Summary
Full Decision
ARBITRAL DECISION
I – Report
On 13 October 2016, A…, Lda., legal entity number …, with registered office at Rua …, No. …, …-… …, Vila do Conde, filed a petition for the constitution of an arbitral tribunal, under 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 decision of partial dismissal of the Hierarchical Appeal Procedure No. …2015… of 2016, instituted following the partial dismissal of the Administrative Claim No. …2014…; the annulment of the self-assessment act for Corporate Income Tax (IRC), dated 24 May 2012, relating to the fiscal year 2011 and contained in IRC Form 22 No. …-… -…; and the condemnation of the Tax Authority to refund the tax paid in excess.
To substantiate its petition, the Petitioner alleges, in summary, that the deduction from the tax liability provided for in Article 3 of the Tax Incentive Regime for Investment, hereinafter abbreviated as RFAI, is subject, in each fiscal year, to a dual quantitative limit:
i. First, the benefit may only be deducted up to the limit of 25% of the tax liability for the fiscal year (see Article 3, No. 1 of RFAI);
ii. Second, the benefit may only be deducted if, together with other tax benefits and deductions arising from the regimes provided for in Article 43, No. 13 and Article 75 of the IRC Code, it does not exceed 10% of that same tax liability (see Article 92, No. 1 of the IRC Code)
The Petitioner further alleges that, being unable to deduct the full amount of tax benefits in a given year, in this case in 2011, due to the application of Article 92 of the IRC Code, it has the right to carry forward such benefits to the four following fiscal years under Article 3, No. 3 of RFAI.
The Petitioner did not appoint an arbitrator, and thus, under the provisions of Article 6, No. 2, subsection a) and Article 11, No. 1, subsection b) of RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrator, who communicated acceptance of the appointment within the applicable deadline.
On 09-12-2016, the parties were notified of this appointment and did not manifest any intention to challenge it.
In accordance with the provision of Article 11, No. 1, subsection c) of RJAT, the Arbitral Tribunal was constituted on 26-12-2016.
Duly notified for this purpose on 28-12-2016, the Respondent submitted its response on 03-02-2017, defending itself by way of challenge, arguing for the dismissal of the action and, consequently, for the maintenance of the tax assessment, as being legal and appropriate.
By order of 10-02-2017, the Tribunal notified the parties to state their position, if they so wished, regarding the timeliness of the submission of the response by the Tax Authority.
The Respondent argued for the timely submission of the Response on 13-02-2017, while the Petitioner chose to make no statement.
Taking into account that, in this case, none of the purposes legally assigned to it were present, under the provisions of Articles 16, subsection c) and 29, No. 2 of RJAT, as well as the principles of procedural economy and prohibition of useless acts, the holding of the meeting referred to in Article 18 of RJAT was dispensed with and the parties were afforded the opportunity to submit written arguments.
The Arbitral Tribunal is materially competent and is regularly constituted, under Articles 2, No. 1, subsection a), 5 and 6, No. 1, of RJAT.
The parties have legal personality and capacity, are legitimate parties, and are legally represented, under Articles 4 and 10 of RJAT and Article 1 of Order No. 112-A/2011 of 22 March.
The parties submitted arguments.
The question of the untimeliness of the submission of the Response having been raised by the Tribunal, the parties were notified to state their position, with the Tax Authority arguing for timeliness and the Petitioner maintaining silence.
Articles 123 and 124 of the Tax Procedure and Process Code (CPPT) regulate the formal and substantive requirements to which a judgment must comply, and a judgment is null if it fails to rule on matters that it should assess under Article 125 of that statute.
In compliance with the aforementioned normative provisions, the Tribunal cannot refrain from examining the (un)timeliness of the submission of the Response by the Tax Authority, given that this is within the scope of official knowledge.
In fact, the Tax Authority was notified to submit the Response on 28-12-2016, in the full period of judicial recess, having submitted it on 03-02-2017.
