CAAD Case 597/2017-T: IRC Withholding Tax on Image Rights & Economic Rights of Athletes Under Double Taxation Conventions

ARBITRAL DECISION

The arbitrators Carlos Alberto Fernandes Cadilha, Rui Duarte Morais and Américo Brás Carlos agree as follows:

I - REPORT

Constitution of the Arbitral Tribunal and Proceedings

A..., Tax Identification Number..., with registered office at... - ..., ..., ..., ..., ... (hereinafter A... or Claimant), has duly filed a request for arbitral ruling, with the Tax and Customs Authority as the Respondent.

The Claimant designated Prof. Dr. Rui Duarte Morais as Arbitrator.

The head of the Tax Administration designated Prof. Dr. Américo Brás Carlos as Arbitrator.

The Arbitrators designated by the Parties agreed to designate Councillor Carlos Alberto Fernandes Cadilha as presiding arbitrator.

The Collective Arbitral Tribunal was constituted on 20/02/2018.

The Tax and Customs Authority duly submitted its response.

On 11/05/2018, the meeting referred to in Article 18 of the RJAT was held, with the issue of the exception of res judicata invoked by the Claimant being deferred to the final decision.

Without opposition from the Respondent, the recording of the witness evidence produced in proceedings 346/2016-T was ordered to be attached to the file. On the same date, the witnesses indicated by the Claimant were examined, their statements being recorded.

The Parties submitted written arguments.

Requests for Arbitral Ruling

B.1) The main request is for annulment of assessment No. 2016..., relating to the year 2013, concerning withholdings on corporate income tax (IRC), in the total amount of €302,767.76, of which €266,183.16 is tax and the remainder is compensatory interest, which originated from corrections made by the Tax Inspection of the Finance Directorate of ... under service order OI2016....

The Claimant had timely filed a gracious complaint requesting the annulment of such assessment, which was expressly denied by order of 04/10/2017.

The Claimant begins by alleging the occurrence of the exception of res judicata.

Subsequently, it attributes to such assessment the following defects: a) erroneous apprehension of facts and incorrect subsumption to applicable law; b) violation of Articles 4, specifically Article 4(3)(d), 94, and 87 of the IRC Code; c) violation of Articles 13, 17, and 22 of the Double Taxation Conventions concluded between Portugal and Brazil and between Portugal and the United Kingdom; d) illegality of Circular No. 18/2011 of the DGI; e) violation of Articles 35 and 38(1) of the General Tax Law and Article 100 of the Code of Tax Procedure, and therefore requests, in addition to the annulment of the assessment, also the annulment of the order denying the gracious complaint.

B.2) The Claimant requests, on a subsidiary basis (should the main request not succeed), the annulment of the assessment of compensatory interest, on the grounds that these are only exigible if the omission or delay in payment of the tax due is accompanied by a judgment of censure or fault attributable to the taxpayer in such conduct, and that it acted based on a plausible interpretation of the law.

B.3) It also requests, in the event of success of the main request, the condemnation of the AT to pay compensation for the guarantee improperly provided by it.

The main question to be decided is therefore whether the Claimant had the obligation to withhold at source and deliver to the State treasury the aforementioned IRC (B.1).

C) Justification of the Disputed Assessment

C1) With Respect to Image Rights

In the legal justification of the disputed assessment, regarding image rights, the principal arguments invoked by the AT are the following:

• When the image rights of a player are held by a non-sports entity and it cedes them to a Club/SAD, with which the player will conclude a professional sports employment contract, the income obtained by that entity from the cession of those rights is closely related to the rights inherent in the professional sports employment contract concluded by the player, because they derive from the player's image in the exercise of their professional activity and only exist for as long as the professional sports employment contract lasts.

• There exists, thus, an unequivocal connection between the activity performed by players and the potential exploitation of their image rights, since the club or SAD only acquires these image rights while the players remain in its service and practicing a sports activity – the duration of the image rights cession contract follows that of the professional sports employment contract.

• Therefore, ultimately, what ends up being transferred from that non-resident third entity will be the income deriving from the image that these athletes hold as players who perform (or will perform) the activity of professional footballers in Portuguese territory.

• Such income would thus be subject to withholding at source, as a final tax, under Article 87(4) read together with Article 94(5), both of the IRC Code.

• The provision in Article 98(1) of the IRC Code would not apply, given the provisions of the Double Taxation Convention concluded between Portugal and Brazil.

C2) With Respect to Economic Rights

In the justification of the disputed assessment regarding economic rights, it relies essentially on the content of Circular No. 18/2011 of 19 May of the then DGCI.

The principal arguments invoked by the AT are the following:

• What results from the terms of the contract concluded between A... and the entities contained in the contracts in question is that there was a cession of "economic rights" relating to the "pass" of the players.

• Under Law No. 28/98 of 26 June, the rights in question emerge from the conclusion of a professional sports employment contract, being nothing more than the rights of registration in a competition by the sports employer entity, duly registered with the entity responsible for the organization and supervision of professional football (in the Portuguese case, the Professional Football League).

• The FIFA Regulation on the Status and Transfers of Players, contained in official communication No. 393 of 2005-05-19 of the FPF, provides that a player can only be registered if the club submits a valid request to the respective Federation during the registration period, with such request to be submitted with a copy of the player's contract (see Articles 6 and 8).

• The existence of sports rights only occurs under the terms described above, with it not being possible for other entities (e.g., companies without the capacity to dispute sports competitions with their own team of players) to claim ownership of sports rights over players.

• No other club/SAD was identified that held the sports rights of the players at the time of their transfer to A....

