Process: 604/2016-T

Date: August 18, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Decision 604/2016-T addresses the tax treatment of cross-border payments to entities in favorable tax jurisdictions under Portuguese Corporate Income Tax (IRC). The taxpayer challenged additional IRC assessments totaling €933,337.09 for 2012, arising from seventeen cross-border transfers. The Tax Authority disallowed these expenses under Article 65(1) CIRC, which presumes non-deductibility for payments to entities in privileged tax regimes unless proven otherwise, and applied autonomous taxation under Article 88(8) CIRC. The company provided extensive documentation including contracts, invoices, transport documents, and payment proofs to demonstrate the operations' legitimacy. Key legal issues included: whether the taxpayer met the burden of proving actual operations without abnormal character; alleged violation of the accrual principle (Article 18 CIRC) in expense timing; and the legality of €163,402.32 in withholding tax assessments. The case highlights the strict documentation requirements imposed on Portuguese companies transacting with low-tax jurisdictions, the dual burden of expense non-deductibility and autonomous taxation, and procedural safeguards under articles 55, 58, and 59 LGT. This decision provides crucial guidance on evidence standards required to overcome the Article 65(1) presumption, the application of anti-avoidance mechanisms in cross-border contexts, and withholding tax obligations on international payments under Portuguese law.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Leonardo Marques dos Santos and Ana Maria Gomes Rodrigues, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 11 October 2016, A…, S.A., with registered office at … of …, …-… … and with corporate identification number … (Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the combined 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, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the act of additional assessment of Corporate Income Tax (IRC) for the financial year 2012, the corresponding assessment of compensatory interest and a statement of accounts rectification, in the total amount of €933,337.09, payable by 18/07/2016.

In support of its application, the Claimant alleges, in summary, that the seventeen cross-border transfers, which pursuant to articles 65(1) and 88(8) of the CIRC (in force on the date of the facts) were disallowed as expenses and subjected to autonomous taxation by the Tax and Customs Authority (AT), correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount, furthermore violating the principle of specialization of financial years/accrual regime, provided for in article 18 of the IRC Code, in relation to certain expenses disallowed and autonomously taxed by the AT[1].

Regarding the amount of €163,402.32, assessed as allegedly due withholding tax (€142,136.20) and corresponding compensatory interest (€21,272.12), the Claimant also alleges its illegality due to lack of justification, as well as the absence of any obligation on its part to withhold IRC.

The Claimant further alleges the occurrence of formal defects, due to violation of articles 55, 58, 59(1) and 59(2) of the General Tax Law (LGT), articles 6 and 9 of the Supplementary Regime of Tax and Customs Inspection Procedure (RCPITA), article 153(2) of the Administrative Procedure Code (CPA), applicable by virtue of the provisions of article 2(c) of the LGT and article 2(d) of the Tax Procedure and Process Code (CPPT).

On 13-10-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Claimant did not appoint an arbitrator, wherefore, pursuant to article 6(2)(a) and article 11(1)(a) of the RJAT, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.

On 30-11-2016, the parties were notified of these appointments, and expressed no intention to challenge any of them.

In accordance with the provision of article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 19-12-2016.

On 03-02-2017, the Respondent, duly notified for this purpose, submitted its response, defending itself by exception and by contestation.

On 17-03-2017, the meeting referred to in article 18 of the RJAT was held, at which witnesses presented by the Claimant were examined.

At a meeting held on 19-05-2017, oral arguments were presented by the parties, making pronouncements on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the delivery of the final decision.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2(1)(a), 5 and 6(1) of the RJAT.

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 Ordinance No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the consideration of the case.

Therefore, it is necessary to issue:

II. DECISION

A. FACTUAL MATTER

A.1. Facts Established as Proven

  1. By virtue of Service Order OI2015…, issued under Activity Code 113-04 – Control of cross-border transfers – 2012 (Special Actions 2014), an inspection action against the Claimant was ordered.

  2. The aforementioned inspection action had a partial scope in the context of IRC, covering the financial year 2012, with a view to the following cross-border transfers:

[table of transfers]

  1. In the course of the inspection procedure, clarifications were requested from the Claimant through:

a. Email on 8/05/15;

b. Mandatory notification pursuant to article 65 of the CIRC by means of letter No. …, dated 11/08/15, following the analysis of the elements sent/clarifications provided in response to the aforementioned email.

  1. The claimant responded to said notifications and provided the clarifications it deemed appropriate, attaching, as appropriate:

a. Certificates;

b. Production contracts;

c. Purchase orders;

d. Maritime transport documents (Bill of Lading or B/L);

e. Insurance documents;

f. Road transport documents (CRM);

g. Payment guarantee documents;

h. Customs clearance documents;

i. Invoices;

j. Payment proof documents;

k. Price proof documents;

l. Sales proof documents;

m. Inspection reports.

  1. The Claimant was notified to exercise the right to a hearing and chose not to exercise such right.

  2. The AT understood that the elements sent and the information provided by the Claimant did not allow for proof of the conditions referred to in article 65(1) of the CIRC, as drafted on the date of the facts, and considered that the expenses in question were not deductible for the purposes of determining taxable profit, and should be subject to autonomous taxation, pursuant to article 88(8) of the CIRC, also as drafted on the date of the facts.

  3. The Tax Inspection Report contains, inter alia, the following:

"Pursuant to article 63-A of the General Tax Law (LGT), credit institutions and financial companies are obligated to communicate to the Tax Authority (AT) financial transfers which have as recipient an entity located in a country, territory or region with a more favorable privileged tax regime, which are not related to payments of income subject to any of the reporting regimes for tax purposes already provided for in law.

For the purposes of compliance with article 63-A(2) of the LGT, through Ordinance No. 1066/2009, of 18/9, the declaration model and respective instructions were approved, designated as "declaration of cross-border transfers" (model No. 38), which must be submitted by financial institutions through electronic data transmission by the end of July of the following year.

It should be noted that pursuant to the explanatory notes to field 11 of said declaration, only transfers with a value exceeding €12,500.00 should be listed.

The Directorate for Planning and Coordination of Tax Inspection (DSPCIT) is the managing entity of said ancillary obligation, being responsible for analyzing the information contained therein and planning and operationalizing subsequent audit and control actions.

In an appropriate "Control Action of Cross-Border Transfers Carried Out by Legal Entities" as referred to in the dispatch of Her Excellency the Deputy Director-General of ITA, of 02-12-2014, set forth in Information No. 162/2014, of 17-11-2014, which is an integral part of case No. 633-2014 of DSPCIT, the information contained in the declaration model No. 38 was processed and cross-referenced with the tax data of the transferors (in this case legal entities) of transfers made in 2012, to entities located in a country, territory or region with a more favorable privileged tax regime.

