CAAD Case 629/2018-T: Deductible Expenses in Corporate Income Tax (IRC) - Tax Assessment Annulment

ARBITRAL TAX JURISPRUDENCE

Case No. 629/2018-T

Decision Date: 2019-08-16

IRC

Value of Claim: € 7,254.61

Subject Matter: IRC - Deductible Expenses

ARBITRAL DECISION (consult complete version in PDF)

I – Report

1. On 10.12.2018, the Claimant, A..., S.A., legal entity no...., with registered office at ..., no. ... A, in Lisbon, requested the CAAD to constitute an arbitral tribunal, pursuant to article 10º of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as RJAT), against the Tax and Customs Authority, with a view to annulling the supplementary assessment of Corporate Income Tax (IRC) no. 2018..., made with reference to the 2014 financial year, from which results tax payable in the amount of € 6,449.58, and also the corresponding compensatory interest assessment no. 2018..., in the amount of € 805.04, corresponding to the Statement of Account Settlement no. 2018... (Adjustment no. 2018...), from which resulted a total amount payable of € 7,254.61.

The Claimant, alleging to have paid the amount in question, further petitions for the Respondent to be ordered to pay indemnificatory interest from the date of the alleged payment.

1. The request to constitute the arbitral tribunal was accepted by the Honorable President of the CAAD and notified to the Tax and Customs Authority.

Pursuant to the provisions of article 6º, no. 1, of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable deadlines, the undersigned was appointed arbitrator, who communicated to the Deontological Council and to the Centre for Administrative Arbitration the acceptance of the appointment within the regularly applicable deadline.

The Arbitral Tribunal was constituted on 25 February 2019.

1. The grounds presented by the Claimant in support of its claims were, briefly, as follows:

LACK OF REASONING

1. From the assessment acts now being contested, there does not result sufficient necessary reasoning, neither factual nor legal, as required in accordance with the provisions of article 77º of the General Tax Law ("LGT"), since the grounds that determined their issuance are not made explicit, with only a set of values being indicated, which are imperceptible to a normal recipient and also to the present Claimant.

2. Against the foregoing, reasoning cannot be invoked, even by way of reference, as there is no reference to any explicit reference to a specific external document.

3. Thus, it seems appropriate to conclude that the assessment acts contested are not reasoned in legally adequate terms, imposing their respective annulment for violation of the provisions of articles 103º, no. 2 and 268º, no. 3, of the CRP and 77º of the General Tax Law ("LGT").

VIOLATION OF LAW

1. In 2017, the present Claimant was subject to an external inspection procedure, as an individual entity, with partial scope to IRC 2014, filed under service order no. OI2017....

2. Following said inspection procedure, the Claimant was notified of the Tax Inspection Report, within the scope of which corrections to taxable income were proposed in the amount of €50,901.50, resulting from the disregard, for tax purposes, of expenses with financial charges borne by the Claimant.

3. The company B..., S.A., a company in which the Claimant has a shareholding, was also subject to an inspection procedure, also with reference to the 2014 financial year, with partial scope to IRC 2014, filed under service order no. OI2017..., pursuant to which corrections to taxable income were proposed in the amount of € 202,724.29, which have direct impact on the assessment acts now being impugned.

4. More recently, the present Claimant was subject to an external inspection procedure, as the dominant company of the group, with partial scope to IRC 2014, filed under service order no. OI2017..., carried out so as to transfer the aforementioned corrections to the dominant company.

5. According to the contents of said Report, the tax administration made corrections to the group's result in the total amount of € 253,625.79, which resulted in a taxable profit of € 28,041.64.

6. Such corrections were subsequently embodied in the supplementary assessment acts that are the subject of the present Request for Arbitral Decision.

CORRECTION IN THE AMOUNT OF € 50,901.50 A..., S.A.

1. The present Claimant cannot agree with the position taken by the tax administration, within which the latter denies the tax deductibility of net financing expenses borne by the Claimant in 2014, because, in its view, they did not contribute to the obtaining of taxable income and, also, constitute expenses with provisions not accepted for tax purposes and are not supported by documentation.

2. From the analysis of the contents of the Report notified, it is clear the position sustained by the tax administration that the net financing expenses borne by the Claimant are not accepted under article 23º of the IRC Code, because they did not contribute to the obtaining of taxable income and, also, constitute expenses with provisions not accepted for tax purposes and are not supported by documentation.

3. Financial investments such as the shareholding in B..., S.A. remain assets managed in the interest of the Claimant, being sources generating income subject to IRC.

4. In the period of 2014, and for what is now relevant, in the context of managing financing/treasury needs, the Claimant obtained financing from C... - Venture Capital Fund ("C..."), the sole owner of its share capital, and granted financing to B....

5. Such financing was obtained not only with the objective of strengthening the Claimant's financial resources - since, in the 2014 period, the need for funds was foreseen to meet projected investments - but also with the objective of ensuring adequate coverage of its current financial needs.

6. It happened that after carrying out the foreseen investments and the analysis of current needs, the Claimant found that it had a treasury surplus in the amount of € 800,000.00, which was channeled to repay part of the financing obtained.

7. In this sense, the present Claimant does not understand how the tax administration can claim that expenses associated with part of the financing obtained are not deductible, under IRC, since part of the financing obtained remained in the current account of the taxpayer until the time when management, in a diligent manner, used such funds to meet obligations.

8. At the end of the 2014 period, management again found the need to strengthen the available financial resources, and the Claimant's shareholder provided the company with the funds necessary to carry out its activity.

9. Such financing resulted from a management decision, based on the foreseen obligations.

10. In making decisions by managers regarding fund needs, decisions are made based on projections, which inherently include the normal cycle of business activity, as well as the investments that are foreseen.

11. In this way, it is abundantly clear that the tax administration cannot, based on article 23º of the IRC Code, call into question the principle of freedom of management, scrutinizing the opportunity and appropriateness of management's economic decisions of any entity and considering that only those expenses that prove convenient for the company can be assumed for tax purposes.