• With no sports rights in effect, one cannot consider that there are economic rights relating to sports rights, commonly called pass, held by a non-sports third party entity, since these presuppose the existence of a professional sports employment contract.

• When the player is "free" for the period that A... intended to contract the player, that is, without a professional sports employment contract in effect, when a non-sports non-resident entity appears charging A... (which intends to conclude a professional sports employment contract with the player) a sum, these economic rights do not have in their origin sports rights, since there is no professional sports employment contract generating economic rights.

• As clarified in Circular No. 18/2011 of the then DGI, under these conditions the economic rights claimed for the conclusion of a professional contract are subsumed under the right equivalent to the signing bonus that a player could demand for that purpose.

• Thus, the non-sports entities in question, when invoking the cession of economic rights, demand nothing more than the right to obtain, instead of the player, a remuneration for the conclusion of the professional sports employment contract.

• Such income, obtained by non-resident entities, flows unequivocally and inseparably from the conclusion of the professional sports employment contract with A..., concluded by the players in their capacity as sports professionals, from which their use in service of the club/SAD resident derives, and are therefore subject to IRC, by force of the provision in Article 4(3)(d) of the IRC Code, and should be subject to withholding at source, as a final tax, under Article 87(4) read together with Article 94(5), both of the IRC Code.

In its response and in its arguments, the AT reaffirms this understanding.

Position of the Claimant

The Claimant sustains, in summary:

• that the remuneration paid to sports agents or similar parties at the conclusion of a professional contract with a player differs from that resulting from the exercise, by the player, of their profession, because the entities acquiring such rights (of image and sports rights) "assume the business risk of profiting from that asset, through its exploitation and commercialization, by itself or through cession to a third party".

• by ceding their sports rights to specialized companies, the players limited their risk (they receive something, even if they become unemployed and without remuneration);

• that this business model is common in the football world;

• that it has not been alleged and proven that the non-resident companies in question acted in the name and on behalf of the athletes or that the remuneration obtained by them was subsequently delivered, in whole or in part, to the players and that A... had knowledge of such.

In its arguments, the Claimant reaffirms this understanding.

II - CLARIFICATION

The request for arbitral ruling is timely, the parties possess legal personality and capacity, have standing and are duly represented.

The arbitral tribunal is competent to appreciate the request for arbitral ruling formulated by the Claimant.

It is necessary to rule on the exception of res judicata invoked by the claimant, which shall be done below, with there being no other exceptions to be analyzed.

There are no nullities that would preclude the examination of the merits.

III - FACTUAL MATTERS

§ 1 - Facts Established

The following facts are considered established:

a) The Claimant is the sports company that includes professional men's football activity of B...;

b) A... was subject to a tax inspection relating to the year 2013, which culminated in the final inspection report, contained in the case file, which constitutes the justification for, among others, the assessment now impugned.

c) A... acquired from the company C..., Ltda, with registered office and management in Brazil and without permanent establishment in Portugal, the image rights of player D... (D...), for the amount of 245,000 euros, paid in the year in question.

d) A... entered into agreements with various non-sports companies, with foreign registered offices and without permanent establishment in Portugal, for the acquisition, in exchange for payment of certain amounts, of the economic rights of several other players.

e) Specifically:

• The Claimant acquired economic rights of player E... (E...) from company F... Ltdª, with registered office in Brazil and without permanent establishment in Portugal, having paid, in the 2013 financial year, the sum of €139,811.16.

• The Claimant acquired economic rights of player G... (G...) from company H..., Ltda, with registered office in Brazil and without permanent establishment in Portugal, having paid, in the 2013 financial year, the sum of €59,921.00.

• The Claimant acquired economic rights of player I... from company J..., Ltda, with registered office in Brazil and without permanent establishment in Portugal, having paid, in the 2013 financial year, the sum of €20,000.00.

• The Claimant acquired the economic rights of player K... from company L... Lda, with registered office in the United Kingdom and without permanent establishment in Portugal, having paid, in the 2013 financial year, the sum of €600,000.00.

f) I... and M... (who signed the economic rights cession contract on behalf of the company relating to this player) are partners of J..., Ltda, the former being managing partner.

g) Portugal concluded with the United Kingdom and Brazil conventions on Double Taxation (CDTs), based respectively on the OECD Model of 1963 and 1977.

h) In the professional sports employment contracts concluded between A... and the players to whom the economic rights in question relate, they declared themselves to be "free", that is, not bound to any sports entity.

i) The Claimant considered that player D..., at the time the contract relating to his image rights was concluded, would be, by his professional curriculum (e.g., international for the main squad of Brazil), one of the most sought-after for marketing events, sponsorship maintenance and acquisition, and therefore, in addition to contracting him, it acquired his image rights for the period in which he was contracted;

j) The acquisition of image rights was further intended to prevent the player from being able to associate with brands competing with the Claimant's sponsors or refuse to participate in promotional campaigns for sponsor products, which could harm the maintenance and acquisition of sponsorships;

l) To suspend various enforcement proceedings resulting from the assessments originated by the inspection action referred to in b), including the one now impugned, the Claimant pledged credits of which it is the holder against N..., SA.

§ 2 - Facts Not Established

The reasons and conditions for acquisition, by the ceding companies referred to in c) and e), of ownership of the rights, of image and economic, relating to the players in question, were not established.

It was not established that the Claimant was aware of the special relationships existing between player I... and company J..., Ltda.

§ 3 - Reasoning Regarding Factual Matters

The facts given as established in a) to h) appear in the inspection report and were not contested.

The facts given as established in i) and j) result from the testimony of O... and P..., who, in the opinion of the arbitral tribunal, testified truthfully and in a clarifying manner.

