Process: 621/2016-T

Date: June 23, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 621/2016-T) examines whether a US company (A…) engaged in acquiring and managing non-performing loans (NPLs) in Portugal had a permanent establishment subject to IRC (Corporate Income Tax). The Portuguese Tax Authority issued an official IRC assessment of €164,038.42 for fiscal year 2014, arguing that A… operated through a permanent establishment in Portugal. The AT's investigation revealed that A… acquired three NPL portfolios from a Portuguese bank and contracted D…, a Portuguese servicing company, to manage and recover these loans between 2005-2010. Critically, A… granted powers of attorney to five individuals (E…, F…, G…, H…, I…) who regularly concluded loan assignment contracts and conducted management acts in Portugal on behalf of the US company. The AT argued these representatives had sufficient authority to constitute a dependent agent permanent establishment under Portuguese IRC law and the Portugal-US Double Taxation Convention. A… contested the assessment, claiming it merely contracted independent services and never voluntarily assumed a permanent establishment in Portugal. The case raises fundamental questions about when cross-border debt recovery activities trigger permanent establishment status, the evidentiary threshold for proving regular business activity in Portugal, and the distinction between independent service providers and dependent agents. A… also sought compensation for bank guarantee costs (€208,268.85) incurred to suspend enforcement proceedings. This decision has significant implications for foreign investment funds and financial institutions operating in Portugal's NPL market.

Full Decision

ARBITRAL DECISION

The Arbitrators Dr. Jorge Manuel Lopes de Sousa (Arbitrator-President, designated by the other Arbitrators), Dr. Ricardo da Palma Borges and Professor Doctor Manuel Pires, designated, respectively, by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 08-06-2016, agree as follows:

1. Report

A…, with registered office in …, city of …, …, …, …, United States of America, with an equivalent collective person number…, which has as its appointed tax representative the company B…, with registered office in …, n.º…, ..., …-… Lisbon ("Claimant"), came, pursuant to article 10.º of Decree-Law n.º 10/2011, of 20 January, hereinafter "RJAT" - Legal Regime for Tax Arbitration), to request the constitution of a collective Arbitral Tribunal, with a view to:

(i) the declaration of illegality and consequent annulment of the assessment of Corporate Income Tax ("IRC") and compensatory interest n.º 2016…, relating to the fiscal year 2014, which resulted in a total amount of IRC and compensatory interest to be paid of € 164,038.42;

(ii) the condemnation of the Tax and Customs Authority ("AT") to pay indemnification for expenses incurred by the Claimant with the provision and maintenance of the bank guarantee n.º …-…-…, issued on 13 October 2016, in the amount of € 208,268.85 for the suspension of the compulsory execution process n.º …2016… instituted by the AT following the failure of voluntary payment of such assessment

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant designated as Arbitrator Dr. Ricardo da Palma Borges, under the terms provided in article 6.º, n.º 2, paragraph b), of the RJAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the AT on 28-10-2016.

Pursuant to the terms provided in paragraph b) of n.º 2 of article 6.º and n.º 3 of the RJAT, and within the period provided in n.º 1 of article 13.º of the RJAT, the highest official of the Tax Administration service designated as Arbitrator Professor Doctor Manuel Pires.

The Arbitrators designated by the Parties agreed to designate Counselor Jorge Lopes de Sousa as Arbitrator-President, who accepted the designation.

Pursuant to the terms and for the purposes of n.º 7 of article 11.º of the RJAT, the President of CAAD informed the Parties of this designation on 03-01-2017.

Thus, in accordance with the precept in n.º 7 of article 11.º of the RJAT, upon expiry of the period provided in n.º 1 of article 13.º of the RJAT without the Parties having anything to say, the Collective Arbitral Tribunal was constituted on 18-01-2017.

The AT submitted a reply in which it argued that the request for arbitral decision should be judged unfounded.

By order of 17-04-2017, it was decided that the proceedings continue with written submissions, without prejudice to the subsequent production of witness evidence, if it should prove necessary.

The Parties submitted submissions.

