Process: 65/2018-T

Date: December 21, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 65/2018-T) addresses the territorial scope of IRC (Corporate Income Tax) withholding obligations under Article 4 of the IRC Code. A..SGPS, S.A., a Madeira-based holding company, challenged IRC withholding assessments totaling EUR 49,183.08 on payments made to non-resident service providers: B...Lda. (Angola) for consultancy services (EUR 67,500 and EUR 78,250) and C...S.A. (Switzerland) for financial advisory services (EUR 9,000). The Tax Authority argued the tribunal lacked material competence because the revenue constituted own resources of the Autonomous Region of Madeira, administered by AT-RAM (Regional Tax Authority), which had not submitted to CAAD jurisdiction. The claimant contended the services were neither performed nor used in Portuguese territory, thus falling outside IRC territorial scope under Article 4(3)(c). For Swiss services, the claimant invoked the Portugal-Switzerland Double Taxation Convention (Article 7) and tax exemptions under Article 33(5)(b) of the Tax Benefits Statute. Additionally, the claimant challenged the calculation methodology, arguing assessments should be based on invoice values rather than grossed-up amounts. The case raises critical jurisdictional questions regarding CAAD competence over regional tax matters and substantive issues concerning territorial nexus requirements for IRC withholding on cross-border professional services, particularly the interpretation of where services are 'used' for tax purposes.

Full Decision

ARBITRATION DECISION

Arbitrator Miguel Durham Agrellos, appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 3 May 2018, decides as follows:

ARBITRAL DECISION

REPORT

The Claimant A... SGPS, S.A., holder of tax identification number ..., with registered office at ..., n.º..., parish ...(...), Island of Madeira, came, pursuant to paragraph a) of article 2, paragraph 1, read together with article 10 of Decree-Law no. 10/2011, of 20 January ("RJAT") and article 2 of Order no. 112-A/2011, of 22 March, to request the constitution of a Singular Arbitral Tribunal, to rule on the illegality of the tax acts for the assessment of corporate income tax withholding at source ("IRC") numbers 2017..., 2017..., 2017..., as well as the respective assessments of compensatory interest numbers 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017... and 2017..., with the total assessments amounting to EUR 49,183.08.

The Tax Authority and Customs Authority is the Respondent.

The request for the constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Claimants and the Respondent on 21 February 2018.

Pursuant to article 6, paragraph 1 and paragraph a) of article 11, paragraph 1 of the RJAT, the Ethics Council appointed the undersigned as arbitrator of the singular arbitral tribunal, who communicated acceptance of the appointment within the applicable timeframe.

On 11 April 2018, the parties were duly notified of this appointment and expressed no wish to challenge the appointment of the arbitrator, pursuant to the combined provisions of article 11, paragraph 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Ethics Code.

Thus, in accordance with the provisions of paragraph c) of article 11, paragraph 1 of the RJAT, the singular arbitral tribunal was constituted on 3 May 2018.

On 12 June 2018, the Respondent filed a Reply in which it defended itself by exception, invoking material incompetence of this Tribunal and its consequent lack of passive procedural standing, and also by impugnation, reproducing all the argumentation used by AT-RAM, contained in the decision on the Petition for Reconsideration that denied the Claimant's request, as well as the Inspection Report.

By order of 30 October 2018, the meeting provided for in article 18 of the RJAT was waived and it was decided that the proceedings would continue with written submissions, and the Claimant was also notified of payment of the subsequent arbitration fee.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, paragraph 1, paragraph a) and 10, paragraph 1, both of the RJAT.

The parties are duly represented and enjoy legal personality and capacity.

The proceedings are not affected by any nullities.

FACTS

2.1. Proven Facts

On 10 January 2013, the Claimant contracted with B... Lda. services of consultancy and project study within the scope of the "work...", valued at EUR 67,500.00.

For the provision of those services, B... Lda. issued, on 6 May 2013, invoice no. 007/13, valued at EUR 67,500.00.

B... Lda. is a company incorporated under Angolan law, constituted on 17 May 2013, with registered office at Rua ..., Luanda.

