Process: 624/2017-T

Date: October 8, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (624/2017-T) addresses whether marketing services provided by a Greek non-resident company to a Portuguese shipyard are subject to IRC (Corporate Income Tax) withholding at 25%. The claimant, a Greek entity, contested EUR 232,963.38 in withholding taxes applied by B... (Portuguese company) between April 2014 and October 2016. The central dispute concerns the qualification of the contractual relationship: the parties characterized it as a marketing services contract, while the Portuguese Tax Authority (AT) sought to reclassify it as an agency contract. Under Article 4(4) of the IRC Code, services performed entirely outside Portuguese territory are exempt from Portuguese taxation if they don't relate to goods situated in Portugal or specific enumerated services. The claimant argued it performed pure marketing activities in Greece—maintaining records of vessels requiring repair, disclosing B...'s services via email and phone, and delivering promotional materials. Crucially, the claimant did not negotiate, prepare, or conclude contracts on behalf of B...; successful leads were simply referred to B... for direct negotiation. The AT contended the arrangement constituted intermediation services subject to Portuguese taxation. The arbitral tribunal examined witness testimony, contractual clauses, and the actual performance of services to determine whether the activities constituted taxable agency/intermediation or exempt marketing services under Portuguese tax law, with significant implications for cross-border service arrangements and the limits of Portuguese taxing jurisdiction over non-resident entities.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

On 28 November 2017, A..., Tax Identification Number..., with offices in ..., Greece, filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of acts of withholding tax on Corporate Income Tax (IRC), in the amount of EUR 232,963.38.

To support its request, the Claimant alleges, in summary:

The fundamental issue raised in the context of these proceedings concerns the question of whether the services provided by the Claimant to B... are or are not considered as generating income in Portuguese territory for the purposes of article 4 of the Corporate Income Tax Code (CIRC) and, to that extent, subject to withholding tax on a final basis.

The facts are not disputed that the Claimant is, on the one hand, a non-resident entity in Portugal and, on the other, the services provided to B... were fully performed outside the country and, finally, withholding taxes on IRC were made to the Claimant, between April 2014 and October 2016, by B... within the scope of the "marketing services provision contract" concluded between them.

The Tax Authority (AT) merely questions the qualification of the contract concluded between the parties, understanding it to be an agency contract and not, as stated by the signatories, a marketing services provision contract.

The present Claimant was to disclose in the Greek market, surgically and with the 'right' people – i.e., those who, within companies, know the repair needs of their fleet vessels and/or have the power to decide on the acquisition of services provided by B....

Materially, the Claimant's activity is a marketing activity.

Under number 4 of the same article 4 of the CIRC, income derived from other services provision performed or utilized in Portuguese territory (not relating to transport, communications and financial activities) is not considered as obtained in Portuguese territory for the purposes of their taxation «when the services from which they derive, being performed entirely outside Portuguese territory, do not relate to goods situated in that territory, nor are related to studies, projects, technical support or management, accounting or audit services and consulting, organization, research and development services in any domain».

Since this, as has been proven, is the case of the services provided by the present Claimant, the AT was wrong in considering that the income derived from those same services is subject to tax in Portugal, dismissing the Claimant's claim to obtain reimbursement of the amounts wrongfully withheld.

On 29 November 2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Claimant did not proceed to appoint an arbitrator, so, under the provisions of letter a) of number 2 of article 6 and letter a) of number 1 of article 11 of the RJAT, the President of the Ethics Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.

On 19 January 2018, the parties were notified of these appointments, having shown no intention to refuse any of them.

In accordance with the provisions of letter c) of number 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 8 February 2018.

On 14 March 2018, the Respondent, duly notified for that purpose, submitted its response defending itself by way of challenge.

On 17 April 2018, the meeting referred to in article 18 of the RJAT took place, where witnesses presented at the proceedings by the Claimant were heard.

Having been granted a time period for the submission of written arguments, these were submitted by the parties, addressing the evidence produced and reiterating and developing their respective legal positions.