Following the analysis of that information it was considered necessary, in a 1st phase, in internal action via email/letter, to learn about the economic and/or financial justification for such transfers in light of the normal activity and/or organization of the taxable subject(s) (SP) in question, without forgoing that in a 2nd phase, in external action, there might be a need to better understand the justifications presented."

  1. In the TIR an increase in taxable matter and tax was determined, calculated from the data contained in the following table:

[table of increases]

  1. The increase in taxable matter and tax was as follows:

[table of increases]

  1. The Claimant was notified of the additional IRC assessment and autonomous taxation for the financial year 2012, the compensatory interest assessment and the statement of accounts rectification, and was obligated to pay, by 18/07/2016, the total amount of €933,337.09.

  2. By assessment notification No. 2016…, the Claimant was further notified to pay, by 15/07/2016, the amount of €163,402.32, of which €142,130.20 as withholding tax and €21,272.12 as compensatory interest.

  3. On 15 and 18 July 2016, the Claimant proceeded to pay the aforementioned assessments.

  4. The Claimant was founded in the late 1970s with the objective of manufacturing metallic aluminum kitchenware.

  5. From the mid-1980s onwards, it also dedicated itself to the production of small household appliances, which at that time represented a growing market.

  6. Since then and progressively, this segment became the main focus of the Claimant, through increasing diversification of its product range, with the launch of new models in various categories of small household appliances such as grills, toasters, electric kettles, irons and many others that made it the leading small household appliance manufacturer based in Portugal.

  7. The Claimant has been working, since the late twentieth century, with various companies based in China, either to manufacture its products or to acquire some components for those it manufactures in Portugal.

  8. For several years the Claimant has been establishing commercial relationships with Chinese companies, some of which invoice through subsidiaries established in Hong Kong.

  9. The Claimant entered into a contract with Group B… for the production of espresso coffee machines, to be sold under the brand "D…", which provided for the sale of 25,000 machines by the end of 2010.

  10. Espresso coffee machines are a complex product in the small household appliances range, as they incorporate, in the same appliance, three factors that generate high technical problems (water, pressure and electricity).

  11. Group B… was interested in selling machines and, mainly, coffee capsules at a more aggressive price than those of the E… brand.

  12. For this purpose, Group B… obtained from company C… permission to market with the brand D… the machines and espresso coffee capsules F….

  13. In order for the machines and capsules to be sold, they had to comply with the patents held by C…(F… capsules).

  14. To allow differentiation between the patents of E… capsule machines and those of C…, a machine with a more complex coffee "Extraction Group" was required.

  15. C…, holder of the F… patent, licensed Chinese company G… for the manufacture of coffee machines.

  16. At the indication of the same C…, the production of coffee machines had to be carried out by Chinese company G….

  17. From the contract concluded between the Claimant and Group B… it contains, inter alia, that the Claimant "obtained from C…, SPA, authorization to produce or have produced, in this case in China, the PRODUCTS, which is valid for the duration of the supply contract concluded on 7 May 2010 between the FIRST PARTY H…, S.A., and said C…, SPA".

  18. From the contract concluded between the Claimant and H…, S.A., it appears that the coffee machines, in a first phase, would be produced in the People's Republic of China and, subsequently, would be produced in Portugal.

  19. Right at the beginning of sales that occurred in October 2010, all machines delivered by the Claimant to H… were sold, so Group B… requested from it the urgent production of 20,000 more machines for delivery by Christmas 2010.

  20. From the very first sales, a large number of technical problems emerged in the units sold.

  21. The contract with H… provided a limit of 8% for machines returned for technical assistance during the 2-year warranty period, with penalties for returns above that value and, if that number exceeded 10%, H… considered that the project might need to be reconsidered as it could jeopardize its brand image, with consequent damages, and penalties were also provided for the Claimant in case of delay in repairs.

  22. The aforementioned value of 8% was provided for return of machines during the 2-year period.

  23. In January 2011, the Claimant alerted G… to the existence of defects in 2,083 of 19,184 machines and the corresponding extra cost that this problem caused it.

  24. By June 2011, more than 73,000 machines had been sold and an order had been placed for 100,000 more machines by December 2011.

  25. At that time, the total number of machines from batches affected by the detected defects amounted to 69,480, and it was found that 9.1% of these were actually defective, and it was estimated that this percentage could reach 30%.

  26. Regarding machines produced up to 30/06/2011, 47,859 ended up requiring repair by 31/03/2013.

  27. The aforementioned technical problems and the return of machines were susceptible to jeopardizing the profitability and continuity of the respective business, depending on the repair costs that the Claimant had to bear and the possibility of damage to H…'s image.

  28. G… acknowledged the aforementioned problems.

  29. In order to compensate for repair costs, compensation was negotiated with G…, which in September 2011 agreed to send "free of charge" 8,578 espresso coffee machines, commercially valued at USD 464,927.60, as a form of compensation for losses caused up to that point.

  30. The Claimant entered into a contract on 7 July 2011, with effect from 1 July 2011, with company I… for the guidance, monitoring and supervision of the production process of coffee machines manufactured by G… (at that time, the model …).

  31. The services provided for in that contract consisted of:

i. Inspect the main raw materials used in production, in accordance with the technical specifications attached to the contract;

ii. Test 100% of the electronic boards...;

iii. Carry out quality control during the production phases;

iv. Inspect the final product in accordance with the technical specifications attached to the contract;

v. Ensure that each machine was tested with at least one capsule during production;

vi. Test in the laboratory 5% of each group of machines, with 5 capsules.

  1. As remuneration for the services provided by I…, in the aforementioned contract, the amount of 14 US dollars per machine was provided for.

  2. The date of the illustrative annex of the contract between the Claimant and I…, of July 2011, is September 2011.

  3. The original annex contained a typographical error and was replaced by the parties and signed by their representatives in substitution of the first.

  4. Regarding machines produced after 30/06/2011, up to 31/03/2013, 6,826 machines required repair.

  5. At the end of 2011 and at the request of Group B…, the Claimant developed a new machine (designated by …, which came to replace the previous …), in relation to which only the "Extraction Group" continued to be manufactured in China, as E… patents were still in force regarding the "Extraction Groups", with the remainder of this new machine … produced and completed in Portugal.

  6. The "Extraction Group" produced by E… was patented by C…, being free from conflicts with the mentioned E…, so the Claimant continued to work with this type of "Extraction Group".

  7. The new agreement with G… involved this company manufacturing only the "Extraction Group", with the Claimant taking charge of introducing changes in order to improve it and adapt it to the remaining part of the machine produced in Portugal.

  8. The Claimant ordered the molds from I… on which G… would fabricate and did fabricate the aforementioned groups in China.