Of the EUR 67,500.00 owed for that provision of services, the Claimant paid EUR 9,625.00 in the fiscal year 2013, EUR 45,247.86 in the fiscal year 2014 and EUR 12,627.14 in the fiscal year 2015.

On 16 September 2014, the Claimant contracted with C..., S.A. the provision of financial consultancy services in the area of private investment banking, for which invoice no. FA14/2667 was issued valued at EUR 9,000.00.

C..., S.A. is a company incorporated under Swiss law, with registered office at ..., Switzerland.

On 1 July 2015, the Claimant contracted with B... Lda. services of consultancy and project study within the scope of the "Financial City Work", for which invoice no. 058/15 was issued, valued at EUR 78,250.00.

The Claimant was subject to an external inspection procedure, accredited by Service Orders no. OI2017..., OI2017... and OI2017..., intended to verify and control the delivery of withholding at source on personal income tax and Stamp Duty, which commenced on 27 January 2017 and concluded on 19 April 2017.

As a consequence of the official correction carried out, the Claimant was notified of the official assessments of IRC numbers 2017..., 2017..., 2017..., as well as the respective assessments of compensatory interest numbers 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017..., 2017... and 2017..., with the total assessments amounting to EUR 49,183.08.

2.2. Unproven Facts

There are no other facts alleged that are relevant to the fair resolution of the dispute, in particular pursuant to article 123, paragraph 2 of the CPPT, applicable by virtue of article 29, paragraph 1, paragraphs a) and e) of the RJAT.

2.3. Reasoning on Facts

The proven facts are based on documents submitted by the parties. The Respondent does not contest the facts presented by the Claimant.

LAW

3.1. Position of the Parties
Position of the Claimant

The Claimant argues that there was error in the characterization of the tax facts and in the quantification of the taxable matter, insofar as the Respondent considered the income paid by the Claimant to B... Lda. and C..., S.A. as obtained in Portugal.

This is because, in its view, briefly put, on the one hand, the service provision provided by B... Lda. was not performed, nor used on national territory, in particular pursuant to article 4, paragraph 3, paragraph c), rule 7 of the IRC Code.

On the other hand, it argues that the service provision performed by C..., S.A. is not subject to IRC in Portugal either because it was not performed nor used on Portuguese territory (article 4 of the IRC Code), or by application of article 7 of the Convention between Portugal and Switzerland for the avoidance of double taxation in matters of income tax and capital tax ("CDT"). Furthermore, the Claimant argues that, even if such income were subject to taxation, it would nonetheless be exempt from taxation by virtue of the provisions of article 33, paragraph 5, paragraph b) of the Statute of Tax Benefits ("EBF").

Finally, the Claimant alleges that the formula used by the Respondent to calculate the taxable base and the respective withholding at source IRC amounts is incorrect, in that it was not based on the value of the invoices, but rather calculated a gross value.

Position of the Respondent

The Respondent argues, first and foremost, that the Tribunal lacks material competence to rule on the matters at issue, because the tax in question constitutes own revenue of the Autonomous Region of Madeira and, in that measure, its administration and assessment is the responsibility of the Regional Directorate of Tax Affairs ("DRAF") – now the Tax Authority of the Region of Madeira ("AT-RAM") – which did not bind itself to the jurisdiction of the arbitral tribunals operating at CAAD – Centre for Administrative Arbitration.

Consequently, the Respondent invokes its lack of passive procedural standing for not being the active party in the tax legal relationship, in that, in its version, it did not proceed to assess any tax, and any intervention it may have had in the course of the proceedings resulted from the performance of cooperation duties imposed on it by article 3 of Decree-Law no. 18/2005, of 18 January, read together with Regional Regulatory Decree no. 14/2015/M, of 19 August, amended by Regional Regulatory Decree no. 4/2017/RAM, of 10 March, and is thus not competent to represent DRAF, AT-RAM or the Regional Government of Madeira.

3.2. Competence of the Arbitral Tribunal and Consequent Passive Procedural Standing of the Respondent

It is necessary to assess the material competence of the Tribunal and the consequent lack of passive procedural standing of the Respondent, insofar as the possible merit of these exceptions implies dismissal of the action, pursuant to articles 278, paragraph 1, paragraphs a) and d), 576, paragraph 2 and 577, paragraphs a) and e), all of the Code of Civil Procedure, applicable by virtue of article 29, paragraph 1, paragraph a) of the RJAT.

