CAAD 628/2017-T: IRC Withholding Tax on Interest Under Article 94(6) CIRC – Arbitral Decision

ARBITRAL DECISION

I – Report

A – Identification of the Parties

Claimant: A..., Lda, with registered office at ...-...-... ..., holding the tax identification number for legal entities NIPC:..., hereinafter referred to as Claimant or taxpayer.

Respondent: Tax and Customs Authority, hereinafter referred to as Respondent or AT.

The Claimant filed a request for constitution of an Arbitral Tribunal in tax matters and a request for arbitral ruling, pursuant to the provisions of subparagraph a) of section 1 of Article 2 and subparagraph a) of section 1 of Article 10, both of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter abbreviated as RJAT).

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD, and in accordance with the provisions of subparagraph c) of section 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December.

The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of section 1 of Article 6 and subparagraph b) of section 1 of Article 11 of Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed as Presiding Arbitrator Judge José Poças Falcão, Arbitrator Dr. Rita Guerra Alves and Arbitrator Professor Doctor Carlos Lobo, whose appointment was accepted in accordance with legally established provisions.

On 2018-01-22, the parties were duly notified, and did not manifest any intention to challenge the appointment of the arbitrators, pursuant to Article 11, section 1, subparagraphs a) and b) of RJAT and Articles 6 and 7 of the Code of Ethics.

The Collective Arbitral Tribunal was properly constituted on 2018-02-14, to examine and decide the subject matter of the present dispute, and the Tax and Customs Authority was automatically notified on 2018-02-14, as recorded in the respective minutes.

B – REQUEST

The Claimant now seeks a declaration of illegality of the tax assessment acts for corporate income tax (IRC) bearing number 2017... relating to the year 2012 and number 2017... relating to the year 2013, which established a tax payable of €69,641.77 (sixty-nine thousand, six hundred and forty-one euros and seventy-seven cents), as well as the respective compensatory interest; subsidiarily, it requests restitution of the amount of €395.78 which it paid, since such payment represents double taxation in accordance with the allegations in Article 82 of the request for arbitral ruling (PPA).

C – GROUNDS FOR THE CLAIM

To support its request for arbitral ruling, the Claimant alleged, in order to obtain a declaration of illegality of the tax assessment acts for IRC purposes, the following:

The Claimant was notified on 13/02/2017 of document number 2017... and respective assessment note number 2017..., in the amount of €32,004.01 (thirty-two thousand and four euros and one cent) by way of determination of withholding tax on source not regularized by the taxpayer, relating to the year 2012.

The Claimant was notified on 10/03/2017 of document number 2017... and respective assessment note number 2017... in the amount of €37,637.76 (thirty-seven thousand six hundred and thirty-seven euros and seventy-six cents) assessed by way of determination of withholding tax on source not performed by the taxpayer, relating to the year 2013.

With respect to the assessment notified for the year 2012, the Claimant argues that the same is based on the consideration that there are recognized charges relating to interest in the amount of €185,208.38, resulting from loans granted by the company "B..., SA", based in Luxembourg, that the supporting documents of the charges are documents issued by the said company with interest calculated from 01/01/2012 to 31/12/2012, that the interest arising therefrom is subject to withholding tax on source as a final tax by virtue of subparagraph e) of section 1 of Article 940 of the Corporate Income Tax Code (CIRC) and that the withholding tax on source of interest relating to the charges should take place on the date of maturity thereof and not when the respective payment occurs.

Such withholdings concern interest relating to financing granted by "B..., SA".

The Claimant emphasizes that at no time is it shown that any amount as interest has been paid to the lending company, – especially since it was not.

With respect to the facts, the loan in question, from which the respective charges originate, concerns a transaction originally concluded between the Claimant and the commercial company C..., B. V., with registered office in the Kingdom of the Netherlands, by means of which the latter loaned to the Claimant various amounts up to an accumulated capital amount of €1,800,000.00.

Clause 1.5 of that agreement provides that the loans are granted for a maximum period of 5 years, commencing on 1 January 2008 and ending on 31 December 2012, during which the loaned capital in debt and the accrued interest thereon should be paid.

The Claimant alleges that the borrower will pay interest on each loan from the date of such loan until its payment, considering that the interest for each loan is not added to the principal capital of the loan until the end of such year.

