Process: 66/2016-T

Date: August 10, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 66/2016-T addresses critical issues in Portuguese corporate income tax (IRC) concerning capital losses from subsidiary liquidation and property depreciation deductions under the RETGS tax group regime. The case involved a parent company managing social investments that challenged IRC assessment corrections totaling €270,963.13 for fiscal year 2011. The dispute centered on two main corrections applied to subsidiary B... S.A.: (1) €261,790.20 relating to losses from liquidation of subsidiary C... Lda, which the Tax Authority limited to 50% deductibility under Article 45(3) of the IRC Code, and (2) €9,172.93 for disallowed depreciation expenses on investment properties not actively generating income. The taxpayer argued Article 45(3) should not apply to liquidation losses, only to onerous transfers of shareholdings, and that property depreciation should be deductible regardless of whether buildings were in active use. The Tax Authority countered that anti-abuse principles and constitutional equality require applying the 50% limitation to liquidation scenarios, and that depreciation expenses must meet the indispensability requirement under Article 23 of the IRC Code. The case was brought before CAAD (Administrative Arbitration Centre) under the LFATM framework, demonstrating that parent companies in tax groups have standing to challenge assessment corrections made at subsidiary level through tax arbitration. The arbitral tribunal consisted of three arbitrators appointed by the Ethics Council. Key legal issues include the interpretation of capital gains/losses provisions, the deductibility test for expenses, and how RETGS consolidation affects correction calculations.

Full Decision

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), Dr. João Taborda da Gama and Prof. Dr. Sérgio Pontes, appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, hereby agree as follows:

I. REPORT

  1. A… - COMPANY FOR MANAGEMENT OF SOCIAL INVESTMENTS, S.A., Corporate Person No…, with registered office at … …, Place of …, …-… …, District of … (hereinafter referred to as Claimant), filed, on 3/2/2016 a request for constitution of the arbitral tribunal, in accordance with Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), in conjunction with Article 102 of the CCP, in which the Tax and Customs Authority is Respondent (hereinafter referred to only as Respondent, or TA).

  2. The Claimant seeks the annulment of the corporate income tax (CIT) assessment decision for the fiscal year 2011, with No. 2015…, relating to the group of companies of which the Claimant is the parent company, because corrections were made to the taxable basis of the individual fiscal result in CIT of the company "B… S.A." in the total amount of €270,963.13.

  3. On 5/2/2016, the request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority.

3.1. The Claimant did not proceed with the appointment of an arbitrator, and therefore, under the provisions of paragraph a) of section 2 of Article 6 and paragraph b) of section 1 of Article 11 of the LFATM, the President of the Ethics Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the prescribed period.

3.2. On 5/4/2016, the parties were notified of the appointment of the arbitrators and raised no objection.

3.2. In accordance with the provisions of paragraph c) of section 11 of the LFATM, the collective arbitral tribunal was constituted on 20/4/2016.

3.3. Accordingly, the Arbitral Tribunal is duly constituted to hear and decide on the subject matter of the proceedings.

  1. To support the request for arbitral pronouncement, the Claimant alleges, in summary, the following:

a) The correction of €261,790.20 arises from the fact that the "losses from the disposal of the social investment in company C…, Lda. in the year 2011" were considered in the calculation of the fiscal result for CIT purposes at only 50% of their value, which constitutes an incorrect interpretation and application of the law, in particular the application of Article 45, section 3 of the CIT Code to a situation of loss by liquidation.

b) The correction of €9,172.93, relating to "Expenses with amortization and depreciation not accepted in the calculation of the fiscal result for CIT purposes in 2011", insofar as it did not consider as deductible the expenses relating to immovable property that were not in use and did not generate income for the Claimant, results from an error in the factual premises and incorrect interpretation and application of the law, in particular Articles 23, section 1 and 29, section 3 of the CIT Code.

c) The Claimant therefore concludes that the contested correction and additional assessment should be annulled and the Public Treasury should be condemned to pay the costs of the proceedings.

  1. The Tax and Customs Authority submitted its response and attached the Administrative File, invoking, in summary, the following:

a) The combination of the anti-abusive teleology of Article 45, section 3 of the CIT Code, its historical element, the general rules of interpretation, and the fact that the liquidated company (C…, Lda.) is held 98% by B…, recommends that an interpretation be made of Article 45, section 3 of the CIT Code that is not anchored solely to the letter of the law and that, therefore, it should be considered applicable to losses arising from a liquidation.

b) It further invokes, on this point, that it would violate the constitutional principle of equality to limit to 50% the deductibility of losses on the onerous transfer of social investments, and not to do so in cases of losses arising from a liquidation.

c) As to the disallowance of expenses relating to amortization of immovable property, the Respondent states that "at no time was the legitimacy of the investments made in question, with no judgment being made on the strategy that the organs of the Respondent here deemed as appropriate, or on the profitability of the management acts", being relevant only "the fact that the expenses in question are not capable of being fiscally deductible, under Article 23 of the CIT Code, given the failure to prove the requirement of indispensability".

d) The Respondent therefore concludes for the legality of the CIT assessment of 2011 contested by the Claimant, and that the request for arbitral pronouncement should be wholly rejected as unproven, with the legal consequences.

