CAAD Case 60/2018-T: IRC Non-Deductible Expenses and Autonomous Taxation of Undocumented Expenses in Sale and Leaseback

ARBITRAL DECISION (consult full version in PDF)

REPORT

On 19 February 2018, A..., Ltd., with the Tax Identification Number ... and registered office at ..., ...-... ..., came, pursuant to the provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters (RJAT) and articles 99 et seq. of the Tax Procedure and Process Code (CPPT), to request the constitution of an Arbitral Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the Respondent, informing that it does not intend to use the faculty to appoint an arbitrator.

The request for constitution of the arbitral tribunal was accepted by the Honourable President of CAAD and automatically notified to the AT, and, pursuant to the provisions of article 6, paragraph 1 and article 11, paragraph 1, letter b) of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed the undersigned as arbitrator of the sole arbitral tribunal, an appointment accepted within the applicable timeframe, without opposition from the Parties.

A. Subject Matter of the Request:

The Claimant seeks the declaration of illegality and the consequent annulment of the additional IRC assessment no. 2017 ... and demonstration of account adjustment no. 2017 ..., for the tax year 2014, in the total amount of € 36,083.92, which includes € 32,966.14 of tax and € 3,117.78 of compensatory interest.

Furthermore, the Claimant seeks to condemn the Respondent to pay indemnification for the provision of undue security, within the framework of the tax enforcement proceedings no. ...2017..., initiated for coercive collection of the disputed assessment.

B. Summary of the Parties' Positions:

1. Of the Claimant:

In support of the request for annulment of the identified tax assessment act, the Claimant invokes the following factual and legal grounds:

• The disputed assessment was issued by the Tax and Customs Authority following an external inspection procedure and was based on corrections to the taxable matter, in the amount of € 24,090.00, relating to expenses recorded in account "68118 – Other direct taxes" and autonomous taxation of undocumented expenses, which resulted in IRC in the amount of € 31,000.00;

• The expenses recorded in account "68118 – Other direct taxes", in the amount of € 24,090.00, refer to the payment of Municipal Tax on Onerous Real Estate Transfers (IMT) and Stamp Tax (IS), as a result of a "sale and leaseback" real estate transaction effected with Bank B..., SA, which the AT considers do not constitute tax-deductible costs, pursuant to article 23-A, paragraph 1, letter f) of the IRC Code;

• The Claimant contends that the aforementioned expenses should contribute to the formation of taxable profit, since the real estate financial lease contract established that the Lessee would assume responsibility for payment of "all expenses, charges, notarial and registration fees, taxes (IS) and fees (...) and insurance to which the property subject to this contract may be subject, its use and its financial leasing, namely Municipal Property Tax (IMI) and Municipal Tax on Onerous Real Estate Transfers (IMT)";

• The payment of IMT and IS relating to that financial transaction took place immediately by the Claimant, since such charges result from contractual and legal rules, as at the end of the real estate financial lease contract, following the exercise of the purchase option provided for in the legal regime of this type of contract, the lessee again becomes the property owner, with exemption from IMT, pursuant to article 3 of Decree-Law no. 311/82, of 4 August;

• In this case, the asset continues to be depreciated for tax purposes by the lessee, in accordance with the regime that had been practiced in the sphere of the Claimant, with the tax neutrality of the transaction in question prevailing, pursuant to article 25 of the IRC Code;

• According to the tax inspection report, "Expenses associated with fixed assets and resulting from the wear to which they are subjected are recognized periodically through depreciations practiced in accordance with articles 29 to 31 of the IRC Code and Regulatory Decree 25/2009";

• However, the IMT and IS in question do not constitute an acquisition expense, as those taxes had already burdened the property subject to financial leasing upon its initial acquisition, with everything now being treated as a mere financing transaction and not as a new acquisition;

• There is, therefore, no legal basis for the correction of such expenses, documentarily proven and paid by the Claimant via check issued to the order of E...;

• As for undocumented expenses, in the amount of € 62,000.00, taxed at the rate of 50%, pursuant to article 88, paragraph 1 of the IRC Code, they were based on the regularization, in tax year 2014, of the balance of account "Cash" as a counterpart to a debit in account "56101 – Carried-Forward Results";

• The Tax Inspection states that the managing partner of the Claimant clarified that this regularization "had the objective of regularizing pending amounts that appeared in the cash balance"; however, this is not a regularization of pending amounts (unknown amounts) that appeared in the "Cash" balance, but rather withdrawals made by the partners from the Claimant's bank account over the years, namely 2006 and 2007, that is, approximately 7 or 8 years before the aforementioned regularization;