The question raised in these proceedings, relating to the competence of Arbitral Tribunals operating under CAAD to resolve disputes of a tax law nature, has already been the subject of numerous decisions in the sense of competence (see in particular, cases 90/2014-T (Marcolino Pisão Pedreiro); 30/2016-T (Fernanda Maçãs) and 426/2017-T (Fernanda Maçãs)).

In particular, reference should be made to Arbitral Decision no. 30/2016-T (Fernanda Maçãs) where it was held that:

"To resolve this question it is necessary to mobilize the relevant regulatory framework, that is, the RJAT and Order no. 112-A/2011, of 22 March, which established the terms of binding of the Tax Administration to the jurisdiction of CAAD. More specifically, article 2, paragraph 1 of the RJAT provides that: 'The competence of arbitral tribunals includes the consideration of the following claims: a) Declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account; b) Declaration of illegality of acts establishing the taxable matter when it does not give rise to the assessment of any tax, acts of determining the taxable base and acts establishing tax values;…'.

However, binding to the jurisdiction of tribunals constituted under the auspices of CAAD includes, as provided in article 1 of Order no. 112-A/2011, of 22 March: '…the following services of the Ministry of Finance and Public Administration: a) The General Directorate of Taxes (DGCI); and b) The General Directorate of Customs and Special Excise Duties (DGAIEC)'. However, by means of Decree-Law no. 118/2011, of 15 December, such services were merged into the Tax Authority and Customs Authority. Furthermore, article 2, paragraph 1 of the aforesaid order adds that: 'The services and bodies referred to in the preceding article bind themselves to the jurisdiction of the arbitral tribunals operating at CAAD which have as their object the consideration of claims relating to taxes whose administration is entrusted to them (our emphasis) referred to in paragraph 1 of article 2 of Decree-Law no. 10/2011, of 20 January…'.

The Organizational Law of the Regional Directorate of Tax Affairs (Regional Regulatory Decree no. 2/2013/M, of 1 February), in article 2, paragraph 3 provides that: 'It is incumbent upon DRAF, in particular, and with regard to fiscal revenue which is own revenue: a) To ensure the assessment and collection of taxes on income, property and consumption and other taxes which it is responsible for administering, as well as to collect and receive other revenues of the Region or of legal persons of public law;…'. However, article 12, paragraph 1 of the same instrument provides that: 'Until all the logistical means necessary for the exercise of the full duties and competences provided for in article 2 of this instrument are in place, the AT, through its departments and services, shall continue to ensure the execution of procedures in administrative and computer matters necessary for the exercise of the duties and competences transferred to RAM, including those relating to the assessment and collection of taxes that constitute own revenue of RAM'.

Now, in the present case, there are regulatory provisions that demonstrate that the administration of personal income tax is the responsibility of the AT. Indeed, article 75 (in the version applicable at the date of the tax event) of the CIRS provides that: 'The assessment of personal income tax is the responsibility of the General Directorate of Taxes'. As well as article 90 of the CIRS establishes that: 'Whenever, with regard to the entities to which the scheme defined in article 20 applies, there are corrections that determine alteration of the amounts attributed to the respective partners or members, the General Directorate of Taxes proceeds to reform the assessment made to them, collecting or cancelling as a consequence the differences found'.

Thus, in the assessment at issue the logo of the AT appears and not that of DRAF, which equally demonstrates that the administration of the tax in question is entrusted to the AT, which is sufficient to conclude that this tribunal has material competence to consider the defects alleged by the Claimants to the contested assessment.

It is furthermore believed that such interpretive direction is reinforced when one observes the care of the regional legislator in the cited article 12, paragraph 1 of Regional Regulatory Decree no. 2/2013/M, of 1 February, when it states that the AT shall continue to execute procedures in administrative matters, until DRAF has all the means necessary for the exercise of all the duties and competences provided for in article 2 of the same instrument and which include the 'assessment and collection of taxes…on income…'."