12. On the other hand, the financial expenses recognized in the 2014 period do not correspond to provisions, but rather to accruals of expenses, and pursuant to no. 1 of article 18º of the IRC Code "income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or borne, regardless of their receipt or payment, in accordance with the accrual basis of accounting".

13. It thus results from the foregoing that, for tax purposes, and under the accrual basis of accounting regime, expenses should be considered relevant in the period in which they are borne, regardless of their payment.

14. However, also on this point, the Claimant cannot fail to express its disagreement, since, as the expenses in question relate to an "accrual of costs," the tax administration cannot simply consider that they are not relevant, for IRC purposes, because they are not supported by external documents, but rather by internal documents.

B..., S.A. – CORRECTION IN THE AMOUNT OF € 202,724.29

1. Notwithstanding the Claimant not specifically contesting all the corrections as to their legal assumptions, even those that are not contested as to their specific legal assumptions are illegal insofar as the IRC assessment acts and Compensatory Interest assessments that constitute the subject of the present request for arbitral decision suffer from lack of reasoning, which determines, per se, its annulment.

2. With respect to financial expenses, the present Claimant cannot fail to contest the assumptions upon which this correction is based.

3. Contrary to what the SIT seeks to uphold, the fact that the contract for the purchase of companies D..., SA and E..., executed between company F..., SGPS, SA and company B..., S.A., also encompasses the advances that had been made to companies D..., SA and E... and the fact that the latter company only bears interest of 6% resulting from the advances that had been granted by its previous shareholder (company F..., SGPS, SA) does not, evidently, allow disregarding, for the purposes of the provision of article 23º, no. 2, paragraph c), of the CIRC, the difference between the advance interest borne by the present Claimant as a result of the advance contracts (fixed at 15%) and the interest received from company E... (fixed at 6%).

4. It should thus be concluded that, given that the capital contributed through the advances was applied in the acquisition of companies D..., SA and E..., there can be no doubt that the interest borne is deductible, in its entirety, under the provisions of article 23º, no. 2, paragraph c), of the CIRC, reason for which this correction is illegal and cannot be maintained.

ACCRUALS

1. This correction is related to invoices no.s FT 352/1926, dated 2015/07/28 – G... (Tax ID no....), in the amount of € 10,620.00 + VAT at 23%, totaling € 13,062.60, and Invoice no. FTCLV2212015..., dated 04/08/2015, issued by H... (Tax ID no....), in the amount of € 1,000.00 + VAT at 23%, totaling € 1,230, which the SIT consider should be attributed to 2015 and not to 2014.

2. As explained by company B... during the inspection procedure, in 2014, the annual costs with auditors were approximately € 12,000, with an accrual being made in account 622109 of € 12,000.

3. In 2015, the expenses in question were recorded in account 622103 but should have been recorded as part of the accrual in account 622109 made in 2014 and a new accrual should have been made in the amount of € 12,000.00 for the year 2015.

4. With respect to invoice no. FTCLI/221201..., issued by H..., although the same was issued on 04/08/2015, it is verified that the same expressly and unequivocally states that it concerns "Professional fees for services, up to the date of issue of this invoice, within the scope of the examination of the financial statements of B..., SA, on 31 December," from which it is clear that the invoice no. FTCLI/2212015... clarifies, in a clear manner, that it concerns services provided regarding the financial statements of B..., SA for the year 2014, reason for which it is evident that the services in question actually relate to the year 2014 and not to 2015, as the SIT sustain in the RIT.

5. The present Claimant cannot thus conform to these corrections because they are illegal.

ILLEGALITY OF COMPENSATORY INTEREST ASSESSMENTS

1. According to article 35º, no. 1, of the LGT, it is established that only "(...) compensatory interest is due when, by a fact attributable to the taxpayer, the assessment of part or all of the tax due or the delivery of tax payable in advance, or withheld or to be withheld in the context of tax substitution, is delayed".

2. Thus, in view of the provisions of articles 74º, no. 1, of the LGT and 342º, no. 1, of the Civil Code ("CC"), it is the responsibility of the Tax Administration to demonstrate and prove these facts constituting the right to assess compensatory interest, namely, the fault of the taxpayer in any delay or retardation in the assessment of tax, that is, to demonstrate the assumption for the assessment of compensatory interest.

3. However, this fault must be assessed or, at least, be subject to consideration by the Tax Administration and externalized in the reasoning of the tax acts, which did not happen in the situation in question, reason for which also the assessment of Compensatory Interest is illegal and should be annulled.

4. The Respondent presented its Reply, defending itself by impugnation, in summary, as follows:

5. The R understood in detail each correction that resulted finally in the assessments now impugned by it, since in the PI by impugning correction by correction, company by company, and legal basis by legal basis, making the relevant references to the Report of the inspection procedure which is precisely where the reasoning for the assessments is contained.

6. As it emerges from the arbitral request, the R understood the cognitive and evaluative path and one can conclude, with relative ease, that the reasoning exists and is sufficient, clear and congruent, the Claimant being wrong in invoking that the tax acts suffer from a defect of insufficient reasoning.

7. With respect to the erroneous interpretation of article 23º of the CIRC by the Claimant in understanding that the AT did not accept them because "they did not contribute to the obtaining of taxable income and, also, constitute expenses with provisions not accepted for tax purposes and are not supported by documentation," the R also does not have reason.

CORRECTIONS MADE TO A..., S.A.

1. As stated in the Inspection Report of A..., of the amount of € 840,000.00 with the parent company, Venture Capital Fund C..., € 50,000.00 was transferred for the constitution of the share capital of company B..., SA, but the main activity of the taxpayer not being financial investments, the legal principles of article 23º of the CIRC are not met, whereby the financial charges resulting from this amount are not to be accepted.

2. As for the differential value (€ 790,000.00), it remained in the current account of the taxpayer, without there having been any need to move it until the payment of € 800,000.00 in September, whereby such expenses did not serve to guarantee profits in accordance with article 23º of the CIRC.

3. As for the advance of € 560,000.00, the value of this at an interest rate of 15% was used for the company to make two time deposits at much lower rates (1.75% and 2.00%), that is, the TP assumes interest at a very high rate to receive interest at much lower rates, thus such financial expense did not serve the taxpayer to obtain income, so that in accordance with article 23º of the CIRC, the financial charges related to this advance are not to be accepted.