A time period of 30 days was set for the issuance of the final decision, following the submission of arguments by the AT, and on 7 August 2018 an arbitral order was notified to the parties extending by two months the time period for issuing the final decision of the proceedings, as well as the time period set in article 21/1 of the RJAT.

The Arbitral Tribunal has material competence and is regularly constituted, under the terms of articles 2, number 1, letter a), 5 and 6, number 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under the terms of articles 4 and 10 of the RJAT and article 1 of Administrative Rule No. 112-A/2011, of 22 March.

The proceedings do not suffer from nullities.

Thus, there is no obstacle to the examination of the case.

Having examined all matters, we proceed to render judgment.

II. DECISION

A. MATTERS OF FACT

A.1. Facts Established as Proven

The Claimant is a legal entity non-resident in Portugal.

The Claimant's corporate purpose is the provision of marketing services for disclosure of naval shipyard repair services in the Greek market, performing agency functions.

On 1 September 2012, the present Claimant concluded with B..., S.A., a company based in ..., ...-... ..., with Tax Identification Number..., a contract denominated "Marketing Agreement".

The said contract contains, among other things, the following clauses:

[Content of clauses omitted in original]

The present Claimant, within the scope of the said contract, did not negotiate, did not prepare the conclusion, nor concluded contracts in the name of B....

The services provided by the present Claimant to B..., within the scope of that contractual relationship, included the performance of activities such as the maintenance of internal records relating to vessels docked in Greek territory and requiring maintenance or repair and the disclosure of the services provided by B... in that context, by email or telephone, to the owners of those vessels and in a timely manner, through the delivery of promotional material provided by B... itself and the referral of customers who had already used B...'s services.

In cases where the activity developed by the Claimant was successful, the potential client was placed in direct contact with B..., with whom, as a rule, it then conducted all aspects of the business.

For the services provided, the present Claimant received remuneration, under the terms of clause D of the contract.

Throughout the entire period of contract execution, B... made payment of the services provided by the Claimant with regular quarterly frequency and always with IRC withholding tax on the amounts due, at the rate of 25%.

The said withholding taxes, relating to the years 2014 to 2016, were the subject of a claim for review submitted on 23-11-2016, to which process number ...2017... was assigned.

By information dated 05-04-2017, with a memorandum from the Deputy Finance Director, acting in substitution, of 26-04-2017, the AT proposed to dismiss the claim for review, stating, among other things, the following:

[Content of AT proposal omitted in original]

The AT notified the present Claimant to, within 15 days, exercise, if it so wished, the right of participation in the decision, by way of prior hearing through office letter No. ... of 27-04-2017.

On 16-05-2017, the Claimant exercised its right to prior hearing.

By memorandum from the Deputy Finance Director, acting in substitution, of 26-05-2017, the AT dismissed the claim for review, as referred to above, adding the following reasoning, taking into account the allegations presented by the claimant, here the Claimant, in the context of prior hearing:

[Content of AT reasoning omitted in original]

On 29-06-2017, the present Claimant appealed hierarchically from the said memorandum of dismissal.

The said hierarchical appeal was not subject to a decision within the 60-day period, counted from its submission.

A.2. Facts Established as Not Proven

1- That with the activity described in point 7 of the proven facts the Claimant's intervention was concluded.

A.3. Justification of Proven and Not Proven Matters of Fact

With respect to matters of fact, the Tribunal does not have to rule on all that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish proven from not proven matters (see article 123, number 2, of the CPPT and article 607, number 3 of the CPC, applicable by virtue of article 29, number 1, letters a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of Law (see former article 511, number 1, of the CPC, corresponding to the current article 596, applicable by virtue of article 29, number 1, letter e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the PA attached to the proceedings, as well as the testimonial evidence produced, the facts listed above were considered proven, with relevance for the decision, taking into account that, as was written in the Decision of the Court of Appeal of the South (TCA-South) of 26-06-2014, handed down in process 07148/13, "the probative value of the report of the tax inspection (...) may have probative force if the assertions contained therein are not challenged".

