CAAD Case 61/2018-T: IRC Corporate Tax Deductions for Depreciation and Amortization Costs

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-chairman), Prof. Doctor Vasco Valdez and Dr. Ricardo Rodrigues Pereira (arbitrators-members) appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Court, constituted on 03-05-2018, agree as follows:

1. Report

A..., S.A., with the collective person identification number..., with registered office at ..., ..., no...., ..., in Lisbon (hereinafter referred to as "Claimant"), came, pursuant to Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Court.

The Claimant seeks the annulment of the additional IRC assessment no. 2017..., of 09-10-2017, which includes the assessments of compensatory interest nos. 2017... and 2017..., of 11-10-2017, relating to the tax period 2013, whose balance payable included in the statement of account settlement no. 2017... was € 814,605.92, and of the additional IRC assessment no. 2017..., of 09-10-2017, which includes the assessment of compensatory interest no. 2017..., of 12-10-2017, relating to the tax period 2014, whose balance payable included in the statement of account settlement no. 2017... was € 277,698.90, as well as compensation should be set for guarantees unduly provided, pursuant to article 53 of the LGT and article 171 of the CPPT.

The TAX AUTHORITY AND CUSTOMS SERVICE is respondent.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax Authority and Customs Service on 20-02-2018.

Pursuant to the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the undersigned, who communicated acceptance of the appointment within the applicable period.

On 11-04-2018 the parties were duly notified of this appointment, having shown no intention to refuse the appointment of arbitrators, pursuant to the combined provisions of article 11, paragraph 1, subparagraphs a) and b) of the RJAT and articles 6 and 7 of the Code of Ethics.

Thus, in compliance with the provisions of subparagraph c) of paragraph 1 of article 11 of the RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 03-05-2018.

The Tax and Customs Administration presented a Response and argued for the inadmissibility of the claims.

On 05-07-2018 a hearing was held at which testimonial evidence was produced and it was decided that the proceedings would continue with written submissions.

The parties presented submissions.

The arbitral tribunal was duly constituted, in light of the provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 1, of DL no. 10/2011, of 20 January, and is competent.

The parties are duly represented, enjoy legal personality and capacity, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

2. Facts

2.1. Proven Facts

The following facts are considered proven:

• The Claimant is a public limited company with the activity of management of own real property and, subsidiary, purchase of real estate or land and development of respective urban development, provision of management services, administration and exploitation of real estate assets, commercial spaces and offices, management, administration and exploitation of shopping centers, condominiums and areas for collection or collective parking of vehicles;

• The Claimant is the owner and commercially operates (in particular through the conclusion of lease agreements) the urban real estate property, composed of a building with six basement levels and twelve floors located at..., no...., in Lisbon, described in the Property Registry Office of Lisbon, under no. .../..., of the parish of ..., commonly referred to as "...";

• To finance the construction of the ..., the Claimant entered into, on 15-05-1996, a credit facility agreement with B... (hereinafter "B..."), C... (hereinafter "C...") and D... (hereinafter "D...") (document no. 3 attached with the request for arbitral decision, whose content is reproduced and testimony of witness E...);

• Under this agreement, a loan was granted to the Claimant in the amount of up to 6,000,000,000$00 (€ 29,927,873.82), distributed as follows (document no. 3):

(i) B...: 2,000,000,000$00 (€ 9,975,957.94);
(ii) C...: 2,000,000,000$00 (€ 9,975,957.94);
(iii) D...: 2,000,000,000$00 (€ 9,975,957.94);

• This financing granted by B..., C... and D... (hereinafter referred to as "Banking Syndicate") was intended "exclusively to ensure the necessary complementary financial resources for A... to build and carry out the marketing, through sale, lease, and temporary assignment, for consideration, of fractions and spaces of the Building (...), in ..., in Lisbon" (clause 5 of document no. 3);

• Through the aforementioned contract, the Claimant undertook, among other things, to:

(i) Ensure the obtaining of new financing or by other means deemed convenient so that it always had the necessary funds to complete the construction of ...;
(ii) Submit for approval the Marketing and Commercialization Plan of ...;
(iii) Submit and keep updated insurance policies relating to ...;
(iv) Obtain authorizations and licenses of use necessary for ... to serve as a building for commerce, offices and parking;
(v) Not establish guarantees in favor of third parties that would burden its assets, as well as its credits and revenues, without prior authorization of the Banking Syndicate;
(vi) Not grant loans to its shareholders before making full payment of the obligations resulting from this financing;
(clause sixteen of document no. 3);

• It was agreed in the referred contract that this financing contract would be in effect for a period of 150 months (10 years and 3 months) from the date of first utilization (clause seven of document no. 3);

• The Claimant entered into, on 15-09-1999, a new credit facility agreement with B... (document no. 4 attached with the request for arbitral decision, whose content is reproduced and testimony of witness E...);

• Under this contract, B... granted to the Claimant a loan in the amount of up to 1,000,000,000$00 (€ 4,987,978.97) (clause three of document no. 4);

• In clause 4 of this contract with B..., it is stated that this financing was intended "exclusively to ensure the necessary complementary financial resources for A... to complete the construction and carry out the marketing, through sale, lease, and temporary assignment, for consideration, of fractions and spaces of the Building [...], in ..., in Lisbon";

• In the context of the aforementioned contract with B..., the Claimant undertook to:

(i) Ensure the obtaining of new financing or by other means deemed convenient so that it always had the necessary funds to complete the construction of ...;
(ii) Submit to B... for approval the Marketing and Commercialization Plan of ...;
(iii) Submit and keep updated insurance policies relating to ...;
(iv) Obtain authorizations and licenses of use necessary for ... to serve as a building for commerce, offices and parking;
(v) Not establish guarantees in favor of third parties that would burden its assets, as well as its credits and revenues, without prior authorization of B...;
(vi) Not grant loans to its shareholders before making full payment of the obligations resulting from this financing; (clause fourteen of document no. 4)

• It was agreed that this contract with B... would be in effect for a period of 150 months (10 years and 3 months) from 01-06-1999 (clause 5);

• To build ... and develop its activity, the Claimant became indebted to its shareholder and other group entities (testimony of witness E...);

• On 29-12-2000, the Claimant's indebtedness to its shareholder and other group entities amounted to the following amounts:

(i) Advances from F... in the amount of 1,210,779,997$00 (€ 6,039,345.16);
(ii) Accessory contributions from F... in the amount of 3,000,000,000$00 (€ 14,963,936.91);
(iii) Loan granted by Swiss law company G... in the amount of 2,300,000,000$00 (€ 11,472,351.63), plus accrued interest in the amount of 982,324,084 (€ 4,899,811.87); (document no. 5 attached with the request for arbitral decision, whose content is reproduced and testimony of witness E...);

• In the year 2000, G... decided to disinvest in Portugal, proposing to sell the shares of the Claimant (document no. 5 and testimony of witness E...);

• In the context of this transaction, referred to in the "Share Purchase Agreement" which is in document no. 5, it was agreed between the seller and the buyer that the Claimant would, after the sale, proceed to the reimbursement of the following foreign capital:

(i) Advances from F... in the amount of 1,210,779,997$00 (€ 6,039,345.16) (clause III of the "Share Purchase Agreement");
(ii) Accessory contributions from F... in the amount of 3,000,000,000$00 (€ 14,963,936.91) (clause III of the "Share Purchase Agreement");
(iii) Loan granted by Swiss law company G... in the amount of 2,300,000,000$00 (€ 11,472,351.63), plus accrued and (still) unpaid interest in the amount of 982,324,084 (€ 4,899,811.87) (clause II of the "Share Purchase Agreement");

• On 29-12-2000, the Portuguese law company H..., SGPS, S.A. (hereinafter "H...") acquired from company F... (a company based in the Netherlands Antilles, hereinafter "F...") all shares representing the capital stock of the Claimant, for the amount of 250,000,000$00 (€ 1,246,994.74), to be paid by 25-06-2001 (clauses I.1.(a), I.3 and V of the "Share Purchase Agreement" in document no. 5)

• It was agreed in the said "Share Purchase Agreement" that the Claimant would acquire all shares representing the capital stock of company I..., S.A. (hereinafter "I..."), which was also wholly held by F... (recitals and clause I.1.(b) of the "Share Purchase Agreement");

• It was agreed in the said "Share Purchase Agreement" that, for the purchase of I..., the Claimant would pay to F... the sum of 6,250,000,000$00 (€ 31,174,868.57), thus itemized:

(i) By 25-02-2001, the Claimant would make a payment to F... in the amount of 3,500,000,000$00 (€ 17,457,926.40);
(ii) By 25-06-2001, the Claimant would make a payment to F... in the amount of 2,750,000,000$00 (€ 13,716,942.17); (clause IV of the "Share Purchase Agreement");

• It was agreed in clause VI of the said "Share Purchase Agreement" that the Claimant would provide, together with H..., to ensure the fulfillment of the contractually assumed responsibilities, to F... irrevocable bank guarantees issued by J... in the following amounts and terms:

(i) 3,000,000,000$00 (€ 14,963,936.91), valid until 29-01-2001;
(ii) 3,500,000,000$00 (€ 17,457,926.40), valid until 28-02-2001;
(iii) 2,750,000,000$00 (€ 13,716,942.17), valid until 29-06-2001;
(iv) 250,000,000$00 (€ 1,246,994.74), valid until 29-06-2001;

• The Claimant entered into, together with H..., on 29-12-2000, a credit facility agreement, constitution and provision of guarantees with a set of banking institutions constituted by the following institutions:

(i) J..., S.A. (hereinafter "J...");
(ii) K...(hereinafter "K...");
(iii) L..., S.A. (hereinafter "L...");
(iv) M..., S.A. (hereinafter "M...");
(v) N..., S.A. (hereinafter "N...");
(vi) O..., S.A. (hereinafter "O..."), hereinafter, when referred to collectively, the "Banks" (document no. 6 attached with the request for arbitral decision, whose content is reproduced);

• Under this contract, J... and K... immediately granted to the Claimant a loan in the form of a credit facility in the amount of 4,500,000,000$00 (€ 22,445,905.37), itemized as follows:

(i) J...: 3,600,000,000$00 (€ 17,956,724.29);
(ii) K...: 900,000,000$00 (€ 4,489,181.07); (clauses 2 and 4 of document no. 6);

• In the context of this contract, J... and K... also opened a credit facility up to the amount of 12,000,000,000$00 (€ 59,855,747.65), to be utilized by the Claimant (and also by H...) through the issuance of bank guarantees, as follows:

(i) 3,000,000,000$00 (€ 14,963,936.91), to be valid until 30-01-2001;
(ii) 3,500,000,000$00 (€ 17,457,926.40), to be valid until 28-02-2001;
(iii) 2,750,000,000$00 (€ 13,716,942.17), to be valid until 29-06-2001;
(iv) 250,000,000$00 (€ 1,246,994.74), to be valid until 30-06-2001;
(v) 2,500,000,000$00 (€ 12,469,947.43), to be valid until 30-06-2001 (clauses 2 and 17 of document no. 6);

• It was agreed in this contract that, as the terms of the guarantees were being returned to J..., the amounts of these guarantees would be utilized for financing purposes to the Claimant (and also, to a lesser extent to H...), with the respective disbursements distributed among the Banks in the following percentages:

(i) J...: 52%;
(ii) K...: 20%;
(iii) L...: 8%;
(iv) M...: 8%;
(v) N...: 8%;
(vi) O...: 4%; (clause 2 of document no. 6);

• This financing was intended to enable the Claimant to reimburse the financing previously contracted with B... and the former shareholder (testimony of witness E... and clause 3 of document no. 6);

• Among other obligations, the Claimant and H... undertook, before the Banks, not to use the funds placed at their respective disposal for purposes other than those which justified their granting (clauses 3 and 12 of document no. 6);

• It was agreed that this financing contract would be in effect until the conclusion of a new credit facility agreement, in the amount of 25,000,000,000$00 (€ 124,699,474.27), to take place by 30-06-2001, among the same contracting parties (clause 5 of document no. 6);

• On 20-04-2001, H... and the Claimant entered into with the Banks a new credit facility agreement, constitution and provision of guarantees (document no. 7 attached with the request for arbitral decision, whose content is reproduced);

• In this new contract, it was established that the Banks agreed to carry out a credit facility up to the amount of 25,000,000,000$00 (€ 124,699,474.27) (clause 2 of document no. 7);

• The contracting parties recognized that, in light of the total loan capital, part of it had already been utilized, in the following terms:

(i) 4,500,000,000$00 (€ 22,445,905.37) were delivered to the Claimant upon the conclusion of the first credit facility agreement;
(ii) 3,000,000,000$00 (€ 14,963,936.91) were delivered to the Claimant on 26-01-2001 (in exchange for the return of a bank guarantee term of equal amount);
(iii) 3,500,000,000$00 (€ 17,457,926.40) were delivered to the Claimant on 26-02-2001 (in exchange for the return of a guarantee term of equal amount) (clause 2 of document no. 7);

• The remaining bank guarantee terms that had been issued by J... and K... under the previous credit facility agreement were returned by the Claimant and H... (clause 2 of document no. 7);

• It was agreed that, of the 25,000,000,000$00 (€ 124,699,474.27) assigned in this contract contained in document no. 7, part would be used to pay the credits of J... and K... arising from the credit facility previously carried out, with the Banks delivering to the Claimant and H... the amount of 14,000,000,000$00 (€ 69,831,705.59), itemized as follows (clauses 2 and 4 of document no. 7):

(i) 11,000,000,000$00 (€ 54,867,768.68) to the Claimant;
(ii) 3,000,000,000$00 (€ 14,963,936.91) to H....

• This new credit facility agreement was intended to provide to the Claimant the necessary financial resources to regularize its liabilities and for the realization of investments (testimony of witness E... and clause 3 of document no. 7);

• In this new financing contract it was established the duty, among other obligations to be fulfilled by the Claimant and H..., that the funds placed at its disposal would not be used for purposes other than those which justified their granting (clause 12 of document no. 7);

• It was agreed that this financing contract would be in effect for a period of 30 years from its conclusion (clause 5 of document no. 7);

• On 31-05-2001, to comply with another of the Banks' requirements, the Claimant and H... respectively subscribed increases in capital stock in companies I... and Claimant in such a way that:

(i) I... came to have a capital stock in the amount of 2,506,025,000$00 (€ 12,500,000.00), fully subscribed by the Claimant; and
(ii) The Claimant came to have a capital stock in the amount of 2,506,025,000$00 (€ 12,500,000.00), fully subscribed by H... (clause 12 of document no. 7 and documents nos. 8 and 9 attached with the request for arbitral decision, whose contents are reproduced);

• H... allocated the following destination to the funds that were loaned to it by the Banks (documents nos. 5, 7 and 10 attached with the request for arbitral decision, whose contents are reproduced):

[Details of allocation not fully translated in original]

• The Claimant gave the following destination to the funds attributed either by the Banks (through the aforementioned credit facility lines) or by H...:

(i) By reference to the successive disbursements of funds attributed only by the Banks (documents nos. 5, 6, 7 and 11):

[Details of allocation not fully translated in original]

(ii) Summary of the various destinations given to the funds received by the Claimant from the Banks (documents nos. 5, 6, 7 and 11 attached with the request for arbitral decision, whose contents are reproduced):

[Details of allocation not fully translated in original]

(iii) By reference to the destination given by the Claimant to the funds that were financed to it by H... (cf. documents nos. 9 and 11 attached with the request for arbitral decision, whose contents are reproduced):

[Details of allocation not fully translated in original]

• The entirety of the financing obtained from the Banks served to refinance the debt incurred (in particular with the Banking Syndicate and B...) in the context of the pursuit of the Claimant's activity, notably with the construction of ... (testimony of witness E...);

• The Claimant transferred to I... (so that it would reimburse a set of advances previously granted by F... and for the pursuit of its investment policy) a set of funds that totaled the amount of 2,950,000,000$00, which had the following origin:

(i) 2,466,025,000$00 came from the increase in capital made by H... (document no. 8 attached with the request for arbitral decision, whose content is reproduced);
(ii) 208,653,287$00 corresponded to the remaining amount of the loan that had been granted to it by the Banks and that had not been used to fulfill the obligations arising from the Share Purchase Agreement (documents nos. 5, 6, 7 and 11 attached with the request for arbitral decision, whose contents are reproduced);
(iii) 240,321,713$00 came from the rents it received as a result of its activity, in particular from the lease of ... (document no. 18 attached with the request for arbitral decision, whose content is reproduced);

• On 20-08-2007, the Claimant entered into with P... a credit facility agreement with mortgage, assignment of income, assignment of credits, pledge of shares and pledge of bank accounts (document no. 12 attached with the request for arbitral decision, whose content is reproduced)

• Under this new credit facility agreement, P... granted to the Claimant a credit up to the amount of € 125,500,000.00, which was intended to refinance the long-term investment that the Claimant had made in ... (clause 1 of document no. 12);

• This financing contract concluded with P... presents an intrinsic relationship with the loans previously concluded by the Claimant (with the Banks) and which had resulted from its need to obtain foreign capital to refinance the construction of its principal asset and principal source of income, ... (document no. 12 and testimony of witness E...);

• The credit granted by P... to the Claimant was composed of two tranches, namely:

(i) Tranche A, in the amount of € 113,000,000.00, made available on the very day of conclusion of this new contract;
(ii) Tranche B, in the maximum amount of € 12,500,000, to be made available, on a single occasion, at any time, until 31-10-2007 (clauses 1 and 3 of document no. 12);

• To ensure the coverage of the interest rate risk until the date of repayment of the credit, the Claimant and P... agreed that the former would subscribe a product for coverage of interest rate risk until the date of repayment of the credit, which would ensure the fulfillment of the debt service coverage ratio provided for in clause 26), during the period of time of counting of interest in which these would be calculated by reference to a variable rate (clause 6, paragraph 3, of document no. 12);

• From 20-08-2012, the Claimant could opt for a fixed rate (clause 6, paragraph 4, of document no. 12);

• To guarantee the fulfillment of all obligations arising from the conclusion of this financing contract:

(i) The Claimant established in favor of P...:
a. First-degree voluntary mortgage on ...;
b. Assignment of income arising from its lease;
c. Financial pledge of bank accounts;
(ii) The Claimant undertook to comply with a broad set of obligations relating to this real property, in particular to maintain it in good condition, to keep up to date multirisk insurance relating to it, to maintain the necessary authorizations for its exploitation, to authorize the carrying out of inspections of it by P...;
(iii) H... established first-degree financial pledge, in favor of P..., over all and each of the shares of the Claimant of which it held title (clauses 10, 15, 20, 30 and 32 of document no. 12);

• The guarantees provided by the Claimant to P... present a connection between the financing contracted with P... and ... (document no. 12 and testimony of witness E...);

• Under this new credit facility agreement, the Claimant used the funds received from P... for:

(i) To pay the liability owed to J...;
(ii) To pay the liability owed to N...;
(iii) To pay the liability owed to K...;
(iv) To bear the payment of commissions and other charges required by P...; and
(v) To bear the normal and natural fiscal charges as Stamp Duty, owed on the borrowed capital and on the banking commissions charged by P... (document no. 13 attached with the request for arbitral decision, whose content is reproduced and testimony of witness E...);

• It was agreed between the Claimant and P... that the credit facility agreement would be concluded for a period of 8 years, beginning on 20-08-2007 and ending on 19-08-2015 (clause 4 of document no. 12);

• Since the conclusion of this credit facility agreement with P..., the Claimant has been punctually complying with the obligations resulting from it, in particular as regards the conditions for payment of interest set out therein, as well as those relating to early repayment of the credit (clauses 8 and 13 of document no. 12 and testimony of witness E...);

• With reference to 31-12-2013, the Claimant presented total indebtedness to P... in the amount of € 112,986,330, of which part corresponded to the outstanding capital arising from the credit facility and another part arises from the liability assumed as a result of contracting the financial product for coverage of interest rate risk (document no. 14 attached with the request for arbitral decision, whose content is reproduced)

• As a consequence of the indebtedness to P..., the Claimant bore charges, in the year 2013, in the total amount of € 4,789,855.81, itemized as follows:

(i) € 3,717,419.45, recorded in accounting account 6886;
(ii) € 1,072,436.36, recorded in accounting account 6911; (page 16 of the Tax Inspection Report, which is in document no. 29 attached with the request for arbitral decision, whose content is reproduced);

• With reference to 31-12-2014, the Claimant presented total indebtedness to P... in the amount of € 111,521,279.47, of which part corresponded to the outstanding capital arising from the credit facility and another part arises from the liability assumed as a result of contracting the financial product for coverage of interest rate risk (document no. 16 attached with the request for arbitral decision, whose content is reproduced);

• As a result of the existing indebtedness to P..., the Claimant bore charges, in the year 2014, in the total amount of € 4,816,476.52, itemized as follows:

(i) € 3,691,605.56, recorded in accounting account 6886;
(ii) € 1,124,873.96, recorded in accounting account 6911; (page 16 of the Tax Inspection Report)

• In the period between the years 2000 and 2006, the Claimant obtained income arising from service provision intrinsic to its economic activity (document no. 18 attached with the request for arbitral decision, whose content is reproduced);

• The income obtained by the Claimant was wholly obtained as a result of the lease of ... to I... (notes contained in the annex to the balance sheet and income statements contained in document no. 18 attached with the request for arbitral decision, whose content is reproduced);

• Between the years 2000 to 2006 the Claimant received the following real property income, in the amount of € 52,438,693.94:

[Detailed breakdown not fully translated in original]

• The Claimant allocated part of the rents received from I... by virtue of the leases of spaces in ... to the non-remunerated financing of other related parties, in particular its parent company at the time, H... (document no. 18 and testimony of witness E...);

• The following evolution was recorded in the credit balances that the Claimant presented over H... in the period between the years 2002 and 2006:

[Detailed breakdown not fully translated in original]

(document no. 19 attached with the request for arbitral decision, whose content is reproduced);

• The Claimant has the ability to generate own income – without depending on external financing to maintain its operational capacity (testimony of witness E...);

• At least 7 years before the conclusion of the loan agreement with P..., the Claimant was already recording the practice of using its own revenues for the purpose of satisfying the treasury needs that, in particular, H... was recording (document no. 19 attached with the request for arbitral decision, whose content is reproduced and testimony of witness E...);

• The Claimant maintained the practice of allocating part of the rents it received from the lease of ... to the financing of related parties during the subsequent years, in particular after the conclusion of the loan agreement with P... (testimony of witness E...);

• On 29-09-2011, H... sold to Dutch law company Q... (hereinafter "Q...") all shares representing the capital stock of the Claimant (document no. 20 attached with the request for arbitral decision, whose content is reproduced);

• The price agreed between the contracting parties for the purchase of these shares was set in the amount of € 32,500,000.00, which corresponded to the debt that H... had to the Claimant (clauses 2.1 and 2.2 of document no. 20);

• The aforementioned price was paid by Q... to H... through the figure of assumption of debt provided for in article 595 of the Civil Code, i.e., Q... assumed the debt that H... had to the Claimant (clause 2.2 of document no. 20);

• On 30-08-2012, the Claimant entered into with company R..., S.A. (hereinafter "R...") a contract that had as its object the modernization of the elevators of ... (document no. 21 attached with the request for arbitral decision, whose content is reproduced);

• The value agreed between the signatory parties of this agreement for the provision of services for the modernization of the aforementioned elevators amounted to € 571,500.00 (first clause of the Annex "Price, Payment Conditions and Other Contractual Terms" which is in part 7 of the administrative proceedings, page 79).

• The contract stipulates that the time limit for the commencement of the modernization works at the work site would be two months counted from the first payment (third clause of the Annex "Price, Payment Conditions and Other Contractual Terms" of document no. 21);

• The contract provides that payments relating to the investment made by the Claimant in the modernization of the elevators of ... would be contemporary with the payments that would result, in accordance with the contract, from services of maintenance and upkeep of the same elevators (second clause of the Annex "Price, Payment Conditions and Other Contractual Terms" of document no. 21);

• The Claimant would only have to make payments to R... relating to the modernization of the elevators of ... as it received periodic invoices relating to the maintenance and upkeep services of such equipment (document no. 21 and testimony of witness E...);

• On 22-10-2013, the Claimant made the first payment, in the amount of € 6,428.22 relating to invoice no. 226212246, referring to this contract for the modernization of the elevators (document no. 22 attached with the request for arbitral decision, whose content is reproduced);

• Q... carried out the execution of this elevator modernization project during the months of September to December 2013 (document no. 23 attached with the request for arbitral decision, whose content is reproduced);

• The payments relating to the contract occurred mainly in the years subsequent to the completion of the project (testimony of witness E...);

• The Claimant recognized the expense with the depreciation of the investment in the modernization of the elevators in the periods of 2013 and subsequent (page 26 of document no. 29 attached with the request for arbitral decision, whose content is reproduced and testimony of witness E...);

• The Claimant calculated the depreciation expense to be recognized in each tax period by reference to a rate of 10% and using the depreciation method by twelfths (page 26 of the Tax Inspection Report and document no. 24 attached with the request for arbitral decision, whose content is reproduced);