• This regularization occurred only in the year 2014, since, with the acquisition of the shares of one of the partners, it was decided by the remaining partners, who kept a record of the amounts withdrawn from the bank accounts over the years, to regularize the "Cash" balance;

• Such withdrawals should never have been regularized as a counterpart to the carried-forward results account, but rather as a counterpart to the partners' account, since it was always the intention of the respective remaining partners to return the amounts withdrawn from the Claimant's bank accounts;

• However, such withdrawals made by the partners in the years 2006 and 2007 cannot be typified as undocumented expenses, given that these amounts were withdrawn via bank checks from the Claimant's accounts and delivered to the partners in those years;

• If, per absurdum, such regularization of the "Cash" account were to be treated as confidential expenses, or even advances on account of profits, such situations would have to be allocated to the years in question 2006 and 2007, which are time-barred pursuant to article 45, paragraph 1 of the General Tax Law (LGT).

1. Of the Respondent:

Following the notification order pursuant to and for the purposes provided in article 17 of the RJAT, the AT submitted a Reply and attached the administrative file, defending the legality and maintenance of the disputed assessment, on the following grounds:

• Enterprises are taxed fundamentally on their actual income, calculated pursuant to the provisions of the IRC Code;

• Article 23, paragraph 1 of the IRC Code provides that, for the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or secure income subject to IRC are deductible;

• Article 115 of the IRC Code establishes the obligation for such entities to maintain organized accounting in accordance with commercial and tax law, requiring, in its paragraph 3, that all entries be supported by dated supporting documents susceptible to being presented whenever necessary, as, regarding the burden of proof, organized accounting enjoys the presumption of truthfulness, with the burden of proof therefore falling on the AT to rebut that presumption by demonstrating that the facts recorded are not true;

• However, this does not apply to the qualification of recorded amounts as deductible costs, with the burden of proof falling on taxpayers, if the AT questions it, of their indispensability for obtaining the income or for maintaining productive capacity;

• Thus, the rule of deductibility of costs admits exceptions, as occurs in situations where such deductibility is prohibited by express legal provision;

• As occurs in article 23-A of the IRC Code, which categorically establishes that the following are not deductible for the purposes of determining taxable profit, even when recorded as expenses of the tax period: "f) taxes, fees and other charges that fall on third parties that the taxpayer is not legally obligated to bear.";

• In a "leaseback" contract, the asset is acquired by the Lessor to be the subject of a lease contract between this entity and the original transferor of the asset, who sells it to the bank to obtain financial liquidity;

• This is a contract in which two distinct transfers occur: (i) the sale of an asset and (ii) the lease of the same asset, through which the seller of the asset acquires the right to use it;

• In the first operation, when the Lessor acquires the property from the Lessee, we are faced with an onerous transfer of the right of ownership over real estate located in national territory, which constitutes the tax-generating fact creating the obligation for IMT and IS;

• The taxpayers, both of IMT and IS, are the natural or legal persons to whom the real estate is transferred, in this case, the Bank which would later assume the position of Lessor in the subsequent financial lease contract;

• In turn, the Claimant, in its capacity as Lessee, so long as it does not become owner of the leased property (which may never happen), has only the right to enjoy the property and all the duties imposed on it by the Lessor;

• At the time of the transfer of the property to the Bank, the Claimant was not yet a Lessee, as the lease contract arises at a later moment, and had no legal obligation to pay the corresponding taxes;

• The obligations arising from the financial lease contract are only consolidated with the execution of that contract, and until then, the lessee holds only the quality of transferor of that asset, although the time interval between these contracts may be immediate, this contractual succession cannot be denied;

• And, as transferor, the Claimant had no legal obligation to pay those taxes, for the simple reason of not being their taxpayer;

• Making, therefore, no sense to invoke, in this case, the principle of prevalence of substance over form, because the concept of taxpayer is not adjustable based on contractual qualification, it is a concept defined by the rules of tax incidence;

• It is therefore concluded that the amount of € 24,090.00, recorded as an expense by the Claimant could not be accepted pursuant to article 23-A, paragraph 1, letter f) of the IRC Code;

• The incidence of IMT on the Lessee's sphere occurs with the payment of rents, as well as with tax depreciations, considered as expenses for IRC purposes, although not confined to a single tax year, as it concerns the lease of a tangible fixed asset (real estate), to be depreciated over its useful life, taking into account the principle of periodization or specialization of tax years, pursuant to NCRF 9 – Leases, articles 29 and 30 of the IRC Code and Regulatory Decree no. 25/2009, of 22/04;