  1. By order of 31 May 2016, the meeting referred to in Article 18 of the LFATM was dispensed with and 20 October 2016 was set as the deadline for delivery of the arbitral decision.

  2. The Claimant and Respondent did not submit arguments.

II. PRELIMINARY MATTERS

8.1. The parties have legal standing and capacity, are shown to be legitimate and are duly represented (Articles 4 and 10, section 2, of the LFATM and Article 1 of Order No. 112-A/2011, of 22 March).

8.2. The tribunal is competent and duly constituted.

8.3. The proceedings are not subject to any nullities.

8.4. No exceptions were raised.

8.5. There are no other circumstances that prevent knowledge of the merits of the case.

III. MERITS

III.1. Factual Matters

  1. Proven Facts

9.1. With relevance to the appreciation and decision of the questions raised, preliminary and substantive, the following facts are taken as settled and proven:

i) The Claimant is a limited company that is classified in the CAE with the main activity … "Activities of holding management companies for non-financial investments";

ii) The activity of the Claimant consists of managing social investments, obtaining and granting loans and management services to group companies;

iii) For CIT purposes, the Claimant is classified under the Special Regime for Taxation of Groups of Companies (SRTGC), and until 13/12/2012, was the parent company of a group of companies that included the company B…, S.A., hereinafter referred to as "B…, S.A.", in which the Claimant held a 100% stake;

iv) The Claimant was subject to a tax inspection that took place under internal service orders No. OI2015… and OI2015…, and which generated the Tax Inspection Report (TIR) notified to the Claimant by Official Letter No…, of 20/10/2015;

v) From that TIR resulted a technical correction in the total amount of €270,963.13 to the fiscal result for CIT purposes of the group of companies of which the Claimant was the parent company, for the fiscal year 2011;

vi) This correction was determined in company B…, S.A., which is the owner of several immovable properties registered as investment properties;

vii) In the fiscal year 2011, some of those immovable properties registered as investment properties were leased, and the remainder were available for lease or sale;

viii) In the fiscal result for CIT purposes of 2011, company B…, S.A. deducted €523,580.40 relating to the loss obtained from the result of the partition of the dissolution of the participated company, C…, Lda., hereinafter referred to as "C…, Lda.";

ix) The correction in the total amount of €270,963.13 is divided as follows:

  • Correction of €261,790.20, relating to losses from the disposal of the social investment in company C…, Lda. in the year 2011, considered in the calculation of the fiscal result for CIT purposes at 50%;

  • Correction of €9,172.93, relating to expenses with amortization and depreciation not accepted in the calculation of the fiscal result for CIT purposes in the year 2011;

x) The corrections determined by the TA are based on the following grounds:

  • Correction of €261,790.20: in the view of the TA, the loss of €523,580.40, recorded by B…, S.A. in the year 2011, resulting from the dissolution of its participated company C…, Lda., is considered as "other losses relating to capital investments", and should therefore be considered in the calculation of the fiscal result at only 50%, and not in its entirety (in accordance with Article 45, section 3 of the CIT Code, in the wording in force at the date);

  • Correction of €9,172.93: in the view of the TA, the losses with amortization of the immovable properties registered as investment properties that are not being used and that did not generate income subject to CIT, are not deductible (in accordance with Articles 23, section 1 and 29, section 3 of the CIT Code, in the wording in force at the date);

xi) Consequently, the Claimant, as parent company, was notified of the additional CIT assessment No. 2015…, relating to the fiscal year 2011;

xii) Dissatisfied with this decision, the Claimant filed on 3/2/2016 the request for arbitral pronouncement, requesting the annulment of the contested correction and additional assessment.

9.2. Grounds for the Factual Matters

The factual matters taken as proven are based on the documentary evidence presented and not contested, as well as on the Administrative File submitted by the Respondent.