The fact given as established in l) results from doc. 5 attached to the initial request.

IV - Exception of Res Judicata

The Claimant begins by raising the exception of material res judicata resulting from the arbitral decision rendered in Case No. 346/2026-T, which dealt with the withholding of IRC for the year 2012, involving the same parties and the same questions of law.

It should first be said that the effect of material res judicata that the Claimant seeks to obtain is not characterized as an exception. In fact, the effects of material res judicata may project themselves in a later procedural relationship by two routes: either through invocation of the force of res judicata, which binds the tribunal to apply the definition of law already final with respect to the same question that arises again in another action; or through invocation of a dilatory exception, which prevents the tribunal from ruling in another proceeding on the substantive question already previously decided, which will lead to dismissal of the instance (Article 577(i) of the CPC). In the first case, the tribunal merely adopts the content of the prior decision regarding the legal aspect covered by res judicata; in the second case, where there is complete identity of the object of the proceeding with respect to another already previously decided (because the same claim is at issue), the tribunal need not issue any ruling and declares the instance extinct.

In the present case, the Claimant does not seek to obtain the negative procedural effect of inadmissibility of the consideration of the case in a second action (which would correspond to the exception of res judicata), but rather the positive effect of the authority of res judicata, ensuring the immutability of a prior decision already final. The issue is not the prohibition of repetition, which the law prevents through the dilatory exception, but the prohibition of contradiction, which is guaranteed not only through the authority of res judicata but also through the prevalence of the first decision that became final when the tribunal, in distinct proceedings, comes to rule on the same claim with contradictory decisions (Article 625(1) of the CPC).

Understood on this substantive plane, res judicata prevents "that in new proceedings the judge can validly rule differently regarding the law, situation or concrete legal position defined by a prior decision, and therefore, disregard wholly or in part the rights recognized and protected by it" (see Manuel de Andrade, Noções Elementares de Processo Civil, Coimbra, 1976, p. 317).

As results from the provisions of Article 619 of the CPC, the extraprocessual effect of res judicata operates within the limits fixed by Articles 580 and 581 which define the concept and requirements of res judicata. It is understood that a cause is repeated "when an action identical to another is proposed as to subjects, claim and cause of action" (Article 581(1) of the CPC). These are the elements that permit, in turn, defining the extent of res judicata. The identity of procedural subjects defines the subjective limits of res judicata, while objective limits are defined by the identity of the claim and cause of action, that is, by the object of the proceeding. Res judicata thus covers only the plaintiff's claim (claim) in light of the fact invoked as its basis (cause of action).

The Claimant alleges that the requirements of Article 581 are met in the case because the proceeding takes place between the same parties, has the same cause of action and aims at the same legal effect - non-withholding of tax on payments to non-resident entities associated with economic and image rights - only noting that the assessment refers to a different temporal period.

This is, however, a decisive element in determining the extent of res judicata. In case No. 346/2026-T, the disputed additional withholding assessment related to the year 2012, whereas the present proceeding concerns the assessment relating to the year 2013. The proceedings do not aim at the same legal effect for the simple reason that, in each of them, the annulment of a different tax act is sought and, consequently, the annulling substantive effect resulting from the decision that became final and dealt with one of those acts cannot extend to another act that has not yet been subject to judicial ruling.

It is not overlooked that the Supreme Administrative Court judgment of 7 December 2011 (Case No. 0419/11) decided that there is identity of object if there already exists a judgment that became final which examined the same factual and legal grounds on which the claim for annulment of the impugned act is based. The situation was different there, however, since in the first action the express act of assessment of the tax was at issue while the second action referred to the tacit denial of the request for official revision of the same assessment act already previously impugned. The tribunal understood in that circumstance that "since the tacit act is devoid of any substantive content, the claim for annulment aims at the elimination of the assessment act that is the subject of the revision request, precisely the same against which the respondent had already reacted in a prior proceeding".

This is not the situation in the present case, since—as seen—in both proceedings claims for annulment relating to different tax acts are at issue.

It is important to bear in mind, as Manuel Andrade emphasized, that "res judicata is only intended to prevent a practical contradiction, and not rather its theoretical or logical collision". It matters little that questions whose legal or even factual elements are identical may be resolved by tribunals. Other procedural institutions are what prevent the eventual conflict of jurisprudence on the same fundamental question—such is the case of appeal for uniformization of jurisprudence. Res judicata, by contrast, "can only prevent concretely incompatible decisions", that is, decisions "which cannot both be executed without detriment to one of them" (ibid., pp. 316-317).

Plainly, this is not the case, and therefore the authority of res judicata cannot be invoked.

V - Question to be Decided

The central question to be decided is whether the amounts referred to in items c) and e) of the established facts, relating to payments made by it to various commercial companies non-resident in Portugal (and without permanent establishment in our country), owed from the acquisition from those entities of image rights and economic rights of various football players, who at the time of conclusion of the professional sports employment contract with the Claimant declared themselves to be free, that is, not bound to another club or SAD, are subject to taxation (IRC) in Portugal – and whether it would be incumbent on the Claimant, as tax substitute, to assess and deliver to the State the tax due.

VI - The Law

Although the exception of res judicata does not succeed, since the questions to be addressed are the same as those underlying case 346/2016-T, the essential content of such arbitral judgment shall be followed, which was approved by the majority of arbitrators comprising the present arbitral collective.

§ 1 – Of the Main Request

1. At issue is the application of Article 4(3)(d) of the IRC Code. This article concerns the "scope of the tax obligation", and in it – after establishing, in paragraph 2, the rule that entities that do not have registered office or effective management in Portuguese territory are subject to IRC only with respect to income obtained therein – the following is provided:

3 - For the purposes of the preceding paragraph, the following income is considered to be obtained in Portuguese territory:

........

d) Income derived from the exercise in Portuguese territory of the activity of entertainment professionals or sportspersons.