Therefore, the interest on the loan does not accrue and does not form part of the capital as it matures. The interest should be paid together with the loans in accordance with the payment schedule.

The Claimant alleges that by a contract for assignment of receivables, C..., B.V assigned to B... the receivable referred to above pro soluto – that is, as payment in discharge of an obligation between the parties.

By effect of the terms thereof, B... succeeds to the rights and actions of C..., B. V., which is why it becomes the active holder of the restitution of the loaned amount, increased by the interest due to be paid solely at the moment of maturity of payment of the loaned capital.

The Claimant argues that it was only called upon to make payment of management costs for the grant of the loan – never the amount of interest indicated in the report in question and which amounts to €185,208.38.

The Claimant alleges that the inspection report does not demonstrate that any amount as interest has been paid to the lending company.

Now, by virtue of the documents attached to the file, it results factually precisely the opposite of what is contained in the tax inspection report – that is, interest only matures at the moment the loan capital matures, which is why it is not correct that it is mature on 31/12/2012 inasmuch as the loan in question does not have maturity on this date.

The report in question forces the assessment of interest while ignoring the distinction between the method of calculating interest and the maturity of the obligation to pay the same.

The Claimant sustains that from the successive loan contracts, it results that interest is not capitalized, given the recapitulation of the amount due for each day of validity of the contract that is sent by the lender to the borrower, that is, the document attached as Annex I to the report is nothing more than a statement of position in order to allow the borrowing company to organize its accounting and verify amounts with the lending company – it does not constitute a document demanding payment of interest or declaration of maturity of the same on the date of the period to which it refers and which is the basis of calculation thereof.

In this respect, it is important to clearly note that an obligation is only due after its maturity, that is, when its payment can be required.

Being determined that the maturity of the interest in question only occurs at the maturity of the capital on 31/12/2015, only then does the obligation to withhold at source on the interest in question mature.

The income in question only becomes subject to taxation on 31/12/2015.

In this respect, a phenomenon of tax substitution is verified, in reality the contributor of the obligation to pay tax on this interest is the borrowing company B....

There cannot, therefore, be a correction in the context of IRC withholding tax on source of the amount in question in 2012, since the same was not due in that fiscal year.

As for the assessment notified for the year 2013, the Claimant argues that the same is based on the consideration that there are recognized charges relating to interest in the amount of €223,313.24 resulting from loans granted by the company B..., based in Luxembourg, that the supporting documents of the charges are documents issued by the said company with interest calculated from 01/01/2013 to 31/12/2013, that the interest arising therefrom is subject to withholding tax on source as a final tax by virtue of subparagraph c) of section 1 of Article 94 of the CIRC and that the withholding tax on source of interest relating to the charges should take place on the date of maturity thereof and not when the respective payment occurs.

The Claimant argues that the factual framework of the present assessment is, therefore, identical mutatis mutandis to that of the previous assessment relating to the year 2012.

The Claimant concludes by alleging that interest is payable with the capital at its maturity. If it is only payable on a determined date, this means that it only matures on that date. Maturity is the moment when an obligation becomes subject to coercive enforcement. It is at the moment of maturity that it becomes enforceable. The obligation to pay interest can only be enforced on 31/12/2015 – therefore, only at this moment does it mature.

To support the subsidiary request, it alleges that the amount of €395.78 already paid following and as a consequence of the assessment of compensatory interest notified on 23-11-2016, is partially duplicated by the calculation of compensatory interest which is the subject of the assessment now at issue (see doc. 12) (Article 82, PPA).

D – RESPONDENT'S REPLY

The Respondent, duly notified for this purpose, timely filed its reply in which, in brief summary, alleged the following:

The Respondent argues that in compliance with External Service Order No. OI 2015..., a procedure for external inspection to the year 2012 was developed by the Division of Tax Inspection I, of the Finance Directorate of ..., with partial scope of IRC – of the now Claimant.

In the course of the action, it was necessary to analyze other taxes, namely VAT and withholding taxes on source, thus its scope was broadened to multi-purpose (subparagraph a) of section 1 of Article 14 of RCPITA).

From said inspection action resulted merely arithmetic corrections, in respect of IRC withholding tax on source, which are duly explained in the RIT, and are summarized below:

The tax inspection services (SIT) proceeded to analyze the accounting elements and respective supporting documents, to confirm the values contained in the statements filed (IRC model 22, IES and periodic VAT declarations).