• The Claimant recognized, in 2013 and 2014, expenses with depreciation relating to the investment made in the modernization of the elevators of ... which amounted, respectively, to € 4,762.50 and € 57,150.00 (documents nos. 22 and 25 attached with the request for arbitral decision, whose contents are reproduced and page 26 of the Tax Inspection Report);

• In 2012, a consultancy service provision contract was concluded under the terms of which Q... would provide services to the Claimant (document no. 26 attached with the request for arbitral decision, whose content is reproduced);

• Under this contract, Q... proceeded to invoice to the Claimant the fees corresponding to the services it was providing to this entity (page 14 of the Tax Inspection Report);

• With reference to the tax periods of 2013 and 2014, Q... issued, on 30-12-2014, invoices nos. 2013002 and 2014001, relating to the services provided to the Claimant in those years, which totaled the amount of € 115,000.00 (page 14 of the Tax Inspection Report and document no. 27 attached with the request for arbitral decision, whose content is reproduced);

• With respect to the expense (€ 60,000.00) associated with the services provided by Q... in the year 2014 the Claimant understood that it would be deductible for tax purposes, whereby it did not proceed to any adjustment when completing the Model 22 declaration relating to this tax period (document no. 28 attached with the request for arbitral decision, whose content is reproduced);

• The Tax Authority and Customs Service carried out a tax inspection action on the Claimant relating to the years 2013 and 2014, authorized by service orders no. OI2016... and OI2016..., of partial scope, on the basis of IRC and VAT;

• In this tax inspection action the Tax Inspection Report was drawn up which is in the administrative proceedings, whose content is reproduced, in which the following is referred to, among other things:

"Having analyzed the Model 22 Declaration of IRC and the Annual Declaration of Accounting and Tax Information, it was verified that the values entered therein correspond to those in the company's accounting.

On the basis of IRC, an analysis of the running accounts and documents supporting the accounting records was carried out, in some cases, by sampling, specifically those of materially significant value, others in their entirety, depending on the nature of the operations in question. However, the approach to them, throughout the report, will only be made to accounts susceptible of correction or whose analysis contributes to clarifying some situation.

III.1. CORRECTIONS ON THE BASIS OF IRC - CORRECTION TO PROFIT/TAXABLE INCOME

III.1.1. NON-TAX DEDUCTIBLE EXPENSES

III.1.1.1 ACQUISITION OF CONSULTANCY SERVICES FROM ENTITY "Q..."

As already mentioned, A... is a public limited company with capital stock of € 12,500,000.00, wholly held by entity Q..., based in Amsterdam (Holland) as of 2011-09-29.

The two entities concluded a consultancy service provision contract (annex VII) in 2012. During the year 2014, under analysis, entity Q... proceeded to issue the following invoices (annex VIII) to A...:

From the analysis of the services identified in them, as well as the documents supporting their accounting entry, allows us the following conclusion:

• The two invoices were issued in December 2014;

• Invoice no. 2013002 relates to services provided in 2013, i.e., it was issued one year after the provision of services;

• The invoice numbers show incoherent numbering 2013002 and 2014001 since both were issued in December 2014

• The invoices do not contain the TIN of the parties involved in the economic operation;

• The invoices do not refer to the rate applied, nor to the amount of VAT, nor to the reason justifying non-application.

III.1.1.2 ACCOUNTING AND TAX FRAMEWORK

Tax legislation establishes the general conditions to which expenses must comply to be tax deductible. Law no. 2/2014 carried out the reform of the taxation of companies, amending the CIRC approved by Decree-Law no. 442-B/88, of 30 November.

With this amendment the wording of articles 18 and 23 of the CIRC is as follows:

Article 18, paragraph 1 of the CIRC provides that "income and expenses (...) are attributable to the tax period in which they are obtained or incurred, independently of their receipt or payment, in accordance with the economic accrual regime".

In turn, article 23 of the same instrument clarifies:

"1- For the determination of taxable profit, all expenses and losses incurred or supported by the taxpayer to obtain or guarantee income subject to IRC are deductible".

The legislator thus makes tax deductibility of the expense dependent upon a justified relationship with the activity generating income subject to tax.

Obviously that above all else, and without the legislation referring to it expressly, it is important to verify the effectiveness and proof of the realization of the expenses, which will consist in their documentary proof, supporting the accounting records as provided for in paragraph 3 of article 23 of the CIRC.

In this respect paragraph 4 of the same article lists the elements that must be contained in the supporting documents which are as follows:

"a) Name or company name of the (...) provider of services and the purchaser or recipient;

b) Tax identification number of the (...) provider of services and the purchaser or recipient, whenever these are entities with residence or stable establishment in national territory;

c) Quantity and usual designation (...) of the services provided;

d) Value of the consideration, in particular the price;

e) Date on which (...) the services were provided.

In turn, paragraph 6 of Article 23 of the CIRC adds "when the supplier of goods or provider of services is obliged to issue an invoice or legally equivalent document in accordance with the CIVA, the supporting document for the acquisition of goods or services provided for in paragraph 4 must necessarily take that form".

In light of the provisions of the legislation cited it can be concluded that the expenses incurred through the invoices for acquisition of services from entity "Q..." do not meet the requirements for the expense to be accepted tax-wise, by infraction of the provisions of the legislation cited.

With respect to invoice no. 2013002, in the amount of € 55,000.00, it is verified that it was recorded in the accounting for the year 2014, in SNC account 6881 and its value was added to section 07 of the Model 22 income declaration in compliance with the principle of economic accrual.

As regards invoice no. 2014001, in the amount of € 60,000.00, (recorded in SNC account 6221058633) in accordance with the legislation cited, it does not meet the requirements for the expense to be accepted tax-wise, whereby the correction to the fiscal result declared by the taxpayer is proposed in the said amount.

III.1.1.2. FINANCIAL CHARGES NOT ACCEPTED TAX-WISE

In the course of developing its activity, company A... resorted to foreign capital.

From the analysis carried out we found that the taxpayer incurred financial charges in the amount of € 4,789,855.81 in 2013 and € 4,816,479.52 in 2014. These values result from the sum of account 6886 and account 691 of the SNC and are related to a bank financing and a SWAP financing contract concluded, in July 2010, with company P... branch in Portugal, TIN ... (currently the assignee S...-Branch in Portugal, TIN...), (annex IX).