The other standards invoked by the AT are merely instrumental with respect to this one, as they establish the manner in which such taxation occurs (total tax substitution, that is, withholding at source with application of a liberatory rate).

The standard in item d) constitutes an exception to the general rule (contained in the body of paragraph 3) that business income (of non-resident entities) can only be taxed by the source State when there is a permanent establishment of the non-resident therein – a rule which is also adopted in Article 7 of the CDTs concluded between Portugal, on the one hand, and Brazil and the United Kingdom, on the other.

Thus, given that the remuneration in question was obtained by commercial companies without registered office or permanent establishment in Portugal, their non-taxation in our country would result, in principle, from Article 7 of the applicable CDTs, since such income would be qualifiable as business profits.

– The Portugal/United Kingdom CDT (Player K...)

The CDT in force between Portugal and the United Kingdom[1], which still follows the OECD Model of 1963, provides, in its Article 16, regarding sportspersons, that income obtained by them from professional activities performed in that capacity may be taxed in the contracting state in which those activities were performed.

This rule is an exception to the principle that the source state can only tax business income or income derived from the exercise of a self-employed professional activity by a non-resident insofar as it is attributable to a permanent establishment therein.

Such convention does not, however, provide for the possibility of the source country taxing income paid to a third party, even if attributable to a sportsperson's activity performed in that state. With ALBERTO XAVIER, Direito Tributário Internacional, p. 643, we would say: Thus, in the absence of express provision, the income was not taxable in the source country as personal compensation, nor could it be taxed with the company, as profit, as it lacked the essential connection of permanent establishment.

Thus, and without more, it results that the AT's claim to tax player K...'s economic rights, in the amount of €600,000.00, paid by the claimant to company L... Lda, with registered office in the United Kingdom and without permanent establishment in Portugal, would always be illegal, even if it were proven that the player benefited from such payment, by violation of Articles 7 and 16 of the CDT in force between Portugal and the United Kingdom.

The Portugal/Brazil CDT (Remaining Players)

From the adoption of the OECD Model of 1977, some conventions, among which the CDT in force between Portugal and Brazil[2], began to include a specific and relevant exception for the matter at hand – which is contained in its Article 17:

2 — Notwithstanding the provisions of Articles 7, 14 and 15, income from activity exercised personally by entertainment professionals or sportspersons, in that capacity, attributed to another person, may be taxed in the Contracting State in which these activities of entertainment professionals or sportspersons are exercised

It is thus in light of this specific provision of the Portugal/Brazil CDT, and subordinate to it, that, in the present case, the exception in Article 4(3)(d) of the IRC Code should be read and considered, regarding the remaining players in question.

The question thus reduces to knowing whether the remuneration in question, obtained by the aforementioned companies, should or should not be qualified as income resulting from the activity personally exercised by the football players in question, in that capacity, in Portugal.

1. Given that one is dealing with an exceptional regime (since, as has just been emphasized, it departs from the one where the source State only has legitimacy to tax business income of non-residents when attributable to a permanent establishment in its territory), what then is its precise meaning and scope? The same is to say: what is the precise meaning and scope of applicability of Article 17(2) of the Convention concluded by Portugal with Brazil?

And very concretely: what is its reflection on the tax situations sub judice?

Such article corresponds textually to that of the Model Double Taxation Convention (as it is usually designated) OECD Model Convention (hereinafter OECD Model), adopted in 1977. Thus, in fixing its meaning and reach, the Commentaries to this Model Convention must be given decisive consideration, in the relevant part.

It is that, although such Commentaries cannot or should not be taken as a form of authentic interpretation of the Model Convention, and of conventions based on it, they cannot, in any case, fail to constitute (as is consensually accepted) an unavoidable element of interpretation of the standards of those conventions, as they express the understanding, as to the reach of the Model (and thus necessarily of the conventional instruments that reproduce it), of the representatives of the countries that participated in its drafting, among them Portugal. Our country did not raise any reservations or observations to the content of the Commentaries in question – that is, it accepted to interpret in the sense advocated there the standards that are the subject thereof.

Thus[3]:

Image Rights

Commentary 9.5 to Article 17 of the OECD Model is clear in requiring the distinction between remuneration for the use of image rights that constitute a form of compensation for the activity of the sportsperson as such, and those that do not. In principle, such remuneration does not fall within the scope of the provision of Article 17, except when there is a close connection between it and the sportsperson's performance in the source State[4].

As examples of this strict connection, the Commentaries refer to cases where a golfer participating in a certain tournament undertakes, upon additional remuneration, to give interviews promoting such competition or the case of an artist who, also upon remuneration, authorizes that his/her image be used in posters promoting the entertainment in question.

KLAUS VOGEL – in work that is a world reference on the subject – maintains (thus) that implicit is the need to analyze the reason for being and the activity that originated the payment[5].

Applying to the case:

The facts established in i) and j) clearly show that, in the concrete case, the strict connection just mentioned does not exist. The acquisition of player D...'s image rights did not aim at promoting A... or competitions in which it participates, but rather at promoting products and services commercialized by sponsors and preventing the possible promotion, by the player, of goods and services of competitors of those sponsors (as it were the creation of an obligation of non-competition, in the broad sense).

Furthermore, the amount of the consideration paid by the Claimant was not determined by the concrete use that would be made of the player's image, but rather by the prestige and notoriety that the athlete had acquired before performing in Portugal.

