Process: 623/2014-T

Date: July 10, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

This CAAD arbitration case (623/2014-T) concerns the deductibility of business costs under Portuguese Corporate Income Tax (IRC) for the 2010 fiscal year. The Tax Authority issued an additional IRC assessment of €19,740.55, disallowing various expenses claimed by an agricultural and wine-making company that was attempting to expand into maritime tourism activities. The disputed costs include: boat acquisition and motor expenses claimed as necessary for estate access via the Douro River and planned tourism operations; building construction and depreciation for tourism accommodation projects that failed due to 2010's economic recession and lack of bank financing; travel and accommodation expenses incurred before tourist facilities were operational; meal expenses for the sole administrator; and wine inventory differences attributed to promotional tastings for clients, enologists, and sommeliers. The company argued all expenses related to its expanded corporate purpose in tourism activities, while the Tax Authority challenged whether costs unrelated to the main agricultural activity could be deducted. This case illustrates the critical IRC principle that business expenses must be indispensable for generating taxable income and properly documented under Article 23 of the IRC Code. The arbitration highlights common disputes regarding mixed-use assets, preparatory investment costs for unrealized projects, and the burden of proof required to demonstrate the business necessity of expenses beyond a company's primary operational activity.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 623/2014-T

Subject Matter: CIT; deductibility of costs

Claimant: A… – …, S.A.

Respondent: Tax and Customs Authority ("TA")

The arbitrator, Henrique Nogueira Nunes, designated by the Deontological Council of the Administrative Arbitration Centre ("CAAD") to constitute the Singular Arbitral Tribunal, decides as follows:

1. REPORT

1.1

The company A… - …, S.A. with tax identification number … (hereinafter abbreviated as "Claimant") filed a request for the constitution of the Arbitral Tribunal pursuant to Article 2, paragraph 1, letter a) of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT").

1.2

The request for arbitral pronouncement concerns the declaration of illegality of the additional Corporate Income Tax assessment No. 2014 …, for the tax year 2010, which resulted in tax and compensatory interest due in the amount of € 19,740.55.

1.3

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority (hereinafter abbreviated as "TA") on 20 August 2014, with the aforementioned arbitrator being designated for the Singular Arbitral Tribunal, who accepted the appointment.

1.4

On 02 October 2014 the parties were duly notified of such designation, showing no intention to refuse the appointment of the arbitrators, in accordance with the combined terms of Article 11, paragraph 1, letters a) and b) of RJAT and Articles 6 and 7 of the Deontological Code.

1.5

The Arbitral Tribunal was constituted on 17 October 2014.

1.6

In support of its request, the Claimant alleges, in summary, the following:

(i) That during the year 2010 the Claimant had to make several investments which aimed at its preparation for a set of activities that form an integral part of its corporate purpose.

(ii) For this reason, it was necessary to incur a set of expenses that are not related to the main activity, agricultural and wine-making, having attached a set of documents that do not refer to the fiscal year 2010.

(iii) That with respect to the correction made by the Respondent to account 62.6.1.114 – Equipment Conservation and Repair – 370, the acquisition of the boat and all its components was intended solely for the development of activities that form part of the Claimant's corporate purpose (Maritime Tourist) as from May 2010 and that the motor (document 52012 in the amount of €1,625.00 attached to the proceedings by the Claimant) refers to an auxiliary boat motor, of low value and having a much shorter useful life than the main motor.

(iv) And that it is a fact that due to current difficulties of access to property, the said boat also provides support for the transport of persons and goods that go to work in the vineyard, namely, in the transport of the administrator, collaborators, clients, enologists, however its true purpose is its operation in the Maritime Tourist activity, since, it alleges, it intends to conduct tourist trips.

(v) As to the cost reported in account 62.6.1.114, in the amount of € 9,900.00, relating to recovery of an aluminum structure and repair of an embankment for vessel moorings existing at the Estate …, it states that the cost relating to this investment is equally connected with the activity it develops.

(vi) As to the correction related to account 62.5111.123/5 – Unaccepted Travel and Accommodation, it comes to state that the Respondent should have accepted as a business expense the documents presented in accounts 62511123 and 62511125, respectively, the amounts of € 665.26 and € 1,309.16, since the same was justified, as this expense only existed while the house that was designed for the exercise of tourism/accommodation activity did not meet all the necessary conditions to accommodate people/tourists.

(vii) As to the correction relating to account 62 6.5 - Litigation and Notarial, it recognized that there was a lapse in the classification of this account, since it should have entered this expense in account 62.5.1. However, it says, the expenses in question should have been accepted by the Respondent since it alleges that they were incurred during the exercise of its activity. It maintains that it has only one employee, its sole administrator, so that he is the only beneficiary of meal expenses, with no other beneficiary to whom this expense can be attributed, so it should have been accepted by the Respondent.