  9. The aforementioned molds were manufactured before the production of the "Extraction Group".

  10. From J… the following molds were ordered:

i. Float pp;

ii. Light separator and pcb fixer;

iii. Capsule tank abs;

iv. Chrome aluminum crank;

v. Left lateral + right lateral abs.;

vi. Water tank SAN.

  1. With the "Extraction Group" manufactured by G… and the remainder of production in Portugal it was possible to obtain a competitive price and without conflicts, at the patent level, allowing the machines to bear the indication "Made in Portugal".

  2. On 26-03-2012, with effect from 01-03-2012, a new agreement was concluded with I… having as its object the supervision and monitoring of the production process of the new "Extraction Group" manufactured by G….

  3. The services provided for in that contract consisted of:

i. Inspect the main raw materials used in production, in accordance with the technical specifications attached to the contract;

ii. Carry out quality control during the production phases;

iii. Inspect the final product in accordance with the technical specifications attached to the contract;

iv. Test in the laboratory 5% of each group of machines, with 5 capsules.

  1. As remuneration for the services provided by I…, in the aforementioned contract, the amount of 6 US dollars per inspected group was provided for.

  2. The invoices issued under the aforementioned contract discriminate the number of machines to which they relate and multiply it by the aforementioned value of 6 USD, relating to "Production Supervision and Quality Inspection", in order to determine the amount to be paid (and paid) by the Claimant.

  3. For this new machine, in addition to parts manufactured by the Claimant itself, the molds purchased from J… were necessary, and, as regards the "Extraction Group", the molds that came to be purchased from I….

  4. The "Extraction Group" molds never left China, and were used by G… for the manufacture of the new "Extraction Group".

  5. Transfer No. 1, contained in the table that forms part of point 8 above, was made on 13/01/2012, and the Claimant submitted the following set of documents to the Tax Authority: the invoice; the internal requisition; the customs import documents; the maritime bill of lading (B/L); the certificate of origin; the road transport documents; the bank transfer proof and proofs of product sale and comparable market price.

  6. The invoice relating to the aforementioned transfer is dated 16/11/2011 and was charged to expenses in that financial year.

  7. The electrical resistances referred to in the transfer in question were manufactured by K… and incorporated by the Claimant in steam cooking machines which, subsequently, were sold to Dutch multinational L….

  8. The purchase price of said electrical resistances was 3.546 USD per unit.

  9. The Claimant obtained a quote from company M…, S.A., for the same type of product, which proposed a price of €4.20 per unit.

  10. Regarding transfer No. 2, contained in the table that forms part of point 8 above, of 02/07/2012, the Claimant submitted the following set of documents to the Tax Authority: invoice, internal requisition, customs import documents, maritime bill of lading, certificate of origin, road transport documents, bank transfer proof, proofs of product sale and comparable market price.

  11. The goods were purchased by the Claimant, entered Portugal, paid the respective customs duties and were subsequently sold.

  12. The purchase price of the products in question (microwaves) was 32.30 USD per unit.

  13. The Claimant obtained a quote from company N…, for the same type of product, which proposed a price of 38.51 USD per unit.

  14. Regarding transfer No. 3, contained in the table that forms part of point 8 above, of 28/09/2012, the Claimant submitted the following documents to the AT: invoice, internal requisition, customs import documents, maritime bill of lading, certificate of origin, road transport documents, bank transfer proof, proofs of product sale and comparable market price.

  15. The goods were purchased by the Claimant, entered the national territory and were subsequently sold, and the respective customs duties were paid.

  16. The purchase price of the products in question (steam station) was 28.97 USD per unit.

  17. The Claimant obtained a quote from company O…, for the same type of product, which proposed a price of 41.40 USD per unit.

  18. Regarding transfer No. 4, contained in the table that forms part of point 8 above, of 13/11/2012, relating to the purchase of kitchenware from P…, the Claimant submitted the following documents to the AT: invoice, internal requisition, customs import documents, maritime bill of lading, certificate of origin, road transport documents, bank transfer proof, proofs of product sale and comparable market price.

  19. The goods were purchased by the Claimant, entered the national territory and were subsequently sold, and the respective customs duties were paid.

  20. The purchase price of the products in question (kitchen set) was 57.76 USD per unit.

  21. The Claimant obtained a quote from company Q…, for the same type of product, which proposed a price of 67.20 USD per unit.

  22. Transfers No. 5, 6, 7, 8, 9, 11, 14, 16 and 17 contained in the table that forms part of point 8 above, respectively of 3/05/2012, 8/06/2012, 18/06/2012, 31/07/2012, 29/08/2012, 13/09/2012, 24/02/2012, 29/08/2012 and 11/12/2012 relate, also respectively, to invoices:

i. TT111073, of 07-10-2011;

ii. TT111120, of 02-11-2011;

iii. TT111124, of 07-11-2011;

iv. TT111127, of 07-11-2011;

v. TT111252, of 02-12-2011;

vi. TT111251, of 02-12-2011;

vii. TT111031, of 03-10-2011;

viii. TT111072, of 07-10-2011;

ix. TT111250, of 02-12-2011;

All from company I…, issued pursuant to the contract of 01-07-2011 referred to above.

  1. Said invoices were charged to expenses by the Claimant in the financial year 2011.

  2. Transfer No. 15 contained in the table that forms part of point 8 above, of 28/02/2012, relates to invoice TT111262, also from company I…, pursuant to the contract of 01-07-2011 referred to above.

  3. In the aforementioned invoice the date is as follows: "12-06-11".

  4. The Claimant recorded that invoice on 22/12/2011.

  5. To the invoices mentioned in the preceding points correspond the following data:

[table of invoices and dates]

  1. The invoices in question discriminate the number of machines to which they relate, as per the table that precedes, and multiply it by the following values, in order to determine the amount to be paid (and paid) by the Claimant:

i. 6 USD relating to "Production Supervision and Quality Inspection";

ii. 5.50 USD relating to "Final Test Control";

iii. 2.50 USD relating to "Test PCB Electronic Boards".

  1. Regarding these payments, the Claimant submitted to the AT payment proofs and sales proofs, inspection reports and a quote for the same service from R… – a company that carried out similar functions.

  2. To the inspection reports submitted by the Claimant, and relating to the invoices to which the preceding points relate, correspond the following data:

[table of dates and quantities]

  1. The Claimant purchased from G… 61,040 machines manufactured between 1 July and 31 October 2011, according to the following table:

[table of machine quantities]

  1. Transfer No. 10, contained in the table that forms part of point 8 above, of 6/09/2012, refers to the payment of the "Diecast Plates…" mold acquired from I…, and the Claimant submitted to the Tax Authority, in addition to the invoice and proof of payment, proof of sale and two quotes for the manufacture of the same mold, from S… and J…, with higher values.