Pursuant to Article 3-A, No. 2 of RJAT, the deadlines for performing procedural acts are calculated under the Civil Procedure Code (Article 138), and are suspended during judicial recesses.
The issue that arises is the determination of the initial term for the Response deadline, that is, when notification is made during the period of judicial recess, whether (i) the first day of the deadline is the first day on which the courts are open or, as the Tax Authority contends, (ii) the third day following notification falling during judicial recess, subsection e) of Article 279 of the Civil Code applies subsidiarily, transferring the notification to the next business day, considering the party notified on the first day the courts are open.
On this particular issue, well-established case law supports the understanding that "(…) the equiparative rule for judicial recesses to Sundays and public holidays contained in subsection e) of the Civil Code is inapplicable to the presumption in No. 2 of Article 245 of the Civil Procedure Code(…)."
Accordingly, the deadline begins on the first business day after the recess, so the Response should have been submitted to this Tribunal on 02-02-2017.
Notwithstanding the foregoing, the subsidiary application of procedural rules to arbitration must take into account the specific nature of this means of resolution, as well as the provisions of RJAT.
Now, as is well known, the submission of the Response by the Tax Authority in the context of arbitral proceedings is similar to a defense in judicial challenge proceedings, and Article 110 of CPPT applies to it, so that the failure to submit a defense by the Tax Authority has no legal consequence.
For its part, RJAT adopts the solution adopted by CPPT, with No. 1 of Article 19 of RJAT providing that "the lack of defense does not prevent the continuation of the proceedings and the consequent issuance of an arbitral decision, based on the evidence produced."
Using an argument a fortiori, also in a situation of untimely submission of the defense by the Tax Authority, the arbitral tribunal is obliged to examine the claim, without this constituting an acceptance of the Petitioner's arguments.
Hence, strictly speaking, the late submission of the Response by the Respondent does not invalidate the acts performed in the arbitral proceedings, nor does it prevent the examination of the subject matter of the action.
The proceedings do not suffer from any nullities.
Thus, there is no obstacle to examining the merits of the case.
A. Factual Matters
A.1. Facts Established as Proven
1- The Petitioner is a limited liability company with registered office and effective management in Portuguese territory, which exercises, as its principal activity, the manufacture of hand tools (CAE code 25731);
2- On 24 May 2012, the Petitioner carried out self-assessment of IRC relating to the fiscal year 2011, submitting IRC Form 22 No. …-… -…;
3- In the declaration mentioned in the preceding number, the Petitioner calculated (i) a taxable profit of €1,990,014.77 (see field 778 of table 07 of the body of the declaration), (ii) an IRC tax liability of €495,941.19 (see field 351 of table 10 of the body of the declaration); (iii) IRC payable in an amount equal to the tax liability, because it made no deduction (see field 358 of table 10 of the body of the declaration); (iv) municipal surtax in the amount of €29,850.22 (see field 364 of table 10 of the body of the declaration); and (v) autonomous taxation in the value of €29,887.97 (see field 365 of table 10 of the body of the declaration);
4- In the fiscal year in question, the Petitioner made payments on account in the amount of €593,312.43 (see field 360 of table 10 of the body of the declaration), having calculated a total amount to recover of €37,643.05 (see field 368 of table 10 of the body of the declaration);
5- In the aforementioned self-assessment, the Petitioner deducted no amount from the 2011 tax liability (see field 357 of table 10 of the body of the declaration), nor entered any amount in the fields designated for the balance of tax benefits carried forward to subsequent fiscal years (see fields 704, 708, 712 and 716 of table 07 of Annex D of the declaration)
6- As part of an internal procedures review conducted subsequently, the Petitioner verified that it had recorded €561,823.40 in expenses on projects that should have been classified as relevant investments, under Article 2 of RFAI.