9.3. There are no facts relevant to the appreciation of the merits of the case that have not been proven.

III.2. Legal Matters

III.2.1 – On the Treatment of Fiscal Losses Incurred Following the Partition of a Participated Company

It is necessary, in summary, to verify whether the regime applicable to the negative difference between gains and losses realized through the onerous transfer of capital investments, established, at the date of the facts, in section 3 of Article 45 of the CIT Code, is applicable to the negative difference between the value attributed to the partners as a result of partition, reduced by the acquisition cost of the corresponding social investment, a difference that is qualified, in paragraph b) of section 2 of Article 81 of the same Code, as a loss.

The Claimant argues that the dissolution, liquidation and partition of companies has a specific legal and fiscal treatment, established, as far as fiscal matters are concerned, in Articles 79 to 82 of the CIT Code, which establishes, specifically in paragraph b) of section 2 of Article 81, that the negative difference between the value attributed to the partners as a result of partition and the acquisition cost of the corresponding social investment is qualified as a loss, considered, in the determination of taxable income, in its entirety. It further argues that, in the presence of this special regime, the regime then contained in Article 45, section 3, of the CIT Code should be considered inapplicable, which, for purposes of determination of taxable income, admits the deduction of only half of the fiscal losses realized through the onerous transfer of capital investments, as well as other losses or negative patrimonial variations relating to capital investments or other components of equity, in particular supplementary contributions.

In a different sense, the Respondent argues that the special rule contained in paragraph b) of section 2 of Article 81 of the CIT Code does not override section 3 of Article 45 of the CIT Code, and the negative difference between the value attributed to the partners as a result of partition and the acquisition cost of the corresponding social investment, the loss, for purposes of determination of taxable income, should be deducted at only half.

For proper framing of the question, it is considered necessary to examine the legislative evolution in this matter, as well as the jurisprudence and doctrine produced thereafter.

The determination of taxable income for CIT purposes is based on the principle, also referred to as the model, of partial dependency of tax law on accounting, a principle which finds legal support in Article 3 and, in particular, Article 17, both of the CIT Code. The latter establishes, in its section 1 that: "The taxable income of legal persons and other entities mentioned in paragraph a) of section 1 of Article 3 is constituted by the algebraic sum of the net result of the period and the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code".

The income determined in accordance with accounting, according to which any loss is a negative component of the result, considered therein in its entirety, is, for purposes of determining the taxable base for CIT, subject to corrections, which find legal support throughout the Code.

With regard to gains and losses, the CIT Code includes some departures – corrections – from accounting, included in articles, at the date of the facts, 46 to 48, which, among other things, define gains and losses, their respective calculation method and explain their taxation.

Indeed, section 1 of Article 46 presents the definition of gains and losses, establishing that: "gains or losses realized are deemed to be the profits obtained or losses suffered through onerous transfer, whatever the title by which it operates and, as well, those arising from claims or those resulting from permanent allocation to purposes outside the activity exercised, relating to: a) Tangible fixed assets, intangible assets, biological assets that are not consumable and investment properties, even if any of these assets has been reclassified as a non-current asset held for sale; b) Financial instruments, with the exception of those recognized at fair value under paragraphs a) and b) of section 9 of Article 18".

In turn, section 2 of the same establishes the respective method of determination, by referring that: "gains and losses are given by the difference between the realization value, net of inherent charges, and the acquisition value reduced by impairment losses and other value corrections provided for in Article 35, as well as depreciation or amortization accepted for tax purposes, without prejudice to the final part of section 5 of Article 30".

The said acquisition value, by force of section 1 of Article 47, having the objective of avoiding taxation of appreciation by mere effect of inflation, is adjusted for the temporal effect of money, that is, "the acquisition value corrected in accordance with section 2 of the preceding article is updated by applying the coefficients of currency devaluation published for this purpose in an order by the Minister of Finance, whenever, at the date of realization, at least two years have elapsed since the date of acquisition, the value of this update being deducted for purposes of determining taxable income".

The legislator therefore established a set of rules for the quantification of gains and losses realized in three specific circumstances: onerous transfer, claim and permanent allocation of assets to purposes outside the activity exercised.

The legislation also adopted rules restricting the deductibility of losses, which did not appear in the original version of the CIT Code approved by Decree-Law No. 442-B/88, of 30 November. It was through Law No. 32-B/2002, of 30 December (State Budget for 2003), introducing into Article 42, corresponding to the said Article 45 at the date of the facts, its section 3, which establishes that: "the negative difference between gains and losses realized through the onerous transfer of capital investments, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital investments or other components of equity, in particular supplementary contributions, contribute to the formation of taxable income at only half of their value".

The original wording of this article was as follows: "the negative difference between gains and losses realized through the onerous transfer of capital investments, including their redemption and amortization with capital reduction, contributes to the formation of taxable income at only half of its value".