  2. The mold in question was acquired by the Claimant to carry out the injection of aluminum plates for a grill, ordered by multinational L…, having cost €49,097.37 and subsequently sold to L… for €55,000.00.

  3. The Claimant obtained a quote from company J…, Ltd., for the same type of product, which proposed a price of €60,000.00.

  4. Transfers No. 12 and 13, contained in the table that forms part of point 8 above, of 23/10/2012 and 20/12/2012, respectively, concern payments to I… for the purchase of the "…– Capsule Machine" mold, the "…body – piece nr. 116 and 131" molds, the "capsule …– piece nr. 110, … holder – piece nr. 126 and … Gasket – piece nr. 123" molds, the "…cover – piece nr. 118, …handle – piece nr. 140 and … handle – piece nr. 139" molds and the "Slide – piece nr. 120, Cam – piece nr. 101 and Rod cam – piece nr. 103" molds.

  5. These molds were used in the manufacture of the new version of the espresso coffee machine D… ….

  6. Without the acquisition of these molds it would not have been possible to manufacture the extraction group nor the machine ordered by H….

  7. Regarding this operation the Claimant submitted to the AT the following documents: invoice, payment proof, sales extract, proof of final product sale and quote from J…, for the same parts, dated 09-01-2012, proposing higher prices for the same molds.

A.2. Facts Established as Unproven

With relevance to the decision, there are no facts to be considered as unproven.

A.3. Justification of Proven and Unproven Factual Matter

Regarding factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that are important for the decision and discriminate between proven and unproven matter (see article 123(2) of the CPPT and article 607(3) of the Code of Civil Procedure (CPC), applicable by virtue of article 29(1)(a) and (e) of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and defined based on their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (see previous article 511(1) of the CPC, corresponding to current article 596, applicable by virtue of article 29(1)(e) of the RJAT).

Thus, having regard to the positions taken by the parties, in light of article 110(7) of the CPPT, the documentary evidence and the materials attached to the proceedings, and the testimony evidence produced, it was considered proven, with relevance to the decision, the facts listed above, taking into account that, as written in the Decision of the TCA-South of 26-06-2014, delivered in case 07148/13[6], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not contested".

In particular, with regard to the facts established as proven in points 29, 36, 43, 45 to 49, 51, 56, 57, 60, 86, 89, 90, the testimony delivered by the witnesses examined was taken into account, which revealed direct knowledge of the facts as they were considered proven, and testified in a logical and coherent manner, both with each other and with the available documentary evidence, evidencing credibility.

Allegations made by the parties and presented as facts were neither established as proven nor unproven, consisting of statements that are strictly matters of law or conclusory, unsusceptible to proof and whose veracity should be ascertained in relation to the concrete factual matter consolidated above.

B. LAW

i. On the matter of exception

The Respondent begins by raising the dilatory exception which prevents the continuation of the proceedings, leading to the dismissal of the instance regarding the legality of the withholding tax assessment of IRC, in accordance with articles 576(2), 577(a) of the CPC, applicable by virtue of article 29(1)(e) of the RJAT, since it considers that the claim for direct declaration of the illegality of the withholding tax act is beyond the competence of this arbitral tribunal, since in cases "of self-assessment, withholding at source and payments on account, such prior recourse to the administrative channel is mandatory", pursuant to article 2(a) of Ordinance No. 112-A/2011.

The Respondent is not, however, correct, since the present arbitral proceedings do not concern any act of withholding tax, but rather an act of administrative assessment of IRC, identified above, which partially is based on the failure by the Claimant to carry out acts of withholding tax that the AT understood should have been carried out.

As the Claimant very well explained in the exercise of its right to be heard on this matter:

"At issue in the present proceedings is the assessment of the legality of tax acts carried out exclusively by the Tax and Customs Authority.

Indeed, the claimant requested from this Arbitral Tribunal the declaration of illegality of an additional IRC assessment, as well as the illegality of a withholding tax assessment, the latter allegedly owed by virtue of income obtained in Portugal by a non-resident entity.

In either case, the act of determining the tax payable, as well as its respective grounds, were of the sole initiative and responsibility of the Tax and Customs Authority.

For this purpose, see the documents attached under numbers 1 to 4, in particular No. 4, where it can be verified that the amounts allegedly owed as withholding tax were determined and assessed by the Tax and Customs Authority itself.

In the same document No. 4 can be seen the indication of the Tax and Customs Authority that the claimant was notified to 'make payment of the IRC withholding tax assessment for the year indicated. You may appeal or contest within the terms and periods established in articles 70 and 102 of the CPPT'.

It is unquestionable that we are dealing with a tax act, carried out exclusively by the Tax and Customs Authority which, although it is a withholding tax assessment, had no intervention from the alleged substitute, so the same would be directly challengeable and is equally directly arbitrable."

Thus, since no act of withholding tax is at issue in the present arbitral proceedings, the exception raised by the Respondent lacks foundation and should therefore be dismissed.

ii. On the merits of the case

The essential question that arises to be decided in the present proceedings, as recognized by the parties, concerns whether, regarding the 17 transfers referred to in point 8 of the facts established as proven, the Claimant has managed to demonstrate that they correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount, as required by articles 65(1) and 88(8) of the CIRC (in force on the date of the facts).

For purposes of systematic organization, the consideration of the matter referred to will be divided into two groups, one corresponding to transfers No. 5, 6, 7, 8, 9, 11, 14, 15, 16 and 17, contained in the table that forms part of point 8 of the facts established as proven, all relating to the contract of 01-07-2011 entered into between the Claimant and company I…, to which points 39 et seq. of the factual matter established as proven relate, concerning service provision, and another corresponding to the remaining transfers, individually considered, concerning the acquisition of goods.

Let us proceed then.

Beginning with the second of the groups listed, regarding transfer No. 1 of 13/01/2012, contained in the table that forms part of point 8 of the facts established as proven, it was established that the electrical resistances referred to in the respective invoices were manufactured by K… and incorporated by the Claimant in steam cooking machines which subsequently were sold to Dutch multinational L….

The documents submitted by the Claimant allow for the conclusion of the effectiveness of the operations, concluding beyond any reasonable doubt that the product paid for was actually acquired and imported.

Similarly, it is verified that the purchase price of the products in question was 3.546 USD per unit, and that the Claimant obtained a quote from company M…, S.A., for the same type of product, which proposed a price of €4.20 per unit.

In light of the facts referred to, it is equally concluded that the operation in question does not have an abnormal character or an exaggerated amount.