7- Consequently, the Petitioner concluded that it would have been entitled to a deduction from the tax liability in the total amount of €112,364.68 (20% of the value of relevant investments - €561,823.40), which should have been: (i) taken into account in the 2011 fiscal year, up to the absolute deduction limit for tax benefits provided for in No. 1 of Article 92 of the IRC Code; and (ii) in the remaining part, carried forward for deduction in the four subsequent fiscal years, in accordance with the provisions of No. 3 of Article 3 of RFAI.
8- On 23 May 2014, the Petitioner filed an Administrative Claim against the self-assessment act identified above, requesting that the Tax Authority correct the amounts originally entered in IRC Form 22;
9- On 15 September 2015, the Petitioner was notified of the decision of partial dismissal of the Administrative Claim, issued by the Head of the Administrative and Contentious Justice Division of the Finance Directorate of Porto based on Information provided by the Tax Inspection Services of that Finance Directorate;
10- Among other arguments, the Tax Authority disagreed with the classification of all the projects indicated by the Petitioner as relevant investments, arguing that the amount to be considered would be €226,809.10 and not €561,823.40 (idem);
11- For this reason, according to the Tax Authority, the total amount of the deduction from the tax liability would be only €45,361.82 (20% of €226,809.10) and not €112,364.68 (20% of €561,823.40) (idem);
12- In October 2015, the Petitioner filed a Hierarchical Appeal of the decision of partial dismissal of the Administrative Claim to the Minister of State and Finance, alleging, fundamentally, that:
i. The relevant investments made in 2011 were of a value higher than that considered by the Tax Authority and that, consequently, the total amount of the deduction from the tax liability amounted to €111,364.68 (and not €45,361.82); and
ii. The amount of that tax benefit must be deducted from the tax liability for the 2011 fiscal year up to the limit provided for in No. 1 of Article 92 of the IRC Code, and carried forward for deduction in subsequent fiscal years, in the remaining part (see the Hierarchical Appeal which is part of the administrative file joined to the proceedings by the Respondent);
13- On 15 July 2016, the Petitioner was notified of the decision of partial dismissal of the Hierarchical Appeal, issued by the Director of Services for Corporate Income Tax;
14- Pursuant to this second decision, the Tax Authority:
i. Confirmed that the amount of relevant investments made in 2011 was €449,605.35;
ii. Fixed the total amount of the deduction from the tax liability provided for in RFAI at €89,921.07 (20% of €449,605.35); and
iii. Determined that the tax benefit in question (€89,921.07) must be entirely allocated (consumed) in the 2011 fiscal year, given that: (i) its amount does not exceed the limit provided for in No. 1 of Article 3 of RFAI (25% of the tax liability); and (ii) the possibility of carryforward to subsequent fiscal years provided for in No. 3 of Article 3 of RFAI does not apply to situations in which the deduction is not entirely made because it exceeds the overall limit for tax benefits enshrined in No. 1 of Article 92 of the IRC Code.
15- The Tax Authority acknowledged that the total amount of the deduction from the tax liability resulting from the relevant investments made by the Petitioner in the 2011 fiscal year is €89,921.07.
A.2. Facts Established as Not Proven
With relevance to the decision, there are no facts that should be considered as not proven.
A.3. Substantiation of the Proven and Not Proven Factual Matters
With respect to the factual matters, the Tribunal does not need to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish the proven from the not proven matters (cf. Article 123, No. 2, of CPPT and Article 607, No. 3 of the Civil Procedure Code, applicable under Article 29, No. 1, subsections a) and e), of RJAT).
In this manner, the facts relevant to the determination of the case are selected and defined based on their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former Article 511, No. 1, of the Civil Procedure Code, corresponding to the current Article 596, applicable under Article 29, No. 1, subsection e), of RJAT).
Thus, taking into account the positions assumed by the parties, the documentary evidence and the administrative file joined to the proceedings, the facts listed above were considered proven, with relevance for the decision, being moreover uncontested by the parties.