To confirm the reality of the records: 1. Expenses and income were controlled and analyzed, as were the documents that served as support for making the accounting entries; 2. The amounts declared in model 22 declarations – IRC and in Annex A of the annual statement of accounting and tax information were controlled.

From the analysis performed, it was found that the Claimant showed tangible fixed assets in the amount of €10,265,867.68.

The investment is being financed through: Subsidies, to investment, attributed by IFAP within the PRODER program; Bank loan in D..., amount in debit on 31/12 of €108,568.28; Loans made through the company B..., SA, based in Luxembourg.

With respect to loans (loan contract) from the company B..., SA, based in Luxembourg, in the year 2012, the following transfers were verified, made through D..., to the Company "A...":

In the year transfers were made in the amount of €1,950,000.00.

During the period, expenses relating to interest were recorded in the following amounts shown:

The interest was attributed to tangible assets, construction of the cellar and construction of the property for agro-tourism which will be recorded as expenses through depreciation.

From the analysis performed, the SIT identified the following discrepancies: it was verified that between the company "B..., SA", based in Luxembourg and the Portuguese company "A..., Lda.", loan contracts were executed in which the calculation of interest is agreed on an annual basis (365 days). It was further verified that the supporting documents of the charges, relating to interest, are documents issued by "B..., SA", with interest calculated from 01/01/2012 to 31/12/2012, and with identification of the capital in debt for the calculation basis.

Therefore, the income from application of capital obtained by non-resident taxpayers is obtained in Portugal and is here taxed. Thus it is necessary to identify the moment from which the said income should be taxed, that is, when the tax event occurs.

Thus, the moment at which the IRC withholding tax on source should be performed is applicable, by reference of section 6 of Article 94 of the CIRC, the procedures in respect of Personal Income Tax (IRS), that is, the withholding should be performed on the date of maturity of the interest (Article 7, sections 1, 2 and 3, subparagraph a) of the Personal Income Tax Code [CIRS]) and not when the respective payment occurs, and the amounts withheld should be delivered by day 20 of the month following that in which they were deducted.

From the analysis performed, it is verified that the contract provides that the borrower will pay interest on each loan and its calculation is performed on an annual basis (365 days).

It being verified that the company "B..., SA", calculated interest from 1/01/2012 to 31/12/2012, in the following amounts shown:

From the analysis of the elements, notably contracts and documents for calculation of interest, it was verified that: the company "B..., SA", is based in Luxembourg, therefore it is a non-resident taxpayer; The loan contract identifies that interest is calculated from the date of the loan and that its calculation is performed on an annual basis (365); It being verified the issuance of documents with the calculation of interest from 01/01/2012 to 31/12/2012.

It is thus verified that the maturity of the interest, by force of what is provided in the contract and by the issuance of the respective interest documents from 01/01/2012 to 31/12/2012, matures on the date stipulated, that is, December of each year, and tax by withholding on source is due at this moment, regardless of whether or not they are paid immediately.

In the case under analysis, and as stated above, the tax event is 31/12/2012, being on the said date that the obligation to withhold the tax due exists, and the amounts withheld should be delivered by day 20 of the month following that in which they were deducted.

Having analyzed the accounting support elements, it is verified that no withholding tax on source was performed, relating to the interest calculated in respect of the loans made by the company "B..., SA", it being verified that the taxpayer did not comply with what is stipulated in Article 7 of the CIRC by reference of section 6 of Article 94 of the CIRC.

By virtue of what is provided in subparagraph c) of section 1 of Article 94 of the CIRC, this type of income will be taxed through withholding tax on source as a final tax at the rate of 25%, as provided in section 4 of Article 87 of the same statute.

However, as there is a convention between Portugal and Luxembourg, and since it has been invoked, through the submission of model form 21-RFI duly authenticated by the Luxembourg authorities, the withholding tax rate provided for in the Convention will be applied (Article 11, section 2, subparagraph b) of the Convention), that is, 15%, verifying a rate reduction. By application of the rate provided for in the Convention, the tax to be withheld is in the amount of €27,781.26, as was calculated in the following table:

By failure to comply with the withholding rule provided in Article 7, sections 1, 2 and 3, subparagraph a) of the CIRS, by reference of section 6 of Article 94 of the CIRC and Article 98 of the CIRC, the taxpayer did not perform withholding tax in the amount of €27,781.26, and consequently did not deliver the amounts withheld by day 20 of the month following that in which they should have been deducted.