The Arbitral Tribunal was duly constituted and is competent.

The Parties enjoy legal personality and capacity and are legitimate (articles 4.º and 10.º, n.º 2, of the same law and article 1.º of Ordinance n.º 112-A/2011, of 22 March).

There are no nullities or obstacles to the examination of the merits of the case.

2. Factual Matters

The factual matters relevant to the decision of the questions to be examined are as follows:

2.1. Proven Facts

The following facts are considered proven:

a) The Claimant A… is a non-resident company and did not voluntarily assume the existence of any permanent establishment in Portugal;

b) The Claimant is engaged, among other activities, in the purchase and sale and in the management and recovery of non-performing loans (loans in default or delinquent);

c) Within the scope of such activity, the Claimant acquired from C…, S.A. ("C…") three portfolios of loans of such nature ("NPLs – Non Performing Loans") whose debtors were resident in Portugal;

d) The Claimant contracted in the years 2008 and 2009, the company D…, S.A. ("D…"), a company that provides services for the management and recovery of non-performing loans, to assist it in the management and recovery of the NPLs acquired ("Loan Servicing" or "Servicing");

e) On 30-11-2011, the Directorate of Fraud Investigation Services and Special Actions of the Tax and Customs Authority prepared Report n.º 617/2011, a copy of which is attached with the request for arbitral decision, the content of which is hereby reproduced, concluding an investigation action regarding the Claimant with the purpose of ascertaining the existence of a permanent establishment in Portugal;

f) In report n.º 617/2011, it is stated, among other things, the following:

With the objective of verifying the aforementioned existence of a permanent establishment in Portugal, as well as determining the taxable profit attributable to it, elements were collected and cross-referenced from entities that had established commercial relations with A…, namely the company D…, with whom it had, until September 2010, a Servicing Agreement contract, and whose directors were authorized with sufficient powers to carry out management acts, which were found to have been regularly conducted.

(...)

However, in the period between November 2005 and September 2010, the company A…, through various powers of attorney, appointed as its representatives E…, F…, G…, H… and I…, to whom it granted powers for the conduct of acts relating to the management and recovery of loans, that is, for the conduct of the activity carried out by this company in Portugal.

The information relating to the acquisition of the loan portfolios carried out in Portugal as well as their recovery was provided by E…- NIF:…, in the capacity of representative of A… in Portugal until September 2010 and director of D… until September 2011.

(...)

5. FACTS ASCERTAINED

5.1. Activity Conducted in Portugal

A…, is a vehicle company of L…, which in Portugal proceeded to acquire, from C…, S.A. (C…), the position of creditor that this institution held in various loan contracts concluded with its clients, and which at the time of acquisition were in default due to failures in payments by the borrowers (clients of C…).

These operations of assignment of position in loan contracts, designated as loan assignments, in which C… acted in the capacity of assignor and A… in the capacity of assignee, implied the transfer to the latter of all rights and guarantees inherent to the assigned loans.

The act through which the assignor transfers to the assignee its position as creditor in a loan contract established with its client, is designated a Loan Assignment Contract and, as stated in point 4 of this report, takes the form of a private document.

To conduct the activity in Portugal, and given that it does not have its own employees there, A… contracts with the company D…, S.A. - NIPC:…, in the capacity of service provider in the area of credit management, through a contract concluded in November 2005, which was to be replaced by another, dated 13 December 2006, and which would be in force until September 2010, the date on which due to incompatibility of the parties they proceed to terminate it, Annex II.

In the aforementioned contract, all necessary and sufficient competencies are assigned by A… to D…, so that the latter develops, in representation of the former, all activity relating to the management of the loans owned by the non-resident, namely, (...)

5.1.2.2 Loan Assignment

In the period between September 2006 and 31 December 2010, A… carried out the following loan assignments to the companies D… and to the non-resident J…- NIF: …

(...)

In the conclusion of loan assignment deeds, the subjects E…, G…, H… and I…, in possession of the powers of attorney granted to them by this company, acted in representation of A….

