Process: 622/2018-T

Date: August 25, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 622/2018-T, dated August 25, 2019) addresses whether a company constructing a warehouse on property owned by its shareholder creates taxable capital income under Portuguese IRS law. The claimant company, A... Lda., challenged an IRS withholding tax assessment of €10,238.25, arguing the warehouse constituted a business asset for operational purposes, not an economic advantage to the shareholder. The Tax Authority contended that the €34,752.80 construction expenditure on the shareholder B...'s property represented an untaxed economic advantage constituting category E capital income, triggering withholding obligations. Central issues included whether construction on third-party property qualifies as deductible business expense versus taxable distribution, the treatment of improvements under accounting standards (SNC accounts 2432312/2432313), and whether absent superficies rights registration invalidated the business purpose. The tribunal examined factual assumptions regarding economic substance, analyzing whether the warehouse's operational use by the company since mid-2016 negated the presumption of shareholder benefit. Key legal questions involved interpreting the breadth of capital income definitions under Portuguese tax law, the significance of legal versus economic ownership, and proper application of withholding tax obligations when corporate assets are constructed on shareholder-owned land without formalized property rights. The decision impacts how Portuguese companies structure arrangements involving shareholder property and demonstrates CAAD's approach to substance-over-form analysis in IRS withholding disputes.

Full Decision

Tax Arbitration Jurisprudence

Process no. 622/2018-T

Decision date:
2019-08-25
PIT

Value of claim:
€ 10,238.25

Subject matter:
PIT - Capital income and economic advantage.

PDF Version

ARBITRAL DECISION

I – REPORT

A..., Lda., taxpayer no. ..., with registered office at Rua ..., no. ..., ..., ..., filed on 10/12/2018 a request for constitution of tribunal and arbitral ruling, in which it requests the assessment of the legality of the dismissal of the gracious appeal no. ...2018... and, in final terms, of the assessment of PIT – withholding at source no. 2017..., in the amount of 10,238.25 euros (lack of withholding at source of 9,730.78 euros and 507.47 euros of compensatory interest) and the reimbursement of the amount of withholdings at source paid, plus indemnity interest, on the grounds that it considers the assessment to be vitiated by error concerning the factual and legal assumptions.

His Excellency the President of the Ethics Council of the Administrative Arbitration Centre (CAAD) appointed on 04/02/2019 Francisco Nicolau Domingos as arbitrator.

On 25/02/2019 the arbitral tribunal was constituted.

In compliance with the provisions of article 17, no. 1 of Decree-Law no. 10/2011, of 20 January (RJAT), the Respondent was notified on 27/02/2019 to, if it wished, present a reply, request the production of additional evidence and attach the Administrative File (PA) to the proceedings.

On 03/04/2019 the Respondent presented its reply, in which it sustains that the assessment in question should be maintained in the legal order, not recognizing the error in the factual and legal assumptions.

The tribunal, on 29/05/2019, decided to dispense with the holding of the meeting to which article 18, no. 1 of the RJAT refers, since its objectives had been exhausted, on the grounds of the principle of autonomy of the arbitral tribunal in the conduct of proceedings and in the determination of the rules to be observed with a view to obtaining, within a reasonable timeframe, a substantive ruling on the claims formulated, cf. article 16, lit. c) of the RJAT, granted a period of ten days for the parties, if they wished, to present successive written final submissions and scheduled as the deadline for issuing the arbitral decision, the date of 25/08/2019.

The parties presented written final submissions on 05/06/2019 and 21/06/2019, respectively, in which they maintained their initial positions.

POSITION OF THE PARTIES

The Claimant presents the request for arbitral ruling, in that, in its judgment, the assessment in question is illegal due to error concerning the factual and legal assumptions, as the warehouse, despite having been constructed on another's property, was intended to be economically utilized within the scope of its business activity.