These facts clearly reveal the absence of a direct link – of the strict connection that the Commentaries require – between the amount paid and the player's performances in Portugal.

In conclusion, by clearly exceeding the scope of Article 17(2) of the applicable Convention, the interpretation sustained by the AT is illegal, by violation of these provisions of international law, hierarchically superior to the provisions of the IRC Code invoked, especially item d) of paragraph 3 of its Article 4 – which must therefore be subordinate to them (as stated above) in its application.

In the part now in question, the assessment must therefore be annulled.

Economic Rights

According to Commentary 11 to Article 17(2) of the OECD Model, if the income of an artist or sportsperson is received by another person and the source State does not have the legal right to disregard the legal personality of that person, this paragraph permits that income which cannot be taxed in the name of the one carrying out the activity may be taxed to the person receiving it.

The said Commentary exemplifies the three principal situations in which this occurs, with the third – potentially applicable in the concrete case – encompassing tax avoidance schemes in which the remuneration of the artist or sportsperson's activity is not paid to the person themselves but to another entity, the ones normally designated star companies, in order to achieve that the income results not taxable [by the source State] either as professional income of the artist or sportsperson or as business profit (due to the absence of permanent establishment)[6].

The vision of Article 17(2) of conventions based on the OECD Model as an anti-abuse rule was, until 1992, dominant, and continues to be sustained by many States and by much of the doctrine. This appears to be also the understanding with which, in the present case, the Claimant is satisfied, when it states that it has not been alleged and proven that the non-resident companies to which it made the payments acted in the name and on behalf of the athletes, or that the remuneration obtained by them was subsequently delivered, in whole or in part, to the players, or that A... had knowledge of such.

However, KLAUS VOGEL, in the work already cited, tells us that, after the 1992 revision of the Commentaries, it began to be argued that Article 17(2) could also encompass situations where the entity receiving the income is not controlled by the sportsperson (situations in which disregard of its legal personality would be possible[7]), such as, for example, cases where the sportsperson is an employee of the entity receiving the remuneration.

But – KLAUS VOGEL also cautions[8] – this "comprehensive interpretation has limits, with the expanded right to taxation by the State where the activity is exercised applying only to income directly related to the exercise of the activity (performance-related income)".

Going again to the case to be decided, one must begin with the payments made by the Claimant to companies based in Brazil, that is, F... and H....

What immediately stands out is that nothing was proven regarding the reason – or, perhaps better, the "origin" – of the economic rights paid by A..., at issue, which would allow their subsumption under the hypotheses that, according to the Commentaries (in any of their readings), are the subject of the provision of Article 17(2).

The AT sustains that they are equivalent to a "bonus" for the conclusion of the professional contract (which seems to have implicit the idea that the player will somehow benefit from it). This is a conclusion – which, as the rules of distribution of the burden of proof demand, implies the allegation and proof of facts from which it can be extracted in the concrete case.

The Claimant, for its part, states that these are remuneration charged by sports agents that acquired the player's "pass" – through contracts aimed at promoting the player's career and their economic security during it – which are completely independent of those owed to them (the players).

Now, it is a generally known fact by those who have even minimal knowledge of professional football reality (to the point of being able to say it is even a "notorious fact") that, with enormous frequency (perhaps in the majority of cases, at the higher competitive levels), professional contracting in that sport implies the involvement of three entities: the club or sports company and the player, which will bind themselves through a contract, and the entity that, holding either sports rights or economic rights over the player, gives them up in exchange for compensation, thus "releasing" the latter for the conclusion of the contract. And it is known, equally, that this compensation is normally paid by the club (sports company) to which the player is being transferred.

The Claimant's assertion that this is what happened in the case, in addition to corresponding (in light of the data available in the proceeding) to the "appearance of the transaction", has, moreover, undeniable correspondence with what is a common situation in the sports field in question.

But it must be recognized that the Claimant, in the present proceeding, did not properly prove positively that it was so – that is, to make positive proof of the correspondence of its assertions (and of the "appearance of the transaction") with the actual reality verified in the concrete cases under analysis: more specifically, to prove that the ceding companies are truly a third entity, with respect to the players, and acquired the respective rights in the terms that are being alleged (ut supra, III, § 2).

However, the fact is that this is irrelevant, as such proof was not incumbent on the Claimant to produce. It was rather to the AT that, according to the rules of distribution of the burden of proof, it would be incumbent, as a condition for the existence of the right to taxation, to allege and prove that the reason for being, or "origin", of the payments at issue (those relating to economic rights) did not correspond to their facial appearance with which they are presented, and rather corresponded, in the order of facts, to an actual situation that fell within the scope of Article 17(2) of the Conventions (as defined above): now the AT did not make such proof.

Since, as we have already mentioned, citing KLAUS VOGEL, it is always the reason for being and the activity that originated the payment that will determine the eventual scope of the situation within Article 17(2) of the Conventions, we are thus, in the concrete case, faced with a situation of non liquet, which, under Article 100(1) of the Code of Tax Procedure, obliges a decision favorable to the Claimant.

Indeed, it would not have been impossible for the AT, without this involving a disproportionate activity, to ascertain the reason why the players in question were "free" at the time of the conclusion of the professional sports employment contracts with the Claimant (e.g., whether the previous professional sports employment contracts concluded by them with other clubs or SADs had expired or whether it was the companies in question that obtained – for payment – their release) and further to ascertain the ownership of the percentages of the economic rights of the players not covered by the contracts at issue.

The situation is different regarding the payment made by the Claimant to company J..., Ltda, relating to the acquisition of economic rights of player I....