• As for undocumented expenses, in the amount of 62,000.00, recorded as a debit to account "56101 – carried-forward results", only on the basis of an internal document, the Claimant did not present any supporting documents of the expenses incurred, nor of the identification of the beneficiaries of that amount;

• In the exercise of the right of hearing, the Claimant came to allege that the amounts appearing in the cash balance were related to withdrawals from the Claimant's bank accounts by the partners over the years, namely in 2006 and 2007;

• However, these check withdrawals were not reflected in the Claimant's accounting, and therefore there are no supporting documents for these expenses and, if there were, the corresponding accounts associated with these expenses would have been debited and not the "Cash" account;

• Undocumented expenses are those that do not present or are not based on any supporting document that justifies them; they are often referred to as "confidential expenses";

• It is currently established case law of the STA that undocumented expenses are expenses for which there is no documentary proof, and these would be expenses borne by the taxpayer that in accounting terms affect the net result of the tax year, reducing it (article 86 of the Reply);

• The non-acceptance as a cost does not imply, in the present case, any correction to taxable profit, given that the taxpayer did not consider the said expenses as a cost of the tax year (article 83 of the Reply);

• With regard to the alleged time-bar of the AT's right to assess the autonomous taxation that fell on undocumented expenses, the Claimant has no basis, given the provisions of article 45, paragraph 1 of the LGT;

• By virtue of this legal provision, the AT is obligated to determine the amount of tax and other tax charges within the deadline fixed by law, as well as to notify it to taxpayers within the same time period;

• It is not apparent, however, how the Claimant can allege that, in the case in question, the AT's right to assess the autonomous taxation that fell on the undocumented/confidential expense has time-barred, since it is not proven in the proceedings the association of that expense and the alleged withdrawals by the partners in the years 2006 and 2007;

• But even if such proof were provided, which it was not, we reiterate, the date relevant for autonomous taxation purposes is 30.11.2014, which was when the internal document no. ... was regularized via Carried-Forward Results.

The AT concludes by requesting a waiver of the meeting referred to in article 18 of the RJAT, given that the dispute centers exclusively on matters of law.

On 11 June 2018, an arbitral order was issued and duly notified to the Parties on the same date, waiving the holding of the meeting referred to in article 18 of the RJAT, inviting the Parties to submit successive written pleadings within 10 days and fixing the date of 3 September 2018 for the rendering of the final decision, with a warning to the Claimant that, until that date, it should proceed to pay the subsequent arbitral fee.

The Claimant did not submit pleadings. Nevertheless, the Respondent submitted written pleadings, in which, in the absence of pleadings from the Claimant, the Tax and Customs Authority limited itself to reiterating the factual and legal arguments invoked in the Reply.

II. CASE MANAGEMENT

The Arbitral Tribunal is competent and was regularly constituted on 3 May 2018, in accordance with the provisions of article 11, paragraph 1, letter c) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Order no. 112-A/2011, of 22 March.

The proceedings do not suffer from vices that invalidate them.

No exceptions were invoked for the Arbitral Tribunal to consider and decide.

III. GROUNDS

III.1 FACTUAL MATTERS

In the judgment, the judge shall discriminate the proven facts from the unproven facts, substantiating his decisions (article 123, paragraph 2 of the Tax Procedure and Process Code [CPPT], subsidiarily applicable to tax arbitral proceedings, pursuant to article 29, paragraph 1, letter a) of the RJAT), under penalty of nullity, imposed by paragraph 1 of article 125 of the same CPPT.

Proven Facts:

The Claimant is a limited liability company established in 1991, whose object is the manufacture, installation, marketing and maintenance of equipment for the food industry and the marketing, assembly and technical assistance of refrigeration equipment and construction activity, registered with CAE 28930, covered by the general regime of IRC taxation (see pages 1 and 2 of the Tax Inspection Report – hereinafter, simplified as RIT, attached to the PA);

By deed of sale and purchase executed on 26 November 2014 at the Notarial Office of C..., located in ...– ..., the Claimant sold to Bank B..., SA, for the amount of € 330,000.00, the urban property registered in the property register of the Union of Parishes of ... and ..., municipality of ..., under article ... (Doc. 10 attached to the PI and PA);

On the same date, notices were issued in the name of the acquirer, Bank B..., SA, for payment of the taxes due for the transfer: IMT – assessment no. ..., in the amount of € 21,450.00 and Stamp Tax, item 1.1 of the TGIS – assessment no. ..., in the amount of € 2,640.00 (Docs. 12 and 13, attached to the PI and PA);