B. On the Law
B.1. Position of the Parties
B.1.1 Summary of the Petitioner's Position
In the fiscal year 2011, the Petitioner made relevant investments, already recognized by the Tax Authority, in the amount of €449,605.35 and, for this reason, the total amount of the deduction from the tax liability provided for in RFAI is €89,921.07, a figure corresponding to 20% of €449,605.35, with the amount effectively deductible from the 2011 tax liability being €49,594.11.
It argues that, in 2011, the absolute limit provided for in No. 1 of Article 92 of the IRC Code applied to all tax benefits that the legislature had not expressly excluded, including the deduction from the tax liability provided for in subsection a) of No. 1 of Article 3 of RFAI, which is why the amount of the benefit that could not be deducted as a result of the application of this provision, in this case €40,326.96, cannot be considered consumed in this fiscal year and should be carried forward to future fiscal years and, to that extent, should be able to be carried forward in the four following fiscal years, particularly because it does not affect the limit established therein.
To that extent, the Petitioner understands that the amounts to be entered in IRC Form 22 are as follows:
Field 713 of table 074 of Annex D, relating to the total value of the deduction from the tax liability generated by the investment made in the 2011 fiscal year: €89,921.07;
Field 355 of table 10, relating to the tax benefits deductible from the tax liability in the 2011 fiscal year: €49,549.11;
Field 714 of table 074 of Annex D, relating to the part of the benefit provided for in RFAI actually deducted from the tax liability in the fiscal year: €49,594.11;
Field 715 of table 074 of Annex D, relating to the balance of the benefit provided for in RFAI carried forward to future fiscal years: €40,326.96.
B.1.2 Summary of the Respondent's Position
The Respondent understands that, by application of the normative provisions that regulate the result of the liquidation of deductions to tax benefits, there is no carryforward of the RFAI tax credit (validated by the Tax Authority) applicable to the 2011 period (€89,201.07), which corresponds to 20% of the investment, given that the entire amount of the tax credit will be subject to deduction from the IRC tax liability.
In other words, the total amount of the deduction from the tax liability, in the amount of €89,921.07, provided for in RFAI must be entirely allocated and consumed in the 2011 fiscal year, given that its amount does not exceed the 25% limit provided for in No. 1 of Article 3 of RFAI.
Bearing in mind that, "(…) the non-deduction of the aforementioned amounts does not arise from the insufficiency of the tax liability but, rather, from the application of the normative provision that regulates the result of the liquidation of deductions to tax benefits."
According to the Tax Authority, the possibility of carryforward to subsequent fiscal years, provided for in No. 3 of Article 3 of RFAI, does not apply to situations in which the deduction is not entirely made because it exceeds the overall limit of benefits enshrined in Article 92 of the IRC Code.
Hence, the amount considered in excess, as a result of the application of the provisions of No. 1 of Article 92 of the IRC Code, must be added to the tax previously assessed.
The Tax Authority further contends that, if the possibility of carryforward were to be maintained, the amount of the benefit that is added following the application of No. 1 of Article 92 of the IRC Code, the effect intended by the legislature would end up being entirely neutralized.
Based on the arguments set forth above, the Tax Authority decided that in IRC Form 22 for the 2011 period, the following amounts should be entered:
€89,921.07 in field 355 of table 10 [to be deducted];
€89,921.07 in field 715 of table 074 of Annex D;
€40,326.96 in field 371 of table 10 [to be added].
B.2 Essential Disputed Question
Taking into account the factual situation set out above and the position of the parties, as expressed in the Petition, Response and Arguments, the issue in these arbitral tax proceedings concerns the meaning and scope to be given to the combined interpretation of the legal provisions contained in Article 3, No. 3 of RFAI, approved by Law No. 10/2009 of 10 March, and in Article 92 of the IRC Code, more specifically, the quantitative limits applicable to the deduction from the tax liability of investments made under RFAI, as well as the possibility of carryforward of the tax benefit to future tax periods, due to insufficiency resulting from the application of Article 92 of the IRC Code, relating to the 2011 fiscal year.
