Process: 630/2014-T

Date: March 4, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 630/2014-T addresses the material competence of the CAAD arbitral tribunal in IRC disputes involving corporate groups and the tax treatment of depreciations arising from asset revaluations. A..., SGPS, S.A., as parent company of Group B under the special taxation regime for groups of companies (RETGS, Articles 69+ of the IRC Code), requested arbitration to challenge a self-assessed IRC liability of €1,572,924.69 for the 2010 tax year, including the related municipal surcharge. The dispute centers on tax adjustments made by subsidiary C..., S.A., specifically concerning depreciation increases resulting from revaluations under Law 36/91 and the transition to the fiscal regime established by Decree-Law 159/2009. The claimant sought corrections totaling €5,429,494.96 in negative adjustments to the group's taxable profit. A critical procedural issue emerged: the Tax Authority challenged the arbitral tribunal's material jurisdiction to decide the claims. The case illustrates key aspects of Portuguese tax arbitration, including: (1) the right of SGPS holding companies to challenge group tax assessments through CAAD; (2) the treatment of depreciation and impairment losses under RETGS, particularly regarding revaluation-based adjustments; (3) the scope of arbitral jurisdiction over IRC and ancillary municipal surcharges; and (4) procedural requirements under Decree-Law 10/2011 and Ordinance 112-A/2011. The tribunal must determine whether it has competence to rule on the substantive tax issues or whether certain claims fall outside arbitral jurisdiction, potentially requiring judicial resolution instead.

Full Decision

CASE NO. 630/2014-T

The Arbitrators Counselor Jorge Lopes de Sousa (appointed by agreement of the other Arbitrators), Dr. Fernando Carreira Araújo and Dr. Maria Manuela Roseiro, appointed respectively by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 20-11-2014, agree as follows:

1. REPORT

A..., SGPS, S.A., entity no. ..., with registered address at Av. ..., no. ..., Lisbon, hereinafter referred to as "A... SGPS" or "Claimant", parent company of a group (Group B) subject to the special tax regime for groups of companies provided for in Articles 69 and following of the Corporate Income Tax Code (IRC), which includes C..., S.A., entity no. ... (hereinafter referred to as "C... S.A."), did, pursuant to Articles 2, no. 1, paragraph a), and 10, nos. 1 and 2, of Decree-Law no. 10/2011 of 20 January, and Articles 1 and 2 of Ordinance no. 112-A/2011 of 22 March, request the constitution of an Arbitral Tribunal with a view to declaring the partial illegality of the self-assessed IRC liability (and consequent municipal surcharge) of the fiscal group B relating to the 2010 tax year, with respect to the amount of € 1,572,924.69, with its consequent annulment in this part.

The TAX AUTHORITY AND CUSTOMS AUTHORITY is requested.

The Claimant appointed an arbitrator, Dr. Fernando Carreira Araújo, pursuant to Article 6, no. 2, paragraph b) of the RJAT.

Pursuant to the provisions of paragraph b) of no. 2 of Article 6 and no. 3 of Article 11 of the RJAT and within the deadline provided for in no. 1 of Article 13 of the same act, the highest official of the Tax Administration designated Dr. Maria Manuela do Nascimento Roseiro as Arbitrator.

The appointed arbitrators designated the third arbitrator, Counselor Jorge Manuel Lopes de Sousa, pursuant to Article 11, no. 4 of the RJAT.

The appointees designated to form this collective Arbitral Tribunal accepted the appointments, in accordance with the legal provisions.

Pursuant to and for the purposes of no. 7 of Article 11 of the RJAT, the President of CAAD informed the Parties of this appointment on 27-10-2014.

Thus, in accordance with the provision of no. 7 of Article 11 of the RJAT, after the deadline provided for in no. 1 of Article 13 of the RJAT has elapsed, the collective arbitral tribunal was constituted on 20-11-2014.

The Tax Authority and Customs Authority filed a Response, defending itself by exception and by challenge.

By order of 09-01-2015, it was decided to dispense with the meeting provided for in Article 18 of the RJAT and that the case proceed with successive written submissions.

The Parties filed submissions.

The arbitral tribunal was regularly constituted and its material jurisdiction to decide the claims is questioned.

The parties have legal personality and legal capacity and are properly interested (Articles 4 and 10, no. 2, of the same act and Article 1 of Ordinance no. 112-A/2011, of 22 March).

The case is not affected by nullities and no further exceptions were raised.

2. FACTUAL MATTER

2.1. Proven Facts

Based on the elements in the case file and the administrative file attached to the record, the following facts are deemed proven:

a) The Claimant A..., SGPS, SA, NIPC ..., is the parent company of the economic group of which it is part;

b) The Claimant is a commercial company engaged in the activity of "Management of Equity Holdings", ..., being considered a "taxpayer of high economic and fiscal relevance" within the meaning of Article 68º B of the General Tax Code (LGT);

c) The Claimant is subject to IRC with framework under the special tax regime for groups of companies;

d) On 31-05-2011, the Claimant filed the IRC declaration model 22 relating to the group of companies, for the year 2010 (document no. 1 attached with the arbitral petition, the content of which is reproduced herein), in which, among other things, it indicated a taxable amount of € 316,040,582.91 and the tax payable of € 61,659,304.18, which the Claimant paid on 31-05-2011 (€ 61,640,423.60) and on 16-06-2011 (€ 18,880.58) (documents nos. 29 and 30 attached with the arbitral petition, the contents of which are reproduced herein);

e) On 31-12-2013, the Claimant filed a request for official revision relating to the self-assessed IRC liability relating to the year 2010 (document no. 2, attached with the arbitral petition, the content of which is reproduced herein);

f) One of the companies that made up the group in 2010 is C..., S.A., NIPC ..., whose taxable profit was € 206,791,147.12 (document no. 2, attached with the official revision request, the content of which is reproduced herein, contained in the document designated "PA19.pdf");

g) For purposes of determining that taxable profit, C... S.A. made various tax adjustments to the accounting profit it calculated in 2010 (in the amount of € 64,848,506.68), including the increase, in field 720 of table 07, of the amount of € 7,467,736.06, relating to 40% of the increase in depreciation of tangible fixed assets as a result of revaluations carried out under legal instruments (document no. 2, attached with the official revision request, the content of which is reproduced herein, contained in the document designated "PA19.pdf");

h) That amount includes a portion, corresponding to € 7,254,488.02, which results from revaluations reflected in the tax schedule of official model 33.12E (Document no. 3 attached with the official revision request, the content of which is reproduced herein);

i) The Claimant understood that that amount does not reflect, in its entirety, the tax impact associated with the revaluations carried out under legal instruments, particularly under Law no. 36/91, of 27 July, and, as parent company of the group of companies subject to the special tax regime for groups (RETGS) of which C... is an integral part, submitted to the Tax Administration a request for official revision, by which it intends to:

– make an adjustment to the taxable profit of C..., in its favor, in the amount of € 2,154,567.63, pursuant to no. 4 of Article 35 of the IRC Code;

– make an adjustment to the taxable profit of C..., in its favor, in the amount of € 4,136,754.37, resulting from the transition to the new fiscal regime approved by Decree-Law no. 159/2009, of 13 July;

j) As a consequence of those adjustments, the Claimant also intended to correct the amount increased by C... in field 720 of table 07, making a correction in favor of the State in the amount of € 861,827.04, thereby changing the value to be adjusted in that field to € 8,329,563.10;

k) The intended adjustments will have a negative impact on the taxable profit of C... in the amount of € 5,429,494.95, which will change to € 201,361,652.17, which will be reflected in a correction of the same amount in the taxable profit calculated by the Claimant, as parent company of the group of companies subject to the application of RETGS, which will thus change to € 310,611,087.96;

l) Regarding the official revision request, Information no. ...-…/2014 was issued in the Large Taxpayers Unit, a copy of which is contained in document no. 3 attached with the arbitral petition, the content of which is reproduced herein, in which it is stated, among other things, the following:

  1. The object of this request is the revision of the self-assessed IRC liability for the tax period 2010, embodied in the request to the Tax Authority and Customs Authority (AT) to reflect in the tax result of the group a negative adjustment calculated for purposes of determining the taxable profit of the company "C..., SA", NIPC ..., in the amount of € 5,429,494.96, inherent to the tax impact of the various asset revaluations carried out under various legal instruments, namely, Decree-Law no. 22/92, of 14 February, which Law no. 36/91, of 27 July refers to, following the privatization process to which the company "D..." was subject, which gave rise to group E..., from which group B... resulted.