The IMT and IS assessments identified in the preceding point were paid on the same date by the Claimant, via check ... on account ... D..., issued to the order of E..., EPE, for the total amount of € 24,090.00 (Doc. 11 attached to the PI and PA);

Still on the aforementioned date, was executed between the Claimant, in its capacity as "Lessee" and Bank B..., SA, in its capacity as "Lessor", a financial lease contract for real estate no. ..., having as its object the urban property registered in the property register of the Union of Parishes of ... and ..., municipality of ..., under article..., intended for warehouse and industrial activity (Doc. 9 attached to the PI and PA);

In accordance with the clauses of the aforementioned financial lease contract for real estate, no IMT would be due for the acquisition of the property by the Bank, with "all taxes (...)" running "at the cost of the Lessee" (Doc. 9 attached to the PI and PA);

Under the external service orders nos. OI2016... and OI2016..., issued by the Tax Inspection Services of the Tax Administration of ... on 15.02.2016, an external inspection procedure began on 17.07.2017 and ended on 14.09.2017, of partial scope, which concerned the withholding of IRS for the periods of 2014 and 2015 and IRC for the tax year 2014 (page 1 of the RIT);

With regard to IRC for tax year 2014, the following analysis of the "Cash" account was made (page 3 of the RIT):

[Table from RIT]

After analysis of the IES statements and IRC model 22 and the Claimant's accounting records, the Tax Inspection Services of the Tax Administration of ... proposed corrections to expenses recorded in account "68118 – Other direct taxes", in the amount of € 24,090.00 and autonomous taxation of undocumented expenses of the amount of € 62,000.00, thus substantiated (pages 4 and 5 of the RIT):

Corrections to taxable profit:

The company recorded in account "68118 – Other direct taxes" the amount of € 24,090.00, with the managing partner clarifying that such an expense concerned the payment of IMT and IS on a real estate leaseback transaction effected with the banking entity D... (Bank B...);

The company A... proceeded to sell a property to D..., having then executed a financial lease contract with that banking entity, in order to enjoy the use of the asset;

In an onerous transfer of a property, responsibility for payment of IMT and IS falls on the buyer, D..., being this the entity mentioned in the assessment documents for the said taxes;

As these are taxes whose payment falls on the buyer's sphere, the amount of € 24,090.00, recorded as expenses in the accounting records of the taxpayer, cannot be accepted, pursuant to article 23-A, paragraph 1, letter f) of the IRC Code;

The taxable profit corrected for the period under analysis is shown in the following table:

[Table from RIT]

Autonomous taxes – Undocumented expenses:

On 30.11.2014, the company effected an account regularization movement, having debited account "56 101 – carried-forward results" as a counterpart to account "111 – Cash" for the amount of € 62,000.00, with only an internal document – document ... – as supporting documentation, with there being no accounting record of any document or documents justifying the existence of that amount in cash;

It is thus concluded that there are no elements demonstrating that those cash outflows had underlying them an expense for the acquisition of goods and/or services (...) if (...) they served to pay expenses actually incurred by the company. We are thus faced with a situation that is classified as undocumented expenses, since it appears to us to be payments that were made with regard to which the taxpayer did not identify the charge and/or the respective beneficiaries;

Expenses or losses are deductible from the tax standpoint for the determination of taxable profit when, being documentarily proven, they contribute to obtaining or securing income subject to IRC (...). The absence of these requirements implies the non-consideration of expenses, and they must be added back to the accounting result;

Now, in the case in question, the taxpayer did not record that amount of € 62,000.00 as an expense, so there was no influence whatsoever for purposes of determining tax profit/loss;

Thus (...) the amount of € 62,000.00 relating to undocumented expenses should be subject to autonomous taxation at the rate of 50% (...) as established in article 88, paragraph 1 of the IRC Code.

In the context of the right of hearing on the draft RIT, exercised in writing on 09.10.2017, the managing partner of the Claimant provided clarifications regarding the recording of expenses relating to IMT and Stamp Tax relating to the sale and lease back transaction executed with Bank D..., as well as regarding the regularization of the "Cash" account balance, which, on the latter subject, received the following assessment (page 8 of the RIT):

"- Regarding the expenses considered as undocumented, in the amount of 62,000.00 €, and despite the taxpayer having alleged that such amounts relate to withdrawals made by the partners over the years 2006 and 2007, the fact is that the accounting does not reflect such movements, and the documents presented as evidence, which constitute doc. 5 of the right of hearing (annex 9 to the RIT), also do not allow that conclusion. In fact, from the detailed analysis of each of the documents presented, it appears that they relate to internal documents of the company dated 2006 and 2007, through which the cash account was debited as a counterpart to a demand deposit account and which have the description "Miscellaneous cash expenses". Now, contrary to what was alleged in the context of the present right of hearing, these documents do not allow concluding that the amount of 62,000.00 € related to withdrawals in favor of the partners, since in that case, the partners' account should have been debited and not the cash account.