(viii) As to the correction relating to Construction of buildings (in wood in the amount of €97,500.00, with depreciation of €6,493.50), it states that for various reasons, the planned tourist project could not proceed due to lack of investment, namely by banking institutions, as in 2010 Portugal entered into economic recession, a fact, it says, which prevented it from obtaining the necessary investment to implement its tourism project.

(ix) It maintains that expenses with the construction of buildings were intended solely for the development of a tourism exploitation project, so the amount of € 6,493.50 recorded in account 64.2.2 should be considered as depreciation with no reason for the Respondent not to accept the respective business expense, as the same falls within the scope of the corporate purpose it exercises.

(x) As to the correction relating to the acquisition of the Motor Boat, the Claimant alleges that as the only access to the Estate is by sea via the Douro River, it saw itself obliged to equip itself with means to overcome this situation, since every person who wished to travel to the Estate would always have to do so by boat. It justifies this acquisition as being essential in order to access the Estate, as well as its clients interested in purchasing the wine produced, and the technicians who provide support in wine-making, among others, since the only route, or at least the most comfortable and best access route it says, is by sea.

(xi) It states that it agreed with its supplier "B…", that the workers of this supplier would always travel by sea, and that it was the Claimant's responsibility to provide transport, due to this supplier not having the nautical means to transport themselves. Concluding, in this manner, that the depreciation incurred should be accepted.

(xii) As to the correction relating to the project for remodeling of 3 houses in the Douro Estate - House Reconstruction Study – it recognizes that in an initial phase it intended to develop a tourism project at the Douro Estate, this being the main reason that led it to prepare an expansion project, since these houses were intended to accommodate tourists, considering that the purpose is the tourism and hotel activity.

(xiii) And that only due to difficulties with bank financing was it not possible to complete said tourism project, concluding that these expenses, and respective depreciation in the amount of €3,330.00, should be accepted as this type of expense falls within the scope of its corporate purpose and which it, it says, has been exercising.

(xiv) Finally, as regards the Differences in inventories, namely the difference recorded in the quantities of bottles verified in wines of the various years, it states that when launching new products the most effective way to do so and present them is by giving tastings and this is what it did, conducting tastings and samplings, to which it invited clients, enologists, sommeliers and chefs. It says it is equally standard practice, in addition to tasting on site, for these guests to purchase wines to compare with other wines on the market, to try to match them with various dishes, all with the objective of classifying the wine and knowing how to place it on the market.

(xv) And that the reason referred to above is the main reason for the differences found in wine inventories in the various years, given that there were no sales of these wines in the year 2010.

(xvi) As to bulk wine it states it is normal to have losses in bottling, when moving from barrels to bottles.

(xvii) In its Allegations, it reinforced the foregoing.

(xx) Therefore it pleads for the merits of its request, with the tax and compensatory interest paid to be refunded.

1.7

The Respondent replied, defending that the request should be judged unfounded, alleging in summary, as follows:

(i) It begins by stating that the Claimant, properly speaking, as it does throughout the Request, alleges and makes an erroneous assessment of the facts and the applicable tax provisions and that from the analysis of the request for arbitral pronouncement results the finding of a clear absence of legal grounds.

(ii) And that the Claimant, it says, merely comes to express its disagreement with the conclusions reached in the course of the inspection procedure, satisfying itself, for that purpose, with mere generic and mutually contradictory allegations.

(iii) And that under Article 552 of the CPC, applicable, ex vi Article 29, paragraph 1, letter e) of RJAT, in the initial petition the Claimant must not only set out the essential facts that constitute the cause of action but also the legal reasons that serve to ground the action, so it says, it finds itself prevented from rebutting the arguments on a legal-fiscal plane, given that at no moment does the Claimant point out or justify the error of fact or of law on which it bases the supposed illegality of the assessment contested herein.

(iv) For which reason, in its understanding, there exists a dilatory exception that obstructs knowledge of the request, and, therefore, it should determine the absolution of the Respondent from the instance.

(v) By counter-pleading it comes to rebut, point by point, as follows summarily:

(vi) It maintains that neither by reference to the year 2010, nor currently, does the Claimant, contrary to what it alleges, provide proof, as is its burden, of the existence of a tourism project at that estate, but only of a mere intention/hypothesis of coming to do so.

(vii) In the same way, it alleges that the references made to the reconstruction work are totally incoherent since the purpose of the same sometimes translates into the implementation of a tourism project, sometimes into the permanence of the owner at the estate, whose tax classification, it maintains, is, necessarily, distinct.

(viii) It concludes that it is not possible to conclude that the Claimant has actually exercised the activity it alleges, namely the operation of a tourism activity.

(ix) With respect to the fiscally non-accepted expenses, it understands that the expenses disallowed by the Tax Inspection were those that were demonstrably not indispensable for the realization of income or for the maintenance of the income-producing source, in the year 2010, as required by Article 23 of CIRC.

(x) For, it states, in the year 2010, the Claimant's income was that obtained from the sale of eucalyptus wood and the commercialization and production of wine, with the expenses inherent to these activities being accepted by the Tax Inspection.