The introduction of this section and the consequent alteration of its wording were framed by the legislator as part of the fight against tax fraud and evasion. The legislator's intention is objective when, on page 53 of the Report of the State Budget for 2003, it identifies the specific alteration to be introduced in the CIT Code, as follows: "it determines the partial exclusion (50%) of losses recorded on the alienation of social investments by the generality of companies". It is clear that the fact generating the partial exclusion of losses is the alienation of social investments. The State Budget for 2006 expanded this limitation to onerous transfers of "other components of equity".

According to recent jurisprudence, "the rule, in any of its versions, integrates an anti-abuse measure, insofar as the legislator would have intended (in addition to the expansion of the tax base) to prevent manipulation of the fiscal result".

From an accounting point of view, the investment of one company in another constitutes, for the one that invests, an asset; for the one that benefits from the investment, a component of equity. It is, in the one that invests, the disposal of that asset, that is, its 'removal' from the balance sheet, that gives rise to a gain or a loss. The one that invests can do so in the share capital of the beneficiary of the investment, or through other forms, such as supplementary contributions, which give rise in the beneficiary to other components of equity.

Furthermore, note the jurisprudence established by CAAD, in particular in the arbitral decision of 07 September 2012, delivered in the scope of case No. 9/2012 – T, where it was recorded that "although share capital and supplementary contributions constitute a contribution by the shareholders to strengthen the company's assets, they are intrinsically distinct obligations and, therefore, the legislator never integrated supplementary contributions into the concept of 'capital investment'". Being so, the initial wording of section 3 of Article 45 (at that time section 3 of Article 42), when mentioning only "capital investments", omitted the treatment to be given to the remaining amounts invested in a company, but covered under other legal instruments, such as supplementary contributions.

From this it is clear that, considering the initial version of section 3 of Article 45 of the CIT Code, when disposing of a social investment, including in that disposal all rights and obligations, any loss generated by the "capital investment" is deductible at only 50%, but the loss generated by the disposal of the investment made "in other components of the equity of the beneficiary", such as supplementary contributions, was deductible in its entirety.

With the original version of the article now under analysis, manipulation of the fiscal result was achieved by differentiating the investment in "capital investments" and in "other components of equity": the smaller the component of investment in "capital investments" (whose loss is deductible at only 50%) and the larger the component in "other components of equity" (whose loss in the original version of the article was deductible in its entirety), the smaller the tax burden. The legislator, by subjecting losses realized through the onerous transfer of the totality of the investment made in a company, whether that investment is made in share capital and, therefore, accounted for as "capital investments", or whether it is made "in other components of equity, in particular supplementary contributions", makes neutral the form of investment, for, upon the respective onerous transfer, all the investment made, whatever the title, "capital investment" or "other components of equity", is fiscally treated similarly.

Still with regard to the interpretation of section 3 of Article 45 of the CIT Code at issue here, see the CAAD decision of 25 November 2013, delivered in case No. 108/2013-T which recommends that:

"Analysis of the normative text reveals with clarity that the legislator chose, to include therein, three types of situations that should be considered, based on the presumption of good legislative technique, as distinct, namely:

a. "The negative difference between gains and losses realized through the onerous transfer of capital investments";

b. "other losses (…) relating to capital investments or other components of equity";

c. "other (…) negative patrimonial variations relating to capital investments or other components of equity".

[…]

The apparent indiscriminate scope of the provisions in question [refers to the situations listed under paragraphs b) and c)], may, however, be reasonably mitigated if one notes that "losses" and "other negative patrimonial variations", will be concepts, not redundant, but endowed with their own and distinct meaning.

To understand this fact, it will be necessary to go back to Articles 23 and 24 of the same Code, taking note of the terminological evolution effected by the article [read, by Decree-Law No. 159/2009, of 13 December].

Indeed, before the entry into force of this latter decree, the articles referred to of the CIT Code stated, respectively, that: "Costs or losses are deemed to be those that are provably indispensable for the realization of the income or gains subject to tax or for the maintenance of the producing source, in particular the following: (…)"; "Under the same conditions referred to for costs or losses, negative patrimonial variations not reflected in the net result of the fiscal year also contribute to the formation of taxable income, except: (…)".

It is verified, thus, that at the time of establishment of the current wording of Article 45/3 of the CIT Code, this Code expressly distinguished, for what is relevant here, three types of situations, namely:

a. Costs;

b. Losses;

c. Negative patrimonial variations not reflected in the net result of the fiscal year.