4. For these reasons stated in the RIT, the corrections made to company A... are to be maintained.

5. With these corrections, contrary to what is sustained by the taxpayer, the AT did not meddle in any management decision of the R, since it is certain that with the legislative amendment resulting from Law no. 2/2014, of 16 January, the deductibility of expenses and losses ceased to be conditioned to indispensability, it became required that expenses and losses be incurred or borne to "obtain or guarantee" the income subject to IRC.

6. Furthermore, in light of the provisions of no. 1 of article 23º of the CIRC, these financial charges cannot be deducted in determining the taxable profit of the claimant, since they relate to liabilities used to finance the activity of other companies which, in addition to being independent and autonomous, also have distinct legal personalities.

7. The taxpayer did not present documentary evidence of the values recorded in the account "6913 – Other interest on loans obtained," whereby such expenses could not be accepted in accordance with article 23º of the CIRC combined with article 23-A, also of the CIRC.

8. Having considered that the counterpart of the expense account was the account "2722131 – C... relating to accruals of expenses, the AT, in light of the provisions of article 18º of the CIRC, analyzed such expenses under article 39º of the CIRC so as to verify whether the same could be maintained from the perspective of a provision, verifying that this also could not be accepted as it is not provided for in the said standard.

CORRECTIONS TO COMPANY B..., SA

1. With respect to the alleged illegality of the corrections made regarding the advance interest effected by company B..., SA, the R also does not have reason, since financial investments in the acquisition of companies are outside the corporate purpose of the company.

2. Nevertheless, part of the costs borne by the taxpayer are offset by the profits from the interest on the loans granted.

3. However, in the acquisition of the Spanish company, it pays interest at a rate of 15%, to obtain interest at 6%, remaining subject to an interest differential of 9%.

4. That is, the taxpayer bears financial charges at an annual rate of 15%, namely interest, resulting from loans it contracted and simultaneously is granting loans to an associated company at a much lower rate (6%), resulting in a difference of 9%.

5. It follows from this that all of said charges are not directly related to the activity of the taxpayer, whose corporate purpose, as already referred to above, consists of "the manufacture of perfumes, cosmetics and hygiene products."

6. By not being related to the activity of the taxpayer, the requirement for deductibility of all financial charges recorded by the taxpayer is not shown to be fulfilled, as established in article 23º of the CIRC.

7. Whereby, all of the interest borne relating to advance loans borne by the taxpayer should not be accepted for tax purposes, but only part of the same, whereby the amount of € 93,205.48 should be subject to an increase in the Net Result of the Period (RLP) of the Company for determining the respective taxable income of IRC.

ACCRUALS

1. The reasons for the non-acceptance of expenses whose documentary support is that of duplication of expenses from the same invoice in two years (2014 and 2015).

2. The amount of € 12,000.00 recorded in account "622109-Other" relating to accruals is not to be accepted in accordance with no. 1 of Article 18º and nos. 1, 3, 4, 6 of article 23º of the CIRC, whereby it should be subject to an increase in the Net Result of the Period (RLP) of the Company for determining the respective taxable income of IRC.

COMPENSATORY INTEREST

1. As for the illegality of compensatory interest, also the R has no reason, as has been the uniform understanding of jurisprudence.

2. In the present case, the R, due to its conduct (action), at least negligent, that is due to the reduction of the amount of tax paid, whether by way of the interpretative route that resulted in a lower amount than legally due, or due to incorrect accounting that also led to that reduction in collection.

3. Verifying the non-existence of any situation provided for in article 18º, no. 1, of the RJAT, which would make necessary the arbitral meeting provided for therein, the holding of the same was dispensed with, on the grounds of the prohibition of performing useless acts.

The holding of closing arguments was also dispensed with, pursuant to article 18º, no. 2, of the RJAT, "a contrario."

1. The tribunal is materially competent and is regularly constituted in accordance with the RJAT.

The parties have legal capacity and standing, are legitimate and are legally represented.

The case does not suffer from defects that would invalidate it.

1. It is necessary to resolve the following questions:

1. Illegality of the tax assessment act for violation of law.

2. Illegality of the tax assessment act for lack of reasoning.

3. Illegality of the compensatory interest assessment act.

4. Right of the Claimant to indemnificatory interest.

II – Material Facts Relevant to the Decision

1. The following facts are considered proven:

2. The present Claimant is a Portuguese limited company whose corporate purpose is the manufacture of perfumes, cosmetics, hygiene products, soaps, detergents and glycerin, the buying and selling of real property and other activities of business consulting and management, being subject to the general regime of Corporate Income Tax, being taxed within the Special Taxation Regime for Groups of Companies, provided for in articles 69º et seq. of that Code, in its capacity as the dominant company of a tax group of which company B..., S.A. is a part (Documents no.s 4, 6 and 8 submitted by the Claimant and administrative file submitted by the Respondent).

3. FUND C... - Venture Capital Fund is the sole owner of the share capital of the Claimant (Documents no. 4 and 6 submitted by the Claimant and administrative file submitted by the Respondent).

4. In 2017, the present Claimant was subject to an external inspection procedure, as an individual entity, with partial scope to IRC 2014, filed under service order no. OI2017... (Documents no.s 4 and 6 submitted by the Claimant and administrative file submitted by the Respondent).

5. Following said inspection procedure, the Claimant was notified of the Draft Tax Inspection Report, within the scope of which corrections to taxable income were proposed in the amount of €50,901.50, resulting from the disregard, for tax purposes, of (net) expenses with financial charges borne by the Claimant, and also to allow the Claimant, if it so wishes, to exercise, within a period of 15 days, its right of hearing (Document no. 4 submitted by the Claimant and administrative file submitted by the Respondent).

6. In compliance with the aforementioned notification, the Claimant exercised, within the granted period, its right of hearing, within the scope of which it expressed its disagreement with the proposed corrections (Document no. 5 and administrative file submitted by the Respondent).