(xi) It says that faced with the facts found the Claimant never managed to prove the questioned requirement of economic rationality of the costs it recorded, despite having had opportunities to do so.

(xii) It alleges that there is no proof that the expenses in question herein go beyond the personal sphere of the Claimant's sole administrator, falling within the company's sphere and being indispensable for the realization of profits or gains subject to tax or for the maintenance of the income-producing source, so it defends, the disregard of such expenses does not merit censure under Article 23 of CIRC.

(xiii) With respect to "Account 62.6.1.114 – conservation and repair of equipment", it understands that the Claimant recorded as an expense of the fiscal year the amount of €1,625.00, relating to the acquisition of a boat motor, and that this operation should, in accordance with Article 19 of Regulatory Decree No. 25/2009, of 14 September, have been previously recorded as a tangible fixed asset.

(xiv) And that such acquisition has no economic causality with the income subject to tax or the maintenance of the income-producing source, for, it alleges, in the year 2010, the Claimant's income was that obtained from the sale of eucalyptus wood and the commercialization and production of wine.

(xv) On the other hand, the Claimant recorded as an expense the amount of €9,900.00 relating to the recovery of an embankment for vessel moorings existing at the Ferradosa estate, when the operation in question, taking into account the description mentioned in the supporting document, should have been recorded as major repairs and improvements and depreciated under Article 5, paragraph 2, letter c) of Regulatory Decree No. 25/2009, of 14 September.

(xvi) As to "Account 62.511.123/5 - unaccepted travel and accommodation", it says that such expenses do not identify the person who stayed overnight at those places, and that the supporting documents refer to meal consumptions which do not contain the identification of the recipient of the catering service, nothing justifying and proving as to the business nature and necessity of such expenses.

(xvii) And even if such invoices were identified, which would immediately be necessary in order to determine whether, in fact, it was the Claimant that bore such expenses, which is not the case, those expenses, even if properly documented, do not pass the test of Article 23 of CIRC.

(xviii) As to the correction related to "Account 62.6.5 - litigation and notarial", it comes to state that since the same refers, allegedly, to meal consumption by various persons, but in which the respective recipient is not identified, it is not possible to accept this expense in light of the provisions of Article 23 of CIRC.

(xix) As to the correction relating to "Account 64.2.2 – Depreciation of buildings and acquisition of motor boat", it says that in 2010, the Claimant constructed, on its own property land, wooden constructions with masonry foundations, for the amount of €97,500.00, buildings which, according to statements by the Claimant's administrator, would be intended for the operation of tourism, an activity which, it says, was never exercised by the Claimant, so it cannot accept the expense in light of the provisions of Article 23 of CIRC.

(xx) With respect to the correction relating to "Account 64.2.2 – Depreciation of buildings and acquisition of motor boat", it comes to state that it does not accept the justification given by the Claimant that the acquisition of such boat was intended to transport workers, particularly because, it says, it is known that the Claimant does not have employees on its payroll.

(xxi) Being certain that, it maintains, if the Claimant contracted with another party for the transport of workers, as it refers to in Article 69 of its request, it should always provide proof of the alleged.

(xxii) Whereby it concludes that the depreciation expense of the boat and acquisition of the motor, in the amount of €2,700.20, cannot be considered as an expense for tax purposes, under Article 23 of CIRC as well as Article 11 of Regulatory Decree No. 25/2009, of 14 September.

(xxiii) Finally, and for the reasons stated with respect to the correction relating to account 64.2.2, in the part relating to depreciation of buildings (cf. pages 18 and 19 of RIT and Articles 103 and following of its Reply), it understands that the interpretation given by the Tax Inspection is correct in disregarding, for tax purposes, the amount of €3,330.00, recorded in "Account 6221114 – specialized works", relating to the expenses of the project for remodeling and expansion of 3 houses at the Douro estate whose usefulness was "to allow the permanence of the owners at the estate, as declared by the representative of the company in response to a notification in the course of Inspection 2011…" (cf. page 20 of RIT attached to the proceedings).

(xxiv) As to the correction of income, it comes to state that the Claimant disagrees about the calculation of missing wine in the inventory of 2010, maintaining that it is normal to have losses in bottling and in conducting tastings and samplings, which simultaneously resulted in an omission of income in 2010, but which it does not prove at any moment, as it never managed to demonstrate or provide any type of proof of the existence of the type of events that the Claimant invokes as having occurred.

(xxv) On the other hand, it states that notwithstanding the attachment of a document presented by the Claimant - IVDP of losses and gifts of 200 bottles (150 liters) (cf. map 4 of document 20 attached by the Claimant with its arbitral request – it alleges that from the same no effect intended by the Claimant can be drawn, solely because, in December 2008, a write-off of inventory of 150 liters was declared.

(xxvi) Since there is no documented information in the accounting records that there were wine losses or gifts that justify the quantities of missing wine.