The fact established as not proven is based on the testimonial evidence produced, from which it resulted that, after the first contact of the customer with B..., in the case of developing a contractual relationship, the Claimant provided residual support services during and after the execution of the B... contract with the Greek customer, such as facilitating contacts between the parties (given the cultural and linguistic gap between Portugal and Greece), or the conduct of satisfaction surveys.

Allegations made by the parties and presented as facts, consisting of strictly conclusory statements, insusceptible of proof and whose truthfulness should be assessed in relation to the specific matters of fact consolidated above, were neither established as proven nor as not proven.

B. LAW

As the Claimant rightly points out, the fundamental issue raised in the context of these proceedings concerns the question of whether the services provided by the Claimant are or are not considered as income obtained in Portuguese territory for the purposes of article 4 of the CIRC and, to that extent, subject to withholding tax in Portugal.

It is therefore important to take into account the legal provisions relevant to the case.

Thus, article 4, numbers 3 and 4, of the CIRC provides that:

"3 – For the purposes of the provision in the preceding number, income is considered obtained in Portuguese territory when it is attributable to a permanent establishment situated there and, as well, income that, not being in these conditions, is listed below:

c) income listed below whose debtor has residence, registered office or effective management in Portuguese territory or whose payment is attributable to a permanent establishment situated there:

  1. income derived from intermediation in the conclusion of any contracts;

  2. income derived from other services provision performed or utilized in Portuguese territory, with the exception of those relating to transport, communications and financial activities;

4 – Income listed in letter c) of the preceding number is not considered obtained in Portuguese territory when it constitutes a charge of a permanent establishment situated outside that territory relating to the activity exercised through it and, as well, when these conditions do not exist, the income referred to in number 7 of the same letter, when the services from which they derive, being performed entirely outside Portuguese territory, do not relate to goods situated in that territory nor are related to studies, projects, technical support or management, accounting or audit services and consulting, organization, research and development services in any domain".

In turn, article 94, number 1 of the CIRC provides that

"IRC is subject to withholding at source with respect to the following income obtained in Portuguese territory:

g) income derived from intermediation in the conclusion of any contracts and income derived from other services provision performed or utilized in Portuguese territory, with the exception of those relating to transport, communications and financial activities".

And, for its part, number 2 of the same article adds that

"For the purposes of the provision in the preceding number, income is considered obtained in Portuguese territory as referred to in number 3 of article 4, except for those referred to in number 4 of the same article."

In this regard, it is important to note the decision in process 418/2014-T, in which the interpretation to be given to the aforementioned provisions is explained:

"The normative conglomerate in question, from the outset, requires a deconstruction in order, to the extent possible, to make its content minimally comprehensible in the specific situation to which it is to be applied.

Thus, and purging that legal provision of passages unrelated to the concrete case, one arrives at an enunciation based on the following points:

  • legal entities and other entities that do not have registered office or effective management in Portuguese territory are subject to IRC only as to the income obtained there;

  • considering as such those whose debtor has residence, registered office or effective management in Portuguese territory or whose payment is attributable to a permanent establishment situated there, derived from other services provision performed or utilized in Portuguese territory, with the exception of those relating to transport, communications and financial activities;

  • except when they:

o constitute a charge of a permanent establishment situated outside Portuguese territory, relating to the activity exercised through it; and, as well

o when the services from which they derive, being performed entirely outside Portuguese territory:

§ do not relate to goods situated in that territory;

§ nor are related to studies, projects, technical support or management, accounting or audit services and consulting, organization, research and development services in any domain.

The operation just executed evidences, from the outset, the normative operativity of this latter reference, to the absence of relationship of the services provided with, namely, technical support.