7. Notwithstanding the exercise of the right of hearing, the Administration maintained the proposed corrections, notifying the Claimant of this decision through the Tax Inspection Report, dated 20 July 2018 (Document no. 6 and administrative file submitted by the Respondent, the entire contents of the said Tax Inspection Report being deemed fully reproduced).

8. Company B..., S.A. was also subject to an inspection procedure, also with reference to the 2014 financial year, with partial scope to IRC 2014, filed under service order no. OI2017..., pursuant to which corrections to taxable income were proposed in the amount of € 202,724.29 (Document no. 7 and administrative file submitted by the Respondent, the entire contents of the said Tax Inspection Report being deemed fully reproduced).

9. Subsequently, the Claimant was subject to an external inspection procedure, as the dominant company of the group, with partial scope to IRC 2014, filed under service order no. OI2017..., carried out "(…) so as to transfer the aforementioned corrections to the dominant company," having been notified of the final Tax Inspection Report issued (Document no. 8 and administrative file submitted by the Respondent, the entire contents of the said Tax Inspection Report being deemed fully reproduced).

10. According to the contents of said Report, the tax administration made corrections to the group's result in the total amount of € 253,625.79, which resulted in the Claimant moving from a tax loss of – € 225,584.15 to a taxable profit of € 28,041.64 (Document no. 8 and administrative file submitted by the Respondent).

11. The Claimant was notified of the final Tax Inspection Report issued, the notification including, in particular, the following:

(Document no. 8 submitted by the Claimant in the initial petition).

1. Such corrections were subsequently embodied in the assessment acts that are the subject of the case (assertion by the Claimant made in the initial petition, not impugned by the Respondent in its reply, and further evidence of notification of the tax assessment attached as doc. no. 1 with the initial petition).

2. The notification of the supplementary assessment includes, in particular, the following:

(doc. no. 1 attached to the initial petition).

1. In the compensatory interest assessment, the number of the base assessment and respective taxation period is mentioned; the amount of tax assessed on which the interest is charged; The mention of "retardation of assessment, arts. 102 CIRC and 35º LGT"; the period to which the interest rate applies, the interest rate and the amount of interest assessed. (doc. no. 1 attached to the initial petition).

With relevance to the decision of the case, it was not proven that the Claimant paid the amount of the assessments that are the subject of the case.

1. The tribunal's conviction regarding the decision on the material facts was based on the documents contained in the case, above mentioned by reference to each probative fact, it being noted that such documents were not subject to impugnation by either party.

With respect to the fact not proven, the tribunal's decision results from the absence of proof regarding such matter.

III – Applicable Law

1. Having the challenging party invoked the illegality of the assessment acts for violation of law and for lack of reasoning, it is necessary to determine the order of examination thereof, which should be observed, as is undisputed, as provided for in article 124º of the CPPT, applicable by virtue of article 29º, no. 1, paragraph a) of the RJAT (See Jorge Lopes de Sousa, Commentary on the Legal Regime for Arbitration in Tax Matters, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2017, Almedina, page 205).

The defect of violation of law is that which will lead to "more stable or effective protection of the offended interests" insofar as its possible merit would prevent renewal of the act, which does not occur with the hypothetical annulment resulting from the defect of lack of reasoning of the tax acts that are the subject of the case.

In conformity, the Tribunal will first examine the defect of violation of law.

Let us proceed.

1. A considerable portion of the dispute between the parties, with respect to the defect of violation of law invoked, is related to the deductibility of expenses incurred by the Claimant and its subsidiary, B..., Ltd. in light of article 23º, no. 1, of the CIRC. Thus, and having in mind the different positions of the parties on the interpretation of the norm in question, it is useful to proceed with an analysis of the concept of deductible expense legally enshrined, in the perspective of its application to the various corrections impugned, without prejudice to what will be more specifically considered with respect to each specific correction.

Pursuant to no. 1, of article 23º of the CIRC:

"For the determination of taxable profit, all expenses and losses incurred or borne by the taxpayer to obtain or guarantee income subject to IRC are deductible."

In turn, no. 1, of article 20º of the CIRC tells us that:

"Income and gains are considered to be those resulting from operations of any nature, as a result of a normal or occasional action, basic or merely accessory, (…)" namely:

(…)

With the deletion of the term "indispensable," contained in the previous wording of article 23º, no. 1, of the CIRC, the interpretation of the norm was simplified, dispensing with the effort inherent in interpreting that indeterminate concept and shifting the focus to the question of whether the expense, objectively viewed at the time of its occurrence, was aimed at obtaining or guaranteeing income subject to IRC. Consequently, it is decisive, in this tribunal's view, to know what is income subject to IRC, so that article 23º, no. 1, partially refers to article 20º which, in truth, in this regard, forms part of the norm embodied in article 23º.

We would even say that, just as, economically, income depends, for its occurrence, on the expense(s), the concept of expense depends on the concept of income.

Thus, considering that "income and gains are those resulting from operations of any nature, as a result of a normal or occasional action, basic or merely accessory," all expenses and losses incurred or borne by the taxpayer to obtain or guarantee them are deductible. Naturally with the exception of those that law expressly and exceptionally forbids.

This conclusion is in line with article 3º of the same statute which provides that:

"1 — IRC is levied on:

a) The profit of commercial companies (…)

2 — For the purposes of the foregoing, profit consists of the difference between the amounts of net assets at the end and at the beginning of the taxation period, with the corrections established in this Code."

There is not, therefore, in this matter, in this tribunal's view, limitation, either from the side of the income subject to taxation or from the side of deductible expenses, resulting from the corporate purpose of the commercial company that is the tax subject, the focus of the legislator being to tax the increase in assets that occurred in the taxation period.

This interpretation, in addition to flowing unequivocally from the letter of the law, is in perfect harmony with the teleology of the norms in question and also with the principle of tax capacity and with the principle of taxation of real income of companies.

In contrast, it is understood that an interpretation that makes the deduction of a cost (or symmetrically the relevance of a revenue) depend on the circumstance of being incurred within the scope of an activity provided for in the registered corporate purpose of the company, does not find in the letter of the law any support, even if imperfectly expressed, is contrary to the other elements of interpretation, in addition to being liable to conflict with the aforementioned principles.