The assignments made to D…, consisted of loans with real guarantees (Real Estate), and the main reason underlying this decision has already been mentioned in point 5.1.2, relating to the fact that this non-resident wished to avoid any type of connection element with national territory.

Regarding the assignment made to company J…, hereinafter designated as J…, it occurs following the litigation between A… and D…, S.A, and from it resulted a loss of approximately € 3,142,161.27 to the assignor, as verified through Annex XXII.

After the assignment, the company managing the loans, now owned by J…, became K…, S.A. - NIPC:… .

(...)

Between November 2005 and September 2010, D… represented in Portugal the non-resident company A…, subsidiary of L…, through the conduct of various acts associated with the activity of management and recovery of loans, namely, organization and maintenance of documentation associated with loans, contacts and negotiations with debtors, collection receipts, management of legal proceedings, conclusion of public deeds relating to sales of real estate and loan assignments, opening and management of bank accounts, etc.

The directors of D…, for the aforementioned period, were duly vested with powers to conduct legal acts in the name of A…, namely through powers of attorney issued by the non-resident in favor of these.

(...)

8. CONCLUSIONS

The action conducted focused on the activity conducted in Portugal by the company A…, which corresponds to a subsidiary of L…, incorporated in the United States of America as a vehicle company for the purchase of loans in default, regarding which it was determined that:

• On 10 October 2005, it requested from the National Registry of Collective Persons its registration for the conduct of an isolated act in Portugal, being assigned the NIF:…;

• The objective of its registration with the RNPC, relates to the fact of acquiring loans in Portugal that have real estate located in national territory as underlying real guarantees, loans which must be registered with the land registry in favor of A…, a situation for which it is necessary to present its tax identification number;

• Between September 2005 and September 2010, it acquires in Portugal three portfolios of loans in default from C… for the amount of €18,040,000.00, with the objective of proceeding to their recovery from the debtors;

• To remedy the absence of employees in Portugal, it concludes, in November 2005, a contract for the provision of credit management services with the Portuguese company D…, which was to be terminated in September 2010, due to litigation between the parties;

• The recovery of the loans relating to the three portfolios acquired by A… took place through the renegotiation of the debts with the debtors, embodied in the conclusion of payment agreements and through loan assignments, where this company acted in the capacity of assignor and took the opportunity to transfer the loans on which there were real guarantees (real estate) since one of the objectives of this company was to eliminate any connection with national territory so as to avoid its taxation in Portugal;

• In the payment agreements with the debtors, in the conclusion of loan assignment deeds, and in the issuance of receipts for discharge of debts issued to the debtors, A… was represented by four attorneys appointed by it, E…, G…, M… and H…, through power of attorney, the same having, on a continuing basis, conducted in Portugal the conduct of various legal acts;

In this way, it is verified that E…, G..., M… and H…, acted in Portugal, in the period between November 2005 and September 2010, in representation of A…, vested with powers of intermediation and conclusion that allowed them to bind this company in the context of its activities.

This situation configures the existence of a Permanent Establishment in Portugal ‑ Personal Establishment, pursuant to n° 6 of art° 5° of the CIRC in conjunction with art° 5° of the Convention for the Avoidance of Double Taxation between Portugal and the United States of America, located in the facilities of D…, located at Avenue … n° … in Lisbon, since it was in that location that, on a regular basis, the aforementioned subjects conducted their acts.

The existence of a permanent establishment in Portugal on the part of A…, results in the taxation under IRC of the taxable profit attributable to that establishment, as provided in paragraph c) of n° 1 and n° 3 of the article of the CIRC.