Thus, the rule will be, in the matter that concerns us, that resulting from the combination of number 2, with number 7, of letter c) of number 3, both of article 4 of the CIRC, that is, that income is considered obtained in Portuguese territory when its debtor has residence, registered office or effective management in Portuguese territory or whose payment is attributable to a permanent establishment situated there, derived from other services provision performed or utilized in Portuguese territory.

The exception to this rule will be that income will not be considered as obtained in Portuguese territory when the services from which they derive, despite being utilized in Portuguese territory, are performed entirely outside it as long as:

  • they do not relate to goods situated in Portuguese territory; or

  • the services are not related, as far as we are concerned, to technical support.

Thus, and in summary, to the rule that income whose debtor has residence, registered office or effective management in Portuguese territory or whose payment is attributable to a permanent establishment situated there, derived from other services provision performed or utilized in Portuguese territory, is considered obtained in Portuguese territory, an exception will be opposable that they were performed entirely outside Portuguese territory. To this exception, however, an exception will be inapposable to the AT when, notwithstanding being performed entirely outside Portuguese territory, the services are related, as far as we are concerned, to technical support."

That is, and as far as the case is concerned, the income obtained by the Claimant will be subject to withholding tax if the income paid to it by B... (its counterparty in the disputed contract):

Is derived from intermediation in the conclusion of any contracts;

Is derived from other services provision performed or utilized in Portuguese territory, except if the services from which it derives, being performed entirely outside Portuguese territory,

do not relate to goods situated in that territory;

nor are related to studies, projects, technical support or management, accounting or audit services and consulting, organization, research and development services in any domain.

As mentioned in the above-cited arbitral process 418/2014-T, the rule will be the taxation in Portugal of income paid by entities resident here, and the exception will be its non-taxation, once certain circumstances are verified.

Thus, and as the Claimant intends to avail itself of the exception to the rule, it must, under the terms of applicable burden of proof rules, prove the assumptions of such exception, which in the case, and given the positions assumed in the matter by the AT, is reduced to proving that the remuneration it received and which had as its source payer an entity resident in national territory, does not derive from intermediation in the conclusion of any contracts.

It is with respect to this matter that the parties diverge, with the Claimant understanding that what is at issue is a marketing contract and the Respondent an agency contract, with the legal-tax consequences drawn therefrom, that is, according to the Claimant, the income deriving therefrom will not be subject to withholding tax in Portugal, or, conversely and according to the Respondent, will be.

It should be noted, from the outset, that, under the terms of article 36, number 4 of the LGT [General Tax Law], "The qualification of the legal transaction effected by the parties, even in an authentic document, does not bind the tax administration."

However, it is considered that the qualification of the contract, as an agency contract or as a marketing contract, the point of disagreement between the parties, will not be decisive, or fundamental, to resolving the question that this tribunal was called to settle, since, the letter of the law referring to income derived from "contract intermediation", it will be this reality that will guide, in function of the facts established as proven, the solution to which one will finally arrive.

Thus, and before all else, it is necessary to clarify what may be understood by activity of "contract intermediation", it being certain that there does not exist, in the legal order, a transversal definition that may serve to guide the law applicator.

From a semantic-literal point of view, the activity of "contract intermediation" will be that which aims to facilitate or promote the conclusion of contracts between third parties (other than the entity that undertakes the said activity).

This first approximation may be consolidated in view of the content of other regulations that give relevance to intermediation activities.

Thus, for example, with regard to the activity of intermediation of sports professional contracts by sports agents, it has been understood that "as an intermediary, the player agent develops a mediation activity: he seeks to bring into contact sports professionals, clubs and sports companies with a view to the conclusion of training or employment contracts and the exploitation of the image of those professionals. To that end, he develops contacts with potential interested parties, involves himself in negotiations, analyzes and discusses the terms of the new link, promotes the approximation of the negotiating positions of the parties and seeks to reach an agreement between them."

With regard to the activity of financial intermediation, article 292 of the Securities Code, in its original wording, provided that "Advertising, promotion and prospecting directed at the conclusion of intermediation contracts or the gathering of information about current or potential customers integrate the intermediation activity referred to, and may only be carried out by financial intermediaries authorized to conduct that activity."