• Furthermore, it is added that the recording as a debit to the cash account, as well as the description contained in the said documents, lead to the conclusion that the withdrawals were made to pay expenses, for which there are no supporting documents whatsoever, because if there were, the corresponding accounts associated with those expenses would have been debited and not the cash account. In other words, that amount remained in balance, awaiting the presentation of supporting documents, which never "appeared", which is why the Tax Inspection Service considered such amounts as undocumented expenses and as such subject to autonomous taxation";

1. Document 5 of the right of hearing (annex 9 to the RIT) includes six internal documents recording debits to account "Cash – 111" as a counterpart to the accounts of "Demand Deposits – 1201 and 1206" for payment of "Miscellaneous Cash Expenses", four of which dated 2006, in the amount of € 46,000.00 and the remaining two, dated 2007, in the amount of € 16,000.00, in the total amount of € 62,000.00;

2. Following the preparation of the RIT, notified to the Claimant by letter no. ... of the Tax Inspection Services of the Tax Administration of ... of 20.10.2017 (Doc. 1 attached to the PI and PA), was issued IRC assessment no. 2017..., dated 23.10.2017 and account adjustment statement no. 2017..., dated 25.10.2017 (Docs. 5 and 6 attached to the PI), both relating to tax year 2014, resulting in the balance of € 36,083.92, with payment deadline on 04.12.2017, of which the Claimant was notified;

3. By letter issued on 24.12.2017, the Claimant was summoned to tax enforcement proceedings no. ...2017..., of the Tax Office of ..., initiated for coercive collection of the IRC assessment identified in the preceding point (Doc. 7 attached to the PI);

4. To suspend the aforementioned tax enforcement proceedings, the Claimant provided bank security no..., issued by D... on 06.02.2018, for the amount of € 45,955.78 (Doc. 8 attached to the PI).

B. Unproven Facts:

It was not proven that the account regularization movement, with debit to account "56 101 – Carried-Forward Results" as a counterpart to account "111 – Cash" for the amount of € 62,000.00, corresponded to real financial flows in tax year 2014.

C. Substantiation of Proven and Unproven Factual Matters:

Regarding factual matters, the Tribunal does not have to rule on everything that was alleged by the parties, but rather has the duty to select the facts that matter to the decision and discriminate the proven facts from the unproven facts.

Thus, the facts pertinent to the trial of the case are chosen and defined based on their legal relevance, which is established in consideration of the various plausible solutions to the legal question(s) (see previous article 511, paragraph 1 of the CPC, corresponding to current article 596, applicable ex vi article 29, paragraph 1, letter e) of the RJAT).

Thus, considering the documentary evidence produced by the parties (documents attached to the PI and PA), the facts listed above are considered as proven and unproven, respectively.

III.2 ON THE LAW

The Issues to be Decided

Given the positions expressed by the Parties in their pleadings and the factual situation established, the following issues to be decided are delimited:

• As to the corrections to taxable profit, the question of whether, in a leaseback contract, the charges relating to the payment of IMT and Stamp Tax assessed in the name of the acquirer-lessor are fiscally deductible in the sphere of the transferor-lessee, if actually borne by the latter;

• With regard to autonomous taxes, the question relating to the qualification as undocumented expenses of an account regularization movement debiting account "56 101 – Carried-Forward Results" as a counterpart to account "111 – Cash", which did not affect the determination of the taxable profit for the tax year to which such autonomous taxes relate.

(i) On the Corrections to Taxable Profit. Expenses Not Accepted Fiscally.

The Claimant contends that the expenses it bore and recorded in account "68118 – Other direct taxes", in the amount of € 24,090.00, relating to the payment of Municipal Tax on Onerous Real Estate Transfers (IMT) and Stamp Tax (IS), as a result of a "sale and leaseback" real estate transaction effected with Bank B..., SA, should contribute to the determination of taxable profit.

It alleges to that effect that the financial lease regime is governed by a principle of tax neutrality, that the said expenses do not constitute acquisition expenses, which will only occur at the end of the contract, a moment at which it will benefit from an exemption from those taxes, with everything now being treated as a mere financing operation and not as a new acquisition.