As these are income due to non-resident taxpayers in Portuguese territory, the debtor entities are obliged to deliver to the Tax and Customs Authority, by the end of the 2nd month following that in which the act of maturity occurs, even if presumed, of its placement at their disposal, its settlement or determination of the respective quantitative in model declaration 30, in accordance with what is provided in subparagraph a) of section 7 of Article 119 of the CIRS, by reference of Article 128 of the CIRC.

It was verified that model declaration 30 was not filed.

From the analysis performed by the SIT, it should be noted that according to accounting support elements, it was proven that the charges/expenses relating to financing interest are recognized in the accounting records, as follows:

Expenses are recognized for financing, under the heading interest on financing obtained in account 691181 – Interest from C..., BV agreement.

This interest should be recognized when incurred, regardless of its payment.

It is verified that the loans were used for investment in tangible assets (construction of the cellar and construction of the house for E...), since they were directly attributed to the construction/acquisition of assets, their capitalization is permitted, and it was verified that the charges recognized as interest were capitalized. At the end of 2012, they were transferred from the financial expenses account to the tangible assets heading, verifying the capitalization during the useful life period thereof.

The accounting support documents, of these charges/expenses are documents issued by the company B..., SA that identify the capital in debt and the respective interest calculated from 01/01/2012 to 31/12/2012.

The interest is recognized in accounts payable, a fact which results from verification of the entries made in account 27 – other accounts payable/other creditors, specifically in account 278427 – Interest B..., SA (Annex 4). The accounting treatment as described evidences the recognition of the debt of interest determined as a financing charge and, consequently, the recognition of the maturity of the said charges.

Given the foregoing, in the year 2012, to determine taxable profit, the accounting records should reflect all operations carried out by the taxpayer and should be organized in accordance with accounting standards, that is, expenses should be recognized when incurred, regardless of their payment, and should be included in the financial statements of the periods to which they relate (principle of specialization or accrual).

Given the factuality described and the accounting entries made by the claimant, it is concluded that the latter recognized for accounting and tax purposes the expenses relating to interest on loans granted by the company B... from 01 January to 31 December 2012.

As for the Corrections made to the year 2013 – OI2016..., the Respondent argues that as already mentioned, the investments made by the company are being financed through loans, essentially granted by the company B..., SA", based in Luxembourg.

From the analysis of the elements, it was verified that charges relating to interest are recognized, from the loans obtained, in the amount of €223,313.24.

It is verified that between the company "B..., SA", based in Luxembourg and the Portuguese company "A..., Lda.", loan contracts were executed in which the calculation of interest is agreed on an annual basis (365 days).

It was further verified that the supporting documents of the charges, relating to interest, are documents issued by "B..., SA", with interest calculated from 01/01/2013 to 31/12/2013, and with identification of the capital in debt for the calculation basis.

From the analysis performed, it is verified that the contract provides that the borrower will pay interest on each loan and its calculation is performed on an annual basis (365 days).

The company "B..., SA", calculated interest from 01/01/2013 to 31/12/2013, in the following amounts shown:

From the analysis of the elements, notably contracts and documents for calculation of interest, it was verified that:

Expenses are recognized for financing, under the heading interest on financing obtained, in account 691181 – Interest from C... BV agreement.

This interest should be recognized when incurred, regardless of its payment.

It is verified that the loans were used for investment in tangible assets (construction of the house for E...), since they were directly attributed to the construction/acquisition of assets, their capitalization is permitted, and it was verified that the charges recognized as interest were capitalized. At the end of 2013, they were transferred from the financial expenses account to the tangible assets heading, verifying the capitalization during the useful life period thereof.

The accounting support documents, of these charges/expenses are documents issued by the company B..., SA that identify the capital in debt and the respective interest calculated from 01/01/2013 to 31/12/2013.

The said support documents, in addition to identifying the respective calculation of interest, inform the debtor of its situation on 31/12/2013.

They also identify that the matured interest should be paid with the capital on 31/12/2015.

The interest is recognized in accounts payable, a fact which results from verification of the entries made in account 27 – other accounts payable/other creditors, specifically in account 278427 – Interest B..., SA.