The determination in accordance with art. 50° of the CIRC, in conjunction with art. 7.º of the Convention for the Avoidance of Double Taxation between Portugal and the United States of America, resulted in a taxable profit of €1,472,465.01 and €656,381.00, in 2008 and 2009, respectively.

g) Pursuant to service orders OI2012… and OI2012…, by order of 18-10-2012, an internal inspection action was conducted with the Claimant, relating to the fiscal years 2008 and 2009 (documents n.ºs 22 and 23 attached with the request for arbitral decision whose contents are hereby reproduced);

h) In the Tax Inspection Report referred to, a copy of which is in that document n.º 23, it is stated, among other things, the following:

The entity «A… » contracted the company «D…, SA», in the capacity of service provider in the area of credit management, through a contract concluded in November 2005, which was to be replaced by another, dated 2006-12-13 (as per Annex I, pp. 2 to 44), called a Servicing Agreement, and which would be in force until September 2010, the date on which due to incompatibility of the parties they proceeded to terminate it.

(...)

3.4 - Legal Framework and Tax Obligations

In the period between November 2005 and September 2010, the representation in Portugal of the entity «A… » was conducted on the basis of powers of attorney issued to various attorneys, configuring the existence of a Permanent Establishment in Portugal - Personal Establishment, pursuant to n.º 6 of article 5.° of the Corporate Income Tax Code in conjunction with article 5° of the Convention for the Avoidance of Double Taxation between Portugal and the United States of America, located in the facilities of «D… SA», located at Ave. … n.°…, in Lisbon.

Given the existence of a permanent establishment in national territory, it should be registered in Portugal for income tax purposes and proceed to comply with the tax obligations provided under IRC, pursuant to articles 117.º and 120.º, both of the Corporate Income Tax Code.

(...)

3.6.2 – Contract Concluded by «A… » with «D…, SA»

(...)

Within the scope of the "Servicing Agreement Contract, signed on 2005-11-21 and amended on 2006-06-07 and on 2006-12-13, date of consolidation, which was in force until September 2010, the company «D…, SA» had all necessary and sufficient competencies to develop, in representation of the entity «A…», all activity relating to the management of the loans owned by the non-resident. This contract defines all the activities that «D…, SA» must ensure to effect the management of the non-resident's loans.

i) In that inspection, the Tax and Customs Authority came to understand that, in the period between November 2005 and 14 September 2010, the representation in Portugal of the Claimant was conducted on the basis of powers of attorney, configuring the existence of a permanent establishment in Portugal, located in the facilities of D…;

j) Based on that understanding, the tax services concluded that the Claimant should be registered in Portugal for IRC purposes and, consequently, should proceed to comply with the tax obligations provided under IRC, pursuant to articles 117.º and 120.º, both of the Corporate Income Tax Code ("CIRC");

k) Until 14-09-2010, the Servicing company contracted by the Claimant to carry out the management of the loans acquired in Portugal was D… (documents n.ºs 11 and 12 attached with the request for arbitral decision, whose contents are hereby reproduced)

l) The Claimant entered into litigation with D… and, on that date, terminated the contract it had concluded with D… (document n.º 14 attached with the request for arbitral decision, the content of which is hereby reproduced);

m) From 14-09-2010, D… ceased to conduct the management of the Claimant's loans referred to;

n) In September 2010, the aforementioned loans of the Claimant began to be managed in Portugal through N…, with whom it concluded a "Servicing Agreement" contract, which was amended on 31-03-2011 (document n.º 13 attached with the request for arbitral decision the content of which is hereby reproduced);

o) The Claimant has no contractual relationship with D… since September 2010;

p) It was only N… that provided Servicing services to the Claimant in 2014;

q) For the fiscal years 2008 and 2009, the Tax Administration determined the Claimant's taxable profit as follows:

[figures not provided]

r) There was no record of cessation of activity of the Claimant, for IRC purposes, relating to the fiscal year 2014;

s) The IT system of the AT detected the non-submission of the Corporate Income Tax Form 22 return, with reference to fiscal year 2014, whose submission deadline was 29-05-2015;

t) On 26-06-2015, the Tax and Customs Authority issued the Official Alteration Certificate that is in the administrative file, the content of which is hereby reproduced, in which it classified the Claimant under IRC as «non-resident with permanent establishment»;

u) On 27-01-2016, assessment n.º 2016… was issued, pursuant to paragraph b) of n.º 1 of article 90.º of the CIRC, which was based on the entirety of the taxable matter of the closest period that was determined, that is, the period of 2009;