(xxvii) With respect to bulk wine, it defends that it never questioned the abnormality of bottling losses, however, it understands it shall never be acceptable to use as justification the mere allegation of normality of bottling losses, made by the Claimant, considering, even, that the Claimant did not reflect in accounting such losses, even in approximate values.

(xxix) It concludes, pleading for absolution from the instance, by the procedence of the dilatory exception invoked or, should that not be understood, and by counter-pleading, by the total lack of merit of the arbitral request.

1.8

The Tribunal dispensed with the holding of the first meeting of the Arbitral Tribunal, by Arbitral Order inserted in the procedural system, considering that the record already contains the necessary and sufficient factual elements to decide on the law, which met with no opposition from the parties. The parties were notified to present Written Allegations, which both decided to do. The delivery of the arbitral decision was fixed until the end of the legal period provided in paragraph 2 of Article 21 of RJAT.

1.9

The Tribunal was regularly constituted and is competent ratione materiae, in accordance with Article 2 of RJAT.

2.0

The parties have legal standing and legal capacity, are shown to be properly interested and are regularly represented (cf. Articles 4 and 10, paragraph 2 of RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

2.1

No procedural defects were identified.

2. PRELIMINARY MATTER

The Respondent, in its allegations, argues that the Tribunal should not consider and admit the documents attached by the Claimant with its allegations, since their attachment would be untimely.

In this regard, it must be noted that pursuant to letter c) of Article 16 of RJAT it is incumbent upon the Arbitral Tribunal to have full autonomy in the conduct of the proceedings.

And even if a parallel were drawn with the judicial tax procedure,[1] the conclusion that would be reached would be that it is possible, in theory, to present evidence by documents after 20 days before the date on which the final hearing for judgment is held,[2] whenever the attachment of documents could not be presented until that moment, as well as those whose presentation has become necessary due to a subsequent occurrence.

That is, civil procedure[3] admits this possibility, although with restrictions, it should be recognized.

In light of the principle of ascertainment of the material truth, this Tribunal admits the attachment of the documents presented by the Claimant with its allegations.

3. ISSUES TO BE DECIDED

In the arbitral petition, the Claimant raises for the Tribunal's consideration, in summary, the following issues:

  • Is the disregard of expenses for tax purposes promoted by the Respondent legal, or, as the latter alleges, does it violate the regime for deduction of costs in Corporate Income Tax?
  • Is the correction promoted by the TA with reference to the calculation of missing wine in the inventory of 2010 legal?

The Respondent, in its Reply, invites the Tribunal to rule on the matter of dilatory exception, by invoking the existence of a dilatory exception which, in its understanding, obstructs knowledge of the request, and, therefore, should determine the absolution of the Respondent from the instance, due to the existence of lack of legal grounds by the Claimant.

4. MATTERS OF FACT

With relevance to the assessment and decision on the merits, the following facts are held to be proven:

  1. The Claimant was constituted as a corporation on 22/02/2010, having commenced its business on the same date, being taxed for Corporate Income Tax purposes in the general regime, and for VAT purposes under the normal quarterly regime. (Cf. Articles of Association attached to the record).

  2. Upon its incorporation, and according to its corporate record, the Claimant had as its corporate purpose "agricultural and wine-making operation, tourism activities, hotel industry, asset administration, as well as organization of events" (Cf. Articles of Association attached to the record and commercial certificate attached by the Respondent with its allegations).

  3. On 08/05/2010, the Claimant amended its corporate purpose to "agricultural and wine-making operation, tourism activities, hotel industry, asset administration, as well as organization of various events. Organization of maritime-tourism activities, with previously established programs, rental of vessels with or without crew, tourist fishing and other services of a maritime nature and similar". (Cf. commercial certificate attached by the Respondent with its allegations).

  4. In the scope of the external inspection action carried out based on Inspection Order 2012…, referring to the year 2010, of general scope, conducted on the Claimant, the Tax Inspection made merely arithmetic corrections to the Corporate Income Tax taxable matter in the amount of € 91,020.25, and, for VAT purposes, found outstanding tax in the amount of € 2,097.21, as a result of violations of the provisions in Articles 17, 20 and 23 of CIRC, Article 1 of Regulatory Decree No. 25/2009, and Articles 19 to 27 of CIVA. (Cf. Articles of Association attached to the record).

  5. The inspection action began on 24/01/2014, with the service order being signed by C, taxpayer number …, who is chairman of the board of directors of the Claimant. (Cf. Articles of Association attached to the record).

  6. Between 04/2010 and 03/2011, as explicitly stated by the Claimant in Article 16 of the request for arbitral pronouncement, it had as its sole employee the administrator C.

  7. In the scope of the said procedure, and after notification to exercise the respective right to be heard, the Claimant did not exercise its right to be heard, so the correction proposals became definitive. (Cf. Articles of Association attached to the record).