In summary, the Petitioner seeks that the RFAI tax credit that is not utilized in the 2011 period, due to the application of adjustments to the result of the assessment, remains available for deduction in subsequent tax periods up to the end of the deadline established in No. 3 of Article 3 of RFAI.
Having delimited the issue, it is necessary to assess:
What is at issue in this case is the self-assessment of IRC relating to the 2011 fiscal year and the administrative decision issued by the Tax Authority in the context of the Hierarchical Appeal appropriately filed by the Petitioner.
To that extent, under Article 12, No. 1 of the General Tax Law (LGT), the law in force at the date of the facts must be applied, and thus the wording of Article 92 of the IRC Code in force in the 2011 fiscal year should be considered, which provided as follows:
"1 - For entities that exercise, as their principal activity, an activity of a commercial, industrial or agricultural nature, as well as non-residents with a permanent establishment in Portuguese territory, the tax assessed under No. 1 of Article 90, net of the deductions provided for in subsections a) and b) of No. 2 of the same article, cannot be less than 90% of the amount that would have been determined if the taxpayer did not benefit from tax benefits and the regimes provided for in No. 13 of Article 43 and Article 75.
2 - The following tax benefits are excluded from the provision of the preceding number:
a) Those of a contractual nature;
b) The fiscal incentive system for research and business development II (SIFIDE II);
c) The tax benefits to free trade zones provided for in Articles 33 and following of the Tax Benefits Statute and those operating through tax rate reduction;
d) Those provided for in Articles 19, 32 and 42 of the Tax Benefits Statute".
In 2011, Article 3 of RFAI, insofar as is relevant here, provided as follows:
1 - To taxpayers of IRC resident in Portuguese territory or who have a permanent establishment therein, who exercise as their principal activity an activity of a commercial, industrial or agricultural nature covered by No. 1 of the preceding article, who make, in 2009, investments considered to be relevant, the following tax benefits are granted:
a) Deduction from the IRC tax liability, and up to 25% thereof, of the following amounts, for investments made in regions eligible for support within the scope of incentives with a regional purpose:
i) 20% of the relevant investment, for investments up to the amount of (euro) 5,000,000;
ii) 10% of the relevant investment, for investments with a value exceeding (euro) 5,000,000;
b) Exemption from municipal property tax, for a period of up to five years, for properties of its ownership which constitute a relevant investment;
c) Exemption from municipal tax on onerous transfers of real property regarding acquisitions of properties which constitute a relevant investment;
d) Exemption from stamp duty regarding acquisitions of properties which constitute a relevant investment.
2 - The deduction referred to in subsection a) of the preceding number is made in the assessment relating to the tax period beginning in 2009.
3 - When the deduction referred to in the preceding number cannot be entirely made due to insufficiency of tax liability, the amount still not deducted may be deducted, on the same terms, in the assessments for the four following fiscal years.(…)"
A similar issue has already been addressed in the context of CAAD proceedings Nos. 693/2014-T, 369/2015-T, 370/2015-T and 285/2016-T, the reasoning of which will be followed very closely.
From the combination of these two rules, it followed that, in 2011, the deduction from the tax liability that constituted the RFAI tax benefit was subject to two limitations:
The specific limitation of Article 3 of RFAI, which establishes a maximum annual percentage for deduction from the IRC tax liability of 25% of the Tax Liability;
The limitation of Article 92, No. 1 of the IRC Code, which provided that the minimum IRC tax liability could not be less than 90% of the tax liability that would exist without the application of tax benefits or other regimes, excepting only the tax benefits referred to in its No. 2.