Thus, as the requirements of articles 65(1) and 88(8) of the applicable CIRC are not met, the tax act that is the subject of the present arbitral action is vitiated in this part by error in the factual assumptions, and consequent error in law, and should be annulled, and the arbitral claim should succeed.

Regarding transfer No. 2 of 02/07/2012, contained in the table that forms part of point 8 of the facts established as proven, it was established that the goods were purchased by the Claimant, entered Portugal, paid the respective customs duties and were subsequently sold.

It was further established that the purchase price of the products in question was 32.30 USD per unit and that the Claimant obtained a quote for the same type of product, which proposed a price of 38.51 USD per unit.

In light of the facts referred to, it is concluded beyond any reasonable doubt that the product paid for was actually acquired and imported and that the operation in question does not have an abnormal character or an exaggerated amount.

Thus, as the requirements of articles 65(1) and 88(8) of the applicable CIRC are not met, the tax act that is the subject of the present arbitral action is vitiated in this part by error in the factual assumptions, and consequent error in law, and should be annulled, and the arbitral claim should succeed.

Regarding transfer No. 3 of 28/09/2012, contained in the table that forms part of point 8 of the facts established as proven, it was established that the goods were purchased by the Claimant, entered the national territory and were subsequently sold, and the respective customs duties were paid.

It was further established that the purchase price of the products in question was 28.97 USD per unit and that the Claimant obtained a quote for the same type of product, which proposed a price of 41.20 USD per unit.

In light of the facts referred to, it is concluded beyond any reasonable doubt that the product paid for was actually acquired and imported and that the operation in question does not have an abnormal character or an exaggerated amount.

Thus, as the requirements of articles 65(1) and 88(8) of the applicable CIRC are not met, the tax act that is the subject of the present arbitral action is vitiated in this part by error in the factual assumptions, and consequent error in law, and should be annulled, and the arbitral claim should succeed.

Regarding transfer No. 4 of 13/11/2012, contained in the table that forms part of point 8 of the facts established as proven, it was established that the goods were purchased by the Claimant, entered the national territory and were subsequently sold, and the respective customs duties were paid.

It was further established that the purchase price of the products in question was 57.76 USD per unit, the Claimant obtained a quote for the same type of product, which proposed a price of 67.20 USD per unit.

In light of the facts referred to, it is concluded beyond any reasonable doubt that the product paid for was actually acquired and imported and that the operation in question does not have an abnormal character or an exaggerated amount.

Thus, as the requirements of articles 65(1) and 88(8) of the applicable CIRC are not met, the tax act that is the subject of the present arbitral action is vitiated in this part by error in the factual assumptions, and consequent error in law, and should be annulled, and the arbitral claim should succeed.

Regarding transfer No. 10 of 6/09/2012, contained in the table that forms part of point 8 of the facts established as proven, it was established that it refers to the payment of the "…Plates…" mold acquired from I…, which was acquired by the Claimant to carry out the injection of aluminum plates for a grill ordered by multinational L…, having cost €49,097.37 and subsequently sold to L… for €55,000.00.

It was further established that the Claimant obtained a quote from company J…, Ltd., for the same type of product, which proposed a price of €60,000.00.

In light of the facts referred to, it is concluded beyond any reasonable doubt that the product paid for was actually acquired and imported and that the operation in question does not have an abnormal character or an exaggerated amount.

Thus, as the requirements of articles 65(1) and 88(8) of the applicable CIRC are not met, the tax act that is the subject of the present arbitral action is vitiated in this part by error in the factual assumptions, and consequent error in law, and should be annulled, and the arbitral claim should succeed.

Regarding transfers No. 12 and 13, of 23/10/2012 and 20/12/2012, contained in the table that forms part of point 8 of the facts established as proven, they concern payments to I… for the purchase of the "…Boiler –…Machine" mold, the "… body – piece nr. 116 and 131" molds, the "…holder – piece nr. 110, …holder – piece nr. 126 and …Gasket – piece nr. 123" molds, the "… cover – piece nr. 118, … handle – piece nr. 140 and … handle – piece nr. 139" molds and the "Slide – piece nr. 120, Cam – piece nr. 101 and Rod cam – piece nr. 103" molds, which were used in the manufacture of the new version of the espresso coffee machine D… …and that without the acquisition of these molds it would not have been possible to manufacture the extraction group nor the machine ordered by H….

It was also established that the Claimant obtained a quote from J…, for the same parts, dated 09-01-2012, proposing higher prices for the same molds.

It was further verified that the Claimant developed a new machine (designated by …, which came to replace the previous …), in relation to which only the "Extraction Group", to which the molds in question were destined, which were naturally manufactured before the production of the "Extraction Group", continued to be manufactured in China, as E… patents were still in force regarding the "Extraction Groups", with the remainder of this new machine … produced and completed in Portugal.

In light of the facts referred to, it is concluded beyond any reasonable doubt that the products paid for were actually acquired and that the operation in question does not have an abnormal character or an exaggerated amount.

Thus, as the requirements of articles 65(1) and 88(8) of the applicable CIRC are not met, the tax act that is the subject of the present arbitral action is vitiated in this part by error in the factual assumptions, and consequent error in law, and should be annulled, and the arbitral claim should succeed.

Regarding the first group of transfers referred to above, the payments are in question, according to what is alleged by the Claimant and emerges from the documentation submitted by it, as consideration for the following services:

i. Inspection of the main raw materials used in production, in accordance with the technical specifications attached to the contract;

ii. Testing of 100% of the PCB electronic boards;

iii. Quality control during the production phases;

iv. Inspection of the final product in accordance with the technical specifications attached to the contract;

v. Testing of each machine with at least one capsule during production;

vi. Laboratory testing of 5% of each group of machines, with 5 capsules.

According to the contract formalizing the service provision in question, for the provision of these services the Claimant owed the amount of 14 US dollars per machine.

From the description of payment of the invoices supporting the payments in question, it states that the aforementioned value relates to:

i. 6 USD relating to "Production Supervision and Quality Inspection";

ii. 5.50 USD relating to "Final Test Control";

iii. 2.50 USD relating to "Test PCB Electronic Boards".

The services to which the payments in question relate were invoiced in accordance with the provisions of point 72 of the factual matter established as proven and were embodied in the inspection reports submitted by the Claimant, to which, inter alia, correspond the data contained in point 75 of the same factual matter.

As was already noted, the issue is to assess the effectiveness of the operations and the normal character or non-exaggerated amount of the respective cost.

As was written in the Decision of the TCA-South of 05-11-2015, delivered in case 07022/13[7], "Regarding proof of the truthfulness of the operation, it will not be sufficient to exhibit written documents, namely contracts concluded between the parties, since these are presumed to be simulated, nor to demonstrate the payment of the price, as that is not disputed. What must be the subject of proof is rather the effective provision of services", proof which, in accordance with normal criteria, should convince the judge, beyond any reasonable doubt, that the services were actually provided.