  2. The arguments of the claimant contained in the petition filed and which are hereby, for brevity of exposition, deemed fully reproduced for all legal purposes, are based, in summary, on the facts set out below, extracted from the record and deemed relevant for the analysis of the request:

– The restructuring of the energy sector, initiated with the change in legal nature of the company "D...", from public company to joint-stock company with exclusively public capital, continuing with a plan of spin-offs, giving rise to the establishment of several companies, including C..., SA, and, with a process of reprivatization of the Group that took place between 1997 and 2011;

– In the context of spin-off operations and in accordance with the legally regulated requirements, the share capital of the new companies was made in kind and at patrimonial values resulting from evaluations, subject to approval by the Minister of Finance, carried out by independent entities, selected and previously qualified for this purpose by the Ministry of Finance;

– The autonomization of Group "B..." from Group "E..." occurred by virtue of Decree Law no. 198/2000, of 24 August, which established the legal separation of companies responsible for managing the transmission network from companies engaged in electricity production or distribution activities, with the share capital of company C..., SA being held 70% by public entities and 30% by "D...";

– In 2006, the company "C..." began to integrate electricity and natural gas transmission infrastructures, through the acquisition of natural gas assets held by F... SGPS, SA and the execution of a concession contract with the Portuguese State for a period of 40 years for the conduct of regulated activities in the natural gas sector, including transport, storage and reception;

– The separation of electricity activity from natural gas activity led to the establishment in 2006 of the company G..., SA, which saw, in 2007, its share capital increased through the transfer of assets and liabilities associated with the concession for exploitation of the electricity transmission network;

– The transfer of assets from "D..." to C..., S.A. and from this to then G... was carried out without any alteration in accounting and tax value, being its value that which resulted from the evaluation made within "D..." by independent entities, in the context of the reprivatization process to which it was subject;

  1. Following the realities described, the claimant concludes that, as the revaluations (positive and negative) were not considered fiscally relevant in the sphere of "D...", and taking into account that part of the assets that underwent the same were, following various legal instruments, transferred to C..., the respective tax treatment should be assessed and justified the requested adjustment, concerning the decrease in depreciation resulting from devaluations that occurred as a result of revaluations carried out under fiscal legislation;

  2. For this purpose, the claimant makes the tax treatment which in its view is adjustable to the situation at hand and completes the request with the specification of the composition and calculation of the overall value it wishes to see fiscally recognized for the tax period 2010 (€ 5,429,494.96), and which in its view should correspond, roughly, to the algebraic sum of the following adjustments:

• Adjustment derived from depreciation that ceased to be practiced as a result of negative revaluations, corresponding to:

• An adjustment, pursuant to no. 4 of Article 35 of the IRC Code, corresponding to the difference between the depreciation that would have been practiced on the acquisition value of the assets and that which was actually practiced in the 2010 tax year incident on the depreciated value as a result of the revaluation, resulting in a decrease to the taxable profit of the company "C..., SA", in the amount of € 2,154,567.63;

• An adjustment aimed at the fiscal recognition of amounts that could not be recovered until the 2009 tax year, inclusive, due to the fact that the fiscal regime in force until that date did not permit the recovery of the impairment loss recognized in previous tax years, resulting in a decrease to the taxable profit of the company "C..., SA", in the amount of € 4,136,754.37;

• Increase to the taxable profit of the company "C..., SA", in the amount of € 861,827.04, in order, following the two previous adjustments, to rectify the correction made to the net result of the tax year relating to the non-acceptance for tax purposes of 40% of the increase in write-backs resulting from the revaluation, which is influenced by the decrease in depreciation associated with the asset elements whose legal revaluations resulted in a reduction of their value.

§ III. OF PROCEDURAL REQUIREMENTS

  1. Upon examination of these records, it is found that:

• The Claimant has tax personality and capacity, pursuant to the provisions of Articles 15 and 16 of the General Tax Code, as well as Article 3 of the Code of Tax and Procedural Process (CPPT), combined with the provisions of Article 5 of the Code of Commercial Companies.

• Since it is a "taxpayer of high economic and fiscal relevance", within the meaning of Article 68-B of the LGT, jurisdiction for the purpose of giving judgment on this official revision request lies with the Director of this Large Taxpayers Unit;

• The Claimant is an interested party in the procedure, having standing to file it, pursuant to Article 18 of the LGT and no. 1 of Article 9 of the CPPT;

• This administrative proceeding is presented pursuant to nos. 1 and 2 of Article 78 of the LGT;

• The request embodying the official revision request of the self-assessed tax act for the tax period 2010 was filed on 31 December 2013;

• The assessment no. ... from the self-assessment made by the claimant was issued on 04/07/2011;

• The periodic tax return declaration, model 22, relating to the self-assessed IRC for 2010 was filed on 31-05-2011.

§ IV. OF ADMISSIBILITY OF REVISION OF THE TAX ACT

  1. The examination of the merits of this request is dependent on assessing the validity of the legal means used by the Claimant to have reflected for tax purposes in the tax period 2010 losses of value that occurred in fixed assets, resulting from revaluation operations carried out by the company "D...", from which the Group "E..." was born and subsequently Group B..., whose autonomization dated 2000 was the result, as already mentioned, of Decree-Law no. 198/2000, of 24 August.

  2. In fact,

  3. As previously stated, the Claimant intends to have fiscally recognized for the tax period 2010 an impairment resulting from the decrease in depreciation relating to assets whose values were reduced as a result of the evaluation carried out by the then "D...", under Law no. 36/91, of 27 July and Decree-Law no. 22/92, of 14 February, in the context of the reprivatization process to which it was subject.

  4. As expressed in the petition, the Claimant considers that the revaluation of assets in the context of the reprivatization process of Group E..., which resulted in a reduction of its recorded value, constitutes an impairment loss, which was not considered fiscally relevant at the moment it was recognized in the sphere of D...

  5. And, this, by understanding that, pursuant to no. 2 of Article 10 of Regulatory Decree no. 2/90, of 12 January, in force at the date the revaluation was promoted (1994), only exceptional devaluations "caused by disasters, natural phenomena and exceptionally rapid technical innovations" were fiscally relevant, a situation that, not being the case at hand, did not permit, at the date of the facts, the request for tax deductibility, thus justifying, pursuant to no. 4 of Article 35 of the IRC Code, in the wording given by Decree-Law no. 159/2009, that the impairment loss recognized in the 1994 tax year be accepted fiscally, in equal parts, during the remaining useful life period of the assets that gave rise to it.

  6. Now,

  7. It is important to make clear here that the issue concerning the possibility of amounts recorded relating to fixed assets being higher than their actual value already had relevance within the scope of the accounting rules that preceded the entry into force of the System of Normalization Accounting (SNC).

  8. The Official Chart of Accounts (POC) in Chapter 5 devoted to "Criteria of Valuation" recommended in point 5.4.4 regarding exceptional devaluations of elements of the asset designated as tangible and intangible fixed assets that:

"When, as of the balance sheet date, elements of tangible and intangible fixed assets, whether or not their useful life is limited, have a value lower than that recorded in the accounts, they should be subject to amortization corresponding to the difference if it is expected that the reduction of that value will be permanent. That extraordinary amortization should not be maintained if the reasons that gave rise to it cease to exist".

  1. For its part, in Chapter 8, concerning the Annex to the Balance Sheet and Statement of Income, in note 3, it required the disclosure in this document of the valuation criteria used regarding the various items of the balance sheet and income statement, as well as the calculation methods concerning adjustments in value, namely amortization and provisions, highlighting in note 10 the types of schedules showing the movements that occurred in the items of fixed assets contained in the balance sheet and in their respective amortization and adjustments.

  2. As for the tax treatment of exceptional devaluations, their recognition as a cost was made dependent on its acceptance as such by the General Directorate of Taxes through properly substantiated submission, as provided for in Article 28 and nos. 3 and 5 of Article 29 of the IRC Code, as well as Article 10 of Regulatory Decree no. 2/90, of 12 January, which specifically implemented, namely, the deadlines for this purpose.

• Article 28 of the IRC Code provided that the following were "accepted as costs: the write-backs and amortization of elements of the asset subject to depreciation, being considered as such the elements of fixed assets that, on a recurring basis, suffered losses of value resulting from their use, the passage of time, technical progress or any other causes..."