Moreover, as results from article 6º, no. 4, of the Code of Commercial Companies "Contractual clauses and corporate resolutions that set a particular corporate purpose for the company or prohibit the performance of certain acts do not limit the capacity of the company, but constitute the company's organs in the duty of not exceeding that purpose or of not performing those acts." As noted by António Menezes Cordeiro "Despite its inertia, it still appears in works of contemporary doctrine and, as we have seen, in the law itself, the principle of specialization no longer presents, today, practical scope, either in doctrine or in jurisprudence. It has, moreover, been removed in various legislatures, including the European one. In fact, companies are freely established, in accordance with the model that the interested parties wish to imprint on it. They can assume various lawful purposes, in accordance with the articles of association and the resolutions of their organs. Any limitation of capacity would be surpassed at that level, despite inevitable doubts. On the other hand, third parties who contract with the company cannot be left in the contingency of analyzing the statutory "purposes" to, from there, extract the validity of the acts. Strictly speaking: all acts can serve any purposes. Finally: Community law does not admit the invalidation of acts because of internal restrictions on the capacity of companies."

In summary, with the exception of specific situations expressly provided for in law, all income and gains "(…) resulting from operations of any nature, as a result of a normal or occasional action, basic or merely accessory" are subject to IRC and, symmetrically, "all expenses and losses incurred or borne by the taxpayer to obtain or guarantee them" are deductible, naturally with the exception of those that law expressly and exceptionally forbids.

The expression "to obtain or guarantee them" cannot but mean that the taxpayer, in incurring the cost, will aim at obtaining income or gains in operations of any nature, normal or occasional, basic or accessory, which must be assessed objectively in light of economic rationality (not requiring, of course, the actual achievement of the obtaining of income, which will always depend on the "risk" of business activity).

Income or gains in operations of any nature, normal or occasional, basic or accessory, aimed at with the deductible expense may, in this tribunal's view, have a direct or indirect link with the cost, or be a mediate or immediate effect thereof. From the breadth of the concept of taxable income or gain, it necessarily follows that the expenses that contributed to its occurrence may have occurred in temporally distant periods.

From the principle of freedom of management, constitutionally enshrined, it follows that the Respondent, nor the courts, cannot scrutinize the business management of the taxpayers, in particular, not accepting the costs inherent to poor management decisions or that in general are causative of losses instead of the desired profits, replacing, in the words of Rui Duarte Morais, which remain current despite the amendment to the aforementioned article 23º, no. 1, of the CIRC "(…) the judgment of convenience and opportunity of the charges assumed, as they resulted from the decision of the corporate organs, with another judgment, also of a business nature, made by the tax administration or by the courts.

A cost ceases not to be (…) because of, in an ex post assessment, it proves to be useless or ineffective," However, from the principle of freedom of management, it does not follow, as is clear, the acceptance of costs not incurred to obtain, directly or indirectly, immediately or mediatedly, from taxable income.

In this case are the costs incurred by the taxpayer that do not aim at economic benefits for itself but for third parties.

As Rui Duarte Morais still writes:

"If the assumption of the charge that gives rise to the cost was presided over by a genuine business motivation - in the understanding of the partners and/or managers of the company, the only ones to whom it falls to decide the corporate interest - the cost is indispensable. When it should be concluded that the charge was determined by other motivations (personal interest of the partners, administrators, creditors, other companies in the same group, business partners, etc.), then such cost should not be regarded as indispensable."

Descending to the case at hand, let us examine the various corrections.

1. CORRECTIONS TO THE COMPANY A..., IN THE AMOUNT OF 50,901.50 €.

The Respondent presents as motivation for the corrections in question several grounds.

On one hand, it understands that the expenses in question cannot be subsumed under the concept of expense provided for in no. 1, of article 23º of the CIRC. On the other, it understands that the expenses are not properly documented and should be disregarded in light of nos. 3 and 4 of article 23º and paragraph C) of no. 1, of article 23º-A of the same code. Finally, it still sustains that such expenses relate to provisions and that in article 39º CIRC the expenses related to interest on loans obtained are not contemplated, whereby the provisions made by the TP should not be accepted.

Beginning to analyze this reasoning, it should be advanced from the outset that the improcedence of the same is manifest, since the interest from the supply contracts in question do not have the nature of provisions, corresponding to certain expenses, based on contractual obligations.

In fact, as is written on account 2722 of the SNC (Creditors for accruals of expenses) by António Borges, Azevedo Rodrigues and Rogério Rodrigues "In this account is recorded, on the credit side as a counterpart of the respective expense account, the amount of expenses or losses attributable to the current period, but whose actual maturity or payment occur in subsequent periods. By way of example, we can cite:

• Financing costs, with deferred payment (e.g. interest on bank loans) due in future periods;

(…)."

Also on this subject, Leonor Fernandes Ferreira writes:

"Rogério Ferreira, in his work entitled Provisions (Ferreira, 1970) clarified that provisions are current and estimated costs. And he noted that provisions are regarded as estimated costs (of the period) but relating to future expense processing (or non-receipts), expenses of uncertain future proof. However, this was not always understood. In bygone times, it was even admitted that provisions included commitments or charges payable, such as commissions payable and interest payable, and also genuine reserves and certain losses already verified."

As can also be read in the judgment of the STA of 28-01-2015, proc. 0652/14, "provisions are accounting entries of sums intended to meet a charge attributable to the period, but whose proof is future, or already proven but of uncertain amount."

Whereas in the case of "provisions" there is an uncertainty as to the occurrence of the obligation, its amount, or the date of its occurrence, in the case of "accrual of expenses" there is no such uncertainty, with only the non-occurrence of the maturity of the obligation being verified, a situation that occurs in the present case.

Thus, from the accounting perspective, the correct entry would unquestionably be the recording of the same in the accrual of expenses account and not in the provisions account.

This reasoning of the Respondent thus lacks merit.

As for the invoked lack of documentation, because such expenses are allegedly only supported by internal document, it also does not appear that the same occurs.

In fact, no. 3, of article 23º of the CIRC determines that:

"The deductible expenses under the foregoing numbers must be documented, regardless of the nature or support of the documents used for that purpose."