To support its claim for annulment, it emphasizes that the facts contained in the inspection report are contextualized in a prior judgment formulated – increase in the patrimony of shareholder B..., with expenses borne by the Claimant. On the contrary, in its judgment, these facts demonstrate a structure of acts and legal transactions related to business activity that have an economic justification, far removed from the attainment of any tax advantage.

Specifically, it argues that: the warehouse was being accounted for in the company as a Tangible Fixed Asset under construction and, once completed, transferred to Tangible Fixed Assets - Buildings and Other Constructions. Therefore, it argues that, despite being in the presence of the construction of a warehouse on another's property, it was intended to be used within the scope of the Claimant's economic and productive activity.

Along these lines, it argues that, although the property is registered in the Land Registry in the name of the shareholder, in substance, he has availability only over the land, but not of the construction, which constitutes an improvement and, as such, should be treated in that manner from an accounting and tax perspective.

It further adds that what is at issue are real improvements attributed to the company, of value superior to the land where they were implanted, registered and accounted for in the company's accounts, allowing, since they are at its service and disposal, the depreciation of their value and deduction of expenses in CIT, with VAT supported in the construction works being deducted in accordance with the provisions of the Value Added Tax Code (CIVA).

The Respondent presents a defense with the following grounds:

i) Error concerning the factual and legal assumptions

The patrimonial increase verified in the legal sphere of the shareholder constitutes a gain that subsumes itself into category E of PIT, as the amount applied by the company in the 2016 financial year, with the construction of the warehouse on a property whose ownership is in the legal sphere of the shareholder, translates an economic advantage.

The constitution of the right of superficies is subject to registration, not having been effected, and likewise the contract for "constitution of the right of superficies" was not subject to Stamp Tax, which can only constitute an economic advantage for the shareholder who came to have ownership of the warehouse and, as such, the Claimant's request should fail.

Strictly speaking, given the breadth of the concept of capital income, the money applied by the Claimant, in 2016, with the construction of the said warehouse on property owned by the managing shareholder, in the amount of 34,752.80 euros, constitutes income subject to taxation in the personal sphere of B....

Thus, these are the issues which the tribunal must address:

a) Whether the act of express dismissal of the gracious appeal no. ...2018... which, in final terms, concerns the assessment of PIT – withholding at source no. 2017... is illegal, due to error concerning the factual and legal assumptions;

b) Whether the Claimant should be reimbursed for withholdings at source paid;

c) Whether the Tax and Customs Authority (AT) should be condemned to pay indemnity interest.

CASE MANAGEMENT

The proceedings do not suffer from any defects, the arbitral tribunal is regularly constituted and is materially competent to know and decide the claims, and consequently the conditions are met for the final decision to be issued.

II – REASONING

FACTUAL MATTER

1. Facts considered proven

1.1. The Claimant bore, during the years 2015 and 2016, the payment of costs for the construction of a warehouse, implanted on the urban property registered under article ..., of the parish of ..., which derives from the rustic property registered under article no. ..., of the same parish. (PA)

1.2. In the construction of the aforesaid warehouse, the Claimant bore and accounted for the following monetary values (PA):

Amount Payment SNC Account

3,690.00 euros January 2016 2432312

3,690.00 euros February 2016 2432312

349.05 euros February 2016 2432312

509.82 euros February 2016 2432312

603.42 euros February 2016 2432313

2,229.38 euros February 2016 2432312

1,608.45 euros February 2016 2432312

798.89 euros April 2016 2432312

1,845.00 euros April 2016 2432312

1,058.99 euros June 2016 2432312

840.18 euros July 2016 2432313

761.72 euros July 2016 2432312

1,143.90 euros September 2016 2432312

1,164.00 euros December 2016 2432312

8,960.00 euros March 2016 Not applicable

5,500.00 euros March 2016 Not applicable

TOTAL: 34,752.80 euros

1.3. The current urban property registered under article ..., of the parish of ..., which derives from the rustic property registered under article no. ..., of the same parish, is the property of the managing shareholder of the Claimant – B.... (PA)

1.4. The construction of the warehouse was completed in mid-2016 and, since then, has been used in the business activity of the Claimant. (PA)