On the basis of the said rule, it was written in the Decision of the Court of Appeal of Lisbon of 26-03-2008, handed down in process 9092/2007-3, "that it is not only acts of promotion and prospecting that may constitute the activity of intermediation, but also advertising itself."

Also, Decree-Law No. 81-C/2017, of 07-07-2017, which approves the legal regime establishing the requirements for access to and exercise of the activity of credit intermediary and the provision of consulting services, partially transposing Directive 2014/17/EU, in its article 4/1/a), integrates into the essential content of the regulated intermediation activity, the presentation or proposal of contracts.

Finally, the Portuguese AT has already understood with respect to the intermediation of financing contracts, that intermediation encompasses the "intervention of third parties aimed at the (...) accomplishment" of contracts".

In light of the materials gathered, one may then establish that income derived from intermediation in the conclusion of any contracts, for the purposes of article 4/3/c)/6) of the CIRC, will be income that has its cause – whose consideration for the income consists – in an activity that essentially aims (that is, whose main economic value consists) at the approximation of parties with a view to the formation of contracts, included in the said activity being others that are accessory to it, such as advertising, market prospecting and contract negotiation, as long as they are functionalised to that main objective of contract conclusion.

This understanding will find correspondence in the ratio legis of the legal regime in application, which aims to define the terms of localization of income taxable in Portugal, doing so, as a rule, in light of the concept of "source of income" and, additionally, the concept of "source payer" and which, in the end, and as far as the case is concerned, translates that income should be taxed in national territory that is considered to be generated there, taking as such the income that derives from the conclusion of contracts that will generate income taxable in Portugal.

Given this, and taking into account the matters of fact ascertained, it must be concluded that the Claimant has failed to demonstrate that the income it obtained does not derive from the intermediation of contracts concluded by B... with operators based in Greece, as it alleges.

Taking into account the factual substratum established, it is verified that the activity developed by the Claimant is not confined to mere promotion and disclosure of B...'s services, and that this is not, indeed, the main purpose of the contractual relationship with it, from which derive the income that the Claimant seeks to exempt from taxation. In fact, the Claimant identifies lists of potential clients, often accompanies the visits of its Portuguese client (B...) to shipowners and maintains visibility and information about the payment of services by the identified clients, to the extent that its remuneration is defined as a percentage of the services provided by B... and is only received when the latter also receives from its client.

Thus, it is necessary to conclude that the principal and immediate interest of the entity contracting the Claimant's services generating the income whose taxation is discussed is the concrete conclusion of contracts with Greek operators, and that, correspondingly, the principal and immediate purpose of the activity developed by the Claimant, generating that income, is the conclusion of contracts between B... and Greek operators.

Therefore, one cannot conclude otherwise than that the income whose taxation the Claimant contests is inseparably linked to the conclusion of contracts with Greek operators by B..., to the point that the Claimant is only paid to the extent that B... is also paid, thus being the accomplishment of such contracts the legal cause of the income paid by the latter to the former.

In light of the foregoing, the income in question must be qualified as "derived from intermediation in the conclusion of any contracts", and, as such, subject to taxation in Portuguese territory, there being, therefore, no error of law imputable by the Claimant to the withholding tax assessments that are the subject of the present arbitral action, which must, thus, fail.

For all the foregoing, the request is held to be unfounded.

C. DECISION

For these reasons, this Arbitral Tribunal holds the arbitral request filed to be entirely unfounded and, in consequence:

Dismisses the Respondent from the claim, maintaining in the legal order the tax acts that are the subject of the present arbitral action; and

Condemns the Claimant to pay the costs of the proceedings, in the amount fixed below, taking into account sums already paid.