The provision of Article 42/3 (predecessor of the current 45/3), should be considered, thus, as reported to these concepts, defined in Articles 23 and 24. Thus, and for obvious reasons, from the provision of that rule should be excluded costs relating to "capital investments or other components of equity", including therein, only losses (as defined in Article 23) and negative patrimonial variations (as defined in Article 24), relating to those investments.

And that this is so, that is, that the expression "other losses or negative patrimonial variations" used in the current Article 45/3 of the CIT Code does not have an indiscriminately broad meaning, but rather a precise meaning, defined in Articles 23 and 24, follows immediately from the fact that the legislator employed the same distinction.

[…]

The normative alteration implemented by Decree-Law 159/2009, of 13 July, will not have altered anything of relevance in the matter at issue. Indeed, although the body of Article 23 has come to refer only to expenses, the fact is that the CIT Code continues to use the expression "losses", including in Article 23 itself (cf. section 1, paragraph h)). This occurs in coherence, moreover, with the SNC, which under section 2.1.3.e) of the annex to Decree-Law 158/2009 of 12 July, maintains the distinction between "expenses" and "losses".

Thus, it is concluded that Article 45/3 of the applicable CIT Code, will be reported to:

a. negative differences between gains and losses realized through the onerous transfer of capital investments;

b. other losses relating to capital investments or other components of equity; and

c. other negative patrimonial variations relating to capital investments or other components of equity,

whereby "losses" should be understood as facts qualifiable as such in light of the CIT Code, and by "negative patrimonial variations" should be understood negative patrimonial variations not reflected in the net result of the fiscal year, as defined in Article 24.

Included thus, within the scope of the rule in question, will not be facts qualifiable as "expenses", in light of the CIT Code, even if relating to capital investments or other components of equity".

A decision of the STA, of 17/02/2016, case No. 01401/14, cites the paraphrased CAAD decision of 25 November 2013, delivered in case No. 108/2013-T, to, in consequence, conclude: "bearing in mind what we have just said, we can advance in the sense that the said losses also do not fit within the situations provided for in paragraphs b) and c) above described. Firstly, because being Article 81, section 2, paragraph b), of the CIT Code that, by qualifying the nature of the income, equates to losses the negative difference between the result of partition and the acquisition cost of social investments, it would not make sense to now consider that difference as another loss or another negative patrimonial variation".

Therefore, the negative difference between the result of partition and the acquisition cost of social investments cannot be legally equated, in Article 81, section 2, paragraph b), of the CIT Code, to a loss and, simultaneously, be considered as "another loss" or "other negative patrimonial variations".

They are, therefore, distinct figures.

Whereas the disposal of "capital investments", as well as of "other components of equity", constitute management decisions taken in continuity, the dissolution, liquidation and partition of a company constitutes a process, in the majority of cases not resulting from a management decision, but rather from the inability to operate in continuity – continuity has ceased. Continuity that ceased, in the vast majority of cases, due to exogenous factors to management, therefore, due to factors that management does not control. Consequently, the manipulation of the fiscal result that was intended to be prevented with section 3 of Article 45 of the CIT Code, will be, in the face of disposal of social investments, substantially smaller in the process of dissolution, liquidation and partition. In this sense, it can be read in a recent decision of the STA, of 17/02/2016, case No. 01401/14, that: "the risks of tax evasion through manipulation of the fiscal result are not as evident in cases of dissolution and partition of a company as in cases of onerous transfer of social investments".

Bearing in mind the model of partial dependency, continuity has such importance that, in "accounting law" it is normatively treated as a presupposition that, when removed, implies the adjustment of accounting rules. The process of dissolution, liquidation and partition is, both from the point of view of management and from the point of view of accounting, a situation of true exception: it is, after all, the end of the company. Similarly, from the point of view of corporate law, the unique characteristics of this process required the establishment of specific rules. Chapter XII of the Commercial Companies Code (CSC) addresses the dissolution of companies, while Chapter XIII addresses the respective liquidation. For what is relevant in this case, it is important to note that Article 156 of the CSC is included in the latter and establishes the rules inherent in partition.

Similarly, from a fiscal point of view, specific rules are established for the treatment of the result of partition.

Article 81 of the CIT Code establishes the nature of the income generated in this operation, providing in its section 1 that "the value attributed to each of the partners as a result of partition, reduced by the acquisition price of the corresponding social investments, is aggregated for purposes of taxation of the partners, in the fiscal year in which it is made available to them", specifying section 2 the rules of that aggregation: "in the aggregation, for purposes of taxation of the difference referred to in the preceding section, the following should be observed: a) That difference, when positive, is considered as income from application of capital up to the limit of the difference between the value that is attributed and that which, in light of the accounting of the liquidated company, corresponds to actual contributions made for the realization of the capital, with any excess having the nature of taxable gain; b) That difference, when negative, is considered as a loss, being deductible only when the social investments have remained in the ownership of the taxpayer during the three years immediately preceding the date of dissolution, and for the amount exceeding the fiscal losses transferred under the special regime for taxation of groups of companies and provided that the liquidated entity is not resident in a country, territory or region with a tax regime clearly more favorable than that on a list approved by order of the Minister of Finance".