From the combined interpretation of the aforementioned rules, it could be deduced that the tax benefit that could not be entirely deducted in the year 2011, because it was subject to the specific limitation of Article 3 of RFAI (up to 25% of the tax liability) and exceeded the limit provided for in Article 92, No. 1 (up to a maximum of 10% of the tax liability that would be due in the case of tax benefits), could no longer be deducted, thereby restricting the application of the benefits.
And, strictly speaking, this is what occurred in 2011 with respect to the Petitioner, insofar as the tax liability determined in that fiscal year did not allow the full deduction of the tax benefit obtained under RFAI, and therefore the Petitioner did not proceed to entirely deduct the benefit to which it would have been entitled, but considered that the non-deducted excess, in the amount of €40,326.96, would be carryable to the following fiscal years.
By contrast, the Respondent does not recognize the aforementioned amount as carryable, arguing that the tax credit would be subject to deduction from the IRC tax liability in its entirety in the fiscal year in question, and that the non-deduction of the excess does not arise from the insufficiency of the tax liability but, rather, from the application of the normative provision that regulates the result of the liquidation of deductions to tax benefits, which is why the amount considered in excess, as a result of the application of No. 1 of Article 92 of the IRC Code, must be added to the previously assessed tax without the possibility of carryforward to subsequent fiscal years.
However, as the arbitral case law has concluded, the legislature's objective is to ensure that, in each fiscal year, the IRC tax revenue is not reduced by more than 10% due to the application of tax benefits, nothing preventing those benefits from being carried forward to future fiscal years: "(…) if to achieve the objectives of consolidation of public finances it is sufficient that the deduction from the tax liability does not exceed 10% of the tax liability in each year, Article 92, No. 1 of the IRC Code provides no obstacle to the carryforward of deductible amounts, provided that, in each year, the imposed limit is not exceeded.(…)"
It is also important to note that the limitation on the deduction of tax benefits provided for in No. 1 of Article 92 of the IRC Code is not intended to restrict the application of those benefits. In fact, according to the General State Budget Report for 2005, which introduced the limitation on the deduction of tax benefits, the legislature's objective was to establish a limit on the reduction of the effective tax rate through the use of tax benefits, ensuring a minimum tax revenue in each fiscal year.
As concluded in the arbitral decision issued in proceeding No. 285/2016-T, whose understanding is endorsed, "To that extent, any refusal of the carryforward of the tax benefits provided for in RFAI that are not entirely utilized in the period in which the relevant investment was made cannot be justified by recourse to Article 92 of the IRC Code.
Accordingly, the existence or non-existence of the right to carryforward of the benefits provided for in RFAI is only subject to the regime of No. 3 of Article 3 of RFAI, which makes such right dependent upon the impossibility of entire deduction in the fiscal year of the investment due to insufficiency of tax liability, whatever the cause of that insufficiency may be. In fact, the legislature did not delimit or identify which situations of insufficiency of tax liability would give rise to such a right to carryforward, and only a broad and non-restrictive interpretation will ensure the useful effect of the fiscal incentive system itself introduced by RFAI."
In this manner, the possibility of deduction of the benefit in the four following fiscal years, provided for in No. 3 of Article 3 of RFAI, constitutes an important guarantee for the taxpayer, insofar as it increases the possibilities of the latter fully enjoying the tax benefit, freeing it from the contingency of there not being sufficient tax liability for the entire deduction in the year of investment, indeed, as has been decided "From this perspective, being presumable that the legislature established the most appropriate solution (Article 9, No. 3, of the Civil Code) to achieve the intended objective of encouraging investment, the reference to the possibility of carryforward in case of insufficiency of tax liability should not be interpreted as making it difficult for taxpayers to enjoy the tax benefit, for the objective of the rule is precisely the opposite, to increase the possibilities of taxpayers being able to actually enjoy the benefit, which the legislature considers to be fair compensation for the investment.