However, part of these charges are not accepted tax-wise as will be explained below.

III.1.1.2.1 FINANCINGS OBTAINED

Tax Year 2013 and 2014

From the analysis carried out it is confirmed that the company has resorted to foreign capital with financial institution "P..." and that as of 2013-12-31 it has accumulated indebtedness of €112,986,330.00 and on 31-12-2014 indebtedness of €111,521,279.47 (annex X).

Resulting from this indebtedness, the taxpayer has supported, annually, financial charges which in the year 2013 reached the value of €4,789,855.81 and in the year 2014 the amount of € 4,816,476.52 which were fully recorded as expenses in the years under analysis, as shown in the table below:

[Table not fully translated in original]

III.1.1.2.2 LOANS GRANTED TO GROUP COMPANIES

However, part of this financing was used to finance other group companies, without establishing the payment of any interest relating to them, as referred to in the management reports and, indeed, information contained in the IES's "the amounts receivable from Q... Holding, B.V. and from other related parties do not accrue interest and do not have a defined repayment period".

A) Tax Year 2013

The average balance of the financings granted, as of 2013-12-31, reached the amount of € 36,847,615.97 as shown in the table below:

[Table not fully translated in original]

B) Tax Year 2014

In the year 2014, the average balance of the financings granted, as of 2014-12-31, remained at the value € 36,847,615.97, as shown in the following table:

[Table not fully translated in original]

III.1.1.2.3 LEGAL FRAMEWORK OF FINANCIAL CHARGES

Given the fact that the taxpayer is incurring financial charges, in particular interest, stamp duty and banking expenses, resulting from loans which it has contracted and simultaneously is granting loans to group companies without remuneration, it is important to assess whether these charges are or are not accepted tax-wise, in light of the provisions of article 23 of the CIRC, whose wording for the years under analysis is as follows:

Tax Year 2013

"Expenses are considered those which provably are indispensable for the realization of income subject to tax or for the maintenance of the source of production".

For this purpose paragraph 2 of the same article lists a series of expenses and losses accepted as such for tax purposes, namely in subparagraph c) "of a financial nature, such as interest on foreign capital applied in operation".

Three essential requirements are thus required for the financial charges incurred to be valued and accepted as a tax expense: proof (justification), indispensability and the link to taxable gains.

The first requirement relates to the effectiveness of the realization of the expenses which consists of various forms of written support to the accounting entries, i.e. their documentary proof.

The second requirement makes the tax deductibility of the expense dependent upon a justified relationship with the productive activity of the company and this indispensability is verified whenever such charges are connected with the obtaining of profit.

The judgment on the indispensability of the expenses incurred implies that its contribution to the obtaining of income or gains subject to tax or to the maintenance of the source of production is verified, whereby, in accordance with a Decision of the STA, handed down on 2011-11-30, in process no. 010711, "the legal notion of indispensability thus reports, therefore, on an economic-business perspective, by direct or indirect fulfillment, of the ultimate motivation of contribution to the obtaining of profit" and "the tax deductibility of the cost depends, only, on a causal and justified relationship with the company's activity".

The third requirement that makes up the general clause of deductibility in respect of expenses, in the formulation introduced by the IRC Code, is the requirement of link to "gains subject to or the maintenance of source of production". It follows from the general principle of article 23 of the CIRC that expenses realized by the taxpayer, to be tax deductible, must be limited to either the obtaining of income subject to tax, or the maintenance of the source of production.

Tax Year 2014

As previously referred to, with the reform of IRC in 2014 (Law no. 2/2014 which carried out the reform of the taxation of companies, amending the CIRC approved by Decree-Law no. 442-B/88, of 30 November) article 23 of the CIRC came to have the following wording: "For the determination of taxable profit, all expenses and losses incurred or supported by the taxpayer to obtain or guarantee income subject to IRC are deductible".

In turn, in the current wording of article 23 of the CIRC, it is paragraph 3 that determines the proof of expenses, by providing in the following terms:

"Deductible expenses must be supported by documentary evidence, independently of the nature or support of the documents used for this purpose".

In light of the legal provisions, documentary proof continues to be the excellent proof, whatever the nature or support of the document.

Notwithstanding the change in the wording of the article, the two great virtues of the formal requirements at the tax level that Tomás Tavares had already pointed out were maintained: the formal obligation in crisis, "in addition to causing an effective control of the activity of the taxpayer, is still translated, in an invisible mechanism for the promotion of reality", since to the expense of an economic operator corresponds, usually, income of another operator.

Also noteworthy is the provision of article 123 of the CIRC, which determines the obligation of taxpayers to present the documentary support that gives title to the operations. Thus, the proof of financial charges, obliges confirmation:

• Of the effectiveness of the expense;

• Of the amount and terms of financing;

• And of the application of foreign capital.

From the analysis carried out on the accounting movements and their respective supporting documents it is revealed that the taxpayer uses the foreign capital obtained to finance, free of charge, the subsidiary companies, being at issue the compliance with article 23, paragraph 1 of the CIRC (year 2013) and paragraphs 2 and 3 of article 23 (year 2014).

In fact the financings contracted, generating financial charges, when placed at the disposal of other entities without there being any charging of interest or any other remuneration (in a group treasury logic), are manifestly not used in the activity of the company that supports the charges, for which taxable income does not accrue that would compensate for the expenses, in that the said financings are not remunerated, which is why they cannot be tax deductible, proportionally to the financings granted.

On this matter jurisprudence has already been produced by the Supreme Administrative Court, by way of example the Decision of 7 February 2007 – Process no. 1046/05 which decided "(…) the costs provided for in that article 23 must from the outset relate to the company taxpayer itself, that is, so that a certain sum is considered a cost of that company it is necessary that the activity respective be by it itself developed, that not by other companies".

More recently and in the same sense, the STA pronounced itself, in the Agreement handed down in Process no. 0107/11, on 30/11/2011, which decided in the following terms: "(…) in light of article 23 of the CIRC, are not to be considered as tax-relevant the costs with interest and stamp duty of bank loans contracted by a company and applied in the non-remunerated financing of its associate companies".

In the same line of thought, Dr. Maria dos Prazeres Lousa, argues that "when a company contracts a loan whose funds it ceded, wholly or in part, to third parties, without stipulating remuneration or fixing it but, at a reduced rate, will not be able to deduct, in principle, all of the financial charges corresponding to such loans, in that it can be considered that the interest were not supported to obtain profits or gains subject to tax nor to maintain the source of production".