v) A compulsory execution process was instituted for the collection of the assessed amounts;

w) The Claimant provided a bank guarantee with n.º ……-…, provided by C…, in the amount of € 208,268.85, to suspend the compulsory execution process n.º …2016…, instituted for collection of the assessed amounts (document n.º 2 attached with the request for arbitral decision the content of which is hereby reproduced);

x) On 11-03-2013, the Claimant appointed as tax representative the company B…- NIPC…, with tax domicile at … n.°… …- …-… LISBON, which accepted the representation;

y) The demonstration of the assessment was sent, by registered mail with Proof of Receipt on 15-02-2016, to the tax domicile that D… had in 2010, at Avenue … …, …, …-… LISBON, the letter being returned to the Tax Office on 17-02-2016 with the indication "unknown" (information provided by the Tax and Customs Authority in the opposition process, which is in the administrative file);

z) No act was taken with a view to implementing the notification provided in article 39.°, n.° 5, of the Tax Procedure and Process Code ("CPPT") (information provided by the Tax and Customs Authority in the opposition process, which is in the administrative file);

aa) Regarding fiscal years 2010 to 2013, the Claimant did not submit the periodic income return declarations referred to in article 120.° of the CIRC, nor did the AT conduct the respective official assessments provided in article 90.°, n.° 1, paragraph b) of the CIRC;

bb) On 16-10-2016, the Claimant submitted the request for constitution of the Arbitral Tribunal that gave rise to this proceeding.

2.2. Unproven Facts

There are no facts relevant to the decision of the questions to be examined that have not been proven.

2.3. Justification of the Decision on Factual Matters

The facts were given as proven on the basis of the documents attached with the request for arbitral decision and the administrative file, with no controversy over them.

3. Legal Matters

The Tax and Customs Authority understood that the Claimant conducted its activity in Portugal until 14-09-2010, as a non-resident with a permanent establishment located in the facilities of D….

This conclusion was formulated on the basis of weighing the relations of the Claimant with this entity, specifically the powers granted to the attorneys.

It is uncontroversial and expressly acknowledged by the Tax and Customs Authority in the Tax Inspection Report relating to the inspection for fiscal years 2008 to 2010 and in the report that gave rise to it that the Claimant entered into litigation with D… and, from 14-09-2010, the latter no longer provided services to the Claimant, including in the year 2014.

The Tax and Customs Authority issued an official assessment, pursuant to paragraph b) of article 90.º, n.º 1, of the CIRC, which establishes the following:

1 - The assessment of IRC proceeds as follows:

a) When the assessment must be made by the taxpayer in the declarations referred to in articles 120.º and 122.º, it is based on the taxable matter contained therein;

b) In the absence of submission of the declaration referred to in article 120.º, the assessment is made by 30 November of the following year to which it refers or, in the case provided for in n.º 2 of the referred article, until the end of the 6th month following the end of the deadline for submission of the declaration mentioned therein and is based on the annual value of the minimum monthly remuneration or, when higher, the entirety of the taxable matter of the closest fiscal year that is determined;

c) In the absence of assessment under the preceding paragraphs, it is based on the elements available to the tax administration.

To effect the disputed assessment, the Tax and Customs Authority based itself on the taxable matter of the closest period that was determined, that is, the period of 2009, in accordance with the aforementioned paragraph b).

The Claimant expressly attributes to the disputed assessment vices of violation of paragraph b) of n.º 1 of article 90.º of the CIRC, lack of reasoning, non-existence of a permanent establishment based on a contractual relation between the Claimant and D… and any permanent establishment related to N… and K… with whom it maintained contractual relations in 2014 and error in the quantification of taxable matter (articles 187.º to 192.º of the request for arbitral decision).

In the order of knowledge of vices, priority shall be given to those that are capable of ensuring more stable and effective protection of the taxpayer, as required by paragraph a), of n.º 2, of article 124.º of the CPPT, subsidiarily applicable, by virtue of the provision in paragraph c), of n.º 1 of article 29.º of the RJAT.