1.5. The managing shareholder of the Claimant, B..., made a request, in his personal capacity, to the Regional Body of the National Agricultural Reserve of the Centre for the non-agricultural use of 868.30 m², by virtue of the expansion of a rope products warehouse, having indicated as the base cadastral article 1998-urban, the said area corresponding to the implantation of the new warehouse on the urban property registered under no. ... - deriving from the rustic property no. ... of the parish of .... (PA)

1.6. The Claimant is the owner of a contiguous property, on which it has a constructed warehouse – urban article, registered in the land registry under no. ..., of the parish of .... (PA)

1.7. On 15/12/2016 was delivered to the Finance Office of ... by B... the Model 1 declaration of IMI, for the purpose of updating/modification of rustic to urban property, by virtue of the construction implanted thereon. (PA)

1.8. From the declaration described in 1.7. resulted the determination of a tax patrimonial value of 213,820.00 euros. (PA)

1.9. The tax patrimonial value of the property registered in the rustic land registry under article ..., of the parish of ... was, until the presentation of the Model 1 declaration of IMI, 12.10 euros. (PA)

1.10. In the course of the external general scope inspection procedure for the years 2014 and 2015 (OI2017... and OI2017...) of the Claimant, AT understood that there were irregularities regarding PIT withholdings at source, with projection in the 2016 financial year. (PA)

1.11. Thus, the Service Order no. OI2017... determined the carrying out of an internal and partial inspection procedure for the 2016 financial year, in which purely arithmetic corrections were made for lack of PIT withholding at source. (PA)

1.12. The aforesaid corrections consisted of lack of withholding at source on income subject to category E of PIT, economic advantage in kind proceeding from patrimonial elements of a movable nature, in the amount of 9,730.78 euros. (PA)

1.13. The Claimant was notified of the consequent assessment (no. 2017...), in the amount of 10,238.25 euros - PIT for lack of withholding at source of 9,730.78 euros and 507.47 euros of compensatory interest. (PA)

1.14. The Claimant presented, on 02/01/2018, a gracious appeal of the PIT assessment – withholding at source which gave rise to proceeding no. ...2018.... (PA)

1.15. By letter dated 10/09/2018 the Claimant was notified of the decision to expressly dismiss the gracious appeal. (PA)

1.16. The assessment of withholdings at source was not paid within the deadline for voluntary payment (02/11/2017), and the tax enforcement proceeding no. ...2017... was instituted. (PA)

1.17. On 11/01/2018 the sum of 7,808.96 euros was paid, with the amount of 2,429.29 euros remaining outstanding as of that date. (PA)

1.18. The request for arbitral ruling was presented on 10/12/2018 (CAAD computer system).

2. Facts not considered proven

2.1. That the Claimant is the holder of the right of superficies (over the area necessary for the construction of the warehouse and remainder) under the property described in the rustic land registry with no. ..., of the parish of ... (now urban article no. ...), by contract dated 1 March 2015.

There are no other facts with relevance to the arbitral decision that have not been considered as proven.

3. Reasoning concerning the factual matter considered proven

The facts pertinent to the judgment of the case were selected and delineated in function of their legal relevance, in light of the plausible solutions to the questions of law, in accordance with the combined application of articles 123, no. 2 of the Tax Procedure and Process Code (CPPT), 596, no. 1 and 607, no. 3 of the Code of Civil Procedure (CPC), applicable by virtue of article 29, no. 1, lit. a) and e) of the RJAT.

The tribunal's conviction was based on the positions assumed by the parties, which was consensual, and on the critical analysis of the documentary evidence attached to the proceedings, whose authenticity was not called into question.

4. Reasoning concerning the factual matter not considered proven

The tribunal considers that, in light of the principle of free appraisal of evidence, one should not take as established the existence of the contract referred to in 2.1., as in the very document appended to the RIT under no. 1, dated 01/03/2015, the property in which the warehouse was implanted is described as urban, when the Model 1 declaration of IMI was only delivered on 15/12/2016 and the existence of the contract for constitution of the right of superficies was not declared to AT.