This rule therefore establishes that "the special regime and rules applicable to the calculation of gains and losses arising from partition by the partners, setting conditions for the deductibility of the losses calculated, namely: i) the investments must remain in the ownership of the partner for three years immediately preceding dissolution; ii) the investments must be recorded for an amount exceeding the fiscal losses transferred under the special regime for taxation of groups of companies; iii) the liquidated entity cannot be resident in a country, territory or region with a tax regime clearly more favorable than that on a list approved by order of the Minister of Finance" (decision of the STA, of 17/02/2016, Case No. 01401/14, Rapporteur: Francisco Rothes).

The cited decision references an opinion from the Fiscal Studies Centre, sanctioned by order of the Director General of Taxes of 12 March 97. Although this opinion precedes the rule established in section 3 of Article 45 of the CIT Code, it clarifies that "if the gains and losses to which they are respectively referred, in paragraphs a) and b) of section 2 of Article 67 of the CIT Code [corresponding to the here analyzed Article 81, section 2, paragraphs a) and b)], are covered by the tax regime defined in Articles 42 to 44 of the same Code [corresponding, at the date of the facts, to Articles 46 to 48], or if only the specific discipline provided for in Article 67 is applicable to them".

In that opinion, after point No. 1, cited above, therefore, immediately in No. 2, the argument seems sufficiently conclusive, referring that "[…] the legislator was sufficiently explicit about the regime it intended to apply to the differences, positive and negative, calculated by the partners, at the moment of partition of the proceeds of liquidation, for Article 67 contains all the essential elements both for their qualification and quantification and for the treatment given to it for purposes of calculating the taxable income of the partners".

In point 4, the said opinion clarifies the reason for the distinct regimes as follows: "[…] although the legislator […] states that […] the negative difference between the result of partition and the acquisition cost is considered a deductible loss does not add that the tax regime provided for gains and losses realized is applicable to it, certainly because it does not fall within the general definition given by section 1 of Article 42 [later, 46], which is concerned, above all, with the nature of the operation of transfer of elements of fixed assets – sale (voluntary or involuntary), exchange, disposal and permanent allocation to purposes outside the company. Indeed, the distinguishing element between these situations generating […] losses and the situation of partition, resides in that, in the latter, the relevant fact from whose occurrence results the calculation of the differences qualified as […] losses is embodied in the extinction of social investments as a consequence of the dissolution of the company."

It concludes, in point No. 8, that "Article 67, section 2, paragraphs a) and b) [corresponding to the cited Article 81, section 2, paragraphs a) and b)] does not merely qualify as a gain the positive difference between the value of the actual contributions made for the realization of share capital and the acquisition cost of social investments and as a loss the negative difference between the result of partition and the acquisition cost of social investments, for it also defines the respective tax regime, therefore, given its distinct nature, the provisions of Articles 42 to 44 of the CIT Code are not applicable thereto".

In summary of all that is presented above:

I. The rules for determination of gains and losses do not assume identity between accounting and tax purposes, the legislator establishing, within the scope of the partial dependency model, specific rules for determination, quantification and taxation of these quantities, which are exclusively applicable to situations of onerous transfer, claim and permanent allocation to purposes outside the activity exercised. These rules, as the TA acknowledged, are not applicable to the negative difference between the result of partition and the acquisition cost of social investments, because, in this circumstance, the legislator was sufficiently explicit about the regime it intended to apply, both as to qualification and quantification, and as to the treatment given to it for purposes of calculating the taxable income of the partners.

II. The legislator also established, equally, restrictive rules of deductibility of (a) negative differences between gains and losses realized through the onerous transfer of "capital investments", a concept circumscribed to the contribution of partners in share capital, a circumstance that justified the legal expansion of the provision, including therein (b) other losses relating to capital investments or other components of equity and (c) other negative patrimonial variations relating to capital investments or other components of equity. The losses recorded in Article 81, section 2, paragraph b), do not fall within the situations provided for in a), b) and c).

III. As jurisprudence has previously acknowledged, the negative difference between the result of partition and the acquisition cost of social investments cannot be legally equated, in Article 81, section 2, paragraph b), of the CIT Code, to a loss and, simultaneously, be considered as "another loss" or "other negative patrimonial variations".