  8. On 21/05/2014 the Claimant was notified of the additional Corporate Income Tax assessment for the year 2010, resulting in Corporate Income Tax due in the amount of €19,740.55 (Cf. Document No. 1 attached by the Claimant with its arbitral request).

  9. The Claimant, for tax purposes, has as its main CAE (statistical classification of economic activities) viticulture (code 01210) and as secondary CAE the organization of tourism animation activities (code 93293) (Cf. Articles of Association attached to the record and Document No. 3 attached by the Claimant with its arbitral request).

  10. The Claimant did not, in fact, exercise the maritime-tourism activity that is part of its corporate purpose with reference to the year 2010 (Articles 55 and 56 of the Claimant's Arbitral Petition).

5. UNPROVEN FACTS

There are no other unproven facts, with interest for the decision of the case.

6. GROUNDS FOR THE DECISION ON MATTERS OF FACT

As to the essential facts, the settled matter is identically shaped by both parties and the Tribunal's conviction was formed on the basis of the documentary evidence attached to the record and above itemized, whose authenticity and truthfulness was not questioned by either party.

7. ON THE LAW

In accordance with the issues set out in point No. 3 of this Decision, and taking into account the matters of fact established in point No. 4, it is now necessary to determine the applicable law.

We shall begin by analyzing the exception invoked by the Respondent in its Reply, since it concerns a matter of dilatory exception, which, if upheld, results in the dismissal of the instance and non-knowledge of the request.

The Respondent invokes that in the case sub judice there exists the dilatory exception of lack of legal grounds in the arbitral action that the Claimant filed.

However, it is not correct.

The Tribunal recognizes some confusion in the manner in which the Claimant presents the facts and even some incorrectness as regards the corrections promoted by the Respondent, namely in determining its taxable profit.

However, it is manifestly excessive to attempt to draw therefrom the legal effect intended by the Respondent, that a manifest lack of legal grounds would have occurred, especially because the Claimant seeks to justify the expenses incurred in light of the regime provided for in Article 23 of CIRC.

So much is this not the case, that the Respondent contests, by counter-pleading and counter-correction, the argumentation promoted by the Claimant throughout its arbitral petition, it being untrue that it has been prevented from rebutting the arguments on a legal-tax plane, since it does so exhaustively in its Reply and Allegations.

For this reason, the dilatory exception invoked by the Respondent is unfounded.

Let us now see whether, in the present case, there is a violation of the regime for deduction of costs in Corporate Income Tax in the totality of the expenses whose fiscal deductibility the Respondent refuses.

Let us therefore analyze the concept of indispensability of costs in light of Article 23 of CIRC, as amended by Decree-Law No. 159/2009, of 13 July.

"Article 23

Costs or losses

1 - Costs or losses that are demonstrably indispensable for the realization of income or gains subject to tax or for the maintenance of the income-producing source are considered as such, namely the following:

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

b) Distribution and sale charges, covering those of transport, advertising and placement of goods;

c) Charges of a financial nature, such as interest on borrowed capital applied in the operation, discounts, premiums, transfers, exchange rate differences, expenses with credit operations, collection of debts and issuance of shares, bonds and other securities and redemption premiums;

d) Charges of an administrative nature, such as remuneration, allowances, pensions or retirement supplements, current consumption material, transport and communications, rent, litigation, insurance, including life insurance and operations in the "Life" class, contributions to retirement savings funds, contributions to pension funds and to any complementary social security regimes;

e) Charges for analysis, rationalization, research and consultation;

f) Tax and quasi-tax charges;

g) Depreciation and amortization;

h) Provisions;

i) Realized losses;

j) Compensation resulting from events whose risk is not insurable.

2 - Unlawful expenses are not accepted as costs, namely those arising from conduct that reasonably indicates violation of Portuguese criminal legislation, even if occurring outside the territorial scope of its application.

3 - In the case of financial lease rents, the part of the rent intended for financial amortization is not accepted as a cost or loss of the lessee.

4 - Except when covered by the provisions of Article 40, the premiums of health and personal accident insurance policies are not accepted as costs, nor the amounts spent with insurance and operations in the "Life" class, contributions to pension funds and to any complementary social security regimes that are not considered dependent work income under the first part of paragraph 3) of letter b) of paragraph 3 of Article 2 of the Income Tax Code.

5 - Costs or losses of the fiscal year borne with the onerous transfer of equity interests, regardless of the title under which it is made, when held by the transferor for a period of less than three years are not accepted, provided that:

a) The equity interests were acquired from entities with which there are special relationships, under the terms of paragraph 4 of Article 58;

b) The equity interests were acquired from entities domiciled in a country, territory or region with a clearly more favorable tax regime, contained in the list approved by the Minister of Finance;

c) The equity interests were acquired from entities resident in Portuguese territory subject to a special tax regime.