Now, in the present case, and regarding the services in question, this does not occur.

Indeed, having reviewed all the evidence submitted by the Claimant for this purpose, there remain inconsistencies and discrepancies that do not allow the Tribunal to overcome the state of doubt regarding the actual provision of the services in question, it being clear that the reports submitted by the Claimant, the principal physical evidence of the provision of the disputed services, are not coherent with the invoicing presented.

Thus, invoices TT111031, TT111072, TT111073, TT111120 and TT111124, which cover series A1100357 to A1100361, relate to a total of 45,344 machines. However, the reports of 9/7/11 (series 357/358), 16/7/11 (series 358), 22/7/11 (series 358/359), 6/8/11 (series 359), 27/7/11 (series 359), 13/8/11 (series 359/360), 16/8/11 (series 360/361), 25/8/11 (series 361), and 17/9/11 (series 361) which cover all of the same series, 42,282, that is, 3,062 fewer machines.

The remaining invoices, relating to the remaining series up to series A1100365, and including the "RO", relate to 34,880 machines, when the remaining reports, covering the same set of machines, show 37,943 machines, or a difference of 3,063 machines.

Furthermore, the invoices in question and the corresponding reports, as inferred from the start date of the service provision contract (1/7/2011) and the first report (9/7/2011), on the one hand, and the date and series of the last report relating to the invoiced series (28/10/2011), on the other, relate to machines produced between 1 July 2011 and 31 October of the same year (series A1100357 to A1100365 and "RO"), in the respective quantities of 80,224 (invoices) and 80,225 (reports), when, according to the data provided by the claimant itself (see doc. 16 submitted by the Claimant and point 84 of the facts established as proven), between those dates (1/7/2011 and 31/10/2011) 61,040 machines were produced.

In the face of these circumstances, it is not possible to conclude, beyond any reasonable doubt, as the Claimant contends, for the effectiveness of the services to which it relates the payments now in question, which in itself is sufficient to lead to the dismissal, in this part, of the arbitral claim formulated.

Regarding this matter, it is necessary to assess, in light of what has just been concluded, the alleged violation of the principle of specialization of financial years provided for in article 18 of the IRC Code.

Article 18 of the IRC Code provides, insofar as relevant to the case, that:

"1 - Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the accrual accounting regime.

2 - Positive or negative components considered as relating to earlier periods shall only be attributable to the tax period when, on the date of closing of the accounts for the period to which they should have been attributed, they were unforeseeable or clearly unknown."

The corrections against which the Claimant objects were made at three levels, as seen, namely at the level of non-deductibility of the expense, pursuant to article 65(1), at the level of autonomous taxation provided for in article 88(8), and at the level of withholding tax, to which article 94(1)(f), 94(2), 94(3)(b), and 94(5) refer, by reference to articles 4(3) and 4(4), all of the applicable CIRC.

Regarding this latter correction, the provision of the aforementioned article 18 of the CIRC does not in any way interfere, insofar as withholding tax is only due at the time of payment.

As regards autonomous taxation, and taking into account that the aforementioned article 88(8) of the CIRC relates its application to "expenses corresponding to amounts paid or owed", it is verified that the AT chose, in the corrections it made, to apply it to amounts paid.

Now, having regard to the fact that the payments in question, subject to autonomous taxation, occurred in the year 2012, there would be nothing to censure, from the perspective of article 18 of the CIRC, regarding the corrections in question.

However, with respect to the corrections made regarding the payments in question pursuant to article 65(1) of the CIRC, the same provides that:

"Sums paid or owed, by any title, to natural or legal persons resident outside Portuguese territory and subject there to a clearly more favorable tax regime, shall not be deductible for the purposes of determining taxable profit, unless the taxpayer can prove that such expenses correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount."

As the mere reading of the provision makes clear, the correction in question operates on the deduction "for the purposes of determining taxable profit of sums paid or owed, by any title, to natural or legal persons resident outside Portuguese territory and subject there to a clearly more favorable tax regime".

From the facts established as proven it results that the Claimant deducted the sums owed to I…, to which the payments now being analyzed relate, in the financial year 2011.

It was this deduction that, in light of the grounds for the corrections made and what was concluded above, was made in violation of the provision of article 65(1) of the CIRC.

Hence, under the law, the correction of the illegality in which the Claimant incurred should have been made in that financial year 2011, and not, as the AT did, in the financial year 2012, since in the latter the Claimant did not proceed to any deduction relating to the payments in question, so there is nothing, at that level, to correct.

Thus, regarding the correction made pursuant to article 65(1) of the applicable CIRC, based on the aforementioned payments, the arbitral claim should succeed, since the same is vitiated by error in the factual assumptions, and consequently in law, and should be annulled.

The Claimant further alleges the illegality of the sums assessed as withholding tax, due to lack of justification, as well as the absence of any obligation on its part to withhold IRC.

Regarding the alleged lack of justification, it is verified that it sufficiently results from the Tax Inspection Report, namely its pages 33, 118 to 121, 124 and 125, that the withholding tax assessed results from the application to the facts discriminated therein of the regime of article 94, with reference to articles 4(3) and 4(4), and 87(4)(e), of the applicable CIRC.

Thus, the burden in question that fell upon the AT should be considered satisfied.

Regarding the obligation to withhold, article 94 of the applicable CIRC provides, insofar as relevant to the case, that:

"1 - IRC is subject to withholding with respect to the following income obtained in Portuguese territory: (…)

f) Income referred to in article 4(3)(d) obtained by entities not resident in Portuguese territory, when the debtor thereof is a taxpayer subject to IRC or when it constitutes an expense relating to the business or professional activity of IRS taxpayers who possess or should possess accounting records;

g) Income from intermediation in the conclusion of any contracts and income from other services provision carried out or utilized in Portuguese territory, with the exception of those relating to transport, communications and financial activities.

2 - For the purposes of the preceding paragraph, income mentioned in article 4(3) is considered to be obtained in Portuguese territory, except that referred to in article 4(4)."

In turn, article 4 of the same CIRC provides that:

"3 - For the purposes of the preceding paragraph, income attributable to permanent establishments situated therein and, as well as those not found in such conditions, are considered to be obtained in Portuguese territory as follows:

c) Income mentioned below whose debtor has residence, head office or effective management in Portuguese territory or whose payment is attributable to a permanent establishment situated therein:

  1. That derived from intermediation in the conclusion of any contracts;

  2. Those derived from other services provision carried out or utilized in Portuguese territory, with the exception of those relating to transport, communications and financial activities;

4 - Income enumerated in article 4(3)(c) shall not be considered to be obtained in Portuguese territory when they constitute an expense of a permanent establishment situated outside that territory relating to the activity exercised through it and, as well as when such conditions are not met, the income referred to in article 4(3)(7), when the services from which they derive, being carried out entirely outside Portuguese territory, do not relate to assets situated in that territory nor are related to studies, projects, technical support or management, accounting or audit services and consulting services, organization, research and development in any field."

