are in force directly in the internal order, provided that this is established in their respective constitutive treaties.

  4. The provisions of the treaties governing the European Union and the norms emanating from its institutions, in the exercise of their respective powers, are applicable in the internal order, in terms defined by the law of the Union, with respect for the fundamental principles of the democratic rule of law.

As taught by Gomes Canotilho and Vital Moreira, in Constitution of the Portuguese Republic Annotated, Vol.I, 4th Edition, Coimbra Editora, pp. 265, in annotation to number 4 of Article 8 of the CRP "when the Portuguese Constitution establishes that the provisions of the Treaties governing the European Union and the norms emanating from its institutions, in the exercise of their respective powers, are applicable in the internal order, in terms defined by the law of the Union, this means that the norms of the treaties, as well as the norms emanating from European institutions prevail over the norms of internal law, including the norms of the Constitution itself (…)."

From the establishment of the primacy of Community law results, thus, that the norms of ordinary internal law that are incompatible with the law of the European Union are ineffective.

Thus, the cited authors, pp. 271, argue that "In case of conflict, national courts must consider inapplicable the earlier norms incompatible with norms of EU law and must disapply the later norms, for violation of the rule of primacy."

Number 4 of Article 8 of the CRP constitutes, therefore, a rule of collision between the law of the Union and internal law in the context of Portuguese constitutional law.

Now, in the case under analysis, the Treaty on the Functioning of the European Union provides in its Articles 107 and 108, the following:

Article 107

  1. Except where the Treaties provide otherwise, any aid granted by a State or using State resources, in whatever form, which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods, is incompatible with the internal market, in so far as it affects trade between Member States.

  2. The following shall be compatible with the internal market:

a) Aid of a social character granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

b) Aid to make good the damage caused by natural disasters or exceptional occurrences;

c) Aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is intended to compensate for the economic disadvantages caused by that division. Five years after the entry into force of the Treaty of Lisbon, the Council may, on a proposal from the Commission, adopt a decision revoking this point.

  1. The following may be considered compatible with the internal market:

a) Aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, having regard to their structural, economic and social situation;

b) Aid to facilitate the development of certain economic activities or regions, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

c) Aid to promote culture and heritage conservation, where such aid does not affect trading conditions and competition in the Union to an extent contrary to the common interest;

d) Such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.

Whereas Article 108 provides the following:

Article 108

  1. The Commission shall, in cooperation with Member States, keep under constant review all systems of aid existing in those States. It shall propose to the Member States any measures required by the progressive development or the functioning of the internal market.

  2. If the Commission, after giving notice to the parties concerned to submit their comments, finds that aid granted by a State or using State resources is not compatible with the internal market under Article 107, or that such aid is being applied in an abusive manner, it shall decide that the State concerned shall alter or abolish such aid within a period of time to be determined by the Commission.

If the State concerned does not comply with this decision within the prescribed time, the Commission or any other interested State may, in derogation from Articles 258 and 259, refer the matter directly to the Court of Justice of the European Union.

If any Member State requests it, the Council may, acting unanimously, decide that aid which an existing or proposed by that State is to be considered compatible with the internal market, in derogation from Article 107 or from regulations under Article 109, if exceptional circumstances justify such a decision. If the Commission has already initiated the procedure provided for in the first subparagraph of this paragraph in respect of such aid, the request made by the interested Member State to the Council shall have the effect of suspending that procedure until the Council has taken a decision.

However, if the Council has not taken a decision within three months of the date of the request, the Commission shall decide.

  1. The Commission must be informed in detail of any plans to grant or alter aid. When the Commission finds that a draft aid measure does not meet the criteria laid down in Article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.

  2. The Commission may adopt regulations relating to the categories of State aid which, as determined by the Council under Article 109, may be exempted from the procedure provided for in paragraph 3 of this article.

For its part, Regulation (EC) No. 1860/2004, of 06/10 and Regulation (EC), No. 875/2007, of 24/07 regulate agricultural activity, establishing a de minimis rule for the agricultural sector concerning aid that Member States may grant, in addition to a maximum global limit per Member State, which, in the case of Portugal is €17,832,000.00 for the agricultural sector.

In Regulation (EC) No. 1998/2006, of 15/12 de minimis aid applicable to enterprises of all sectors of economic activity, with the exception of those provided for in Article 1 of this regulation, therein included agriculture, are determined.

As has been understood by the Judicial Courts, "The norms contained in Community Regulations are mandatory and immediately applicable and are integrated into the national legal order with a value in the hierarchy of laws similar to that of national laws" – See Judgment of the Supreme Administrative Court, issued in case 328/02, of 6.12.2005.

Thus, Administrative Order No. 170/2002 merely ensures compliance with the Community rules applicable to the agricultural sector, in accordance with the primacy of Community law.

For this reason, as the Respondent argues, the feasibility of the incentive measure provided for in paragraph b) of number 1 of Article 43 of the TBS, has always been (and is) dependent on the approval of the regulatory provisions necessary to ensure compliance with the Community guidelines issued under the EU Treaty, by force of the primacy of Community law enshrined in Article 8, number 4 of the CRP.

Considering that Regulation (EC) No. 1860/2004 and later Regulation (EC) No. 875/2007 constitute legal acts directly applicable in the legal order of Member States, any national norms that are incompatible with the material dispositions contained therein are inapplicable.

It is concluded, thus, that, on the one hand the provision in paragraph b) of number 1 of Article 43 of the TBS was not intentionally the subject of the regulation necessary for its implementation, with respect to agricultural activity, and on the other hand, such could not, in any case occur, by force of the primacy of Community law.