Being the latter a partner and manager of such company (and the other partner a family member of his/hers), as was proven, one must conclude, according to the rules of common experience, that we are faced with the aforementioned tax avoidance scheme (a star company), that is, that the player would have been the effective beneficiary of the amount paid by the Claimant to the company, a payment that can only be attributable to the conclusion of the professional sports employment contract with the Claimant.

Such finding would thus legitimize the taxation of that income by Portugal, in light of Article 17(2) of the applicable convention.

However, as it was not proven that the Claimant was aware of the special relationships between such company and the player in question, an omission of its obligations as tax substitute cannot be attributed to it.

Although the Claimant, as tax substitute, is formally the original passive subject of such tax obligation, the fact is that there was nor could there be withholding at source since the Claimant, understandably, was unaware that the prerequisites of such an obligation were met. Now, the responsibility of the tax substitute (which is not the taxpayer, which is not the one whose assets the law wishes to strike with the tax) always implies a culpable violation of the duties arising from such status, which has not been proven to have occurred in the concrete case. To require someone, in the absence of fault, to pay another's tax would violate, in our view, frontally, the principle of justice that should preside over the configuration of tax obligations in a state of law.

That said, it is necessary, on the other hand, to add a note on the question raised by the AT regarding inadmissibility – in light of the national and international standards regulating the practice of professional football – of the ownership of sports rights by entities that are not football clubs or SADs, with the consequent "invalidity" or "irrelevance" of ownership, by entities without that quality, of alleged "economic rights" over players.

It is true that, also according to Portuguese law (Law No. 28/98), invoked by the AT, the professional sports employment contract can only be concluded between practitioners and clubs or SADs, that only this contract generates "sports rights" and that only it is a prerequisite or condition, according to the sports federation regulations, for registration of a practitioner by a club; and it may well be true that the sports organization seeks to discourage other types of contracts involving sports practitioners (notably, football players). Simply, it is also true that these other contracts – source of the so-called economic rights, at issue here and where the counterparty of the practitioner is an entity other than a club or SAD (e.g., a fund) – are common practice, and it cannot even be said that state law (in any case, Portuguese state law) prohibits them: they would be contracts that would simply be beyond (or alongside) the professional contract and the regime of Law No. 28/98, concluded, at bottom and in the end, in the exercise of the general contractual autonomy of persons – which (beyond express legal prohibitions) has as its only limit the unlawfulness or impossibility of the subject matter of the transaction.

This is sufficient to conclude, without more, that the question raised by the AT, and now considered, in no way, obviously, could be relevant in the present context. Moreover, the same would be true if, to the contrary of what has been stated, one were faced with contracts that should be reputed "unlawful" – and this, in view, ultimately, of Article 10 of the General Tax Law.

In conclusion: just as occurred with the AT's interpretation regarding the payment of image rights, so too the interpretation made by it with reference to the payment of the economic rights in question must be considered illegal, that is, also in that part, the IRC assessment sub judice must be annulled.

It remains to add, finally (in view of Article 8(3) of the Civil Code), that the understanding now endorsed, regarding the general questions on which a ruling must be made, follows the line of existing jurisprudence on the subject (arbitral, as no other exists), namely, in addition to judgment 346/2016-T, the judgments rendered in CAAD cases Nos. 108/2015-T and 501/214, whose justification, although proceeding from a somewhat different analysis, is essentially subscribed to.

§ 2 – Of the Subsidiary Request

The assessment of tax impugned being deemed illegal and about to be annulled, the consideration of the Claimant's subsidiary request, relating to the illegality of the assessment of compensatory interest, is rendered moot – since the annulment of this other assessment is already a direct consequence of the annulment of the tax assessment to which it refers.

§ 3 – Of Compensation for Indebted Guarantee Provision

The Claimant formulates a request for compensation for provision of an indebted guarantee.

Article 171 of the Code of Tax Procedure establishes that "compensation in case of a bank guarantee or equivalent improperly provided shall be requested in the proceeding in which the legality of the enforceable debt is contested" and that "compensation must be requested in the complaint, impugning or appeal or in case its ground is subsequent within 30 days after its occurrence".

The request for constitution of the arbitral tribunal and for arbitral ruling has as a corollary the passing to be in the arbitral proceeding that will be discussed the "legality of the enforceable debt", and therefore, as results from the express tenor of that paragraph 1 of the said Article 171 of the Code of Tax Procedure, the arbitral proceeding is also the appropriate one to consider the request for compensation for indebted guarantee.

In the case at hand, the errors underlying the disputed assessments are attributable to the Tax and Customs Authority, as they were of its initiative and the Claimant in no way contributed to these errors being committed.

For this reason, the Claimant has, in the abstract, the right to compensation for the guarantee provided, under Article 52 of the General Tax Law.

However, the guarantee provided refers to various fiscal enforcement proceedings, not merely the one resulting from the assessment that is the subject of the present proceeding. Nor were any concrete damages resulting from the guarantee (pledge of credits) provided alleged.

There being no elements that permit determining the amount of compensation, this request shall have to be considered separately.

VII - DECISION

• The assessment No. 2016..., relating to withholdings on corporate income tax for the year 2013, in the total amount of €302,767.76 (including compensatory interest), is annulled in its entirety, as illegal.

• No ruling is made on the request for compensation for provision of an indebted guarantee, which must be formulated separately.

VII - Value of the Proceeding

Having regard to Article 306(2) of the CPC, Article 97-A(1) of the Code of Tax Procedure, and Article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at €302,767.76.

VIII - COSTS

The costs of the proceeding are the responsibility of the Respondent, under Article 5(2) of the Regulation on Costs in Tax Arbitration Proceedings.