• No. 3 of Article 29 of the same act established that "Different methods of write-back and amortization from those indicated in the previous numbers may also be used when the nature of the depreciation or the economic activity of the company justifies it, after prior recognition by the General Directorate of Taxes"

• In paragraph b) of no. 5 of the same article it was stipulated the possibility of being considered "(...) as costs quotas of write-back or amortization higher due to the occurrence of exceptional devaluations from abnormal causes duly proven, accepted by the General Directorate of Taxes"

• According to Article 10 of Regulatory Decree no. 2/90, the tax regime defined for devaluations of elements of fixed assets applied, in particular, to exceptional devaluations caused by disasters, natural phenomena and exceptionally rapid technical innovations, the taxpayer having to "(...) obtain the acceptance of the General Directorate of Taxes through properly substantiated submission by the end of the first month following the month of the occurrence of the fact that determined the exceptional devaluation, except in cases duly justified, and as such recognized by order of the Minister of Finance, in which that submission may be delivered by the end of the first month following the end of the tax period in which the exceptional devaluations occurred".

  1. Thus, contrary to what was stated by the Claimant, it is concluded that until the end of 2009, losses derived from devaluations that occurred in tangible fixed assets had due treatment both at the accounting level and from the fiscal point of view, so their analysis should always have been raised in the proper forum and at the proper time.

  2. That is,

  3. The matter of devaluations of assets was, at the date of the facts, duly regulated both under the POC and under the IRC Code and Regulatory Decree no. 2/90, of 12 January, to which Decree-Law no. 22/92 of 14 February itself referred, which established the fiscal character revaluation in question.

  4. It does not appear from the record that "C..." or the companies from which it originated ever requested, at any time, under the provisions then in force, any authorization from the Tax Administration regarding the application of the effects of the permitted revaluation of assets.

  5. In light of the legal framework cited above, we therefore understand that the fiscal deduction of devaluations of assets caused by the revaluation performed should have been requested from the Tax Administration at the proper time.

  6. It cannot, therefore, be accepted that the claimant, through the revision request, provided for in Article 78 of the LGT and on the grounds of error attributable to the services, taking advantage of the four-year period for this purpose, seeks the tax deductibility of losses resulting from the devaluation of elements of fixed assets that occurred in the sphere of "D..." as a result of the privatization process to which it was subject.

  7. The use of official revision cannot prejudice the specificities of the tax with respect to the provision of mechanisms specific to validation by the Administration of losses of value of fixed assets requested by taxpayers.

  8. Official revision cannot be admitted under penalty of the rules governing the regime for amortization and write-backs being deprived of any efficacy.

  9. In no way can the Tax Administration be assigned the obligation to proceed with the revision of the tax act, upon request of the taxpayer, presented within the period of 4 years after assessment, on the grounds of error attributable to the services, considering as such, for this purpose, the error in the self-assessment.

  10. In the self-assessed tax act of 2010, no error was committed that would justify its revision, and much less an error attributable to the services.

  11. Given the contours of the case at hand, which were duly explained above, the official revision requested is not the appropriate means.

  12. And, even if it were understood otherwise, the possibility of using no. 1 of Article 78 of the LGT insofar as it provides for official revision of the tax act within a period of four years on grounds of error attributable to the services was perfectly barred.

  13. There is no, in the failure to timely present the request for authorization for fiscal consideration of losses resulting from devaluations, the occurrence of an error attributable to the services that can legally support the revision.

  14. In the present records we are faced with the improper use of official revision as an administrative means of fiscal recognition of devaluations that occurred in a set of tangible fixed assets.

  15. The official revision request referred to in Article 78 of the LGT is not the proper administrative means for the request for fiscal consideration of losses resulting from devaluations that occurred in a set of assets.

  16. Given all that has been said, we understand that this official revision request should be rejected.

§ V. OF CONCLUSION

Having analyzed the due legal requirements, we, in the terms explained, understand that the revision request should be rejected at first instance, proceeding, as a consequence, to its filing, of which the Contributor, now Claimant, shall be notified, through official correspondence to be sent by registered mail, pursuant to the provisions of Articles 35 to 41 of the CPPT, with no place here for the faculty established in the norm inserted in Article 60 of the LGT, as, conversely, is inferred from no. 1 of Article 100 of the Code of Administrative Procedure.

m) On 26-05-2014, the Director of the Large Taxpayers Unit issued the order that appears at p. 193 of the administrative file ("PA24.pdf"), in which he states the following:

  1. I agree with the conclusions of the information, whereby I dismiss the administrative appeal.

  2. Notify the taxpayer.

n) Following the reprivatization process, H... E.P. was transformed into a joint-stock company with exclusively public capital, with the name C..., S. A. (hereinafter "C...") and its assets distributed to various companies, including the Claimant;

o) In 1994, C... carried out a revaluation of its assets pursuant to Article 8 of Decree-Law no. 7/91, of 8 January, for purposes of separate accounting for a spin-off to create C..., SA, pursuant to Decree-Law no. 131/94, of 19 May (document no. 4 attached with the arbitral petition, the content of which is reproduced herein and Official Journal, III series of 30-11-1994, reproduced in document no. 9);

p) Between downward revaluations (negative) and upward revaluations (positive), there was generated a net increase in the recorded value of revalued assets of 31,666,263,000$00 (Document no. 4 attached with the arbitral petition, the content of which is reproduced herein);

q) With regard to assets for which the revaluation determined values lower than their acquisition cost net of accounting and tax amortization already made, an extraordinary amortization was recorded (Article 21 of the arbitral petition, whose correspondence to reality is not disputed);

r) The result of said revaluations was not taken into account in determining the taxable profit of D... for the year 1994 (Document no. 10 attached with the arbitral petition, the content of which is reproduced herein);

s) These revaluations were carried out by entities chosen from among those previously qualified by the Ministry of Finance, were subject to the approval of the Minister of Finance and had a fiscal character pursuant to Article 4 of Decree-Law no. 36/91, of 27 July, and Decree-Law no. 22/92, of 14 February;

t) The criteria used in these revaluations were those recommended at the time by Accounting Directive no. 13 (documents nos. 11 and 12 attached with the arbitral petition, the contents of which are reproduced herein);

u) The spin-off that operated in 1994 the transfer of the assets that are here in question from D... to C..., S.A., was subject to the tax neutrality regime;

v) This patrimonial assets transferred to C... S.A. corresponded to the assets relating to J... referred to in Decree-Law no. 99/91, of 2 March;

w) In 2006, it was determined that C..., S.A. would have as its sole object the management of equity investments and would adopt the name A..., SGPS, S. A. (the Claimant), proceeding to the establishment of G... S.A., which subsequently became known as C..., S.A. (documents nos. 15, 16 and 18 attached with the arbitral petition, the contents of which are reproduced herein and Resolution of the Council of Ministers no. .../2006, published in the Official Journal of 30-06-2006);

x) In early 2007, the transfer of the assets here in question occurred, now from A... SGPS to C... S.A.: the first became a SGPS on that date (point 5 of RCM no. .../2006), and was emptied of all its operational assets, including the J... assets, transferred to the newly created C... S.A. (see point 3, paragraph c), of RCM .../2006);

y) This second and final transfer of the assets here in question was subject to the tax neutrality regime of "entry of assets" (deed of increase of capital – entry of assets – which is contained in Document no. 18 attached with the arbitral petition, the content of which is reproduced herein);

z) The assets here in question – tangible fixed assets that underwent negative revaluations – are today with C... S.A. following two transfers subject to the tax neutrality regime, and the extraordinary amortizations (devaluations) on them recorded as a consequence of the revaluations of 1994 were not directly recognized for tax purposes, being so only indirectly as to 40% of a portion (Documents nos. 19 and 20 attached with the arbitral petition, the contents of which are reproduced herein, and Article 43 of the arbitral petition);

aa) On 23-05-2014, the Claimant filed the request for constitution of the arbitral tribunal that gave rise to this case.

2.2. Unproven Facts

There are no facts relevant to the resolution of the case that have not been proven.

2.3. Substantiation of the Decision on Factual Matter

The decision on factual matter is based on documents attached with the arbitral petition and with the official revision request contained in the administrative file, documents whose correspondence to reality is not disputed by the Tax Authority and Customs Authority.

3. LEGAL MATTER

3.1. Issue of Material Incompetence of the Arbitral Tribunal Arising from the Circumstance that the Arbitral Petition was Formulated Following Dismissal of an Official Revision Request

The jurisdiction of the arbitral tribunals functioning in CAAD is, in the first place, limited to the matters indicated in Art. 2, no. 1, of Decree-Law no. 10/2011, of 20 January (RJAT).

In a second aspect, the jurisdiction of the arbitral tribunals functioning in CAAD is also limited by the terms by which the Tax Administration was bound to that jurisdiction by Ordinance no. 112-A/2011, of 22 March, since Art. 4 of the RJAT provides that "the binding of the tax administration to the jurisdiction of the tribunals constituted pursuant to this law depends on an ordinance of the members of the Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

In light of this second limitation on the jurisdiction of the arbitral tribunals functioning in CAAD, the resolution of the jurisdictional issue essentially depends on the terms of this binding, because, even if one is faced with a situation that fits within that Art. 2 of the RJAT, if it is not covered by the binding, the possibility for the dispute to be jurisdictionally decided by this Arbitral Tribunal is excluded.