In turn, the Respondent invokes the unavailability of elements of the tax-legal relationship, alleging that the concept of taxpayer is not adjustable based on contractual qualification, but is rather a concept defined by the rules of tax incidence, which is why the charges recorded in the tax period cannot be accepted as expenses, relating to taxes that fall on third parties and that the Claimant is not legally obligated to bear, by virtue of the provisions of article 23-A, paragraph 1, letter f) of the IRC Code, as is the case with the IMT and Stamp Tax assessed in the name of the Lessor, in its capacity as acquirer of the property given in lease.

The leaseback contract is an atypical contract, not specifically regulated in our legal system, which constitutes a special case of financial lease, regulated by Decree-Law no. 149/95, of 24.06.

In accordance with the provisions of article 1 of the cited Decree-Law no. 149/95, of 24.06, the essential elements of the financial lease contract are (i) the indication, by the lessee to the lessor, of the thing to be purchased or built by a supplier; (ii) the duties to which the lessor is subject, before the lessee, to acquire the thing in order to grant its temporary enjoyment to him, and (iii) the duty of the lessee to pay the agreed rent, with the faculty to acquire the leased thing at the end of the contract.

The leaseback contract differs from the typical financial lease contract in that they converge in the same person, simultaneously, the positions of financial lessee and seller, on one side and, on the other party, the positions of financial lessor and buyer.

It is thus a financing contract, in which the debtor transfers to the creditor the ownership of an asset as security for the credit obtained, being "intimately associated with transfer as collateral" (see the Decision of the Court of Appeal of …, issued on 24.11.2015 in Proceedings:…).

However, as a financing contract, it does not fall within the provision of the rules relating to the assignment of the tax, the responsibility of the entity obliged to provide security or of the user of the credit (see article 5, paragraphs 1 and 3, letters e) and f), respectively, of the Stamp Tax Code), which, in either case, would always be the Claimant.

For, although the financial lease contract has emerged "(…) as a mere financial instrument to address some needs of companies and natural persons in their economic activity (…) this does not allow that the relevance of its financial function obscure its legal characteristics (structural), or that the economic objective of the contract and the legal instruments for pursuing that objective be confused, incorrectly subordinating these legal instruments to the economic purpose or even to the accounting discipline to which they are currently subordinated. Although the financial, economic or accounting aspects may have important practical consequences and serve to assist in understanding the figure being analyzed, the characterization of the financial lease contract, like any other contract, must be based on its legal structure, its legal regulation and not on any other aspects, whether financial, economic or accounting, following the teachings of Diogo Leite de Campos - Financial Lease (Leasing) and Lease (Study for a legislative reform), Lisbon, 1994)", (see the Decision of the Supreme Administrative Court (STA), of 15.11.2017, Proceedings no. 0883/16).

Now, from a structural point of view, the leaseback contract is analyzed as two distinct contracts: the purchase and sale in favor of the credit provider, Bank or Financial Lease Company, followed by a financial lease contract, in which the selling company assumes the position of lessee.

From a tax standpoint, through the purchase and sale, suitable for the onerous transfer of the right of ownership over real estate located in national territory (article 2, paragraph 1 of the Code of Municipal Tax on Onerous Real Estate Transfers – IMT), the acquirer of the real estate is subject to payment of IMT, pursuant to article 4 of the respective Code and Stamp Tax, pursuant to articles 1, paragraph 1 and 2, paragraph 3, both of the Stamp Tax Code and item 1.1 of the General Table attached to it.

As the rules of tax incidence, subject to the reservation of law (article 103, paragraph 2 of the Constitution of the Portuguese Republic) cannot be set aside by the will of the parties, any contractual clause purporting to set them aside is ineffective.

In view of the foregoing, it must be concluded that, in the situation under analysis, the charges relating to those taxes, the responsibility of the lessor, cannot constitute deductible expenses in the sphere of the Claimant, in its capacity as lessee, as established by article 23-A, paragraph 1, letter f) of the IRC Code.

The tax act in question merits no censure in this respect and should be maintained.

On Autonomous Taxes. Undocumented Expenses. Time-Bar.

The Respondent contends that certain expenses for which the Claimant does not have external documentary proof should be taxed autonomously, at the rate of 50%, pursuant to article 88, paragraph 1 of the IRC Code, and that would be at the origin of withdrawals from the Cash account, debited to the Carried-Forward Results account.

The Tax and Customs Authority further considers, in article 97 of its Reply, that, even if there were proof that the undocumented expenses related to the tax years 2006 and 2007, as argued by the Claimant, the question of time-bar of the AT's right to assess does not arise since "the date relevant for autonomous taxation purposes is 30.11.2014, which was when the internal document no. 110011 (...) was regularized via Carried-Forward Results".