6 - Costs or losses of the fiscal year borne with the onerous transfer of equity interests, regardless of the title under which it is made, are likewise not accepted, whenever the transferring entity has resulted from a transformation, including modification of corporate purpose, of a company to which a different tax regime was applicable with respect to these costs or losses and less than three years have elapsed between the date of occurrence of such fact and the date of transfer.

7 - Equally, costs or losses of the fiscal year borne with the onerous transfer of equity interests, regardless of the title under which it is made, to entities with which there are special relationships under the terms of paragraph 4 of Article 58, or to entities domiciled in a country, territory or region with a clearly more favorable tax regime, contained in a list approved by the Minister of Finance, or entities resident in Portuguese territory subject to a special tax regime, are not accepted."

It must be said from the outset that we closely follow the position expressed by Rui Duarte Morais, in "Notes on CIT, Almedina Editions, pages 81 to 88.", in the part referring to the indispensability of costs.

Indeed, as, and rightly, that esteemed Author states and citing him for ease of exposition:

"The literal element points, therefore, to the necessity of costs. Necessary for what? For the realization of income or gains or for the maintenance of the income-producing source, answers paragraph 1 of Article 23. This phrase must be carefully considered.

(...)

The expression maintenance of the income-producing source cannot be understood in a static sense (conservation of the company as it exists), but rather in a dynamic sense. Companies aim for their development, their growth. Expenses incurred with such objective are, indisputably, fiscal costs. Think, for example, of charges incurred in the search for new products, new markets, rationalization of business processes, acquisition of more modern equipment, research, quality certification."

Continuing to affirm Rui Duarte Morais, which we likewise follow: "Taxpayers are, therefore, free in their choices, namely to decide how to manage their companies, to decide which (in their kind and amount) the charges they consider convenient for the pursuit of a given economic activity. We have, as a principle inherent to the idea of a Fiscal State, non-interference by the administration in the management of companies.

A cost does not cease to be one (should not cease to be considered as such for tax purposes) by the fact that, in a posteriori evaluation, it proves to be useless or ineffective (for example, by not proving to be a generator of income) or, simply, excessive in the view of fiscal interests. Especially because such an evaluation would often result, vitiated by the fact that, at the moment it is carried out, new facts are known, not present at the time of the decision by the taxpayer.

We cannot have as good guidance certain case law that refuses the fiscal acceptance of certain costs because it is not possible to establish a direct correlation with the obtaining of specific income. Taken to the extreme, such an understanding would have that charges with research would only be fiscally deductible when such research succeeded, when, as a result, the company began to sell new goods and services or achieved the reduction of other costs.

In the same logic, neither would charges with other forms of company development, for example, prospecting for new products and markets, be fiscally deductible, whenever such initiatives did not come to fruition, being realized in the obtaining of new income."

To conclude in the following sense: "The requirement of 'indispensability', because it is present with respect to any and all cost as a condition of its fiscal acceptance, cannot be referred to the nature of the charge, but rather to the circumstances in which it occurred. If the assumption of the charge that originates the cost was presided over by a genuine business motivation - in the understanding of the shareholders and/or managers of the company, the only ones to whom it falls to decide on the corporate interest – the cost is indispensable. When it is to be concluded that the charge was determined by other motivations (personal interest of shareholders, administrators, creditors, other companies in the same group, commercial partners, etc.) then such cost should not be deemed indispensable.

Bold, italic and underlined by the Tribunal.

Having framed preliminarily and dogmatically what this Tribunal should understand by the requirement of indispensability, let us therefore analyze the concrete case, beginning with the analysis of the Claimant's expenses that were not considered by the Respondent for tax purposes.

The central question to be determined for the proper decision of the case sub judice, in this Tribunal's view, is whether, despite the maritime-tourism activity that is part of the Claimant's corporate purpose not having been exercised by it with reference to the year 2010, one can still accept the expenses in question herein.

Having reviewed the evidence offered by the Claimant we arrive at the conclusion that it does not show that there was a prior decision to advance towards a maritime-tourism project with reference to the year 2010, considering that the overwhelming majority of documents offered by the Claimant refer to years subsequent to 2010, in most cases to 2012, 2013 and 2014.[4]

In fact, the justification that the Claimant provides throughout its argumentative course is that the majority of the expenses in question herein would fall within the development of activities related to the corporate purpose (maritime-tourism component) and that, as such, were justified, but from the evidence it provided to the Tribunal it is clear that the motivation (and decision) to begin the possibility of advancing towards the implementation of a project of this kind occurred in fiscal years not prior[5] but subsequent to 2010.

It is not enough to amend a company's corporate purpose to conclude that it exercised that activity or initiated preliminary or prior preparation for the exercise thereof.

It is necessary that some acts or decision-making processes be verified and ascertained that lead to that same conclusion, even if subsequently to the practice of such preparatory act or management decision, for reasons of an economic and/or financial and/or other nature, such project is eventually abandoned, a decision, this one, entirely legitimate, and which would merit no censure from this Tribunal, provided that the expenses incurred presented a genuine business motivation, which, in the present case, cannot be discerned.