In paragraph a) of Art. 2 of this Ordinance no. 112-A/2011, expressly excluded from the scope of the binding of the Tax Administration to the jurisdiction of the arbitral tribunals functioning in CAAD are "claims relating to the declaration of illegality of self-assessed acts, withholding tax acts and payment on account acts that have not been preceded by recourse to the administrative remedy pursuant to Articles 131 to 133 of the Code of Tax and Procedural Process".

The express reference to the prior "recourse to the administrative remedy pursuant to Articles 131 to 133 of the Code of Tax and Procedural Process" should be interpreted as referring to cases where such recourse is mandatory, through an administrative appeal, which is the administrative remedy indicated in those Arts. 131 to 133 of the CPPT, to the terms of which reference is made. In fact, it would not be understood, in the first place, that, if administrative impugnation prior to challenge were not necessary "when its ground is exclusively a matter of law and the self-assessment has been carried out in accordance with generic guidelines issued by the tax administration" (Art. 131, no. 3, of the CPPT, applicable to withholding tax cases, by virtue of the provision in no. 6 of Art. 132 of the same Code), that arbitral jurisdiction be excluded because that administrative impugnation, which is understood to be unnecessary, was not made.

In the case at hand, the annulment of the IRC self-assessed act relating to the 2010 tax year is requested, as well as the annulment of the act of dismissal of the official revision requests.

Thus, it is important, first and foremost, to clarify whether the declaration of illegality of acts of dismissal of official revision requests of tax acts, provided for in Art. 78 of the LGT, are included in the competencies attributed to the arbitral tribunals functioning in CAAD by Art. 2 of the RJAT.

In fact, in this Art. 2, there is no express reference to these acts, contrary to what occurs with the legislative authorization on which the Government based itself to approve the RJAT, which refers to "requests for revision of tax acts" and "administrative acts that entail the appraisal of the legality of assessment acts".

However, the formula "declaration of illegality of assessment acts, self-assessed acts, withholding tax acts and payment on account acts", used in paragraph a) of no. 1 of Art. 2 of the RJAT does not restrict, in a mere declaratory interpretation, the scope of arbitral jurisdiction to cases in which an act of one of those types is directly challenged. In fact, the illegality of assessment acts can be declaratorily stated jurisdictionally as a corollary of the illegality of a second-instance act, which confirms an assessment act, incorporating its illegality.

The inclusion in the competencies of the arbitral tribunals functioning in CAAD of cases in which the declaration of illegality of the acts indicated there is made through the declaration of illegality of second-instance acts, which are the immediate object of the impugnatory claim, results with certainty from the reference that in that norm is made to self-assessed acts, withholding tax acts and payment on account acts, which are expressly mentioned as included among the competencies of the arbitral tribunals. Indeed, regarding these acts, as a rule, the necessary administrative appeal is imposed, in Arts. 131 to 133 of the CPPT, so that, in these cases, the immediate object of the impugnatory proceeding is, as a rule, the second-instance act that appraises the legality of the assessment act, an act which, if it confirms it, must be annulled to obtain the declaration of illegality of the assessment act. The reference made in paragraph a) of no. 1 of Art. 10 of the RJAT to no. 2 of Art. 102 of the CPPT, in which the challenge of acts of dismissal of administrative appeals is provided for, removes any doubts that the competencies of the arbitral tribunals functioning in CAAD cover cases in which the declaration of illegality of the acts referred to in paragraph a) of that Art. 2 of the RJAT must be obtained following the declaration of the illegality of second-instance acts.

Moreover, it was precisely in this sense that the Government, in Ordinance no. 112-A/2011, of 22 March, interpreted these competencies of the arbitral tribunals functioning in CAAD, by excluding from the scope of these competencies "claims relating to the declaration of illegality of self-assessed acts, withholding tax acts and payment on account acts that have not been preceded by recourse to the administrative remedy pursuant to Articles 131 to 133 of the Code of Tax and Procedural Process", which has the scope of restricting its binding to cases where that recourse to the administrative remedy was used.

Having concluded that the formula used in paragraph a) of no. 1 of Art. 2 of the RJAT does not exclude cases in which the declaration of illegality results from the illegality of a second-instance act, it will also include cases in which the second-instance act is that of dismissal of a request for revision of the tax act, since there is no reason to restrict, especially since, in cases where the revision request is made within the period for administrative appeal, it must be equated to an administrative appeal. [1]

The express reference to Article 131 of the CPPT made in Article 2 of Ordinance no. 112-A/2011 cannot have the decisive scope of excluding the possibility of appraisal of requests for illegality of acts of dismissal of official revision requests of self-assessed acts.

Indeed, the interpretation exclusively based on the literal tenor that the Tax Authority and Customs Authority defends in this proceeding cannot be accepted, because in the interpretation of tax rules the general rules and principles of interpretation and application of laws are observed (Article 11, no. 1, of the LGT) and Article 9, no. 1, expressly prohibits interpretations exclusively based on the literal tenor of the rules, by stating that "interpretation must not be confined to the letter of the law", and must instead "reconstitute from the texts the legislative intent, taking especially into account the unity of the legal system, the circumstances in which the law was drafted and the specific conditions of the time in which it is applied".

As to the correspondence between interpretation and the letter of the law, only "a minimum of verbal correspondence, even if imperfectly expressed" is required (Article 9, no. 3, of the Civil Code) which will only prevent the adoption of interpretations that cannot in any way be reconciled with the letter of the law, even recognizing in it imperfection in the expression of the legislative intent.

Therefore, the letter of the law is not an obstacle to making declaratory interpretation, which clarifies the scope of the literal tenor, or even extensive interpretation, when it can be concluded that the legislator said less than what, in coherence, it would intend to say, that is, when it said imperfectly what it intended to say. In extensive interpretation "it is the valorization of the norm itself (its "spirit") that leads to the discovery of the need to extend the text of this to the hypothesis that it does not cover", "the expansive force of the valorization itself is capable of leading the disposition of the norm to cover hypotheses of the same type not covered by the text". [2]

Extensive interpretation, thus, is imposed by the evaluative and axiological coherence of the legal system, erected by Article 9, no. 1, of the Civil Code as a primordial interpretive criterion through the imposition of observance of the principle of unity of the legal system.

It is manifest that the scope of the requirement of prior administrative appeal, necessary to open the contentious avenue of challenging self-assessed acts, provided for in no. 1 of Article 131 of the CPPT, has as its sole justification the fact that, regarding that type of act, there does not exist a position taken by the Tax Administration on the legality of the legal situation created with the act, a position that may even come to be favorable to the taxpayer, avoiding the need to resort to the contentious avenue.

Indeed, apart from not seeing any other justification for this requirement, the fact that an identical necessary administrative appeal is provided for the contentious challenge of withholding tax acts and payment on account acts (in Articles 132, no. 3, and 133, no. 2, of the CPPT), which have in common with self-assessed acts the circumstance that there does not exist a position taken by the Tax Administration on the legality of the acts, confirms that this is the reason for that necessary administrative appeal.

Another unequivocal confirmation that this is the reason for the requirement of necessary administrative appeal is found in no. 3, of Article 131 of the CPPT, by establishing that "without prejudice to the provisions of the previous numbers, when its ground is exclusively a matter of law and the self-assessment has been carried out in accordance with generic guidelines issued by the tax administration, the deadline for challenging does not depend on prior appeal, the challenge being presented within the deadline of no. 1 of Article 102". Indeed, in situations of this type, there was a prior generic pronouncement by the Tax Administration on the legality of the legal situation created with the self-assessed act, and it is this fact that explains why the necessary administrative appeal ceases to be required.

Now, in cases where an official revision request of a tax assessment act is formulated, the Tax Administration is provided with, through this request, an opportunity to pronounce on the merits of the taxpayer's claim before the latter resorts to the jurisdictional avenue, so that, in coherence with the solutions adopted in nos. 1 and 3 of Article 131 of the CPPT, it cannot be required that, cumulatively with the possibility of administrative appraisal within the scope of that official revision procedure, a new administrative appraisal through administrative appeal be required. [3]

On the other hand, it is unequivocal that the legislator did not intend to prevent taxpayers from formulating official revision requests in the case of self-assessed acts, since these are expressly referred to in no. 2 of Article 78 of the LGT.