As also follows from that rule, if the request for arbitral decision is judged founded on the basis of some vice that provides effective and stable protection to the situation of the Claimant, the knowledge of the remaining vices becomes prejudiced, as being superfluous.

3.1. Question of Non-Compliance with the Deadline Provided in Paragraph b) of n.º 1 of Article 90.º of the CIRC.

Paragraph b) of n.º 1 of article 90.º of the CIRC establishes that «in the absence of submission of the declaration referred to in article 120.º, the assessment is made by 30 November of the following year to which it refers or, in the case provided for in n.º 2 of the referred article, until the end of the 6th month following the end of the deadline for submission of the declaration mentioned therein and is based on the annual value of the minimum monthly remuneration or, when higher, the entirety of the taxable matter of the closest fiscal year that is determined».

The Supreme Administrative Court has consistently decided that the deadline for official assessment of IRC is a disciplinary or organizational deadline and not a peremptory deadline, which means it does not extinguish the right of the Tax and Customs Authority to proceed with assessment. ( [1] )

In line with this jurisprudence, to which we refer, the request for arbitral decision is unfounded as to this question.

3.2. Non-Existence of Permanent Establishment Based on Contractual Relations between the Claimant and D… in 2014

The Claimant, in articles 159.º and following of the request for arbitral decision, argues the following, in summary:

– «having such contractual relation between the Claimant and D... terminated on 14 September 2010, the conclusion of the existence of a permanent establishment of the Claimant in Portugal in such fiscal years 2008 and 2009 cannot be applied tout court – as the AT intends -, without any further analysis, to the fiscal year 2014 (nor, for that matter, to any fiscal year after 2010)»;

– «if the AT's conclusion is precisely that D… was a dependent agent of the Claimant, and if the Claimant has, since 2010, no contractual relation with D…, it is not clear how D… can configure a permanent establishment of the Claimant in 2014»;

– «if the Claimant was and is a non-resident entity in Portugal – which the AT does not call into question at any moment -, the conclusion of the existence of a permanent establishment will always depend on a case-by-case analysis, i.e., an analysis of the facts and the contractual relations of the Claimant with the Servicer in question, in order to ascertain the existence or non-existence of legal and economic dependence that may confirm (or refute) the continuation of the permanent establishment»;

– «and such case-by-case analysis is not satisfied with the analysis conducted by the AT within the framework of the inspection procedure relating to fiscal years 2008 and 2009, since the contractual relation with the Servicer that was providing services to the Claimant in those fiscal years ceased in 2010».

The Claimant is correct on this matter.

In fact, the assessments made under paragraph b) of n.º 1 of article 90.º of the CIRC are made without a determination of the actual existence of the real taxable matter of the taxpayers in the year to which they refer, and thus have merely provisional nature, as confirmed by the provision in n.º 10 of the same article, in which it is established that «the assessment provided for in n.º 1 can be corrected, if appropriate, within the period referred to in article 101.º, collecting or annulling the differences determined».

Being the Claimant a non-resident entity, its taxation in 2014 must be founded on the conduct of its activity, in that year, on the basis of a permanent establishment.

In the case at hand, it is recognized without controversy that the Claimant can no longer have a permanent establishment in the facilities of D… from 14-09-2010, which therefore cannot serve as a basis for the taxation of the Claimant in 2014.

Moreover, it is not even invoked by the Tax and Customs Authority as a basis for the assessment that the Claimant had any permanent establishment in the facilities of N… or K…, which means that any eventual existence of one cannot be considered as a basis for the assessment.

Furthermore, doubts about the existence of a permanent establishment which is a requirement for taxation under IRC must be procedurally valued in favor of the taxpayer and not against it, by virtue of the provision in article 100.º, n.º 1, of the CPPT, subsidiarily applicable, by virtue of the provision in paragraph c), of n.º 1 of article 29.º of the RJAT.