Moreover, as the RIT itself describes, only in the second phase of the inspection procedure was the existence transmitted and the document with the heading "contract for constitution of the right of superficies" over the property in which the warehouse was implanted sent.

LEGAL MATTER

The first issue which the tribunal must address consists in determining whether the assessment of PIT – withholding at source, for an economic advantage from which a shareholder of the Claimant benefited, is illegal.

The legislator, by Law no. 30-G/2000, of 29 December, established a general definition of capital income – article 5, no. 1 of the CIRS, in which the following segment stands out: "Capital income shall be considered the fruits and other economic advantages, whatever their nature or denomination, whether pecuniary or in kind, proceeding, directly or indirectly, from patrimonial elements, assets, rights or legal situations, of a movable nature, as well as from their respective modification, transmission or cessation, with the exception of gains and other income taxed in other categories".

The list, of an exemplificative nature, of gains which are subject to category E of PIT is provided for in article 5, no. 2 of the Tax Code for Income of Natural Persons (CIRS), with the following regulatory formulation:

"The fruits and economic advantages referred to in the previous number comprise, namely:

a) interest and other forms of remuneration arising from loan contracts, credit facilities, repo transactions and others which provide, on an onerous basis, the temporary availability of money or other fungible things;

b) interest and other forms of remuneration derived from current or fixed-term deposits in financial institutions, as well as from deposit certificates and securities accounts with price guarantees or other similar or related operations;

c) interest, redemption or repayment premiums and other forms of remuneration of public debt securities, bonds, participation securities, consignment certificates, cash bonds or other similar securities, issued by public or private entities, and other financial application instruments, namely bills, promissory notes and other negotiable credit instruments, insofar as used as such;

d) interest and other forms of remuneration of shareholder contributions, allowances or capital advances made by shareholders to the company;

e) interest and other forms of remuneration owed by the fact that shareholders do not withdraw profits or remuneration placed at their disposal;

f) the balance of interest determined in a current account contract;

g) interest or any increases in pecuniary credit resulting from extension of the respective maturity or from default in its payment, whether legal or contractual, with the exception of interest owed to the State or other public entities for delay in payment or default in the payment of any contributions, taxes or fees and interest allocated within the scope of an indemnity not subject to taxation under the terms of no. 1 of article 12;

h) profits and reserves placed at the disposal of associates or members and advances on account of profits, with the exclusion of those referred to in article 20;

i) the value attributed to associates in the amortization of social shares without reduction of capital;

j) income distributed from investment fund participation units;

l) income earned by the associate in the partnership and in the quota association, as well as, in the latter, the income referred to in lit. h) and i) earned by the associating partner after deduction of the contribution owed by him to the associate;

m) income from contracts which have as object the assignment or temporary use of intellectual or industrial property rights or the provision of information concerning experience acquired in the industrial, commercial or scientific sector, when not earned by the respective original author or holder, as well as those derived from technical assistance;

n) income arising from the use or granting of use of agricultural and industrial, commercial or scientific equipment, when they do not constitute real property income, as well as those arising from the assignment, sporadic or continuous, of computing equipment and networks, including data transmission or provision of computing capacity installed in any of its possible forms;

o) interest not included in other lit. of this article entered in any current accounts;

p) any other income derived from the simple application of capital;

q) the gain arising from interest rate swap operations;

r) the remuneration arising from certificates that guarantee the holder the right to receive a minimum value superior to the subscription value.

s) indemnities intended to compensate for losses of income in this category;

t) amounts paid or placed at the disposal of the taxpayer by fiduciary structures, when such amounts are not associated with their liquidation, revocation or termination, and have not already been taxed under the terms of no. 3 of article 20".

The regulatory technique used – open enumeration – for the classification of capital income seeks to reconcile the fight against tax evasion with predictability for taxpayers regarding the income subject to the category of PIT under study. The teleological basis for the use of the aforesaid technique is found in the constant mutations of financial products, a circumstance which could open the door to legitimate tax avoidance.