In this context, the law permitting taxpayers to opt for administrative appeal or for official revision of self-assessed acts, and the official revision request being formulated within the period for administrative appeal being perfectly equivalent to an administrative appeal, as mentioned, there can be no reason that can explain that arbitral avenue cannot be accessed by a taxpayer who has chosen revision of the tax act instead of administrative appeal.

Therefore, it must be concluded that the members of the Government who issued Ordinance no. 112-A/2011, in making reference to Article 131 of the CPPT regarding requests for declaration of illegality of self-assessed acts, said imperfectly what they intended, because, intending to impose prior administrative appraisal to the contentious challenge of self-assessed acts, they ended up including a reference to Article 131 that does not exhaust the possibilities for administrative appraisal of those acts.

Moreover, it is to be noted that this interpretation, not confining itself to the literal tenor, is specially justified in the case of paragraph a) of Article 2 of Ordinance no. 112-A/2011, because its imperfections are evident: one is to associate the comprehensive formula "recourse to the administrative remedy" (which references, besides administrative appeal, hierarchical appeal and revision of the tax act) to the "expression pursuant to Articles 131 to 133 of the Code of Tax and Procedural Process", which has potential restrictive scope to administrative appeal; another is to use the formula "preceded" by recourse to the administrative remedy, referring to "claims relating to the declaration of illegality of acts", which, obviously, would cohere much better with the feminine word "preceded".

Therefore, beyond the general prohibition of interpretations limited to the letter of the law contained in Article 9, no. 1, of the Civil Code, in the specific case of paragraph a) of Article 2 of Ordinance no. 112-A/2011, there is a special reason for not justifying great enthusiasm for literal interpretation, which is the fact that the wording of that norm is manifestly defective.

Moreover, as official revision of the tax act ensures the possibility of appraisal of the taxpayer's claim before access to the contentious avenue that is intended to be achieved with the necessary administrative impugnation, the most correct solution, because it is most coherent with the legislative intention of "strengthening effective and efficient protection of the rights and legally protected interests of taxpayers" manifested in no. 2 of Article 124 of Law no. 3-B/2010, of 28 April, is the admissibility of the arbitral avenue for appraisal of the legality of assessment acts previously appraised in a revision procedure.

And, because it is the most correct solution, it must be presumed to have been normatively adopted (Article 9, no. 3, of the Civil Code).

On the other hand, containing that paragraph a) of Article 2 of Ordinance no. 112-A/2011 an imperfect formula, but which contains a comprehensive expression "recourse to the administrative remedy", which potentially also references official revision of the tax act, one finds in the text the minimum of verbal correspondence, although imperfectly expressed, required by that no. 3 of Article 9 for the viability of adopting the interpretation that enshrines the most correct solution.

It is to be concluded, thus, that Article 2, paragraph a) of Ordinance no. 112-A/2011, properly interpreted on the basis of the criteria for interpretation of law provided for in Article 9 of the Civil Code and applicable to substantive and procedural tax norms, by virtue of the provision in Article 11, no. 1, of the LGT, enables the presentation of requests for arbitral pronouncement regarding self-assessed acts that have been preceded by a request for official revision.

3.2. Issue of Material Incompetence Arising from the Circumstance that the Decision on Official Revision Dismissed the Request at the Threshold

In Art. 2 of the RJAT, in which the "Jurisdiction of arbitral tribunals" is defined, it is not expressly included the appraisal of claims for declaration of illegality of acts of dismissal of official revision requests of tax acts, since, in the wording introduced by Law no. 64-B/2011, of 30 December, only the jurisdiction of arbitral tribunals for "the declaration of illegality of assessment acts, self-assessed acts, withholding tax acts and payment on account acts" and "the declaration of illegality of acts of determination of taxable matter when it does not give rise to assessment of any tax, acts of determination of taxable base matter and acts of setting patrimonial values" is indicated.

However, the fact that paragraph a) of no. 1 of Art. 10 of the RJAT makes reference to nos. 1 and 2 of Art. 102 of the CPPT, in which the various types of acts that give rise to the deadline for judicial challenge are indicated, including administrative appeal, allows one to understand that all types of acts that may be challenged through judicial challenge proceedings, covered by those nos. 1 and 2, will be included within the scope of the jurisdiction of the arbitral tribunals functioning in CAAD, provided they have as their object an act of one of the types indicated in that Art. 2 of the RJAT.

Moreover, this interpretation in the sense of identity of the fields of application of the judicial challenge proceeding and the arbitral proceeding is the one that is in harmony with the aforementioned legislative authorization on which the Government based itself to approve the RJAT, granted by Art. 124 of Law no. 3-B/2010, of 28 April, in which the intention is revealed that the tax arbitral proceeding constitute "an alternative procedural means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest in tax matters" (no. 2).

But, this same argument that is drawn from the legislative authorization leads to the conclusion that the possibility of using the arbitral proceeding will be ruled out when, in the judicial tax proceeding, judicial challenge or action for recognition of a right or legitimate interest cannot be used.

In fact, being this the meaning of the aforementioned legislative authorization law and falling within the relative reserve of legislative competence of the Assembly of the Republic to legislate on the "tax system", including the "guarantees of taxpayers" [Articles 103, no. 2, and 165, no. 1, paragraph i), of the CRP] [4], and on the "organization and jurisdiction of courts" [Article 165, no. 1, paragraph p), of the CRP], the aforementioned Art. 2 of the RJAT, under penalty of unconstitutionality, for lack of coverage in the legislative authorization law that limits the power of the Government (Article 112, no. 2, of the CRP), cannot be interpreted as attributing to the arbitral tribunals functioning in CAAD jurisdiction for the appraisal of the legality of other types of acts, for whose challenge the judicial challenge proceeding and the action for recognition of a right or legitimate interest are not adequate.

Thus, to resolve the issue of jurisdiction of this Arbitral Tribunal, it becomes necessary to determine whether the legality of the act of dismissal of the official revision request could or could not be appraised, in a tax tribunal, through judicial challenge proceeding or action for recognition of a right or legitimate interest.

The act of dismissal of an official revision request of the tax act constitutes an administrative act, in light of the definition provided by Art. 120 of the Administrative Procedure Code [subsidiarily applicable in tax matters, by virtue of the provision in Article 2, paragraph d), of the LGT, Article 2, paragraph d), of the CPPT, and Article 29, no. 1, paragraph d), of the RJAT], since it is a decision of an organ of the Administration that, under public law norms, intended to produce legal effects in an individual and concrete situation.

On the other hand, it is also indisputable that it is an act in tax matters since the application of tax law rules is made in it.

Thus, that act of dismissal of the official revision request constitutes an "administrative act in tax matters".

From paragraphs d) and p) of no. 1 and of no. 2 of Art. 97 of the CPPT it is inferred the rule that the challenge of administrative acts in tax matters is made, in the tax judicial proceeding, through judicial challenge or special administrative action (which succeeded the contentious proceeding, pursuant to Article 191 of the Code of Procedure in Administrative Courts) according to whether or not those acts entail the appraisal of the legality of administrative assessment acts. [5]

Possibly, as an exception to this rule, one could consider cases of challenge of acts of dismissal of administrative appeals, due to the fact that there is a special rule, which is no. 2 of Art. 102 of the CPPT, from which it can be deduced that judicial challenge is always usable. [6] Other exceptions to that rule may be found in special norms, subsequent to the CPPT, which expressly provide for the judicial challenge proceeding as a means to challenge a certain type of act. [7]

But, in cases where there are no special rules, that criterion of division of the fields of application of the judicial challenge proceeding and special administrative action is to be applied.

In light of this criterion for division of the fields of application of the judicial challenge proceeding and special administrative action delineated by paragraphs d) and p) of no. 1 of Article 97 of the CPPT, the acts issued in procedures for official revision of self-assessed acts may only be challenged through judicial challenge proceeding when they entail the appraisal of the legality of these self-assessed acts. If the act of dismissal of the official revision request of self-assessed act does not entail the appraisal of the legality of this, special administrative action will be applicable. This is a criterion for distinguishing the fields of application of the aforementioned procedural means of questionable justification, but the fact is that it is what results from the tenor of paragraphs d) and p) of no. 1 of Article 97 of the CPPT and has been uniformly adopted by the Supreme Administrative Court. [8]

This finding that there is always an adequate procedural challenge means to contentially challenge the act of dismissal of the official revision request of self-assessed act leads, from the outset, to the conclusion that one is not faced with a situation in which in the tax judicial proceeding the action for recognition of a right or legitimate interest could be used, since its application in tax contentious proceedings has a residual nature, inasmuch as these actions "can only be proposed always that this procedural means is the most adequate to ensure full, effective and efficient protection of the right or legally protected interest" (Article 145, no. 3, of the CPPT).