In this context, before the evidence produced, it is concluded that the disputed assessment is vitiated by a breach of law, due to error regarding the factual assumptions, in presuming the existence of a permanent establishment of the Claimant in 2014 in the facilities of D….

This vice justifies the annulment of the disputed assessment [article 163.º, n.º 1, of the Administrative Procedure Code, applicable by virtue of the provision in paragraph d) of article 2.º of the General Tax Law ("LGT")].

3.3. Questions of Prejudiced Knowledge

As referred to, it follows from article 124.º of the CPPT, if the request for arbitral decision is judged founded on the basis of some vice that provides effective and stable protection to the situation of the Claimant, that the knowledge of the remaining vices becomes prejudiced, as being superfluous.

In fact, if it were necessary to examine all vices in every case, the order of their examination by the Tribunal would be indifferent.

In the case at hand, the vice of error regarding the factual assumptions referred to prevents the performance of a new act with the bases invoked by the Tax and Customs Authority and none of the vices that the Claimant attributes to the disputed act provides it with more effective or stable protection.

Thus, the knowledge of the remaining vices attributed by the Claimant to the disputed act becomes prejudiced, as being superfluous (article 130.º of the Code of Civil Procedure –"CPC").

4. Indemnification for Undue Guarantee

The Claimant requests that the Tax and Customs Authority be condemned to pay indemnification for expenses incurred by the Claimant with the provision and maintenance of the bank guarantee n.º …-…-…, in the amount of € 208,268.85, issued on 13 October 2016, for the suspension of the compulsory execution process n.º …2016….

Article 171.º of the CPPT, establishes that «indemnification in case of bank guarantee or equivalent improperly provided shall be requested in the proceedings in which the legality of the debt subject to execution is disputed» and that «the indemnification must be requested in the complaint, opposition or appeal or in case its basis is subsequent within 30 days after its occurrence».

The request for constitution of the Arbitral Tribunal and for arbitral decision has as a corollary the fact that it is now in the arbitral proceedings that the «legality of the debt subject to execution» will be discussed, which means that, as results from the express content of that n.º 1 of the aforementioned article 171.º of the CPPT, the arbitral proceedings are also appropriate to examine the request for indemnification for undue guarantee.

The regime of the right to indemnification for undue guarantee is contained in article 53.º of the LGT, which establishes the following:

Article 53.º

Guarantee in Case of Undue Provision

  1. The debtor who, to suspend execution, offers a bank guarantee or equivalent, shall be indemnified in whole or in part for the losses resulting from its provision, if maintained for a period longer than three years, in proportion to success in administrative appeal, opposition or challenge to the execution that have as their object the debt guaranteed.

  2. The period referred to in the previous number does not apply when it is verified, in amicable complaint or judicial opposition, that there was error attributable to the services in the assessment of the tax.

  3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnification interest provided in this law and can be requested in the own proceedings of complaint or judicial opposition, or autonomously.

  4. The indemnification for provision of undue guarantee shall be paid by offset against the tax revenue of the year in which the payment took place.

In the case at hand, the error underlying the disputed assessment is attributable to the Tax and Customs Authority, as it was of their initiative and the Claimant in no way contributed to the commission of this error.

For this reason, the Claimant is entitled to indemnification for the guarantee provided.

Lacking elements that allow determining the amount of indemnification, the condemnation must be made with reference to what is to be assessed in execution of this decision [article 609.º, n.º 2, of the CPC, applicable pursuant to article 2.º, paragraph d), of the LGT].

5. Decision

In these terms, this Arbitral Tribunal agrees on the following:

a) To judge the request for arbitral decision founded;

b) To annul the assessment of IRC and compensatory interest n.º 2016…, relating to the fiscal year 2014;

c) To condemn the AT to pay to the Claimant indemnification for the guarantee provided which is to be assessed in execution of this decision.

6. Value of the Case

In accordance with the provision in articles 306.º, n.º 2, of the CPC and 97.º -A, n.º 1, paragraph a), of the CPPT and 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 164,038.42.