III.1.1.2.4 FINANCIAL CHARGES NOT DEDUCTIBLE – CORRECTION PROPOSED

Given the above, it is proposed that the financial charges supported by the taxpayer be corrected in the sense of reflecting merely the cost of capital effectively used in the development of its activity.

Thus, the financial charges that A... supported to finance group companies will not be accepted tax-wise.

For determination of the financial charges not accepted, for tax purposes, the following was considered:

• Financings obtained by A...;

• The calculation made to determine the average balance of financing granted by A...;

• The financial charges supported/recorded in account 6911 – Interest on financings obtained and in account 6886-Losses on financial instruments;

• The calculation of the ratio "loans granted/loans obtained", which was applied to the loans made to group companies, determining the financial charges not accepted tax-wise:

A) Tax Year 2013

From the calculations made, for the year 2013, results a total amount of financial charges not accepted tax-wise of 1,612,814.88 euros, in accordance with the calculations in the table below:

[Table not fully translated in original]

As stated, the financial charges supported by A... in the year 2013 will be corrected to 3,332,580.63 euros which result from the difference between the financial charges declared by the Taxpayer (€ 4,945,395.51) and the financial charges not accepted tax-wise (€ 1,612,814.88).

B) Tax Year 2014

From the calculations made, for the year 2014, results a total amount of financial charges not accepted tax-wise of €1,644,881.83, in accordance with the following table:

[Table not fully translated in original]

Given the above, in the year 2014, the financial charges supported by A...will be corrected to € 3,333,440.95 which result from the difference between the financial charges declared by the Taxpayer (€ 4,978,322.78) and the financial charges not accepted tax-wise (€ 1,644,881.83).

III.1.1.3. APPLICATION OF ARTICLE 67 OF THE CIRC – LIMITATION ON THE DEDUCTIBILITY OF FINANCING CHARGES

With respect to the deductibility of financing charges, article 67 of the CIRC establishes the regime of limitation on the deductibility of charges, providing in the following terms:

"1- Net financing charges are deductible up to the limit of the greater of the following:

a) (euros) 3,000,000 (2013)/ (euros) 1,000,000.00 (2014); or

b) 30% of the result before depreciation, net financing charges and taxes"

Paragraph 2 of article 192 of Law no. 66-B/2012 of 31 December provides for a transitional provision, which establishes: "in the tax periods beginning between 2013 and 2017, the limit referred to in subparagraph b) of paragraph 1 of article 67 of the IRC Code is raised to 70% in 2013 and 60% for 2014, 50% in 2015, 40% in 2016 and 30% in 2017".

It should be noted that the legislator also chose to clarify in article 67 of the CIRC, the two fundamental concepts of this regime. Thus, in paragraph 12 of the same article it defines the concept of net financing charges as "the amounts due or associated with the remuneration of foreign capital, namely interest on bank overdrafts and loans obtained in the short and long term, interest on bonds and other similar titles, amortizations of discounts or premiums related to loans obtained, amortizations of accessory costs incurred in connection with the obtaining of loans, financial charges relating to financial leases, as well as exchange rate differences arising from loans in foreign currency, deducted from income of identical nature".

In turn, with respect to the year 2014, paragraph 13 of the same article clarifies that "the result before depreciation, amortizations, net financing charges of taxes is that calculated in the accounting, corrected by:

a) Gains and losses resulting from changes in fair value that do not contribute to the determination of taxable profit;

(…)".

As already referred to, the regime of limitation on the deductibility of net financing charges, applicable to all IRC taxpayers who are taxed on the basis of profit, consists in accepting tax-wise the net financing charges up to the limit of the greater of the limits provided for in article 67, paragraph 1, subparagraphs a) and b) of the CIRC.

In the years under analysis the EBITDA was calculated in accordance with the table below and the corresponding limits, for both years.

The taxpayer, in the tax period of 2013, presents as EBITDA in the accounts the amount of € 1,567,369.95 (result before depreciation, net financing charges and tax) whereby the financing charges will be accepted tax-wise up to the limit of € 3,000,000.00 since 70%*1567369.95=1,097,158.97.

In the year 2014, the taxpayer calculated an EBITDA in the amount of € 7,009,433.24

(result before depreciation, net financing charges and tax).

Considering the provisions of paragraphs 1, 12 and 13 of article 67 of the CIRC, the taxpayer may deduct € 4,205,659.94. (7,009,433.24*60%).

Proceeding then to the analysis of the financial charges considered by A... for the purposes of the application of the regime provided for in article 67 of the CIRC, it was concluded that:

A) Tax Year 2013

The taxpayer declared global financial charges in the amount of €4,969,005.57 which includes the interest and other financing charges (Stamp Duty, bank service expenses), as well as losses on financial instruments, in accordance with the calculations shown in the table below, which is based on annex VI.

With respect to financial income it was verified in the trial balance that A... considered the total amount of €23,610.06 (#791), corresponding to interest obtained (annex VI).

As from the application of paragraph 12 of article 67 of the CIRC to determine the net financing charges of the period, are to be considered the amounts due or associated with the remuneration of foreign capital, deducted from income of identical nature, calculations were made, as shown in the table below, having still taken into account the correction already made in section III.2 of this draft report, in the amount of € 1,612,814.88:

[Table not fully translated in original]

Given the above, the correction to the fiscal result declared is proposed, by application of article 67 of the CIRC, in the amount of € 332,580.63, a value that the Taxpayer may carry forward in the five following years, in accordance with paragraph 2 of Article 67 of the CIRC.

B) Tax Year 2014

The taxpayer declared financial charges in the amount of € 4,995,500.84 where it includes interest and other charges (stamp duty, bank service expenses) of financing obtained as well as losses on financial instruments, in accordance with the calculations shown in the map below.

With respect to financial income it was verified in the analytical trial balance that A... considered the total amount of 17,178.06 (#791), corresponding to interest obtained (annex VI).

As from the application of paragraph 12 of article 67 of the CIRC to determine the net financing charges of the period, only are to be considered the amounts due or associated with the remuneration of foreign capital, deducted from income of identical nature, the following calculations were made having taken into account the correction made to financial charges in section III.2 of this report:

[Table not fully translated in original]

Given the above, the value to be corrected by application of the provisions of article 67 of the CIRC is in favor of the taxpayer, in the amount of € 891,398.30 (332,580.63+558,817.67).