Another conclusion that allows the aforementioned delimitation of the fields of application of the judicial challenge proceeding and special administrative action is that, by restricting the jurisdiction of the arbitral tribunals functioning in CAAD to the field of application of the judicial challenge proceeding, only requests for declaration of illegality of acts of dismissal of official revision requests of self-assessed acts that entail the appraisal of the legality of these acts fall within this jurisdiction.

The legislative concern to exclude from the competencies of the arbitral tribunals functioning in CAAD the appraisal of the legality of administrative acts that do not entail the appraisal of the legality of assessment acts, beyond resulting, from the outset, from the generic directive of creating an alternative means to the judicial challenge proceeding and to the action for recognition of a right or legitimate interest, results clearly from paragraph a) of no. 4 of Article 124 of Law no. 3-B/2010, of 28 April, in which among the possible objects of the tax arbitral proceeding are indicated "the administrative acts that entail the appraisal of the legality of assessment acts", since this specification can only be justified by a legislative intent in the sense of excluding from the possible objects of the arbitral proceeding the appraisal of the legality of acts that do not entail the appraisal of the legality of assessment acts.

Therefore, the solution to the issue of jurisdiction of this Arbitral Tribunal connected with the content of the act of dismissal of the official revision request depends on the analysis of this act.

In the case at hand, the ground invoked for the dismissal of the official revision was the understanding that there are "specificities of the tax with respect to the provision of mechanisms specific to validation by the Administration of losses of value of fixed assets requested by taxpayers", so "official revision cannot be admitted under penalty of the rules governing the regime for amortization and write-backs being deprived of any efficacy" (points 25 and 26 of the Information) on which the order of dismissal of the official revision request is based, reproduced in the factual matter fixed).

And, substantiating such conclusion on the inadmissibility of the official revision request, that Information states:

  1. In light of the legal framework cited above, we therefore understand that the fiscal deduction of devaluations of assets caused by the performed revaluation should have been requested from the Tax Administration at the proper time.

  2. It cannot, therefore, be accepted that the claimant, through the revision request, provided for in Article 78 of the LGT and on the grounds of error attributable to the services, taking advantage of the four-year period for this purpose, seeks the tax deductibility of losses resulting from the devaluation of elements of fixed assets that occurred in the sphere of "D..." as a result of the privatization process to which it was subject.

(...)

  1. In no way can the Tax Administration be assigned the obligation to proceed with the revision of the tax act, upon request of the taxpayer, presented within the period of 4 years after assessment, on the grounds of error attributable to the services, considering as such, for this purpose, the error in the self-assessment.

  2. In the self-assessed tax act of 2010, no error was committed that would justify its revision, and much less an error attributable to the services.

It is manifest that there is here an appraisal of the legality of the self-assessment, understanding that it does not suffer from any error attributable to the services, because the fiscal deduction of devaluations of assets caused by the performed revaluation should have occurred at a moment prior to the year 2010.

In light of the criterion for division of the fields of the judicial challenge proceeding and special administrative action delineated by paragraphs d) and p) of no. 1 of Article 97 of the CPPT, it is not necessary that a judgment on the legality of an assessment act be the ground of the procedural decision or that in the claim formulated the appraisal of the legality of an assessment act be requested, it being sufficient that that act that decides the procedure entails that appraisal, which, in this context, means that in the decisory act there is included a judgment on the legality of an assessment act, even if it is not its legality or illegality that is the ground of the decision.

Now, in the case at hand, beyond the indication of the regime for revaluation of fixed assets that is exposed in the Information embodying a definition of which is the "legality" applicable, there is in the decision of dismissal of the official revision request an express judgment on the legality of the 2010 IRC self-assessment, understanding that in it "no error was committed that would justify its revision, and much less an error attributable to the services". [9]

Therefore, not requiring the expression "entail the appraisal of the legality of the assessment act", used in paragraph d) of no. 1 of Article 97 of the CPPT, that such appraisal be the ground of the decision, should it be understood that one is faced with an act falling within that norm for whose challenge in tax courts the judicial challenge proceeding would be adequate.

Being so, one cannot conclude that this Arbitral Tribunal is incompetent, so the exception raised by the Tax Authority and Customs Authority is without merit.

4. Issue of Fiscal Relevance in 2010 of the Portion of Impairments Attributable According to the New Fiscal Rule on Impairments (Which Entered into Force in 2010) to the 2010 Tax Year

4.1. Essential Facts and Positions of the Parties

Within the context of the privatization process of public company H..., E.P., D..., S.A. was created (Decree-Law no. 7/91, of 8 January).

Part of its assets were separated for the creation of C..., S.A., pursuant to Decree-Law no. 131/94, of 19 May, which, in 2006, became to have as its sole object the management of equity investments and adopted the name A..., SGPS, S. A. (the Claimant), proceeding to the establishment of G..., S.A., which subsequently became known as C..., S.A. (Resolution of the Council of Ministers no. .../2006, of 30 June).

As mentioned in the factual matter established, all transfers of assets were made under the tax neutrality regime.

Law no. 36/91, of 27 July, established, in its Article 4, that "companies subject to privatization may consider the value of elements of fixed assets resulting from evaluations elaborated by entities qualified for purposes of privatization processes as valid for purposes of the provision of paragraph b) of no. 1 of Article 29 of the IRC Code, having heard the respective control authorities, in the case of financial institutions".

Decree-Law no. 22/92, of 14 February, came to regulate the terms of revaluations of elements of its tangible fixed assets in service of the company at the date to which the revaluation relates and existing at the date on which it is carried out.

In 1994, there occurred negative revaluations of tangible fixed assets of the initial D... that are now in the patrimony of C... S.A., which is part of the group of which the Claimant is the parent company.

The extraordinary amortizations (devaluations) recorded following the 1994 revaluations were not directly recognized for tax purposes, being so only indirectly as to 40% of a portion.

The Claimant contends, in summary, that the IRC regime in force before 2010, the year in which the amendments introduced by Decree-Law no. 159/2009, of 13 July, came into force, did not allow it to fiscally deduct the extraordinary amortizations derived from the devaluations resulting from the revaluation of assets carried out in 1994 by the companies that preceded it, in the context of the privatization process of D..., that have not yet been fiscally recognized.

With the entry into force of the amendments to the CIRC introduced by Decree-Law no. 159/2009, of 13 July, the Claimant understands that the regime of no. 4 of Article 35 should have been applied to those devaluations, in relation to the 2010 tax year, in the wording of the CIRC introduced by that act, which establishes that:

Impairment losses on depreciable or amortizable assets that are not accepted fiscally as exceptional devaluations are considered as expenses, in equal parts, during the remaining useful life period of that asset or, without prejudice to the provisions of Articles 38 and 46, until the tax period prior to that in which the transfer, physical write-off, abandonment, dismantling or non-use of the same shall occur.

The Tax Authority and Customs Authority, in appraising the official revision request of the self-assessment made by the Claimant relating to the year 2010, understood, in summary:

– that "contrary to what was stated by the Claimant, it is concluded that until the end of 2009, losses derived from devaluations that occurred in tangible fixed assets had due treatment both at the accounting level and from the fiscal point of view, so their analysis should always have been raised in the proper forum and at the proper time";

– that "in the self-assessed tax act of 2010, no error was committed that would justify its revision, and much less an error attributable to the services";

– "given the contours of the case at hand, which were duly explained above, the official revision requested is not the appropriate means";

– "and, even if it were understood otherwise, the possibility of using no. 1 of Article 78 of the LGT insofar as it provides for official revision of the tax act within a period of four years on grounds of error attributable to the services was perfectly barred";

– "there is no, in the failure to timely present the request for authorization for fiscal consideration of losses resulting from devaluations, the occurrence of an error attributable to the services that can legally support the revision".

4.2. Issue of Application of Article 78 of the LGT

Regarding the impropriety of the official revision procedure, invoked in the Information on which the order of dismissal of the official revision request is based, the Tax Authority and Customs Authority is not correct, because if there is an error in the self-assessment, the situation fits perfectly within the scope of Article 78, no. 1 of the LGT, insofar as it allows revision "within four years after assessment or at any time if the tax has not yet been paid, on grounds of error attributable to the services".

Indeed, the request was presented within the four-year period from the self-assessment and, by virtue of the provision in no. 2 of the same article, "error in the self-assessment is considered attributable to the services for purposes of the previous number".

Therefore, it is manifest that official revision requests of self-assessments may be formulated and that their errors are considered, for these purposes of possibility of revision, as attributable to the services.

Thus, this invoked ground of dismissal does not proceed.