IV. It is, equally, in this sense that jurisprudence produced on this matter is presented. In the decision delivered by the TCA Sul, on 17 April 2012, in the scope of case No. 05315/12, it was concluded, regarding section 3 of Article 42 of the CIT Code [section 3 of Article 45 of the CIT Code at the date of the facts], that "[…] in the wording resulting from Law 60-A/2005, of 30/12, the legislator considers that only losses resulting from the onerous alienation of capital investments, including their redemption and amortization with capital reduction, as well as other losses or negative patrimonial variations relating to capital investments or other components of equity, in particular supplementary contributions, contribute to the formation of taxable income at half of their value (50%). In other words, Article 42, section 3, of the CIT Code, declared half the value of the losses to be non-deductible, regardless of the conditions of their realization. The rule in question is intended to prevent the deductibility of the aforesaid losses […] and is not applicable to cases of liquidation and partition of companies (cf. Articles 73 to 75, of the CIT Code), a regime in which the calculation of the losses actually realized […], resulting from the extinction of social investments as a consequence of the dissolution of the company, is at issue".

V. In this vein, by way of conclusion, preparing the decision, and paraphrasing the summary of the profusely cited decision of the STA, of 17/02/2016, in the scope of case No. 01401/14: "Article 81, section 2, paragraph b), of the CIT Code, not only qualified as a loss the negative difference between the result of partition and the acquisition cost of social investments in the case of dissolution and partition of the company, but also set the respective special regime for taxation of the result of partition, with its own form of calculation and with specific deductions. Given the special regime thus set and in the absence of reference to the regime of limitation of deductibility then set by section 3 of Article 45 of the CIT Code, the latter is not applicable to that situation."

The TA's argument is therefore unfounded.

III.2.2 – Indispensability of Expenses with Amortization of Immovable Property

The central question to be decided revolves around whether expenses with amortization of immovable property that are accounted for as investment properties of a company, which, at a given moment, despite being available for lease or sale, are not being used by the company, are deductible.

In the view of the TA, expenses with amortization of immovable properties registered as investment properties, available for lease or sale, but that are not being used and that did not generate income subject to CIT, are not deductible in accordance with Article 23, section 1, and 29, section 3, of the CIT Code, in the wording in force at the date. The TIR does not justify the correction, it merely asserts non-deductibility, conclusively, after transcribing, adding some underlining, the legal provisions referred to.

In the view of the Claimant, the articles in question of the CIT Code, as they have been concretized over decades by jurisprudence and doctrine, do not prevent the full deductibility of these expenses, in particular because one should understand that a causal and direct relationship between an expense and income is not required, as in the past, but only that the expense be incurred "in the interest of the company", that it be an "act of management", or acts "abstractly subsumed in a profitable profile".

We believe the Claimant is right.

On the one hand, it is today absolutely settled, and confirmed by the current wording of Article 23, section 1 of the CIT Code, what has long been advocated in doctrine and jurisprudence: for an expense to be considered deductible it is sufficient only that it be "an expense with a business purpose, which does not mean an expense that has an immediate and direct profitable purpose; what is indispensable is that it have, in its origin, and in its cause the specific interest of the company". The fact that a company, which moreover has in its corporate object the management of immovable property, has entered in its balance sheet a set of immovable properties, part of which it leases and operates in a given fiscal year, is sufficient for, in relation to all of them, one to be able to presume the connection to the business purpose, all the more so when provably – and as admitted by the TA – the unleased immovable properties were available for lease and/or sale. That is, the deduction of expenses should be admitted taking into account the provision of Article 23, section 1 of the CIT Code.

The TA's invocation of Article 29, section 3, of the CIT Code is also unfounded.

According to this article, in the wording then in force, "save for duly justified and accepted reasons by the Director General of Taxes, elements of assets are only considered subject to depreciation after entering into operation or use".

The TA does not justify in the TIR the transcription of this article, with an added underline, nor does it explain why it believes that the same applies to the specific case. Beyond the deficient reasoning, it must always be said that we believe that the transcribed article is not applicable to the specific case, since that provision only intends to mark the normal initial moment of depreciation of assets, generally excluding the fiscal deductibility with respect to "work in progress investments", and the immovable properties whose amortizations are contested were already entered in the balance sheet as "investment properties". One thing is the initial moment of consideration of depreciation for tax purposes (which Article 29, section 3, of the CIT Code seeks to resolve), another is the fact that a specific asset, at a given moment, is undergoing normal use aimed at its profitability but is not, for some reason, directly generating income (for example, because a tenant has not yet been found).