III.1.1.4 REINTEGRATIONS AND DEPRECIATIONS OF THE YEAR(S)

In the course of the analysis of the Extraordinary Investment Tax Credit (CFEI), deducted from IRC collection, of the years under analysis, we found that the taxpayer considered as investment expense eligible for the calculation of the said tax benefit, the amount of € 571,500.00, relating to the modernization of elevators of Building "... recorded in SNC account 4.22.1.2.12 – "Investments in Real Property Buildings and Other Construction – Elevator Modernization".

Associated with the fact that this investment is not considered eligible, for possible application of Law no. 49/2013 of 16 July, which approved the extraordinary credit to investment, in particular its article 4, by not being applicable to tangible fixed assets, non-consumable biological assets, or intangible assets subject to depreciation, as referred to in the following section III.2.1 of this report, if it were to be applicable, could not be accepted tax-wise, by not being duly documented.

In fact, when requested the documents proving the investment in question, the taxpayer did not prove it, with an invoice or equivalent document, presenting only a budget to document the accounting entry in the aforementioned account, as such expense not duly documented, in accordance with the provisions of articles 23 and 45 of the IRC Code.

In turn, from the analysis of the maps of Reintegrations and Depreciations of the years under analysis (annex XIII), it was verified that the taxpayer practiced depreciation, with respect to the said value, at the rate of 10% (Code 2105 of the Table).

We also noted that the same carries out depreciation by twelfths.

Thus, because the value in question is not duly proved, the expense recorded in the said years, relating to the same (depreciation) in the value, respectively of € 4,762.50, and € 57,150.00, in accordance with the calculations that follow, cannot be accepted tax-wise, by infraction of articles 23, paragraph 1, subparagraph g) and 45, paragraph 1, subparagraph g) (year 2013) and 23, paragraph 1, paragraphs 2, subparagraph g), 3, 4 and 6 (year 2014), all of the CIRC.

[Calculations not fully translated in original]

III.5. Summary map of corrections/conclusion

Given the above, the value of the corrections proposed to taxable profit, of the years under analysis is respectively of € 1,950,158.01 and € 870,633.53, in accordance with the following calculations:

[Table not fully translated in original]

Given the corrections proposed, for 2013 and 2014, respectively of € 1,950,158.01 and €870,633.53 the Profit/Taxable Income declared of €907,838.11 and €1,633,356.40 is corrected, respectively, to the amounts of € 2,857,996.12 and of €2,503,989.93.

(...)"

• Subsequently the Tax Authority and Customs Service issued the following assessments:

  • the IRC assessment no. 2017..., which includes the assessments of compensatory interest nos. 2017... and 2017..., whose balance payable included in the statement of account settlement no. 2017... was € 814,605.92, relating to the tax period 2013;
  • the IRC assessment no. 2017..., which includes the assessment of compensatory interest no. 2017..., whose balance payable included in the statement of account settlement no. 2017... was € 277,698.90, relating to the tax period 2014 (document no. 30 attached with the request for arbitral decision, whose content is reproduced);

• The Claimant did not pay the amounts assessed;

• The Tax Authority and Customs Service initiated tax enforcement proceedings nos. ...2017... and ...2017..., for the coercive collection of the amounts assessed (document no. 31 attached with the request for arbitral decision, whose content is reproduced);

• The Claimant provided guarantees to suspend the referred tax enforcement proceedings (document no. 32 attached with the request for arbitral decision, whose content is reproduced);

• On 19-02-2018, the Claimant presented the request for arbitral decision that gave rise to these proceedings;

2.2 Unproven Facts

It was not proved that the financing obtained by the Claimant from P... was directly used to finance other group companies.

In the contract concluded between the Claimant and P... it is stated that the credit "is intended to refinance the long-term investment in the Property" (clause 1, paragraph 1, of document no. 12) and no proof was produced that it was used for other purposes, in particular to finance group companies.

The testimony of witness E... corroborates that the utilization of the P... financing was that provided for in the contract.

The Tax Authority and Customs Service also accepts that "the financing obtained from P... was intended exclusively for the repayment of loans contracted in years prior to 2007", but adds "that nothing indicates that part of such funds were not placed, over the years, at the disposal of H... and other related entities" (article 27 of the Response).

However, neither has this hypothetical indirect utilization of the financing obtained from P... to finance group companies been proved.

2.3. Basis for the Determination of Facts

The proven facts are based on the documents attached by the Claimant and contained in the administrative proceedings and on testimonial evidence.

The witness examined appeared to testify with impartiality and with personal knowledge of the facts on which his testimony fell.

3. Legal Issues

The Tax Authority and Customs Service carried out a tax inspection action on the Claimant relating to the years 2013 and 2014 in which it made various corrections to the factual basis, considering non-deductible expenses as follows:

[Table not fully translated in original]

3.1. Question of the Acquisition of Services from Q...

A... and Q... concluded a consultancy service provision contract in 2012, having issued two invoices with the following elements:

[Table not fully translated in original]

The Tax Authority and Customs Service established the following:

• The two invoices were issued in December 2014;

• Invoice no. 2013002 relates to services provided in 2013, i.e., it was issued one year after the provision of services;

• The invoice numbers show incoherent numbering 2013002 and 2014001 since both were issued in December 2014

• The invoices do not contain the TIN of the parties involved in the economic operation;

• The invoices do not refer to the rate applied, nor to the amount of VAT, nor to the reason justifying non-application.

In light of the requirements set out in article 23, paragraph 4 and 6, of the CIRC, in the wording of Law no. 2/2014, of 16 January, the Tax Authority and Customs Service understood that it cannot accept as an expense the amount of invoice no. 2014001.

Article 23 of the CIRC, in this 2014 wording, establishes the following, insofar as is relevant:

Article 23

Expenses and Losses

1 - For the determination of taxable profit, all expenses and losses incurred or supported by the taxpayer to obtain or guarantee income subject to IRC are deductible.

2 - The following expenses and losses are considered to be covered by the preceding paragraph, in particular:

a) Those relating to the production or acquisition of any goods or services, such as materials used, labor, energy and other general production, maintenance and repair expenses;

(...)

4 - In the case of expenses incurred or supported by the taxpayer with the acquisition of goods or services, the supporting document referred to in the preceding paragraph must contain, at least, the following elements:

a) Name or company name of the supplier of goods or provider of services and the purchaser or recipient;

b) Tax identification numbers of the supplier of goods or provider