Notice to be served.

Lisbon, 15 June 2018

The Presiding Arbitrator

(Carlos Alberto Fernandes Cadilha)

The Member Arbitrator

Rui Duarte Morais

The Member Arbitrator

Américo Brás Carlos, voting in dissent, in accordance with the statement attached.

DISSENTING OPINION

I voted against, in a part of the decision contained in the Judgment, for the reasons and in the terms that follow:

1. The provisions of the double taxation conventions (CDTI) concluded by States that adopted, without reservations, the wording contained in the OECD Model Tax Convention on Income and Capital (CMOCDE) should be interpreted in light of the "Commentaries" to this Model[9].

2. It is relevant to the concrete case that the wording of paragraphs 1 and 2 of Article 17 of the CDTIs concluded between Portugal and Brazil is identical to that of the CMOCDE, which expressly exclude the application of Articles 7, 14, and 15 of this CDTI.

3. Where income is formally attributed to a person other than the sportsperson, the "Commentaries" to paragraph 2 of Article 17 of the CMOCDE are of decisive relevance in fixing the scope and meaning with which the expression "income from activity exercised personally by (...) sportspersons, in that capacity, attributed to another person" must be understood.

4. For the understanding of what constitutes "income from activity exercised personally by (...) sportspersons, in that capacity" the Commentaries to paragraph 1 of the same Article 17 are also decisive, since paragraph 2 of the same provision is a particular development – income attributed to a person different from the sportsperson – of that provision.

5. Regarding the cession of image rights of player D..., it results from the contract concluded between the Claimant and C..., Ldª, that the latter ceded to the former "the rights of commercial exploitation jointly or individually of the public image of the Third Granting Party as a professional football player"[10] (see fl. 34 of the annex to the Tax Inspection Report - RIT).

6. For its part, paragraphs 1 and 2 of Article 10 of Law No. 28/98 of 26 June (Legal Regime of Work of the Sports Practitioner and of the Sports Formation Contract) establish the dichotomy between the individual exploitation of the player's image and the exploitation of the use of the image of the collective of practitioners.

7. A similar dichotomy can also be found between paragraphs 2 and 3 of Article 38 of the Collective Labor Agreement concluded between the Professional Football League and the Union of Professional Football Players. Paragraph 2 of that article states: "The right to use and exploit the image of the player is incumbent upon the player himself on a merely individual level, being able to cede that right to the club in whose service he finds himself during the validity of the respective contract". On the other hand, in paragraph 3 of the same article it can be read: "The right of image of the collective of players of the same team is reserved to the respective club or sports company".

8. There is thus a part of the player's image right that is not automatically ceded to the club or sports company by virtue of the professional sports employment contract. This portion of the image right can be exploited individually by the player himself or by another to whom he has ceded it. And it was these "rights of individual exploitation of image" that the Claimant acquired.

9. It is important now to know whether the income resulting from the cession of this portion of the player's image right has a close relationship with the "...personal activity exercised in that capacity" of sportsperson, such that it is subsumed in Article 17 of the CDTIs.

10. The distinction between a use of the image right of the sportsperson closely linked to sporting activity – covered by Article 17 of the CMOCDE – and the use of the same right without that close link – not covered by Article 17 of the CMOCDE – is also impressively present in the Commentaries to the CMOCDE.

11. As to the most consistent criterion for determining what that "close relationship" is, see point No. 9 of the said "Commentaries": "Such a close connection will generally be found to exist where it cannot reasonably be considered that the income would have been derived in the absence of the performance of these activities"[11].

12. And in the case under analysis, it is not clear how, reasonably, the Claimant would acquire the image rights of player D... if not for him exercising his activity as a footballer. It would not do so, certainly, if he did not exercise or no longer exercised his sporting activity. Moreover, as the Judgment confirms, the Claimant concluded the contract for the cession of image exploitation rights for this player because he is a sportsperson with a good professional curriculum (e.g., international for the main squad of Brazil).

13. That the income paid by the Claimant results from "activity exercised personally by the player, in that capacity" is also attained from the fact that the contract for cession of image rights depends imperatively on the elements and vicissitudes of the professional sports employment contract between the latter and the player – e.g., beginning, termination, expiration, or rescission, enforceability of performances[12].

14. Therefore, without prejudice to due respect for the contrary opinion, I depart from the Judgment, considering Article 17(2) of the CDT with Brazil to be applicable to the image rights sub judice, from which, together with the provision in Article 4(3)(d) of the IRC Code, results the consequent taxation of the respective income in Portugal.

15. Regarding the so-called Economic Rights of players E..., G..., and I..., the Claimant declares that it acquired the economic rights – calls them the pass – of players without employment relationship to a club, from specialized commercial companies, non-sports, and non-resident in Portugal, which assumed the risk of profiting from those assets (the players).

16. I consider that the payments made by A... to said companies have a close relationship with the activity of each of the sportspersons, in that capacity.

17. Payments for the acquisition of "economic rights" only occur because it has already been agreed that the player will conclude a professional sports employment contract with A.... It can be said that the acquisition of such rights is, with the signing of the professional sports employment contract, the internal requirement that A... must fulfill for those athletes to formally be its players.

18. It is clear to me that, in similarity with the test done above to ascertain the existence of a "close relationship" of income resulting from image rights with the activity exercised personally by the sportspersons, in that capacity, also in the case of acquisition of the so-called "economic rights", A... would not have made those payments to the non-resident entities if the respective players were not to exercise their sporting activity with the club.