At the level of expense deduction, this is, therefore, the rule.

In cases of acquisition of goods or services, no. 4 applies, which provides:

"In the case of expenses incurred or borne by the taxpayer with the acquisition of goods or services, the documentary evidence referred to in the previous number must contain, at least, the following elements:

(…)"

In the case in question, we are dealing with expenses incurred with a supply contract, not being a contract for the acquisition of goods or a contract for the provision of services.

In this measure, no. 4, and consequently no. 6, of article 23º of the CIRC are inapplicable to the expenses in question, whose obligation of documentation is provided for in no. 3, which requires documentary proof, regardless of the nature or support of the documents used for that purpose. In the case, such proof results from the internal document supported and justified by the supply contract.

This reasoning of the tax acts thus lacks legal support.

Lastly, let us examine the reasoning of the Respondent to the effect that such expenses are not deductible because they were not incurred by the Claimant to obtain or guarantee income subject to IRC.

The Respondent did not accept as expenses the interest incurred on the amount of € 50,000 that the Claimant transferred to B..., S.A., for capital constitution, invoking for this purpose that financial investments do not form part of its corporate purpose.

However, it should be said, in light of the above-expressed understanding of this arbitral tribunal regarding article 23º of the CIRC, that this correction utterly lacks merit. It is evident that the income that the Claimant may obtain in the future resulting from this investment are subject to taxation under article 20º of the CIRC and, consequently, the expenses incurred for such obtaining are deductible pursuant to article 23º, no. 1, of the same code, regardless of whether the activity of financial investments forms, or not, part of the Claimant's corporate purpose, since, as has been said, the law, in line with the principle of tax capacity and with the principle of taxation of real profit, does not establish the corporate purpose as a criterion for deductibility of expenses (and also, symmetrically, for the consideration of revenues).

Thus, with respect to the interest incurred with this value, the tax act is illegal, for violation of law, which implies the corresponding partial annulment of the tax assessment and the compensatory interest assessment.

Let us now examine the disregard of the interest concerning the amount of € 790,000 that the Claimant maintained in its current account without movement and the € 560,000 that the taxpayer used to make two time deposits at rates of 1.75% and 2%, while paying the Fund exploiting it, which owns its capital, interest at a rate of 15%.

The Claimant argues that, with respect to the disregard of the interest concerning the amount of € 790,000, relating to the supplies of 2.06.2014, that:

"As referred to above, in the period of 2014, and for what is now relevant, in the context of managing financing/treasury needs, the Claimant obtained financing from C... - Venture Capital Fund ("C..."), the sole owner of its share capital, and granted financing to B....

Such financing was obtained not only with the objective of strengthening the Claimant's financial resources - since, in the 2014 period, the need for funds was foreseen to meet projected investments - but also with the objective of ensuring adequate coverage of its current financial needs.

It happened that after carrying out the foreseen investments and the analysis of current needs, the Claimant found that it had a treasury surplus in the amount of € 800,000.00, which was channeled to repay part of the financing obtained."

And with respect to supplies of 19.12.2014, the following:

"At the end of the 2014 period, the management again found the need to strengthen the available financial resources, and the Claimant's shareholder provided the company with the funds necessary to carry out its activity.

Such financing resulted from a management decision, based on the foreseen obligations.

In making decisions by managers regarding fund needs, decisions are made based on projections, which inherently include the normal cycle of business activity, as well as the investments that are foreseen.

In this way, the application of part of the funds in time deposits is nothing more than a management decision (…)"

Let us see.

Disregard of interest concerning the amount of € 790,000, relating to supplies of 2.06.2014.

Of the € 910,000 in supplies granted, € 120,000 were transferred to B... and the remaining € 790,000 remained in the current account of the taxpayer until the payment to the Fund C..., in September.

These circumstances, by themselves, do not necessarily mean that the expenses with interest here in question were not incurred with a view to obtaining income, and the thesis of a necessary causal relationship between costs and revenues for the purposes of assessing the deductibility of the former has long been ruled out by national doctrine and jurisprudence, a dismissal that follows today clearly from the legal text, as stated above.

Moreover, it is undisputed that neither the Respondent nor the courts can substitute their judgment for that of the manager regarding management decisions.

However, having considered that the taxpayer paid interest at a rate of 15% to the Fund holding all of its share capital, having maintained the amounts in question without use in current account (in the case of € 790,000), or in time deposit (in the case of € 560,000), in this case, with a rate approximately 7.5 to 8.5 times lower than that paid to the Fund holding its capital, such circumstances are capable, according to the rules of common experience, of at least creating doubt about the profit-making purpose of such costs, requiring, at minimum, an "explanation of the economic congruence of the transaction" by the Claimant, the only entity with the conditions, by the nature of things, to provide such clarification.

And indeed, the Claimant presented its explanations for these transactions, as we have seen.

With respect to the disregard of the interest concerning the amount of € 790,000, relating to the supplies of 2.06.2014, it is to be observed, however, that the Claimant does not detail and much less prove the alleged investments.

Additionally, even if investments were made, it results from the Claimant's own allegations that after carrying out the same, the Claimant found it had a treasury surplus slightly exceeding the amount in question, which remained unused in its current account, so that the financial resources in question were not applied in the alleged investments.

By itself, this reality would not prevent the supplies in question from having been destined for such purpose, but that such application did not actually occur, due to subsequent unnecessary, such as an unforeseen receipt or a reduction in the cost of the investment in question.

However, the Claimant, the sole possessor of the adequate information for such purpose, provides no explanation for the circumstance that the financial resources that would allegedly be necessary for investments had no application in the same.

Similarly, it did not detail the need to strengthen treasury and the reason for non-use of the amount in question since the amount in question remained deposited in current account, without any use.

Thus, the Claimant's explanation is minimally convincing of the economic congruence of the transaction.

Having considered the facts set out above and the circumstance that the Claimant has not given any rationally convincing explanation for the transaction, in the part in question, nor produced any proof, it is to be concluded that the expenses were not incurred for the obtaining of income subject to tax. Rather, in light of the rules of common experience, in view of the facts and the explanations given by the Claimant, it is to be concluded, presumptively, that such expenses will have been contracted to benefit the Fund holding the sole title of the Claimant's share capital.