4.3. Regime of Write-backs and Amortization in Force Between 1994 and 2010

The goods that constitute tangible fixed assets (tangible fixed assets, in the terminology of the System of Normalization Accounting) have a durable character, and it is expected that they can be used under conditions of economic operation during a certain period of time, which is their useful life or economic life. In determining this period, account must be taken of the period of time during which the asset element is in normal operating conditions, but still the loss of value resulting from technological innovations or obsolescence. These are the determining reasons for an economic life, in general, shorter than physical life. [10]

"In any case, fixed assets are not "consumed" in a single economic period, but rather, in principle, in the number of years provided for their economic life. In this way, it does not seem reasonable to impute the total cost to the period in which their acquisition is made. On the other hand, as it continues to be "used" its utility diminishes, until theoretically reaching a utility (value) of zero. In summary, as the goods are used in successive periods they depreciate, that is, they lose value".

The accounting operation that simultaneously aims at the imputation of the cost of the use of fixed assets by various economic periods and the updating (depreciation) of these same goods is called depreciation or amortization". [11]

For tax purposes, the CIRC established the rule that "the write-backs and amortization of elements of the asset subject to depreciation are accepted as costs, being considered as such the elements of fixed assets that, on a recurring basis, suffered losses of value resulting from their use, the passage of time, technical progress or any other causes" (Article 27, no. 1, in the initial wording, to which corresponds Article 28 in the wording of Decree-Law no. 198/2001, of 3 July, and Article 29 in the wording of Decree-Law no. 159/2009, of 13 July).

However, the concept of useful economic life that accounting, conscious of its limitations, only estimates, even requiring its annual revision [12], does not have the same relevance in tax law, since, taking into account the interests specific to taxation - namely the stability of tax revenue - the period of life is set (or presumed) by the IRC Code based on the amortization rates defined in the regulatory decree on amortization (Article 28, nos. 1 and 4, of the CIRC in the initial wording, to which corresponds Article 29 in the wording of Decree-Law no. 198/2001 and Article 30, in the wording of Decree-Law no. 159/2009), whereby there is an (almost) indifference of taxation in relation to the effective economic depreciation of an asset.

In fact, for tax purposes, the depreciation of assets resulting from their use or merely from the "temporal aging of investments" [13], as long as they have entered into operation or use, is set fiscally between a minimum period of useful life (which, between 1994 and 2009, resulted from the rates provided for in Regulatory Decree no. 2/90, of 12 January) and a maximum period of life (which results from half the rates provided for in the same Regulatory Decree) and had the following consequences:

  • annual amortizations higher than the maximum provided for in the tables attached to the regulatory decree (those resulting from the minimum legal period of life) are not accepted;

  • amortizations lower than the minimum (those resulting from the maximum legal period of life) are not recoverable (Article 28, no. 5, of the CIRC in the initial wording, to which corresponds Article 29 in the wording of 2001 and Article 30 in the wording of 2009).

But, the rule that is drawn from the CIRC, set aside in some special cases, is that all losses of value of goods of fixed assets (tangible fixed assets in current terminology) are fiscally relevant, which, moreover, is a corollary of the constitutional principle that taxation of companies is fundamentally based on their actual income (Article 104, no. 2, of the CRP).

Therefore, what is at issue, as a rule, in matters of write-backs and amortization, for tax purposes, is not whether the value of goods can be relevant as a cost (today an expense), but rather which part of their value should be relevant as such in each of the tax years.

This conclusion finds explicit support in Article 21 of Regulatory Decree no. 2/90, of 12 January, which establishes the "regime of regularization of write-backs and amortization subject to taxation" by saying that "write-backs and amortization that are not considered as costs or losses of the tax year in which they were recorded because they exceeded the maximum amounts allowed may be taken as costs or losses of following tax years, with observance of the other provisions of this regulatory decree, provided that the proper accounting regularization is made".

Until 2010, excess amortizations, i.e. amortizations of the tax year higher than the maximum could result from two distinct origins:

  • adoption of useful lives lower than the minimum period defined in law;

  • exceptional amortizations, which correspond to the sum of the amortization quota of the period with the value corresponding to a lasting loss in the value of the asset in question, a concept which we now designate as impairment and which, since the adoption of SNC/IFRS, has had a distinct accounting treatment).

Thus, depreciations that exceeded the maximum quotas provided for in the IRC code were not fully accepted and the excess had to be increased for purposes of determining taxable income.

But, this difference between taxable income and accounting income resulted only in a temporary tax loss, since the amount not accepted fiscally could be deducted for purposes of determining taxable income in the following tax years, in harmony with the provision of the aforementioned Article 21 of Regulatory Decree no. 2/90 and as is evidenced in the completion of the IRC model 22 declaration of the tax year.

Thus, the tax lost in depreciation above the maximum quota until 2010 would be capable of recovery in a following tax year (provided that not beyond the maximum period of useful life), by way of the application of Article 21 of Regulatory Decree no. 2/90, of 12 January, applicable both in the case of exceptional devaluations and in the case of adoption of periods of useful life lower than the legal minimum, as long as the depreciation quota practiced before the regularization provided for in Article 21 of the Regulatory Decree was lower than the maximum quota set out in the same act or by way of alienation.

Moreover, only thus was effective compliance with the provision of Article 29, no. 1, of the CIRC in the initial wording (to which corresponds Article 30 in the wording of 2001 and Article 31 in the wording of 2009) achieved, since the law does not provide for another depreciation quota (that is another expense of the tax year) than that resulting from the application of the amortization rate (which can vary between the minimum and maximum) to the acquisition or production cost (i.e. before the exceptional devaluation) or to the value resulting for more from revaluation under fiscal legislation, since before 2010 the rule then introduced by the new wording of Article 35, no. 4 did not exist.

4.4. Issue of the Possibility of Having Been Requested the Application of the Regime of "Exceptional Devaluations from Abnormal Causes" Regarding the Devaluations Resulting from the 1994 Revaluation

The Tax Authority and Customs Authority understood that the devaluations derived from the said revaluation carried out in 1994 could and should have been before the year 2010: "the fiscal deduction of devaluations of assets caused by the performed revaluation should have been requested from the Tax Administration at the proper time" and "there is no, in the failure to timely present the request for authorization for fiscal consideration of losses resulting from devaluations, the occurrence of an error attributable to the services that can legally support the revision".

The legal regime that, in the understanding of the Tax Authority and Customs Authority, imposed that the fiscal deduction be requested was the following:

• Article 28 of the IRC Code provided that the following were "accepted as costs: the write-backs and amortization of elements of the asset subject to depreciation, being considered as such the elements of fixed assets that, on a recurring basis, suffered losses of value resulting from their use, the passage of time, technical progress or any other causes...";

• No. 3 of Article 29 of the same act established that "Different methods of write-back and amortization from those indicated in the previous numbers may also be used when the nature of the depreciation or the economic activity of the company justifies it, after prior recognition by the General Directorate of Taxes";

• In paragraph b) of no. 5 of the same article it was stipulated the possibility of being considered "(...) as costs quotas of write-back or amortization higher due to the occurrence of exceptional devaluations from abnormal causes duly proven, accepted by the General Directorate of Taxes";

• According to Article 10 of Regulatory Decree no. 2/90, the tax regime defined for devaluations of elements of fixed assets applied, in particular, to exceptional devaluations caused by disasters, natural phenomena and exceptionally rapid technical innovations, the taxpayer having to "(...) obtain the acceptance of the General Directorate of Taxes through properly substantiated submission by the end of the first month following the month of the occurrence of the fact that determined the exceptional devaluation, except in cases duly justified, and as such recognized by order of the Minister of Finance, in which that submission may be delivered by the end of the first month following the end of the tax period in which the exceptional devaluations occurred".

On the basis of this substantiation, the thesis of the Tax Authority and Customs Authority rests on the assumption that the devaluations derived from the revaluation are qualifiable among the "exceptional devaluations from abnormal causes duly proven" referred to in paragraph b) of no. 5 of Article 29 of the CIRC, in the wording of Decree-law no. 198/2001, of 3 July, to which previously corresponds paragraph b) of no. 5 of Article 28 of the CIRC, in the initial wording.

The regulation of the regime for fiscal relevance of these exceptional devaluations was contained in Article 10 of Regulatory Decree no. 2/90, of 12 January, [14] which established the following, in the wording of Regulatory Decree no. 16/94, of 12 July, in force from 17-07-1994 and until December 2005:

10

Exceptional devaluations of elements of fixed assets

1 - In the event that exceptional devaluations from abnormal causes duly proven occur in elements of fixed assets, the acceptance as cost or loss of the tax year in which those occur of a write-back or amortization quota higher than that which results from the application of the methods referred to in Article 4 may be accepted.