IV. DECISION

In these terms, the Arbitral Tribunal decides:

A) To dismiss the request for arbitral determination, and consequently, the assessment acts under review are upheld;

B) To condemn the Claimants in the costs of the present proceeding, as the losing party and having given cause to the present proceeding.

V. VALUE OF THE PROCEEDING

In accordance with the provision in Article 306, number 2 of the Code of Civil Procedure, Article 97-A of the Code of Tax Procedure and Article 3, number 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the claim is fixed at €110,947.96.

VI. COSTS

Costs to be borne by the Claimants in the amount of €3,060, in accordance with Article 12, number 2 of the LFTA and Article 4, number 3 of the Regulation of Costs of Tax Arbitration Proceedings and Table I attached thereto.

Let notification be made.

Lisbon, March 18, 2015

The Arbitrators

Manuel Luís Macaista Malheiros (Arbitrating President)

Guilherme D'Oliveira Martins (Member)

Magda Feliciano (Reporter)

1 Document prepared by computer, pursuant to Article 138, number 5 of the Code of Civil Procedure (CCP), applicable by referral of Article 29, number 1 paragraph e) of Decree-Law No. 10/2011, of January 20 (Legal Framework for Tax Arbitration), with blank lines and reviewed by me.

The drafting of the present decision is governed by the old spelling.

Frequently Asked Questions

Automatically Created

What are the IRC tax benefits related to interioridade (interior regions) under Portuguese tax law?
IRC tax benefits related to interioridade (interior regions) under Portuguese tax law primarily consist of a reduced corporate income tax rate of 10% for qualifying businesses located in designated inland areas. These incentives were originally established under Law No. 171/99 to combat rural depopulation and encourage economic development in interior regions, and were subsequently incorporated into the Tax Benefits Statute (EBF) through Law No. 53-A/2006. The benefits are governed by Article 43 of the EBF and regulated by Decree-Law No. 310/2001 and Administrative Order No. 170/2002. Taxpayers claim this benefit by marking specific fields on IRC Form 22 (field 5 of table 03.4 and field 245 of table 8.1). However, Administrative Order No. 170/2002 excludes certain economic activities, notably agriculture and fisheries, from eligibility for these inland area incentives.
How did the CAAD rule on the additional IRC tax assessments for companies claiming interior region benefits?
The complete ruling is not provided in the case excerpt, which ends at the factual findings and legal framework sections before presenting the tribunal's final decision. However, the case shows that CAAD accepted jurisdiction over the dispute and deemed the additional IRC assessments issued for 2010 and 2011 to be contestable through arbitration. The Tax Authority's position was that the agricultural companies did not meet the legal requirements to benefit from the inland areas tax incentive, resulting in additional assessments. The tribunal identified the principal legal question as whether the claimants could benefit from the tax incentive under Article 43(b)(1) of the EBF despite being engaged in agricultural activities, given the exclusion of agriculture in Administrative Order No. 170/2002 and considering the transitional provisions in the 2007 State Budget.
What legal framework governs tax benefits for businesses located in Portugal's interior regions under the EBF?
The legal framework governing tax benefits for businesses in Portugal's interior regions under the EBF consists of several legislative instruments. Originally, Law No. 171/99 of September 18, 1999, established measures to combat rural depopulation and encourage accelerated recovery of inland areas through tax incentives. This was subsequently repealed and replaced by Law No. 53-A/2006 (State Budget for 2007), which incorporated inland area benefits into the Tax Benefits Statute (EBF), specifically Article 43. The implementing regulations include Decree-Law No. 310/2001 of December 10, 2001, and Administrative Order No. 170/2002 of February 28, 2002, which define eligible economic activities and beneficiary areas. Article 43 of the EBF, as amended by Decree-Law No. 108/2008 of June 26, 2008, provides the current framework for these benefits. Notably, Article 2 of Administrative Order No. 170/2002 excludes agriculture and fisheries from the scope of qualifying economic activities for these inland incentives.
Can multiple taxpayers file a joint arbitration request at CAAD for related IRC tax disputes?
Yes, multiple taxpayers can file a joint arbitration request at CAAD for related IRC tax disputes. Article 3 of the Legal Framework for Tax Arbitration (LFTA - Decree-Law No. 10/2011) expressly permits both the joinder of claimants and the cumulation of claims when the merits of the claims depend essentially on the assessment of the same factual circumstances and on the interpretation and application of the same legal principles and rules. In Case No. 597/2014-T, the CAAD accepted a joint arbitration request from two separate companies (A and B), each with different tax identification numbers, challenging their respective additional IRC assessments. The tribunal found that since both cases involved agricultural companies claiming the same inland areas tax benefit under Article 43 of the EBF for the same tax years (2010 and 2011), and the legal questions were identical, joint proceedings were admissible and procedurally efficient.
What is the procedure for challenging additional IRC tax assessments through CAAD tax arbitration?
The procedure for challenging additional IRC tax assessments through CAAD tax arbitration involves several steps under the Legal Framework for Tax Arbitration (LFTA - Decree-Law No. 10/2011). First, the taxpayer files a formal request for establishment of an arbitral tribunal pursuant to Articles 2 and 10 of the LFTA, identifying the contested tax acts and legal grounds. The President of CAAD reviews and accepts the request, which is automatically notified to the Tax Authority (respondent). Under Article 11(1)(c), the tribunal is constituted within a specified timeframe. After constitution, a preliminary meeting is held per Article 18 of the LFTA where procedural matters are decided, including whether to dispense with witness testimony. The parties then submit written arguments in succession within designated timeframes (typically 20 days). The tribunal must verify its material competence (Article 2(1) LFTA), the parties' legal personality, capacity, legitimacy, and proper representation (Articles 4 and 10(2) LFTA), and check for any nullities, exceptions, or preliminary questions before addressing the merits of the case.