Thus, in a teleological interpretation that allows finding in the law a way to ensure the objectives intended by the legislature and not to impair them, the possibility of deduction should exist in the generality of situations in which the IRC tax liability available to enjoy the tax benefit is not sufficient for its entire utilization, which is not inconsistent with an interpretation that corresponds to the letter of the law, for Article 92, No. 1, of the IRC Code results in a reduction of the tax liability available to enjoy tax benefits in IRC. And, therefore, when this available tax liability is insufficient to deduct the entirety of the tax benefit resulting from the investment, one is in the presence of a situation of "insufficiency of tax liability" for purposes of Article 3, No. 3, of RFAI.
Thus, it is concluded that the position defended by the Petitioner finds in the letter of the law, even by merely declarative interpretation, verbal correspondence in the letter of Article 3, No. 3, of RFAI, even more than the insufficiently expressed minimum required by Article 9, No. 2, of the Civil Code. Furthermore, even if an extensive interpretation were necessary, it would be permitted by Article 10 of the Tax Benefits Statute, for it is clear that the legislative intention underlying No. 3 of Article 3 of RFAI is to permit the taxpayer to use the tax benefit to which it is entitled in subsequent years, up to a limit of four, when it cannot use it in prior years.
On the other hand, this interpretation is the one that ensures coherence in the values of the legal system, for it would not be consistent to admit in Article 3, No. 1, subsection a), of RFAI a deduction from the IRC tax liability of up to 25% and, at the same time, definitively restrict the benefit to 10% or less, through Article 92, No. 1, of the IRC Code."
For this reason, while it is true that the concerns of consolidation of public finances may justify that, in each year, the achievement of minimum IRC revenue is prioritized over the tax benefit, those concerns can no longer explain that there is no possibility of utilization of the tax benefit in one of the four subsequent years, if such utilization in one of them would not affect such consolidation.
It is concluded, following the guidance of the arbitral decisions issued in proceedings Nos. 369/2015-T, 370/2015-T and 285/2016-T, that: "the tax benefit resulting from RFAI in the matter of IRC can only be utilized to the extent that it does not jeopardize the limit provided for in Article 92, No. 1, of the IRC Code, but no legal obstacle is discerned to the part not utilized in the year of investment being able to be utilized for deduction from the IRC tax liability in subsequent years, up to the limit provided for in No. 3 of Article 3 of RFAI."
In fact, a literal, but also systematic, interpretation of No. 3 of Article 3 of RFAI can only lead to one conclusion, namely that the deduction in the four following fiscal years of the amount that cannot be deducted in the fiscal year relating to relevant investments due to insufficiency of tax liability applies equally when that limitation results from the limitation embodied in Article 92 of the IRC Code.
Contrary to what the Respondent seeks, the argument put forth in the decision issued by the Director of Services for Corporate Income Tax to the effect that:
"(…) the amount considered in excess as a result of the application of the provision of No. 1 of Article 92 of the IRC Code must be added to the previously assessed tax (…).
"(…) otherwise, if the possibility of carryforward of the amount of the benefit that is added following the application of No. 1 of Article 92 of the IRC Code were to be maintained, the effect intended by the legislature would end up being entirely neutralized.(…)"
does not hold.
In fact, benefiting from the RFAI regime, the Petitioner did not have to allocate the total amount of the relevant investment to the 2011 fiscal year, and would thereby lose the right to deduct the part that exceeded the limit of No. 1 of Article 92 of the IRC Code, being able, for such purpose, to make use of the possibility provided for in No. 3 of Article 3 of RFAI.
From the foregoing, it can be concluded that the tax benefit that cannot be effectively deducted in the 2011 fiscal year, due to the application of the limit of No. 1 of Article 92 of the IRC Code, should be carried forward to future fiscal years, in an amount sufficient so that the amount to be paid corresponds to 90% of the amount that would be determined if the taxpayer did not benefit from tax benefits.