The Tribunal expressly adheres to the reasoning contained in the above-mentioned decision and partially transcribed, for which reason it considers itself competent to resolve the present dispute, all the more so that, constituting tax arbitration a relevant instrument for guaranteeing the rights of taxpayers, this is the position that best ensures the right to effective judicial protection arising from article 22 of the Constitution of the Portuguese Republic.

For these reasons, it is to be concluded that this Tribunal is competent, and the dilatory exception invoked is therefore without merit.

Also the question relating to the standing of the Respondent is, as a consequence, without merit, insofar as the Tribunal considers that the act of assessment at issue was performed by the Respondent, for which reason it cannot fail to admit that the latter has passive procedural standing.

3.3. Issues to be Decided
5.1. Service Provision Performed by B... Lda.

The Respondent argues that, given that service provisions relating to projects, studies and consultancy, performed by non-residents and without permanent establishment on national territory – B... Lda., C..., S.A., and owed by the Claimant, resident in Portugal – should be considered as income obtained in Portugal, pursuant to article 4, paragraph 4 of the IRC Code and, consequently, be subject to withholding at source, pursuant to article 94 of the IRC Code.

In the construction of the reasoning that leads to such conclusion, the Respondent argues, briefly, that, given that services are at issue performed outside national territory and "related to studies, projects, technical support or management, accounting or audit services and consultancy, organization, research and development services in any field", these are considered as obtained in Portugal as provided for in article 4, paragraph 4 at the end of the IRC Code.

However, it is not correct. In fact, paragraph 4 of article 4 of the IRC Code presupposes, in this case, the prior application of the provisions of rule 7, paragraph c), paragraph 3 of article 4. Now, given that the services provided by B... Lda. were not performed or used on Portuguese territory (but rather in works that took place in Angola), the income in question is not considered as obtained on Portuguese territory.

Effectively, the provisions of paragraph 4 of article 4 of the IRC Code cannot be applied to the case, given that the same aims only to restrict the scope of application of paragraph c) of paragraph 3 of the same article.

It should also be said that the letter of the law does not permit the intended equation of "service used in Portugal" to "service performed for an entity with registered office or effective management on Portuguese territory or whose payment is attributable to a permanent establishment situated on the same territory", under penalty of making absurd the provisions in the various paragraphs of paragraph c), of paragraph 3 of article 4 of the IRC Code, first and foremost, in violation of the principle that the legislator knew how to express its thinking correctly (article 9, paragraph 3 of the Civil Code, applicable by virtue of article 11, paragraph 1 of the LGT).

On this matter, as stated in the Report of the Commission for the Development of Tax Reform of 1996, "obviously, service provisions performed abroad would not be considered as of Portuguese source, even if the debtor were resident on Portuguese territory, and related to the activity developed outside Portuguese territory by residents in this territory".

There is thus an impermissible methodological reversal in the cognitive process underlying the reasoning of the assessment act in the segment under analysis, which determines its invalidity.

Consequently, given that there is no taxable income in Portugal, there will be no withholding at source, pursuant to article 94 of the IRC Code, the assessment being invalid in that same segment.

5.2. Service Provision Performed by C..., S.A.

Regarding the services provided by C..., S.A., it follows from the reasoning of the contested assessment acts that services obtained on Portuguese territory are at issue, by application of the provisions of the second part of paragraph 4 of article 4 of the IRC Code, without it being a matter of demonstrating that the prior requirement of performance or use of the service on Portuguese territory has been fulfilled (in accordance with article 4, paragraph 3, paragraph c) of the IRC Code). As decided above, the Tribunal considers such interpretation of the norm to be without merit. According to the correct interpretation of the norm, it was incumbent upon DRAF to bear the burden of proof of the facts constitutive of its right (article 74 LGT) – performance or use of the service on Portuguese territory – facts which are not even circumstantially considered as verified in the reasoning of the assessment act, precisely because it labors under the assumption that the reasoning of the assessment act is sufficient based on the "consultancy" nature of the service, by application of the provisions of paragraph 4 of article 4 of the IRC Code (which, as stated, restricts the scope of application of article 4, paragraph 3, paragraph c) of the IRC Code, rather than extending it).