Indeed, it is the Claimant itself that assumes[6] that the expenses incurred were motivated by the operation of the maritime-tourism activity, since, it states, it is intended to conduct tourist trips.

It states in Article 56 of its arbitral petition that for various reasons, which it does not specify in detail, it was not possible to advance with the tourism project due to lack of investment, namely by banking institutions, which would have prevented it from obtaining the necessary financial investment.

However, it provides no proof of what it alleges, and surely it would not be difficult to attach some proof that it would have tried to obtain that investment it comes to tell the record it failed to obtain.

For the reasons stated above, the Tribunal considers that the requirement of indispensability is not met, as it previously framed it, with respect to expenses related to Account 62.6.1.114 – conservation and repair of equipment, so it understands that the corrections promoted by the Respondent do not merit censure.

As to the corrections promoted to Account 64.2.2 – depreciation of buildings and boats and motor - the Claimant, as to the acquisition of a recreational boat, comes to justify these expenses with the need to transport workers of B… to work in its vineyard. However, once again it provides no proof of this responsibility it would have assumed, and considering that in the year 2010 the Claimant did not have staff beyond its administrator, the correction promoted by the Respondent does not merit censure.

As to the expense incurred with the construction of buildings, the same should not be accepted because, in the Claimant's words, it is related solely to a tourism project[7] which, with reference to the year 2010, cannot find proof that it would even have been considered, so the correction made by the TA does not merit censure in light of the evidence produced by the Claimant herein.

As to the correction promoted by the Respondent to Account 6221114 – Project for remodeling of 3 houses at the Douro estate - the Claimant, once again, comes to justify this expense solely as the development of a tourism exploitation project[8] so, for the same reasons already extensively explained throughout this decision, the correction promoted by the Respondent does not merit censure. Additionally, the evidence attached by the Claimant in its arbitral petition as Document No. 17 refers to the award of work relating to "conducting the general execution project for the remodeling of a rural warehouse for residential use", with no reference whatsoever to a tourism project, nor even simply to the execution of preparatory acts with a view to the implementation thereof.

As to the corrections promoted to Accounts Nos. 62.511.123/5 – Unaccepted Travel and Accommodation and Account 62.6.5 – Litigation and Notarial, the Claimant comes, in essence, to justify them with the exercise of its business activity.

However, the supporting documents in the record do not identify the recipient of such meals/lodging, nor, above all, the business purpose that justified them.

The nature of this type of expense is related to meal and accommodation expenses when a service is usually provided outside the usual place of work. The Claimant merely invokes the general interest of the company's activity to justify the expense, but this is insufficient, because, considering that the Respondent comes to question the indispensability of this expense, alleging that very easily could the same take on the nature of a personal expense given the circumstances of the case sub judice,[9] it was incumbent upon the Claimant to seek to demonstrate minimally the contrary, which it does not do at all in the record.

Indeed, the Claimant in Articles 46 and 47 of its Arbitral Petition comes to declare that these expenses only existed while the house that was designed, according to it, for the exercise of tourism/accommodation activity did not meet the necessary conditions to accommodate people/tourists and that since the place where it develops its wine-making activity is located in the Douro, there was a need to incur this type of expense.

Curiously, having examined the meal invoices that are contained in Annex 5 of RIT, they occurred almost all in the District of Lisbon and not in the District of Bragança…

Whereby the correction promoted by the Respondent does not merit censure.

Finally, as to the differences recorded by the Respondent in its inventories, the Claimant alleges it is normal to record losses in bottling and justifies the differences, equally, through the conduct of tastings and samplings, to which, it says, it invited clients, enologists and sommeliers.

And that this is, in its understanding, the reason for the differences found in wine inventories in the various years.[10]

However, it fails to demonstrate in the record or provide any type of proof of the existence of this type of event.

Nor is there in its accounting documented information that there were wine losses or gifts that justify the quantities of missing wine.

Whereby, in light of the evidence produced in the record, the conclusion reached is that the correction promoted by the Respondent does not merit censure.

8. DECISION

In accordance with the foregoing, it is decided:

  • To judge unfounded the request of the Claimant relating to the request for illegality of the official Corporate Income Tax assessment No. 2014 …, for the year 2010, which resulted in tax and compensatory interest due in the amount of € 19,740.55.

Costs calculated in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, based on the value of the request, to be borne by the Claimant in the amount of € 1,224.00 (one thousand two hundred and twenty-four euros).

Let notice be given

Lisbon, Administrative Arbitration Centre, 10 July 2015

The Arbitrator

Henrique Nogueira Nunes

Text prepared by computer pursuant to Article 131, paragraph 5 of CPC, applicable by reference from Article 29, paragraph 1, letter e) of Decree-Law No. 10/2011, of 20 January. The drafting of this arbitral decision is governed by the orthography prior to the 1990 Orthographic Agreement.