A similar conclusion is applicable to supplies of 19.12.2014, regarding which the Claimant alleges "the need to strengthen available financial resources" but does not detail what such need translates into, with such allegation lacking any concrete content. Such hypothetical need, in a transaction lasting nine days, is, moreover, belied by the reality of the facts brought into the case, since the amount in question was not used, having only been applied in time deposits with substantially lower rates (€ 260,000.00 at a rate of 1.75% and € 300,000.00 at a rate of 2.00%), than that paid (15%) to the holder of its share capital.

Having considered the facts set out above and the circumstance that the Claimant has not given any rationally convincing and concrete explanation for the transaction, it is to be concluded that the expenses were not incurred for the obtaining of income subject to tax, it being equally to be concluded, in light of the rules of common experience, in view of the facts and the explanations given by the Claimant, that such expenses will have been contracted to benefit the Fund holding the sole title of the Claimant's share capital.

The defects pointed out to the assessments resulting from these corrections to the taxable income of the Claimant thus do not prevail.

1. CORRECTIONS TO COMPANY B..., S.A.

ADVANCE INTEREST

Regarding this correction, in the amount of € 93,205.48, the conclusions of the RIT state, in particular, the following:

It should be advanced from the outset that this correction, in the terms and with the reasoning with which it was made, lacks legal basis.

In fact, article 23º-A, no. 1, paragraph m), of the CIRC, determining that it is not deductible for the purposes of determining taxable profit the charges for "interest and other forms of remuneration of supplies and loans made by partners to the company, to the extent that they exceed the rate defined by ordinance of the member of the Government responsible for the area of finance, except in the case of the regime established in article 63º," implies the recognition of the deductibility of charges for interest and other forms of remuneration of supplies and loans made by partners to the company, in the part not in which the interest does not exceed the rate defined in the ordinance, unless the Respondent applies the regime established in article 63º, which was not the case.

The Respondent, by basing the corrections in question on article 23º, no. 1, of the CIRC, produced a manifestly erroneous reasoning, which the court cannot replace by applying the limitation to the deductibility of the charges in question provided for in article 23º-A, no. 1, paragraph m), of the CIRC, since, as decided in the judgment of TCA/North of 25.05.2010, proc. 0232/01) "in the field of the contentious matter of mere legality, which is that of judicial impugnation provided for in the tax process, the court can only formulate its judgment on the validity of the act in light of the contextual reasoning that is part of the act itself, being totally irrelevant for this purpose other grounds not those that were duly externalized."

It will always be said, however, that, even in the absence of the special norm regulating article 23º-A, no. 1, paragraph m), as has already been stated, it is this tribunal's understanding that deductible expenses are not legally limited to those incurred within the scope of activities comprised in the taxpayer's corporate purpose, encompassing all activities of any nature capable of generating income subject to IRC, as is manifestly the case of dividends that the taxpayer may obtain based on the economic results obtained by its subsidiaries, the Respondent being unable to interfere in the taxpayer's management criteria.

The correction in question, in light of its reasoning, suffers from the defect of violation of law, due to error in the legal assumptions, having as a consequence its illegality, which implies the corresponding partial annulment of the tax assessment acts.

ACCRUALS

This correction relates to expenses recorded by the Claimant in 2014, in the amount of € 12,000, which, following a request by the Respondent within the scope of the inspection procedure, the Claimant justified with the following invoices:

i) Invoice no. FT 352/1926, dated 2015/07/28 – G... (Tax ID no....), in the amount of € 10,620.00 + VAT at 23%, totaling € 13,062.60;

ii) Invoice no. FTCLV2212015..., dated 04/08/2015, issued by H... (Tax ID no....), in the amount of € 1,000.00 + VAT at 23%, totaling € 1,230.

However, it was found that these same invoices were also recorded by the Claimant in 2015 and considered expenses of this taxation period.

The Claimant alleges that in 2014, the annual costs with auditors were approximately € 12,000, with an accrual being made in account 622109 of € 12,000, and that in 2015, these costs were recorded in account 622103 but should have been recorded as part of the accrual in account 622109 made in 2014 and a new accrual should have been made in the amount of € 12,000.00 for the year 2015.

The Claimant thus alleges, in essence and for what is relevant here, that it incorrectly attributed these invoices to the 2015 financial year, when instead it should have attributed them to 2014.

Is this so? Let us see.

With respect to invoice no. FTCLI/2212015..., issued by H..., issued on 04/08/2015, it is verified that the same states that it concerns "Professional fees for services, up to the date of issue of this invoice, within the scope of the examination of the financial statements of B..., SA, on 31 December."

From the description of the invoice, it thus results that the service concerned the examination of the financial statements of B... SA provided up to 4.08.2015, with reference to those accounting documents dated 31.12.2014.

Article 18º of the CIRC provides that:

"1 — Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the taxation period in which they are obtained or borne, regardless of their receipt or payment, in accordance with the accrual basis of accounting.

2 — (…)

3 — For the purposes of applying the provisions of no. 1:

a) (…)

b) Revenues relating to the provision of services are in general considered to be realized, and the corresponding expenses to be borne, on the date the service is completed, except for services that consist of the provision of more than one act or of a continuous or successive performance, which are attributable proportionally to their execution;

c) (…)"

Given that the service concerns the examination of the financial statements of B... SA provided up to 4.08.2015, with reference to those accounting documents dated 31.12.2014, it results that the services will have been executed after this last date until 4.08.2015.

Thus, in light of paragraph b), of no. 3, of article 18º of the CIRC, such services can only be attributable to the 2015 financial year, and not to 2014 as the Claimant wishes.

iii) Invoice no. FT 352/1926, dated 2015/07/28 – G... (Tax ID no....), in the amount of € 10,620.00 + VAT at 23%, totaling € 13,062.60;

This invoice, dated 28.07.2015, does not state which financial year it relates to, being recorded in the accounting in 2015 in the expense account 622103-Tax and financial consultants by the accounting entry 70001/2015, journal 41.