Insofar as the services provided by C..., S.A. are not subject to taxation under corporate income tax, there is no withholding at source pursuant to article 94 of the IRC Code, which implies the invalidity of the assessment act in the segment under analysis here.

In this manner, the request for arbitral ruling is judged to be entirely well-founded, with the contested assessments being annulled and with all legal consequences flowing therefrom.

DECISION

Accordingly, the Arbitral Tribunal decides:

To judge the dilatory exceptions of incompetence of the arbitral tribunal and lack of passive procedural standing invoked by the Respondent to be without merit.

To judge the request for arbitral ruling to be entirely well-founded, with the contested assessments being annulled and with all legal consequences flowing therefrom.

To condemn the Respondent to pay the costs due.

VALUE OF THE PROCEEDINGS

€ 49,183.08. (in accordance with the provisions of article 305, paragraph 2 of the CPC and article 97-A, paragraph 1, paragraph a) of the CPPT and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings).

COSTS

Pursuant to paragraph 4 of article 22 of the RJAT, the amount of costs is fixed at € 2,142.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the expense of the Respondent.

Porto, 21 December 2018

The Arbitrator,

(Miguel Durham Agrellos)

Frequently Asked Questions

Automatically Created

What is the scope of IRC tax obligation under Article 4 of the Portuguese IRC Code?
Article 4 of the IRC Code establishes territorial scope based on residence and source principles. Under Article 4(3)(c), income from services provided by non-residents is taxable in Portugal only if the services are performed or used in Portuguese territory. This provision determines when withholding tax obligations arise on payments to foreign service providers. The interpretation of 'used in Portuguese territory' is crucial for consultancy and advisory services where performance location may differ from benefit location.
How are withholding tax obligations on IRC applied to consulting and project study services in Portugal?
IRC withholding tax obligations on consulting services paid to non-residents depend on territorial connection under Article 4 of the IRC Code. The payer must withhold tax if services are performed or used in Portugal. The tax authority may gross up the payment amount to calculate withholding. For services like project studies and financial consultancy, determining where services are 'used' requires analyzing where benefits are realized. Double taxation treaties may override domestic law, potentially allocating taxing rights to the service provider's residence country under Article 7 (business profits) if no permanent establishment exists in Portugal.
Can taxpayers challenge IRC withholding tax assessments through CAAD arbitration proceedings?
Taxpayers can challenge IRC withholding tax assessments through CAAD arbitration under Decree-Law 10/2011 (RJAT), but jurisdictional limitations apply. CAAD has competence over disputes with the Tax Authority regarding taxes it administers. However, when IRC constitutes own revenue of autonomous regions (like Madeira), administered by regional tax authorities (AT-RAM), CAAD competence depends on whether the regional authority submitted to CAAD jurisdiction. Taxpayers must verify which authority issued the contested assessment. If regional authorities have not adhered to CAAD, challenges must proceed through administrative or judicial courts with regional jurisdiction.
What are the grounds for claiming material incompetence of CAAD arbitral tribunals in IRC withholding tax disputes?
Material incompetence of CAAD tribunals in IRC disputes arises when: (1) the tax constitutes own revenue of autonomous regions administered by regional authorities not subject to CAAD jurisdiction; (2) the respondent Tax Authority lacks passive procedural standing because it did not issue the contested assessment; (3) regional authorities like AT-RAM operate under specific regulatory frameworks (Regional Regulatory Decree 14/2015/M) independent of central tax administration. The Tax Authority may argue it merely performed cooperation duties under Decree-Law 18/2005 without being the active party in the tax relationship, thus lacking competence to represent regional entities in arbitration.
How are compensatory interest charges calculated on IRC withholding tax liquidations in Portugal?
Compensatory interest on IRC withholding tax liquidations is calculated under Article 35 of the General Tax Law (LGT) from the date payment was due until actual payment or enforcement. Interest accrues automatically without need for specific assessment decision. When multiple withholding obligations exist across different tax periods, separate interest calculations apply to each delayed payment. The tax authority issues individual interest assessments for each withholding period. Rates follow the legal interest rate applicable to tax debts. In this case, eleven separate compensatory interest assessments were issued corresponding to different payment dates across fiscal years 2013-2015, reflecting the phased payment schedule of the underlying service invoices.