In addressing this matter, in contrast with what occurs regarding non-deductibility of payments referred to in article 65(1) and autonomous taxation referred to in article 88(8), both of the CIRC, one cannot lose sight of the fact that the burden of proof of the verification of the respective requirements falls upon the AT, since "It is the AT that bears the obligation to prove the verification of the legal (binding) requirements of its action, in particular if aggressive (positive and unfavorable)"[8].

Taking into account the normative framework invoked, and being unequivocal and settled that there are payments made by an entity resident in Portugal – the Claimant – to an entity not resident and without a permanent establishment in this country – I… – and that the payments in question did not constitute an expense of a permanent establishment of the paying entity situated outside national territory, it would have been incumbent upon the AT to demonstrate that:

a) There are concerned payments from "intermediation in the conclusion of any contracts" or "services provision carried out or utilized in Portuguese territory";

b) There are concerned income from services provision that "relate to assets situated in that territory nor are related to studies, projects, technical support or management, accounting or audit services and consulting services, organization, research and development in any field."

Having reviewed the factual matter ascertained, it is not possible to validate either of these conclusions.

Indeed, nothing permits indicating, contrary to what is speculated in the Tax Inspection Report, that the intervention of I… in question relates to intermediation in the conclusion of any contracts, not least in that no contracts are known to have been concluded downstream from that intervention.

On the other hand, in light of what was ascertained, nothing equally permits establishing that any services were provided in national territory by I…, in light of the payments under consideration, or indeed that such a commitment was assumed, even if not actually fulfilled.

Finally, and having regard to the substance of the services assumed by the aforementioned I… in the contract underlying the payments subject to withholding tax by the AT, referred to above, one cannot conclude that there are concerned services that "are related to studies, projects, technical support or management, accounting or audit services and consulting services, organization, research and development in any field", since, as contractually defined, and with nothing in what was ascertained permitting a contrary conclusion, the contracted services are of the nature of inspection and quality control services.

Given this, it must be concluded, nevertheless, that the Claimant is correct regarding the non-applicability, in the present case, of any obligation on its part to withhold IRC regarding the aforementioned payments.

The Claimant further alleges the occurrence of formal defects due to violation of articles 55, 58, 59(1) and 59(2) of the LGT, articles 6 and 9 of the RCPIT, article 153(2) of the Administrative Procedure Code, applicable by virtue of the provision in article 2(c) of the LGT and article 2(d) of the CPPT.

With due respect, it is understood that the allegations in question lack foundation since, as is evident from the administrative proceedings and the Tax Inspection Report, these proceeded in perfectly normal terms, the AT having acted, within the legal framework of its functions and assumed a posture that cannot but be considered acceptable, within the powers and duties that are its responsibility, in particular those to which the provisions that the Claimant indicates as violated relate, and having condensed its respective conclusions, correct or not, in terms previously analyzed, in a report that is perfectly intelligible, notwithstanding the complexity of the matter, conveying in sufficiently explicit and coherent manner the factual and legal assumptions that it considered verified and on which the corrections against which the Claimant objects are based, without having, in the determination thereof, omitted diligences that it was required to perform, or performed diligences that were legally prohibited.

The formal defects raised by the Claimant referred to above should therefore be dismissed.

Thus, from the above and in summary, it is concluded that the arbitral claim should succeed regarding the annulment of the act of additional assessment of Corporate Income Tax (IRC) for the financial year 2012, which is the subject of the present arbitral action, with the exception of the part relating to autonomous taxation applicable to payments corresponding to transfers No. 5, 6, 7, 8, 9, 11, 14, 15, 16 and 17, contained in the table that forms part of point 8 of the facts established as proven.

Regarding the claim for compensatory interest formulated by the Claimant, article 43(1) of the LGT establishes that compensatory interest is owed when it is determined that there was error attributable to the services as a result of which payment of the tax debt in an amount greater than legally due occurred.

In the present case, the errors that affect the assessment are attributable to the AT, which carried out the act of illegal assessment on its own initiative.

The Claimant therefore has the right to be reimbursed for the amount it paid unduly (pursuant to articles 100 of the LGT and article 24(1) of the RJAT) and, further, to be indemnified for the unduly payment through the payment of compensatory interest by the Respondent, from the date of payment of the sum until reimbursement, at the legal default interest rate, pursuant to articles 43(1) and 43(4) and 35(10) of the LGT, article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

The Claimant further formulates the claim for condemnation of the Respondent in expenses equivalent to the expenses and fees of its representatives, however indicating no legal foundation for its claim, whether from a substantive or procedural point of view.

With due respect to other opinions, it is understood that the choice of arbitral jurisdiction implies the waiver of compensation for expenses covered by party costs, where lawyer's fees are included (article 25(2)(d) of the Regulations on Procedural Costs).

Indeed, since no payment of party costs is provided for in arbitral jurisdiction, by admitting the possibility of the taxpayers claiming compensation for expenses with representatives, one would be negatively discriminating against the AT, in that, in cases it wins, it would not see itself compensated for the corresponding party costs, nor could obtain the corresponding compensation.

Thus, it should be understood that, by opting for tax arbitral jurisdiction, both the AT and the taxpayer are waiving compensation due for expenses covered by party costs.

Without prejudice to the above, it is further understood that it does not fall within the competence of arbitral tribunals in tax matters to assess the indemnification claim in question.

Indeed, as decided in the Decision of the Plenary of the STA of 30-04-2013, delivered in case 03197/13[9]:

"The competence to assess actions in which the prevailing party in a prior dispute comes to claim indemnification for the expenses it incurred as lawyer's fees is assigned to the administrative courts, even if such action has taken place before the tax courts."

It is thus considered, taking into account, in accordance with the terms set forth in the aforementioned judgment, the provisions of articles 4(1), 37(f) and 49, all of the ETAF, as well as the provisions of article 2 of the RJAT, that, regarding the claim in question, the exception of lack of absolute competence, lack of competence ratione materiae, of official knowledge and which prevents consideration of the merits of the claim, applies.