D. Value of the Proceedings

The value of the proceedings is fixed at EUR 232,963.38, under the terms of article 97-A, number 1, a), of the Code of Tax Procedure and Process, applicable by virtue of letters a) and b) of number 1 of article 29 of the RJAT and number 2 of article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at EUR 4,284.00, under the terms of Table I of the Regulations on Costs of Tax Arbitration Proceedings, to be paid by the Claimant, since the request was entirely unfounded, under the terms of articles 12, number 2, and 22, number 4, both of the RJAT, and article 4, number 4, of the said Regulations.

Notice is hereby given.

Lisbon, 8 October 2018

The Arbitrator President

(José Pedro Carvalho)

The Arbitrator Member

(Adelaide Moura)

The Arbitrator Member

(Catarina Gonçalves)

Frequently Asked Questions

Automatically Created

Are marketing services provided by a non-resident company outside Portugal subject to IRC withholding tax?
Marketing services provided by a non-resident company entirely outside Portugal are generally exempt from IRC withholding tax under Article 4(4) of the IRC Code, provided they don't relate to goods situated in Portugal or fall within specific enumerated categories (studies, projects, technical support, management, accounting, audit, consulting, organization, or R&D services). Pure promotional and disclosure activities performed abroad typically qualify for exemption. The key distinction lies in whether the non-resident merely promotes services or actively intermediates/negotiates contracts.
How does Portuguese tax law distinguish between a marketing services contract and an agency contract under Article 4 of the IRC Code?
Portuguese tax law under Article 4 of the IRC Code distinguishes marketing services from agency contracts based on the substance of activities performed. An agency contract involves negotiating, preparing conclusions, or concluding contracts on behalf of the principal, creating binding commitments. Marketing services involve only promotional activities—disclosing services, maintaining market information, and referring potential clients without negotiating terms or concluding agreements. The Tax Authority may reclassify contracts based on actual performance rather than contractual denomination, examining whether the non-resident exercises decision-making authority or merely facilitates introductions.
When are services performed entirely outside Portugal exempt from IRC withholding tax under Article 4(4) of the IRC Code?
Services performed entirely outside Portugal are exempt from IRC withholding under Article 4(4) of the IRC Code when: (1) they are completely executed outside Portuguese territory; (2) they don't relate to goods situated in Portugal; and (3) they don't constitute studies, projects, technical support, management, accounting, audit, consulting, organization, or research and development services. The provision creates a negative carve-out—general services performed abroad escape Portuguese taxation unless specifically enumerated. Evidence of where services are actually performed (not just where the provider is located) is critical to establishing the exemption.
Can the Portuguese Tax Authority reclassify a marketing services contract as an agency contract for purposes of IRC withholding tax on non-residents?
The Portuguese Tax Authority can reclassify a marketing services contract as an agency contract for IRC withholding purposes based on substance-over-form principles. The AT examines the actual activities performed rather than contractual labels. Factors considered include: whether the non-resident negotiates contract terms, has authority to bind the Portuguese company, prepares or concludes agreements, or merely performs promotional activities. In this case, the AT argued the arrangement constituted intermediation of contracts generating Portuguese-source income under Article 4 CIRC. Taxpayers can challenge such reclassifications through CAAD arbitration, presenting evidence of actual service performance and contractual limitations on authority.
What is the procedure for a non-resident entity to challenge IRC withholding tax through CAAD tax arbitration in Portugal?
A non-resident entity challenging IRC withholding tax through CAAD follows this procedure: (1) File an administrative claim for review with the Tax Authority within the statutory deadline; (2) If the claim is dismissed or partially accepted, file a request for arbitration constitution within 90 days under RJAT Article 10; (3) The request must identify the contested acts, amounts, legal grounds, and factual basis; (4) Pay applicable court fees; (5) Upon acceptance, an arbitral tribunal is constituted (collective or singular); (6) The Tax Authority submits a response; (7) Evidence is produced, including witness testimony and documents; (8) Parties submit written arguments; (9) The tribunal issues a binding decision within statutory deadlines. Non-residents need Portuguese legal representation and must demonstrate their non-resident status and the nature of services performed.