Thus, the facts generating capital income are described by the legislator in function of the economic result produced and, therefore, do not attend to the type of underlying transaction.

In summary, the open enumeration, in the regulatory description of income subject to category E of PIT, constitutes the adequate response for the economic segment regulated – capital.

It is likewise important to emphasize that within the general concept of "capital income" set out in the rule of objective scope of application fit both the "fruits" and "economic advantages".

The legislator intends to tax in category E of PIT the fruits of capital, and therefore, legal scholars defend that there is capital income when: "a thing should be had by capital (patrimony, assets, rights or legal situations of a movable nature) and produces economic advantages without this implying for the respective holder the loss of that source".

Thus, for income to be integrated into the category, it must be periodic, the receipt cannot prejudice the substance of the asset, right or legal situation, of a movable nature, which is at the genesis of the income.

It is thus necessary to determine whether the pecuniary amounts made available for the construction of the warehouse should be had as capital income, by constituting an economic advantage. Or, put another way, whether the assessment of PIT for lack of withholding at source should, or should not, be maintained in the legal order.

Now, if it is unquestionable that it was the Claimant which paid the costs of construction of a warehouse implanted on a property registered in the land registry and described in the Land Registry in the name of the managing shareholder, B..., from which resulted an increase in tax patrimonial value, it is advanced from the outset that no jurisdictional censure will be effected on the actions of AT.

Strictly speaking, the personal patrimony of the shareholder grew, to the extent of the increase in the tax patrimonial value of the property – resulting from the change from rustic to urban, in the amount of 213,807.90 euros (213,820.00 euros - 12.10 euros); it is likewise highlighted that it was with the payment of the costs of construction of the warehouse that the patrimony of a natural person increased, and this person has a single functional connection to the Claimant, being a shareholder and manager. Or, put another way, attending to the economic result, we are facing an advantage for the shareholder.

The fact that the company is using the warehouse within the scope of its business activity and the accounting of the construction invoices in the sphere of the Claimant does not have the effect intended by it, as, in Tax Law, the principle of substance over form applies. Likewise, it is repeated, one cannot ignore the fact that there was growth in the personal patrimony of the shareholder.

Moreover, nothing permits setting aside the fact that the asset is not his property and there exists no right of the company over it.

In summary, we are in the presence of payments to a natural person who is a holder of share capital of the Claimant, assumed the function of manager at the time of the monetary outflows, and therefore these are income which subsume themselves to capital income, by the existence of an economic advantage.

Thus, there is no defect of violation of law, due to error concerning the factual and legal assumptions imputed to the assessment. The issues of reimbursement of the amount of withholdings at source paid and the condemnation of AT to pay indemnity interest are of prejudiced knowledge.

III – DECISION

In these terms and with the reasoning described above, the tribunal decides to judge the request for arbitral ruling to be totally without merit and, in consequence, absolves the Respondent of the claims, with the due legal consequences.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at 10,238.25 euros, under the terms of article 97-A of the CPPT, applicable by virtue of the provisions of article 29, no. 1, lit. a) of the RJAT and of article 3, no. 2 of the Regulation for Costs in Tax Arbitration Proceedings (RCPAT).

COSTS

Costs to be borne entirely by the Claimant, in the amount of 918 euros, cf. article 22, no. 4 of the RJAT and Table I attached to the RCPAT.

Notify.