The Claimant contends that this was not a regularization of unknown amounts that appeared in the "Cash" balance, but rather withdrawals made by the partners from the Claimant's bank account over the years 2006 and 2007; that the said regularization occurred only in the year 2014, since, with the acquisition of the shares of one of the partners, it was decided by the remaining partners, who kept a record of the amounts withdrawn from the bank accounts over the years 2006 and 2007, to regularize the "Cash" balance; that such withdrawals should have been regularized as a counterpart to the partners' account, since it was always the intention of the latter to proceed with the return of the amounts withdrawn from the Claimant's bank accounts; and that, even if the regularization of the "Cash" account were to be treated as confidential expenses, or even advances on account of profits, such situations would have to be allocated to the years 2006 and 2007, which are time-barred pursuant to article 45 of the General Tax Law (LGT).

In a diachronic analysis of the institute of autonomous taxes, it is verified that these first appeared within the scope of the Code of Industrial Contribution, via Decree-Law no. 375/74, of 20.08, considered the regulation defining the "regime of undocumented expenses by companies", as confirmed in the preambles of Decrees-Law nos. 235-F/83, of 1.06 and 167/86, of 27.06. However, "in view of the cumulative reference to confidential expenses and undocumented expenses, the former will be those for which their nature, origin and purpose is not disclosed, while the latter will be expenses for which there is no documentary proof, although there is no concealment of their nature, origin or purpose. All of them, however, will be expenses not documented proofwise" (see the Decision of the STA, of 07.07.2010, proceedings no. 204/2010).

This cumulative reference to confidential expenses and undocumented expenses would transition to the IRC Code, having disappeared with the wording given to article 81, paragraph 1 (current article 88, paragraph 1 of the IRC Code), by Law no. 67-A/2007, of 31.12.

Article 88, paragraph 1 of the IRC Code had, at the time of the facts, the wording still in force, pursuant to which:

"Article 88 - Autonomous taxation rates

1 — Undocumented expenses are taxed autonomously at the rate of 50%, without prejudice to their non-consideration as expenses pursuant to letter b) of paragraph 1 of article 23-A."

It must therefore be ascertained whether the expenses that the Tax Administration subjected to autonomous taxation in tax year 2014 can be qualified as undocumented expenses.

On one hand, on page 5 of the RIT, the Tax Inspection Services wrote that "in the case in question, the taxpayer did not record that amount of € 62,000.00 as an expense, so there was no influence whatsoever for purposes of determining tax profit/loss"; on the other hand, in line with the aforementioned Decision issued by the STA in proceedings no. 204/2010, the Respondent states in article 86 of the Reply that "It is currently established case law of the STA that undocumented expenses are expenses for which there is no documentary proof, and these will be expenses borne by the taxpayer that in accounting terms affect the net result of the tax year, reducing it".

However, as is also referred to in the RIT (page 5), the determination of the missing tax, by way of autonomous taxes, was based on the verification that the Claimant had effected "an account regularization movement, debiting account "56101 – carried-forward results, as a counterpart to account "111 – Cash" for the amount of 62,000 €.".

That is, the additional IRC assessment for tax year 2014, as far as autonomous taxes are concerned, is based on an accounting movement supported only by an internal document (Document no. 110011 – annex 2 to the RIT), a movement that affected carried-forward results but did not affect the net result of the tax year, reducing it.

Now, following the reasoning set forth in the Arbitral Decision issued on 11.12.2017, in proceedings no. 287/2017-T, it will always be said that, being "IRC, which includes the autonomous taxes provided for in article 88 of the IRC Code «due for each tax period, which coincides with the calendar year» (article 8, paragraph 1 of the IRC Code) (...) the undocumented expenses that are taxed autonomously with reference to the tax year of (...) are those that were incurred in that year (...)".

The conclusion reached by the AT in its Reply, that "the date relevant for autonomous taxation purposes is 30.11.2014, which was when the internal document no. 110011 (...) was regularized via Carried-Forward Results", could only be accepted if that regularization related to undocumented expenses of tax year 2014, which had affected the net result of that tax year, reducing it, which, in the case in question, is not the case, as the Respondent itself, contradictorily, acknowledges.

The proof offered by the Claimant, both in the administrative proceedings and in the arbitral proceedings, although consisting of internal documents, is compatible with the occurrence of undocumented expenses, in the amount of € 62,000.00, relating to tax years 2006 and 2007.

However, it is not appropriate to invoke here the institute of time-bar, referred to in article 45 of the General Tax Law (LGT), since the additional IRC assessment whose annulment is sought by the Claimant does not relate to those tax years, but rather to tax year 2014, as follows from the Report of the tax inspection procedure that gave rise to it.