The accounting treatment as described evidences the recognition of the debt of interest determined as a financing charge and, consequently, the recognition of the maturity of the said charges on 31 December.

Given the foregoing, in the year 2013, to determine taxable profit, the accounting records should reflect all operations carried out by the taxpayer and should be organized in accordance with accounting standards, that is, expenses should be recognized when incurred, regardless of their payment, and should be included in the financial statements of the periods to which they relate (principle of specialization or accrual).

It was thus concluded that the moment at which the IRC withholding tax on source should be performed is applicable, by reference of section 6 of Article 94 of the CIRC, the procedures in respect of IRS, that is, withholding tax on source should be performed on the date of maturity of the interest (Article 7, sections 1, 2 and 3, subparagraph a) of the CIRS) and not when the respective payment occurs.

Having analyzed the accounting support elements, it is verified that no withholding tax on source was performed, relating to the interest calculated in respect of the loans made by the company "B..., SA", it being verified that the taxpayer, now claimant, did not comply with what is stipulated in Article 7 of the CIRC by reference of section 6 of Article 94 of the CIRC.

By virtue of what is provided in subparagraph c) of section 1 of Article 94 of the CIRC, this type of income will be taxed through withholding tax on source as a final tax at the rate of 25%, as provided in section 4 of Article 87 of the same statute.

However, as there is a convention between Portugal and Luxembourg, and since it has been invoked, through the submission of model form 21-RFI, duly authenticated by the Luxembourg authorities, the withholding tax rate provided for in the Convention will be applied (Article 11, section 2, subparagraph b) of the Convention), that is, 15%, verifying a rate reduction.

By application of the rate provided for in the Convention, the tax to be withheld is in the amount of €33,496.99, as was calculated in the following table:

By failure to comply with the withholding rule provided in Article 7, sections 1, 2 and 3, subparagraph a) of the CIRS, by reference of section 6 of Article 94 of the CIRC and Article 98 of the CIRC, the claimant did not perform withholding tax in the amount of €33,496.99, and consequently did not deliver the amounts withheld by day 20 of the month following that in which they should have been deducted.

As these are income due to non-resident taxpayers in Portuguese territory, the debtor entities are obliged to deliver to the Tax and Customs Authority, by the end of the 2nd month following that in which the act of maturity occurs, even if presumed, of its placement at their disposal, its settlement or determination of the respective quantitative in model declaration 30, in accordance with what is provided in subparagraph a) of section 7 of Article 119 of the CIRS, by reference of Article 128 of the CIRC.

It was verified that model declaration 30 was not filed.

The taxpayer, now Claimant, was notified to, if it so wished, exercise the right of hearing in relation to the corrections proposed on the Draft Tax Inspection Report, pursuant to Article 60 of the General Tax Law (LGT) and Article 60 of the Supplementary Procedure Regime for Tax Inspection, through personal notification made on 2017/02/03, by means of official letter No. 2017 7561 R 001157.

The Respondent concludes by requesting that the present request for arbitral ruling be judged to be groundless as not proven, and consequently the Respondent absolved of all requests, as petitioned above, all with the due and legal consequences.

II – REASONING

E – FACTS PROVEN

For the examination of the questions submitted for consideration, it is necessary to describe the relevant factual matter, based on the documentary evidence presented by the parties to the file and the non-contestation of the administrative tax procedure.

Thus, in respect of relevant facts, this tribunal deems established the following facts:

In compliance with External Service Order No. OI 2015..., a procedure for external inspection to the year 2012 was developed by the Division of Tax Inspection I, of the Finance Directorate of ..., with partial scope of IRC.

Following this, the Claimant was notified: on 13/02/2017 of document number 2017... and respective assessment note number 2017..., in the amount of €32,004.01 (thirty-two thousand and four euros and one cent) by way of determination of withholding tax on source not regularized by the taxpayer, relating to the year 2012. And the Claimant was notified on 10/03/2017 of document number 2017... and respective assessment note number 2017... in the amount of €37,637.76 (thirty-seven thousand six hundred and thirty-seven euros and seventy-six cents) assessed by way of determination of withholding tax on source not performed.

The Claimant concluded a loan contract with the commercial company C..., B. V., with registered office in the Kingdom of the Netherlands, by means of which the latter loaned to the Claimant various amounts up to an accumulated capital amount of €1,800,000.00.

C..., B.V by contract for assignment of receivables assigned to B... the receivable it held from the Claimant.