19. Moreover, the framing of payments made to an "artist or sports professional promotion company" – a model to which, without effort, one could reframe the said non-resident companies that, while the players are unemployed, pay them remuneration and assume the risk of profiting from those assets (sic) until a new club is found – is one of the cases that the Commentaries to the CMOCDE use as an example of income subsumed in paragraph 2 of Article 17[13], and therefore taxable in the State of exercise of sporting activity (Portugal).

20. Therefore, also as regards payments for acquisition of the so-called economic rights, I consider the provision of Article 17(2) of the CDT concluded between Portugal and Brazil to be fulfilled, as well as the provision of Article 4(3)(d) of the IRC Code, with the consequent taxation of those amounts in Portugal, under Article 94(1)(f), 94(3)(b), and 94(4) of the IRC Code.

For the reasons explained above, I consider that the tax act sub judice should have been partially upheld, in the terms mentioned above.

Américo Brás Carlos

[1] Approved for ratification by Decree-Law 48497 of 24/07/1968.

[2] Approved for ratification by Assembly of the Republic resolution of 27/04/2001.

[3] We use the most recent version (2014) of such Commentaries. Although it is to be understood that conventions should be interpreted in light of the Commentaries in effect at the time of their conclusion, the fact is that the solutions advocated regarding Article 17(2) are, in essence, the same since 1992.

[4] We transcribe this Commentary in full:

"9.5 It is frequent for entertainers and sportspersons to derive, directly or indirectly (e.g. through a payment made to the star-company of the entertainer or sportsperson), a substantial part of their income in the form of payments for the use of, or the right to use, their "image rights", e.g. the use of their name, signature or personal image. Where such uses of the entertainer's or sportsperson's image rights are not closely connected with the entertainer's or sportsperson's performance in a given State, the relevant payments would generally not be covered by Article 17 (see paragraph 9 above). There are cases, however, where payments made to an entertainer or sportsperson who is a resident of a Contracting State, or to another person, for the use of, or right to use, that entertainer's or sportsperson's image rights constitute in substance remuneration for activities of the entertainer or sportsperson that are covered by Article 17 and that take place in the other Contracting State. In such cases, the provisions of paragraph 1 or, depending on the circumstances, will be applicable."

[5] Klaus Vogel, On Double Taxation Conventions, Kluwer Law International, 2015, I- Overview and Main Features, No. 16.

[6] We transcribe such commentary:

"11. Paragraph 1 of the Article deals with income derived by individual entertainers and sportspersons from their personal activities. Paragraph 2 deals with situations where income from their activities accrues to other persons. If the income of an entertainer or sportsperson accrues to another person, and the State of source does not have the statutory right to look through the person receiving the income to tax it as income of the performer, paragraph 2 provides that the portion of the income which cannot be taxed in the hands of the performer may be taxed in the hands of the person receiving the remuneration. If the person receiving the income carries on business activities, tax may be applied by the source country even if the income is not attributable to a permanent establishment there. But it will not always be so. There are three main situations of this kind:

a) The first is the management company which receives income for the appearance of e.g. a group of sportspersons (which is not itself constituted as a legal entity).

b) The second is the team, troupe, orchestra, etc. which is constituted as a legal entity. Income for performances may be paid to the entity. Individual members of the team, orchestra, etc. will be liable to tax under paragraph 1, in the State in which they perform their activities as entertainers or sportspersons, on any remuneration (or income accruing for their benefit) derived from the performance of these activities (see, however, paragraph 14.1 below). The profit element accruing from a performance to the legal entity would be liable to tax under paragraph 2.

c) The third situation involves certain tax avoidance devices in cases where remuneration for the performance of an entertainer or sportsperson is not paid to the entertainer or sportsperson himself but to another person, e.g. a so-called star-company, in such a way that the income is taxed in the State where the activity is performed neither as personal service income to the entertainer or sportsperson nor as profits of the enterprise, in the absence of a permanent establishment. Some countries "look through" such arrangements under their domestic law and deem the income to be derived by the entertainer or sportsperson; where this is so, paragraph 1 enables them to tax income resulting from activities in their territory. Other countries cannot do this. Where a performance takes place in such a country, paragraph 2 permits it to impose a tax on the profits diverted from the income of the entertainer or sportsperson to the enterprise. It may be, however, that the domestic laws of some States do not enable them to apply such a provision. Such States are free to agree to other solutions or to leave paragraph 2 out of their bilateral conventions."

[7] A figure which should generally be considered inapplicable in tax law, by force of the typicality of incidence standards.

[8] Op. cit., Commentary 125 to Article 17(2).

[9] For reasons identical to those indicated in the Judgment, and having neither Portugal nor Brazil declared any reservation to the commentaries to Article 17 of the CMOCDE, I also use the version of 15 July 2014.

[10] Emphasis added.

[11] In contrary sense – absence of said close relationship – see Commentary No. 9.5 to this Article 17: "(…)Where such uses of the entertainer's or sportsperson's image rights are not closely connected with the entertainer's or sportsperson's performance in a given State, the relevant payments would generally not be covered by Article 17."

[12] Clause Four of said image rights cession contract provides: "1. This contract takes effect from 01/07/2011 and shall be valid during the period in which the Third Granting Party (the player) maintains in force the professional sports employment contract with the First Granting Party (the claimant), expiring automatically when, regardless of the reason, said contract terminates, without need for any other declaration or interpretation, written or verbal. 2. In the case of expiration or rescission of the professional sports employment contract maintained between the First Granting Party and the Third party, shall cease to be enforceable performances not yet due under this contract."

[13] "11.1 – (…)Thus, notwithstanding the provisions of Article 7, the paragraph allows that State to tax the income derived by a star-company resident of the other Contracting State even where the entertainer or sportsperson is not a resident of that other State."