Lisbon, 25 August 2019

The Arbitrator,

(Francisco Nicolau Domingos)

Frequently Asked Questions

Automatically Created

What qualifies as capital income (rendimentos de capitais) and economic advantage under Portuguese IRS tax law?
Under Portuguese IRS law, capital income (rendimentos de capitais) encompasses returns from capital investments including dividends, interest, and economic advantages. Article 5 of the IRS Code defines economic advantages broadly to include benefits attributable to shareholders from their relationship with companies, even when not formally distributed. The CAAD tribunal in Process 622/2018-T examined whether construction expenditure on shareholder property constitutes such an advantage, focusing on whether the benefit accrued to the shareholder personally or served legitimate business purposes. The Tax Authority argued that €34,752.80 spent building a warehouse on the shareholder's land represented an untaxed economic advantage taxable as category E income, particularly absent proper registration of superficies rights that would formalize the company's legal interest in the improvement.
Can construction on third-party property be treated as a business expense rather than taxable capital income for IRS purposes?
Construction on third-party property presents complex tax treatment under Portuguese law. The claimant argued that despite building on the shareholder's land, the warehouse constituted a tangible fixed asset properly recorded in SNC accounts (2432312 and 2432313) and used exclusively for business operations since mid-2016. This operational use, combined with accounting treatment as company property subject to depreciation and VAT deduction on construction costs, supported characterizing expenditures as legitimate business expenses. However, the Tax Authority emphasized that legal ownership remained with the shareholder, and without registered superficies rights or proper stamp tax payment on such rights, the construction represented an economic transfer to the shareholder requiring IRS withholding. The tribunal's analysis turned on whether economic substance (business use) overcame legal form (shareholder ownership) in determining tax treatment.
How does the CAAD arbitral tribunal assess withholding tax (retenção na fonte) obligations on economic advantages in IRS?
CAAD arbitral tribunals assess IRS withholding tax obligations on economic advantages by examining both legal formalities and economic substance. In this case, the tribunal considered: (1) whether construction costs represented genuine business expenditure evidenced by accounting records and operational use; (2) whether absence of registered superficies rights indicated a shareholder benefit requiring withholding; (3) whether the company properly treated the asset as available for depreciation and VAT recovery; and (4) whether the facts supported the Tax Authority's presumption of economic advantage. The tribunal applied Article 5 of the IRS Code's broad definition of capital income, examining whether the shareholder received measurable economic benefit from the company's expenditure. Key factors included legal ownership registration, formalization of property rights, stamp tax compliance, and whether the arrangement's structure indicated tax avoidance versus legitimate business purpose.
What are the grounds for challenging an IRS withholding tax assessment through a CAAD arbitral proceeding?
Challenging IRS withholding tax assessments through CAAD arbitral proceedings requires establishing legal grounds under the RJAT (Decree-Law 10/2011). In Process 622/2018-T, the claimant invoked error concerning factual and legal assumptions (erro sobre os pressupostos de facto e de direito), arguing the Tax Authority mischaracterized business expenditure as shareholder benefit. Valid grounds include: demonstrating the assessment misapplied legal provisions to proven facts; showing factual findings lacked evidentiary support; proving economic substance contradicted the Authority's characterization; or establishing that procedural defects vitiated the assessment. The claimant must request reimbursement of withholdings paid plus indemnity interest. The tribunal examines the administrative file, inspection reports, accounting records, and legal arguments to determine whether the withholding obligation was correctly imposed, focusing on whether disputed expenditures truly constituted taxable economic advantages requiring source withholding under IRS rules.
Is a company liable for IRS withholding tax when a warehouse is built on property owned by its shareholders?
A company's IRS withholding liability when constructing on shareholder property depends on whether the expenditure constitutes an economic advantage to the shareholder. Portuguese law imposes withholding obligations when companies provide measurable benefits to shareholders beyond normal business relationships. In this case, the Tax Authority assessed withholding tax because: (1) the warehouse was built on land legally owned by shareholder B...; (2) no superficies rights were formally registered, leaving legal ownership of improvements with the landowner; (3) no stamp tax was paid on alleged superficies arrangements; and (4) the construction increased the shareholder's patrimony by €34,752.80. The company contested this characterization, arguing the warehouse served exclusively business purposes, was properly accounted for as a company asset, generated VAT deductions and depreciation allowances consistent with company ownership, and involved no intention to benefit the shareholder personally. The tribunal's determination hinged on whether these operational factors overcame the legal presumption that construction on shareholder property without formalized rights constitutes a taxable distribution.