C. DECISION

Therefore, this Arbitral Tribunal decides to hold the arbitral claim partially well-founded and, in consequence:

a) Annuls the act of additional assessment of Corporate Income Tax (IRC) for the financial year 2012, which is the subject of the present arbitral action, with the exception of the part relating to autonomous taxation applicable to payments corresponding to transfers No. 5, 6, 7, 8, 9, 11, 14, 15, 16 and 17, contained in the table that forms part of point 8 of the facts established as proven;

b) Condemns the Respondent to payment of compensatory interest owed from the date of payment of the tax now annulled, until full reimbursement of the amount paid;

c) Condemns the parties in the costs of the proceedings, in the proportion of their respective unsuccessful claims, setting at the amount of €4,534.00 the part to be borne by the Claimant, and at the amount of €10,460.00 the part to be borne by the Respondent.

D. Value of the Proceedings

The value of the proceedings is set at €1,096,739.41, pursuant to article 97-A(1)(a) of the Tax Procedure and Process Code, applicable by virtue of articles 29(1)(a) and (b) of the RJAT and article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is set at €14,994.00, pursuant to Table I of the Regulation on Costs in Tax Arbitration Proceedings, to be paid by the parties, in the proportion of their respective unsuccessful claims, set above, since the claim was partially well-founded, pursuant to articles 12(2) and 22(4), both of the RJAT, and article 4(4) of the aforementioned Regulation.

Notify accordingly.

Lisbon, 18 August 2017

The Presiding Arbitrator

(José Pedro Carvalho - Relator)

The Arbitrator Vogal

(Leonardo Marques dos Santos – with dissenting opinion)

The Arbitrator Vogal

(Ana Maria Rodrigues)

Dissenting Opinion

Dissenting from the above Decision, only regarding the decision relating to payments corresponding to transfers No. 5, 6, 7, 8, 9, 11, 14, 15, 16 and 17, since I consider, with due respect for the contrary opinion, that the Claimant has provided sufficient proof that the expenses correspond to operations actually carried out and do not have an abnormal character or an exaggerated amount.

In light of the above, I would hold the claim for annulment of the entire act of additional assessment of IRC for the financial year 2012 to be well-founded.

18 August 2017

Leonardo Marques dos Santos

[1] Specifically: transfer No. 1 of 13/01/2012, transfer No. 5 of 3/05/2012, transfer No. 6 of 8/06/2012, transfer No. 7 of 18/06/2012, transfer No. 8 of 31/07/2012, transfer No. 9 of 29/08/2012, transfer No. 11 of 13/09/2012, transfer No. 14 of 24/02/2012, transfer No. 15 of 28/02/2012 and transfer No. 16 of 29/08/2012.

[2] PO ("Production Order").

[3] "Return Order".

[4] PO ("Production Order").

[5] "Return Order".

[6] Available at www.dgsi.pt, as is the remaining case law cited without mention of source.

[7] Available at www.dgsi.pt.

[8] See Decision of TCA-South of 16-01-2007, delivered in case 00911/03, available at www.dgsi.pt.

[9] Available at www.dgsi.pt.

Frequently Asked Questions

Automatically Created

What are the tax consequences of payments to entities subject to a more favorable tax regime under Portuguese IRC?
Payments to entities subject to more favorable tax regimes face significant tax consequences under Portuguese IRC law. Article 65(1) CIRC establishes a legal presumption that such expenses are non-deductible for tax purposes unless the taxpayer proves the operations actually occurred, correspond to real economic transactions, and do not involve abnormal or excessive amounts. Additionally, Article 88(8) CIRC subjects these payments to autonomous taxation at elevated rates (currently 35% or 55% depending on circumstances), creating a dual tax burden even when deductibility is proven. Cross-border transfers exceeding €12,500 must be reported via Model 38 declarations, triggering Tax Authority scrutiny and potential inspection actions.
How do Articles 65/1 and 88/8 of the IRC Code apply to cross-border transfers?
Articles 65(1) and 88(8) CIRC create a two-tier control mechanism for cross-border transfers to favorable tax jurisdictions. Article 65(1) shifts the burden of proof to taxpayers, requiring comprehensive documentation to demonstrate legitimate business operations—including contracts, invoices, transport documents (B/L, CMR), payment proofs, and business rationale. Failure to provide sufficient evidence results in expense disallowance, increasing taxable profit. Article 88(8) then applies autonomous taxation independently of deductibility determinations, functioning as an anti-abuse measure that taxes the gross payment amount at punitive rates. Both provisions work together to discourage artificial profit shifting to low-tax jurisdictions while allowing legitimate business expenses with proper substantiation.
Can expenses from transactions with entities in favorable tax regimes be deducted as costs for IRC purposes?
Expenses from transactions with entities in favorable tax regimes can be deducted as costs for IRC purposes, but only if the taxpayer overcomes the Article 65(1) CIRC presumption of non-deductibility through robust documentary evidence. Required proof includes: (a) existence of actual operations through contracts and commercial documentation; (b) normal business character demonstrated by market conditions and business purpose; (c) reasonable pricing supported by transfer pricing documentation or market comparables; and (d) effective execution evidenced by transport documents, customs clearance, payment records, and delivery confirmation. The Tax Authority maintains discretion to evaluate sufficiency of evidence, making thorough documentation essential. Even when deductibility is established, autonomous taxation under Article 88(8) still applies.
What is the role of the specialization of fiscal years principle (Article 18 CIRC) in disallowed expense corrections?
Article 18 CIRC establishes the accrual basis and specialization of fiscal years principle, requiring income and expenses to be recorded in the tax period when economically incurred, regardless of payment timing. This principle becomes critical when the Tax Authority disallows expenses and makes corrections across multiple periods. If corrections improperly attribute expenses to fiscal years different from when they were economically incurred, this violates Article 18 CIRC. In this case, the taxpayer alleged the Tax Authority violated the accrual regime by disallowing and autonomously taxing certain expenses without respecting their proper fiscal year allocation. Such violations can constitute grounds for annulling assessment corrections, as they distort the accurate measurement of annual taxable profit and violate fundamental tax accounting principles.
What withholding tax obligations arise from cross-border payments to low-tax jurisdictions under Portuguese tax law?
Withholding tax obligations on cross-border payments to low-tax jurisdictions depend on payment classification and applicable tax treaties. Portuguese IRC law requires withholding on certain income types paid to non-residents, including services (Article 4 CIRC), royalties, interest, and technical assistance. Rates vary based on jurisdiction and applicable double taxation treaties. However, withholding applies only to specific income categories—not all cross-border payments trigger withholding. In this case, the taxpayer challenged €142,136.20 in alleged withholding tax deficiencies, arguing no legal obligation existed for the payment types involved. Proper classification requires analyzing payment nature, contractual terms, and treaty provisions. The Tax Authority must justify withholding assessments by demonstrating the payments fall within taxable categories and the payer's withholding obligation under applicable law.