[1] Which would not even be necessary given the nature of the arbitral dispute.

[2] See paragraph 2 and paragraph 3 of Article 423 of CPC.

[3] Applicable to judicial tax procedure, ex vi, Article 2, letter e) of CPPT.

[4] By way of example, documents 16 to 19 attached by the Claimant, dated 15 December 2013 and 30 April 2014, respectively, consist of an invitation addressed by the Claimant to an architectural studio so that it could issue an opinion on the opportunity of a tourism project for the estate, and if affirmative, on the issuance of a work proposal.

[5] Which would make sense, for if there were some proof that the Claimant intended to advance a project of this type, surely it would not be very difficult for it to gather some proof that before or, at the limit, in 2010, it would have undertaken concrete actions with a view to the realization of that part of its corporate purpose.

[6] See, for example, what was stated in Articles 40 and 55 of its arbitral petition.

[7] See Article 63 of the Claimant's arbitral petition.

[8] See Article 79 of the Claimant's arbitral petition.

[9] The Claimant had only one employee, its Administrator.

[10] Article 84 of the arbitral petition.

Frequently Asked Questions

Automatically Created

What are the rules for deducting business costs under Portuguese IRC (Corporate Income Tax)?
Under Portuguese IRC law, business costs are deductible when they meet the requirements of Article 23 of the Corporate Income Tax Code (CIRC). Expenses must be: (1) indispensable for the company's activity or for maintaining its income-producing capacity; (2) properly documented with invoices and supporting evidence; (3) recorded in the accounting books in the correct fiscal year; and (4) not expressly excluded by law. The Tax Authority may reject costs that lack sufficient documentation, are not related to business activities, or represent personal expenses. Companies bear the burden of proving that expenses are necessary, reasonable, and exclusively for business purposes.
Can expenses for mixed-use assets like boats be deducted as business costs under IRC?
Expenses for mixed-use assets like boats can be deducted under IRC only to the extent they are used for business purposes and properly justified. The taxpayer must demonstrate: (1) the asset's indispensability for the company's activity; (2) the business purpose prevails over any personal use; (3) adequate documentation proving business necessity; and (4) reasonable proportionality between the expense and the company's revenue-generating activities. In this case, the company argued the boat was essential for estate access via the Douro River and for planned maritime tourism operations within its corporate purpose. However, the Tax Authority often scrutinizes such claims, requiring concrete evidence of predominant business use rather than personal benefit to shareholders or administrators.
How does the CAAD arbitration tribunal assess the deductibility of investment costs outside a company's main activity?
The CAAD arbitration tribunal assesses investment costs outside a company's main activity by examining: (1) whether the expenses fall within the company's legally defined corporate purpose, even if not the primary activity; (2) if there is genuine intent and concrete action to develop the new business area; (3) whether costs are indispensable for that activity's operation; (4) the reasonableness and proportionality of expenses relative to the project's stage and potential; and (5) adequate documentation proving business necessity. In this case, the company claimed tourism project investments were legitimate despite being an agricultural/wine business, but the Tax Authority challenged costs for unrealized projects. Tribunals typically require evidence that preparatory expenses were objectively necessary and not speculative, examining whether projects advanced beyond mere intention.
What happens when the Portuguese Tax Authority (AT) issues an additional IRC assessment for disallowed cost deductions?
When the Portuguese Tax Authority (AT) issues an additional IRC assessment for disallowed cost deductions, the taxpayer receives a liquidation notice demanding payment of additional tax plus compensatory interest (juros compensatórios) calculated from the original payment deadline. The taxpayer has several options: (1) pay the assessment and file an administrative complaint (reclamação graciosa); (2) challenge it through hierarchical appeal; (3) request tax arbitration at CAAD within 90 days, which suspends collection during proceedings; or (4) file a judicial appeal in tax courts. Failure to pay or challenge results in enforcement proceedings. Compensatory interest accrues automatically to compensate the State for delayed tax collection. If the taxpayer prevails in arbitration or court, the assessment is canceled and any amounts paid are refunded with default interest (juros indemnizatórios).
What documentation is required to prove that business expenses are deductible under Portuguese corporate tax law?
To prove business expenses are deductible under Portuguese corporate tax law, companies must provide: (1) valid invoices or equivalent documents complying with invoicing rules, containing all legally required elements (supplier identification, description, amounts, VAT); (2) payment proof such as bank transfers, receipts, or checks; (3) supporting documentation demonstrating business necessity, such as contracts, correspondence, meeting minutes, or project descriptions; (4) proper accounting records in the correct accounts and fiscal period; (5) evidence linking expenses to revenue-generating activities or income maintenance; and (6) for specific categories like travel, meals, or vehicle expenses, additional justification such as trip purposes, attendee lists, or business rationale. In this case, the company provided various documents but the Tax Authority found insufficient proof that certain expenses (boat, buildings, wine inventory differences for tastings) were indispensable for actual business operations versus personal use or unrealized projects.