2 - The regime established in the previous number applies, in particular, to exceptional devaluations caused by disasters, natural phenomena and exceptionally rapid technical innovations.

3 - For purposes of the provision of no. 1, the taxpayer must obtain the acceptance of the General Directorate of Tax Contributions and Taxes through properly substantiated submission by the end of the first month following the month of the occurrence of the fact that determined the exceptional devaluation, except in cases duly justified, and as such recognized by order of the Minister of Finance, in which that submission may be delivered by the end of the first month following the end of the tax period in which the exceptional devaluations occurred. [15]

As can be seen, regarding "exceptional devaluations", the need was foreseen for the acceptance by the Tax Administration to be obtained for the use of write-back or amortization quotas higher than those that resulted from the methods provided for in Article 4 of the same Regulatory Decree, and appropriate moments were established for such acceptance to be requested, which, at the latest, could not be later than the end of the first month following the end of the tax period in which the exceptional devaluations occurred.

Therefore, after that month had elapsed, it was not viable to obtain the acceptance of the Tax Administration for the use of write-back or amortization quotas higher than those that resulted from the methods provided for in Article 4.

But, that non-viability due to lack of timely request only prevented the exceptional devaluation from being considered as a cost by its entirety in the tax year in which it had occurred, that is, it only prevented the anticipation of its fiscal relevance. In fact, there was no legal obstacle to the possibility of write-back and amortization of goods that had suffered exceptional devaluation with the application of the quotas that resulted from the regime that had been applied before it occurred, in harmony with the rule of no. 4 of Article 28 of the CIRC in the initial wording (to which corresponds Article 29 in the wording of 2001 and Article 30 in the wording of 2009) which established that "except in cases duly justified and accepted by the General Directorate of Taxes, regarding each element of the asset the same depreciation or amortization method should be applied from its entry into operation or use until its full depreciation or amortization, transfer or non-use".

In the same vein, Article 21 of Regulatory Decree no. 2/90 provided that "write-backs and amortization that are not considered as costs or losses of the tax year in which they were recorded because they exceeded the maximum amounts allowed may be taken as costs or losses of following tax years, with observance of the other provisions of this regulatory decree, provided that the proper accounting regularization is made".

Therefore, the devaluations mentioned did not become irrelevant, and could be so subsequently, at most when the useful life of the devalued goods ended.

Being so, the position assumed by the Tax Authority and Customs Authority in the order of dismissal of the official revision request does not face the essential issue that was raised by the now Claimant.

In fact, what is at issue, regarding this first issue, is not whether the Claimant, by the fact of not having timely requested from the Tax Administration the acceptance of the devaluation derived from the revaluation as being exceptional for purposes of write-back of its value in the period in which it occurred, permanently lost the right to have it assigned fiscal relevance, since it has already been concluded that it did not lose it. What was at issue was whether that fiscal relevance, instead of being made concrete on the basis of the quotas that had been practiced regarding each of the revalued goods, could be advanced, to the extent of the revaluation, for the 2010 tax year, by virtue of the new no. 4 of Article 35 of the CIRC, introduced by Decree-Law no. 159/2009.

And this issue arises independently of whether the devaluation derived from the revaluation is or is not considered as exceptional, because even if it is, since the anticipation of its fiscal relevance was not requested for the 1994 tax year, the issue equally arises whether that new no. 4 of Article 35 allows again an anticipation, this time as an expense (new terminology that replaced the previous "cost") of the year 2010.

In any case, beyond this error of analysis, the position assumed by the Tax Authority and Customs Authority in the order of dismissal of the official revision request is not correct on the qualification of the devaluations in question as "exceptional devaluations from abnormal causes duly proven" for purposes of paragraph b) of no. 5 of Article 28 of the CIRC, in the initial wording [later paragraph b) of no. 5 of Article 29 of the CIRC, in the wording of Decree-Law no. 198/2001] and of Article 10 of Regulatory Decree no. 2/90.

The devaluations resulting from revaluation imposed or permitted by law are not directly resulting from "desastres, fenômenos naturais ou inovações técnicas excepcionalmente rápidas" [disasters, natural phenomena or exceptionally rapid technical innovations] - the three cases specifically mentioned in Article 10, no. 2, of Regulatory Decree no. 2/90 as being the cases in which the regime of exceptional devaluations applies.

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Frequently Asked Questions

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What is the material competence of the CAAD arbitral tribunal in IRC (corporate income tax) disputes?
The CAAD arbitral tribunal has material competence to decide disputes concerning the legality of acts of tax assessment, self-assessment, payment, and other decisions on IRC pursuant to Articles 2(1)(a) and 10 of Decree-Law 10/2011. However, this case specifically questions the tribunal's material jurisdiction, with the Tax Authority raising exceptions regarding competence. The tribunal's jurisdiction extends to IRC disputes involving amounts exceeding procedural thresholds and includes challenges to self-assessments by corporate groups under the special taxation regime (RETGS). The tribunal must determine whether all aspects of the dispute, including those involving complex revaluation adjustments and transitional fiscal regimes, fall within its arbitral competence or require resolution through administrative or judicial courts.
How are depreciations and impairment losses treated under Portuguese IRC rules for corporate groups?
Under Portuguese IRC rules for corporate groups subject to RETGS (Articles 69+), depreciations and impairment losses are treated at the individual company level but consolidated for group taxation purposes. Depreciations from asset revaluations under legal instruments (such as Law 36/91 and Decree-Law 159/2009) require specific tax adjustments. Article 35(4) of the IRC Code governs certain revaluation-related adjustments. In this case, C..., S.A. increased its taxable profit by €7,467,736.06 (representing 40% of depreciation increases from revaluations) in field 720 of table 07. The company later sought to correct this by claiming €5,429,494.96 in negative adjustments, reflecting the proper tax impact of historical revaluations and transitional regime changes. The parent company aggregates these adjustments when calculating the group's consolidated taxable profit.
Can a holding company (SGPS) challenge IRC self-assessments through tax arbitration in Portugal?
Yes, a holding company (SGPS) acting as parent of a corporate group under RETGS can challenge IRC self-assessments through CAAD tax arbitration in Portugal. As demonstrated in this case, A..., SGPS, S.A., as the dominant company of Group B, filed the arbitration request pursuant to Articles 2(1)(a) and 10(1)(2) of Decree-Law 10/2011 and Articles 1-2 of Ordinance 112-A/2011. The SGPS, as the entity responsible for filing the consolidated IRC declaration (Model 22) and self-assessing the group's tax liability, has legal standing and legitimate interest to challenge assessments. The holding company can seek corrections to adjustments made by subsidiary companies (like C..., S.A.) that affect the group's overall taxable profit. This right extends to requesting annulment of self-assessed liabilities and associated municipal surcharges.
What is the special taxation regime for groups of companies under Articles 69 and following of the IRC Code?
The special taxation regime for groups of companies (RETGS) under Articles 69 and following of the IRC Code allows related companies to be taxed as a single entity. A parent company (dominant) and its subsidiaries (dominated companies) meeting specific participation and relationship requirements can elect this regime. Under RETGS, each group company calculates its individual taxable profit with required adjustments, but the parent company aggregates these results to determine a consolidated group taxable profit. The regime permits offsetting profits and losses among group members in the same tax period. The parent company files a single consolidated IRC declaration and is responsible for the group's tax obligations. In this case, Group B, headed by A..., SGPS, included C..., S.A., and reported a consolidated taxable profit of €316,040,582.91 for 2010, with adjustments made at both subsidiary and group levels.
What procedural requirements apply to CAAD arbitration requests involving municipal surcharge (derrama municipal) linked to IRC?
Procedural requirements for CAAD arbitration requests involving municipal surcharge (derrama municipal) linked to IRC include: (1) filing the arbitration request pursuant to Decree-Law 10/2011 and Ordinance 112-A/2011; (2) specifying the contested amount and legal grounds; (3) appointing an arbitrator within prescribed deadlines (Article 6(2)(b) RJAT); (4) proper constitution of the three-member arbitral tribunal with arbitrators designated by the claimant, the Tax Authority, and by agreement of the other arbitrators; (5) demonstrating legal personality, capacity, and legitimate interest; and (6) prior administrative challenge through official revision (revisão oficiosa) when applicable. Since municipal surcharge is an ancillary levy calculated on IRC taxable profit, challenges to IRC assessments automatically encompass related surcharges. The tribunal must determine whether its material jurisdiction extends to both the principal IRC liability and the consequent municipal surcharge, as both stem from the same taxable base determination.