The company "B..., SA", is based in Luxembourg, is a non-resident taxpayer.

Within the scope of that contract resulted the following interest: between 01/01/2012 to 31/12/2012 in the amount of €185,208.38, and between 01/01/2013 to 31/12/2013 in the total amount of €223,313.24.

The Claimant did not file model declaration 30 for the years 2012 and 2013, with respect to the interest referred to above.

On 23-11-2016, the Claimant was notified to make payment of the assessment of IRC withholding tax on source relating to the year 2012, as well as demonstration of the assessment of compensatory interest due in the amount of €395.78...

... which the Claimant paid on 18-1-2017 [See Doc 12, with the PPA].

F – FACTS NOT PROVEN

Of the facts with interest for the decision of the case, contained in the challenge, all objects of concrete analysis, those not contained in the factuality described above were not proven.

G – QUESTIONS TO BE DECIDED

Given the positions of the parties, adopted in the arguments presented by each, the following central question is constituted, which must therefore be examined and decided:

A) Declaration of illegality of the tax assessment acts for IRC purposes No. 2017... relating to the year 2012 and No. 2017... relating to the year 2013, which fixed a tax payable of €69,641.77 (sixty-nine thousand, six hundred and forty-one euros and seventy-seven cents) and

B) Payment of compensatory interest

Subsidiarily, in the event of the groundlessness of the main request, the Tribunal will examine and decide the question of double taxation based on Article 82 of the PPA.

H – MATTERS OF LAW

Herein, it is important to define the scope of application in respect of income tax on interest income.

In respect of spatial attribution nexus, the company "B..., SA" being based in Luxembourg, and obtaining income in Portuguese territory, by virtue of the provision in subparagraph 3 of subparagraph c) of section 3 of Article 4 of the CIRC ("…, income derived from Portugal is considered to be that attributable to a permanent establishment situated there and, likewise, that which, not being in such conditions, is listed below: … c) income hereinafter mentioned whose debtor has residence, registered office or effective management in Portuguese territory or whose payment is attributable to a permanent establishment situated there: … 3) Other income from application of capital; …"),

This income is taxed in national territory by the rule of territoriality in effect here, that is, "Legal entities and other entities that have neither registered office nor effective management in Portuguese territory are subject to IRC only as regards income obtained therein." – Section 2 of Article 4 of the CIRC.

By what is established in subparagraph c) of section 1 of Article 94 of the CIRC, this type of income will be subject to withholding tax on source as a final tax "IRC is subject to withholding tax on source in relation to the following income obtained in Portuguese territory: … c) Income from application of capital not covered in the preceding subparagraphs and property income, as they are defined for IRS purposes, when their debtor is a subject of IRC or when they constitute a charge relating to the business or professional activity of IRS taxpayers who possess or should possess accounting.", at the rate of 25%, as provided in section 4 of Article 87 of the same statute.

There being an Agreement to Avoid Double Taxation between Portugal and Luxembourg, the provisions of the agreement prevail over national law (Article 98 of the CIRC), and there may be partial exemption from withholding tax on source on income earned by non-resident entities.

In this framework, income from application of capital obtained by non-resident taxpayers is obtained in Portugal and is taxed here. Thus it is necessary to identify the moment from which the said income should be taxed, that is, when the tax event occurs.

The methodology for this taxation is as follows: by reference of section 6 of Article 94 of the CIRC, the rules of the Personal Income Tax Code (CIRS) are applied to the moment at which the withholding tax on source of the said income should be performed.

Article 7 of the CIRS identifies the moment from which income from "interest and other forms of remuneration arising from loan contracts, credit facilities, repos and others that provide, on an onerous basis, the temporary availability of money or other fungible things" become subject to taxation (section 2, subparagraph a) of Article 5 of the CIRS).

According to section 1 of Article 7: "The income referred to in Article 5 becomes subject to taxation from the moment it matures, if its maturity is presumed, it is placed at the disposal of its holder, it is settled or from the date of determination of the respective quantitative, as the case may be".

Section 2 provides that "In the case of loans, deposits and credit facilities, interest, including partially presumed interest, is considered to mature on the date stipulated, or, in the absence thereof, on the date of reimbursement of the capital, except as regards wholly presumed interest, whose maturity is considered to occur on 31 December of each year or on the date of reimbursement, if earlier".