Lisbon, 23 June 2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Ricardo da Palma Borges)

(Manuel Pires)

[1] Decisions of 16-12-2009, case n.º 0955/09 (concerning article 83.º of the CIRC in the wording prior to Decree-Law n.º 159/2009, of 13 July, which corresponds to the current article 90.º); of 18-06-2014, case n.º 01842/13; and of 11-05-2016, case n.º 0442/15.

Frequently Asked Questions

Automatically Created

What is an official IRC assessment (liquidação oficiosa) and when can the Portuguese Tax Authority issue one?
An official IRC assessment (liquidação oficiosa) is issued by the Portuguese Tax Authority when it determines a taxpayer has taxable income in Portugal but failed to file a tax return or declare that income. The AT can issue such assessments when it identifies through inspection or investigation that a foreign entity conducted taxable activity in Portuguese territory, such as operating through a permanent establishment, even if the taxpayer never voluntarily registered or declared IRC liability. The assessment is based on evidence gathered by tax inspectors regarding the nature and extent of activities conducted in Portugal.
How does Portugal determine whether a foreign company has a permanent establishment (estabelecimento estável) subject to IRC?
Portugal determines permanent establishment status for foreign companies under IRC Article 4 and relevant double taxation conventions by examining whether the company has a fixed place of business in Portugal or operates through a dependent agent with authority to conclude contracts. Key factors include: (1) having a physical presence or designated location for business activities; (2) the permanence and regularity of activities conducted; (3) whether agents or representatives have binding authority to commit the company; (4) the degree of independence of local service providers; and (5) whether the foreign company bears entrepreneurial risk for Portuguese operations. The Portugal-US Convention's permanent establishment definition also applies, requiring analysis of both physical presence and dependent agent criteria.
What evidence is required to prove a US company is exercising taxable activity in Portugal under IRC rules?
To prove a US company is exercising taxable activity in Portugal under IRC rules, the Tax Authority must demonstrate: (1) regular and continuous business operations in Portuguese territory; (2) evidence of contracts concluded or substantially negotiated in Portugal; (3) powers of attorney or mandates granted to Portuguese residents authorizing them to conduct business on behalf of the US company; (4) documentation showing management decisions or commercial acts performed in Portugal; (5) the existence of dependent agents who habitually exercise authority to bind the company; and (6) banking, accounting, or commercial records indicating Portuguese-source income. In this case, the AT relied on servicing agreements, loan assignment contracts signed by Portuguese representatives, and testimony from individuals with powers of attorney to establish A…'s taxable presence.
Can a taxpayer claim compensation for bank guarantee costs after successfully challenging an IRC assessment at CAAD?
Yes, under Portuguese tax procedure law (Article 53 of the LGT and CPPT provisions), a taxpayer who successfully challenges an illegal tax assessment at CAAD can claim compensation for expenses necessarily incurred due to the unlawful administrative act, including bank guarantee costs. If the arbitral tribunal declares the IRC assessment illegal and annuls it, the taxpayer may request indemnification for guarantee issuance fees, maintenance charges, and other related expenses, as these costs result directly from the AT's illegal assessment and the need to suspend enforcement proceedings. The compensation claim must demonstrate the causal link between the illegal assessment and the expenses incurred, and the guarantee must have been necessary to protect the taxpayer's rights.
How does the Portugal-US Double Taxation Convention affect IRC liability for American companies with alleged permanent establishments?
The Portugal-US Double Taxation Convention (based on the OECD Model) directly affects IRC liability by defining when a US company has a permanent establishment in Portugal subject to Portuguese taxation. Article 5 of the Convention specifies that Portugal can only tax business profits if the US company operates through a permanent establishment in Portuguese territory, and only on profits attributable to that establishment. The Convention's dependent agent provisions (Article 5(5)) state that a permanent establishment exists if a person habitually exercises authority to conclude contracts in the company's name in Portugal. However, Article 5(6) excludes independent agents acting in their ordinary course of business. The Convention also provides mechanisms for eliminating double taxation and establishes that the treaty prevails over domestic IRC provisions where conflicts exist, potentially limiting Portugal's taxing rights.