Thus, it must be concluded that the assessment under review, as far as autonomous taxes are concerned, suffers from the defect of violation of law, due to error in the factual and legal premises on which it was based, which justifies its annulment, pursuant to article 163, paragraph 1 of the Administrative Procedure Code, subsidiarily applicable by virtue of the provisions of article 29, paragraph 1, letter d) of the RJAT.

On the Request for Indemnification for Undue Security

The Claimant accumulates, with the request for annulment of the tax act that is the subject of these proceedings, the request for a determination that the AT pay indemnification for undue security in tax enforcement proceedings no. ...2017..., an accumulation implicitly presupposed in article 3 of the RJAT.

Case law has considered that "There is an obligation to indemnify on the part of the AT, arising from the provision of undue security, if the illegality of the tax assessment results from a wrong interpretation that the AT made of the applicable legal rules in the specific case or from the erroneous legal subsumption of the concrete factual situation to the applicable tax rules and principles".[1]

Article 171 of the CPPT establishes that "indemnification in the case of bank security or equivalent wrongly provided shall be requested in the proceedings in which the legality of the debt being executed is disputed" and that "indemnification should be requested in the claim, challenge or appeal or if its basis is subsequently arising within 30 days after its occurrence".

In these terms, the judicial challenge proceeding is, in principle, the appropriate procedural means to formulate the request for indemnification for undue provision of security.

Also in tax arbitral proceedings, indemnification for undue provision of security is included in the provision of article 24, paragraph 1, letter b) of the RJAT, which refers to the AT's duty to "Restore the situation that would have existed if the tax act subject to the arbitral decision had not been taken", thus being an appropriate means to consider such request.

The regime of the right to indemnification for undue security is provided for in article 53 of the LGT, which establishes the following:

"Article 53 - Security in the case of undue provision

1 - The debtor who, to suspend enforcement, provides bank security or equivalent shall be indemnified fully or partially for the damage resulting from its provision, should it have been maintained for a period exceeding three years in proportion to the reversal in administrative appeal, challenge or opposition to enforcement that have as their object the debt secured.

2 - The period referred to in the preceding paragraph does not apply when it is verified, in amicable reclamation or judicial challenge, that there was error attributable to the services in the tax assessment.

3 - The indemnification referred to in paragraph 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest provided for in this law and may be requested in the administrative appeal or judicial challenge itself, or autonomously.

4 - Indemnification for undue provision of security shall be paid by set-off against the tax revenue of the year in which payment was made."

In the case in question, it is manifest that the error of the assessment act, embodied in the erroneous qualification as undocumented expenses of tax year 2014 of the regularization of the "Cash" account balance as a counterpart to "Carried-Forward Results", is attributable to the Tax and Customs Authority, which determines the right of the Claimant to indemnification for the security provided, from the date of its respective provision, to the extent of the annulment of the disputed assessment, coercively demanded in the identified tax enforcement proceedings.

DECISION

Based on the factual and legal grounds set forth above and, pursuant to article 2 of the RJAT, the decision is:

To partially annul the IRC assessment no. 2017..., for tax year 2014, in the amount of € 31,000.00, corresponding to autonomous taxes;

To partially annul the compensatory interest associated with the preceding assessment, to the extent of the annulled tax;

To condemn the AT to pay indemnification for wrongly provided security in tax enforcement proceedings no. ...2017..., to the extent of the annulment of IRC and compensatory interest constituting the respective amount being executed, to be determined in execution of this arbitral decision;

To maintain the assessment act in question, as far as corrections to taxable profit and respective compensatory interest are concerned.

CASE VALUE: In accordance with the provisions of article 306, paragraphs 1 and 2 of the CPC, 97-A, paragraph 1, letter a) of the CPPT and 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned the value of € 36,083.92 (thirty-six thousand eighty-three euros and ninety-two cents).

COSTS: Calculated in accordance with article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to it, in the amount of € 1,836.00 (one thousand eight hundred thirty-six euros), to be divided between the Claimant and the Respondent, in the proportion of 5.96% and 94.04%, respectively.

Notify.

Lisbon, 3 September 2018.

The Arbitrator,

Mariana Vargas

Text prepared by computer, pursuant to paragraph 5 of article 131 of the CPC, applicable by referral from letter e) of paragraph 1 of article 29 of Decree-Law 10/2011, of 20 January.

The drafting of this decision complies with the 1990 spelling agreement.

[1] Decision of the STA, of 11.10.2017, proceedings no. 0160/17.