The Claimant not alleging delay by the issuer in issuing the invoice, it is to be presumed that it relates to services provided in 2015, especially since the Claimant did not prove and did not even allege that such services had been performed in 2014.

In these circumstances, also in light of paragraph b), of no. 3, of article 18º of the CIRC, such services should be attributed to the 2015 financial year, and not to 2014 as the Claimant wishes.

Thus, the two invoices in question, in light of paragraph b), of no. 3, of article 18º of the CIRC were correctly considered by the Claimant as expenses of 2015, not being suitable to justify the "accruals" of 2014, in the amount of € 12,000, the Claimant's claim regarding these corrections thus being without merit.

1. DEFECT OF LACK OF REASONING

The Claimant still invokes the defect of insufficiency of reasoning, legally equated with lack of reasoning.

It is manifest, however, that the assessment acts under challenge are reasoned in the tax inspection reports, as the Claimant unquestionably well understood in exhaustively refuting the positions of the Respondent contained therein and even expressly stating that the corrections contained therein were subsequently embodied in the supplementary assessment acts that are the subject of the present request for arbitral decision.

At most, as a result of what the Claimant alleges, there could be a lack of notification of the reasoning of the tax act (with the consequences provided for in article 37º of the CPPT), but, in truth, such irregularity did not even occur.

In fact, from the notification of the final inspection report made to the Claimant, as the dominant company, in order to transfer the corrections made to company B..., S.A. and to itself, for the purposes of group taxation, the following is stated:

On the other hand, in the notification of the tax assessment that is the subject of the case made to the Claimant, it also states that:

In light of these express declarations, and especially of the combination of both (in one it is announced that—naturally as a result of the conclusions of the report—the taxpayer will be notified of the "respective assessment," in another it notifies of the assessment referring to the reasoning already having been sent), a normal declaratee will understand, without any margin for reasonable doubt, as "in casu" the Claimant understood, that the reasoning for the assessment is contained in the final inspection report (which, in turn, incorporates the reasoning of the final reports of the inspection procedures previously carried out with respect to the Claimant and company B..., S.A.).

In this conformity, the defect of lack of reasoning invoked by the Claimant does not prevail.

1. COMPENSATORY INTEREST

No. 1 of article 102º of the CIRC provides that:

"Whenever, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due or the payment of tax payable in advance or to be withheld in the context of tax substitution or obtained undue reimbursement is delayed, compensatory interest accrues to the amount of tax at the rate and in the terms provided for in article 35º of the General Tax Law."

In turn, article 35º, no. 1, of the LGT establishes that "(...) compensatory interest is due when, due to a fact attributable to the taxpayer, the assessment of part or all of the tax due or the payment of tax payable in advance or to be withheld in the context of tax substitution is delayed."

In the case at hand, based on the inaccuracies relating to the Claimant's tax situation contained in the tax return presented by the taxpayer to the Respondent (action subsumed in article 119º of the general tax infringement regime), the assessment of the tax due was delayed, so that the situation subsumes into articles 102º, no. 1 of the CIRC and 35º of the LGT, being consequently compensatory interest due.

With respect to the reasoning of the compensatory interest assessment act, the STA decided in the judgment rendered in case 0805/15, of 09-03-2016, in line with settled jurisprudence, as follows:

"with respect to the interest assessment act, the STA's jurisprudence has established the understanding that the minimum reasoning required for such assessment acts (interest) must indicate the amount on which they are charged, the period of time considered for the assessment and the rate or rates applied, with mention of these elements in the act itself or by reference to an attached document (see the STA judgments of 21/4/2010, case no. 743/09; of 16/10/2010, case no. 830/10; of 30/11/2011, case no. 619/11; of 29/2/2012, case no. 928/11; and of 14/2/2013, case no. 645/12).

Therefore, descending to the specific case, it is understood that the requirements required for the validity of the aforementioned assessment act (interest) are met, since, as results, in particular, from paragraph H) of the Probative Provisions, in the assessment are detailed the elements above indicated [the reason for the assessment (there having been retardation in the assessment of part or all of the tax, due to a fact attributable to the taxpayer - arts. 89º of the CIVA and 35º of the LGT); the indication of the tax in default on which the interest is charged; the period to which the interest rate applies—from 2000/05/10 to 2000/12/26."

In the case at hand, all these elements are contained in the assessment act, so that, endorsing this jurisprudence, it is judged that the Claimant's annulment claim regarding the compensatory interest assessment in the part relating to the tax assessment that remains in the legal order is without merit.

1. INDEMNIFICATORY INTEREST

In the case at hand, it was not proven that the Claimant had proceeded to pay the amount of tax assessed.

In this way, the supplementary claim for the Respondent to be ordered to pay indemnificatory interest cannot but fail, the Claimant's claim being consequently without merit.

IV – Decision

Thus, the arbitral tribunal judges the request for arbitral decision to be partially granted, decreeing: a) The partial annulment of the tax assessment that is the subject of the case, in the part corresponding to the corrections corresponding to the disregard of expenses of the Claimant and its subsidiary B..., S.A. above declared illegal;

b) The partial annulment of the compensatory interest assessment in the part corresponding to the interest relating to the corrections corresponding to the disregard of expenses of the Claimant and its subsidiary B..., S.A. above declared illegal;

c) Maintain in the legal order the tax acts in the remaining parts.

d) Judge without merit the claim for the Respondent to be ordered to pay indemnificatory interest to the Claimant.

Value of the action: € 7,254.61 (seven thousand, two hundred and fifty-four euros and sixty-one cents), in accordance with the provisions of article 306º, no. 2, of the CPC and 97º-A, no. 1, paragraph a), of the CPPT and 3º, no. 2, of the Regulation on Costs in Arbitration Proceedings.

Costs by Claimant and Respondent in the proportion of sixty-two point fifty-one percent and thirty-seven point forty-nine percent, respectively, in accordance with no. 4 of article 22º of the RJAT.

Let notification be made.

Lisbon, CAAD, 16 August 2019.

The Arbitrator

Marcolino Pisão Pedreiro