Based on the foregoing, it is understood that the self-assessment of IRC for 2011 and the decision of partial dismissal issued by the Director of Services for Corporate Income Tax in the context of the Hierarchical Appeal Procedure No. …2015…, are vitiated by the defect of violation of law, due to incorrect interpretation of Articles 92, No. 1 of the IRC Code and 3, No. 3, of RFAI and, consequently, such acts must be annulled.
Hence, by virtue of Articles 24, No. 1, subsection b) of RJAT and 100 of the General Tax Law, the situation that would have existed if the tax act that is the subject of the arbitral decision had not been performed shall be restored.
C. Questions Rendered Moot
Since the claim for arbitral pronouncement due to violation of law is to be upheld, which prevents the performance of a new act with the same content, the examination of the remaining questions raised by the Petitioner is rendered moot, as it would be futile.
D. Decision
For these reasons, this Arbitral Tribunal decides:
a) To uphold the claim for arbitral pronouncement, declaring the illegality of the self-assessment act for IRC contained in "IRC Form 22 No. …-… -…, as well as the illegality of the decision of partial dismissal of the Hierarchical Appeal Procedure No. …2015…, and consequently ordering its annulment, it being reformulated in such a way as to allow the tax benefit that cannot be deducted in the 2011 fiscal year due to application of the limit of No. 1 of Article 92 of the IRC Code to be utilized in the following fiscal years under the RFAI regime;
b) To condemn the Respondent to pay the costs of the proceedings (Article 5, No. 2 of the Regulation on Costs in Tax Arbitration Proceedings).
E. Value of the Proceedings
The value of the proceedings is fixed at €40,326.96, under Article 306, No. 2 of the Civil Procedure Code, Article 97-A, No. 1, a), of the Tax Procedure and Process Code, applicable by virtue of subsections a) and b) of No. 1 of Article 29 of RJAT and No. 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings.
F. Costs
Pursuant to No. 4 of Article 22 of RJAT, the amount of costs is fixed at €2,142.00, under Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Respondent.
IRC / Tax Incentive Regime for Investment
Let it be recorded and notified.
Lisbon, 19 April 2017
The Arbitrator
(Cristina Coisinha)
Text prepared by computer in accordance with the provision of Article 131, No. 5 of the Civil Procedure Code, applicable by reference in Article 29 of RJAT.
The wording of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.
[1] Approved by Article 13 of Law No. 10/2009 of 10 March and whose force was successively extended by Law No. 3-B/2010 of 28 April and Law No. 55-A/2010 of 31 December
[2] Decision of the Supreme Court of Justice of 23-01-2003, issued in the context of Proceeding No. 523/02, available at http://www.dgsi.pt/jstj.nsf/954f0ce6ad9dd8b980256b5f003fa814/70542756efeabfbd80256cee004c5f64?OpenDocument
[3] Decision of the Supreme Court of Justice of 02-05-2001, issued in the context of Proceeding No. 25869, available at http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/bf82757eb9248b3e80256a7d004a35a9?OpenDocument&ExpandSection=1#_Section1.
[4] In this sense also No. 2 of Article 35 of the General Tax Litigation Law
[5] Article 21 of the Response of the Tax Authority
[6] Maintained in force for the fiscal years 2011 and 2012, respectively, by Law No. 55-A/2010 of 31 December and Law No. 64-B/2011 of 30 December
[7] Available at www.caad.org.pt.
[8] Decision of the Hierarchical Appeal, page 13
[9] CAAD Decisions Nos. 693/2014, 369/2015 and 370/2016
[10] Available at: https://www.dgo.pt/politicaorcamental/Paginas/OEpagina.aspx?Ano=2005&TipoOE=Proposta+de+Or%u00e7amento+do+Estado&TipoDocumentos=Lei+%2F+Mapas+Lei+%2F+Relat%u00f3rio
[11] CAAD Decisions Nos. 693/2014 T, 370/2015 T and 286/2016 T
[12] Article 24 of RJAT Nos. 1 and 4.
Frequently Asked Questions
Automatically Created