Section 3, subparagraph a), subparagraph 1) of Article 7 provides that income from loans becomes subject to taxation at its maturity.

It is further verified that the decree which regulated, at the date of the tax event, the regime for withholding tax on source, Decree-Law No. 42/91 of 22 January, in Article 8, section 3, provides that "The withholding affecting income from categories B and F referred to in section 1 is performed at the moment of the respective payment or placement at disposal and that affecting income from category E in accordance with what is provided in Article 7 of the CIRS", that is, the withholding on interest income from loan contracts is performed under the rules of Article 7 of the CIRS.

It is concluded, therefore, that the moment at which the IRC withholding tax on source should be performed is applicable, by reference of section 6 of Article 94 of the CIRC, in accordance with the procedures in respect of IRS.

That is, the withholding should be performed on the date of maturity of the interest (Article 7, sections 1, 2 and 3, subparagraph a) of the CIRS) and not when the respective payment occurs, and the amounts withheld should be delivered by day 20 of the month following that in which they were deducted.

From the analysis performed, it is verified that the contract provides that the borrower will pay interest on each loan and its calculation is performed on an annual basis (365 days).

And this interest was recognized accounting by the claimant: at the end of 2013, the amounts were transferred from the financial expenses account to the tangible assets heading, verifying capitalization during the useful life period thereof.

In this framework, and in terms of the comprehensive concept of accrual income, the perception of "net patrimonial gain" was materialized, regardless of the fact that an actual payment thereof took place.

This is indeed the consistent jurisprudence of the STA (e.g., Decision of the STA of 8 October 2003, referring to case No. 01100/03; Decision of the STA of 22 September 2004, referring to case No. 01481/03).

In truth, actual payment thereof would only be relevant if the Portuguese system adopted a cash perspective, which clearly does not occur.

I – Subsidiary Request

The Claimant alleges, to support the subsidiary request, that the amount of €395.78 already paid following and as a consequence of the assessment of compensatory interest notified on 23-11-2016, is partially duplicated by the calculation of compensatory interest which is the subject of the assessment now at issue (See Article 82 of the PPA and Doc 12).

This matter is not, in fact and in law, impugned or contested by the AT.

Double taxation, by reference to a temporal and structural element, occurs when, with a collection having been paid, another of the same nature is assessed and collected in relation to the same tax event and the same period of time.

Double taxation is a specific ground for opposition to enforcement [Article 204, section 1, subparagraph g) CPPT] but is also a ground for judicial challenge, insofar as the second assessment is unlawful, by unjust enrichment of the AT and constitutes a ground for judicial challenge of any illegality (see Article 99 of the CPPT). As noted by Alfredo José de Sousa and Silva Paixão (CPPT Annotated, annotation 7 to Article 99), double taxation, as defined in Article 205, is also included in the concept of "illegality" of the tax act, and is thus a ground for judicial challenge.

And, in truth, it is shown documentally in the case sub judice that in relation to the assessment of IRC withholding tax on source relating to 2012 and notified on 23-11-2016, the Claimant was confronted with the demonstration of assessment of compensatory interest (then 130 days) in the amount of €395.78 and made the respective payment on 18-1-2017.

Whence the subsequent demonstration of assessment of compensatory interest now the subject of these proceedings, with the same commencement date for counting [22-1-2013] (now 1387 days) on the same withholding tax on source assessment act from 2012, constitutes a tax act partially tainted by the defect of double taxation insofar as it overlaps the previous counting of interest already assessed and paid.

Thus the subsidiary request will succeed.

III – DECISION

In terms of what is agreed by this Arbitral Tribunal:

The main requests for annulment of the additional assessments are judged to be groundless, maintaining the same in the legal order.

The subsidiary request relating to double taxation is judged to be entirely well-founded, annulling, partially (€395.78), by double taxation, the assessment of compensatory interest in accordance with the terms set out above.

Both parties are condemned to the costs of the proceedings in proportion to their respective losses, namely 0.56% is borne by the Respondent and the remainder is borne by the Claimant.

Process value: €69,641.77

Costs: €2,448.00

Lisbon, 5 September 2018

The Collective Arbitral Tribunal

José Poças Falcão

(Presiding Arbitrator)

Rita Guerra Alves

(Arbitrator Member)

Carlos Lobo

(Arbitrator Member)