In sum, Article 29, section 3, of the CIT Code is not applicable to expenses with amortization of unleased immovable properties, but available for lease or sale, and therefore those expenses are deductible.

In such terms, for all the above stated, the Claimant's request is held to be founded, insofar as it relates to the illegality of the correction to the individual fiscal result for CIT purposes, 2011, of the Company "B… S.A.," in the amount €270,963.13, reflected in the result of the Group, with the consequent annulment of the contested additional assessment.

IV. DECISION

In the terms expounded, this Arbitral Tribunal decides:

a) To hold the request for arbitral pronouncement as founded and, consequently, to declare illegal the CIT assessment No. 2015…, in the amount of €270,963.13, relating to the fiscal year 2011, with its consequent annulment, for error on the legal and factual premises and incorrect interpretation and application of the provisions of Articles 23, section 1 and 29, section 3, of the CIT Code; and

b) To condemn the TA to payment of the costs of the proceedings.

V. VALUE OF THE PROCEEDINGS

In accordance with the provisions of Articles 306, section 2 and 297, section 2 of the CCP, Article 97-A, section 1, paragraph a) of the CPPT and Article 3, section 2 of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are valued at €270,963.13.

VI. COSTS

In accordance with the provisions of Articles 22, section 4, and 12, section 2, of the Legal Framework for Arbitration, Article 2, section 1 of Article 3 and sections 1 to 4 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, as well as Table I attached to this instrument, the amount of costs is set, at the expense of the Respondent, at €4,896.00.

Notify.

Lisbon, 10 August 2016.

The arbitrators,

Fernanda Maçãs

Sérgio Pontes

João Taborda da Gama

Frequently Asked Questions

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How are capital losses from subsidiary liquidation treated under Article 45(3) of the Portuguese IRC Code?
Under Article 45(3) of the Portuguese IRC Code, capital losses from subsidiary liquidation face interpretive controversy. The Tax Authority argues the 50% deductibility limitation applies to liquidation losses based on anti-abuse teleology, historical interpretation, and constitutional equality principles, reasoning it would be discriminatory to limit deductibility for onerous transfers but not liquidations. However, taxpayers contend Article 45(3) applies only to capital losses from onerous transfers of shareholdings, not liquidation scenarios, arguing a literal interpretation of the provision. The dispute centers on whether liquidation losses should receive the same tax treatment as losses from share sales when the parent company held 98-100% of the liquidated subsidiary.
What are the rules for deducting property depreciation expenses when buildings are not in active use under IRC?
Property depreciation expenses under IRC require meeting the 'indispensability' test established in Article 23(1) of the IRC Code. For buildings not in active use, Article 29(3) becomes relevant. The Tax Authority's position is that depreciation on investment properties not generating income fails the indispensability requirement because the expenses are not necessary for obtaining or guaranteeing taxable income. Even if properties are classified as investment properties and held available for lease or sale, if they are not actually leased or actively producing income, their depreciation may be considered non-deductible. The key distinction is between properties actively leased (generating income) versus those merely held available for lease, with only the former's depreciation considered fiscally indispensable under Article 23.
How does the RETGS tax group regime affect the calculation of taxable income corrections in IRC?
Under the RETGS (Regime Especial de Tributação de Grupos de Sociedades) tax group regime, taxable income is calculated on a consolidated basis for all group companies. When tax corrections are made to individual subsidiary companies, they directly impact the group's overall taxable income calculation. In Process 66/2016-T, corrections totaling €270,963.13 were made at the level of subsidiary B... S.A., but these corrections adjusted the consolidated fiscal result of the entire tax group for which A... was the parent company. The RETGS regime means that deductions, losses, and expenses at subsidiary level flow through to the group assessment, making it crucial to properly determine which items are deductible at the individual company level before consolidation.
Can a parent company in a tax group challenge IRC assessment corrections through CAAD tax arbitration?
Yes, a parent company in a tax group has full legal standing to challenge IRC assessment corrections through CAAD (Centro de Arbitragem Administrativa) tax arbitration, even when the corrections were technically made at the subsidiary level. This is established under the LFATM (Legal Framework for Arbitration in Tax Matters - Decree-Law 10/2011). In Process 66/2016-T, the parent company A... successfully initiated arbitration proceedings to contest corrections made to subsidiary B... S.A.'s fiscal result, because under RETGS, the assessment is issued to the parent company as representative of the tax group. The arbitration request must be filed within the legal deadline, and the collective arbitral tribunal is constituted by arbitrators appointed by the CAAD Ethics Council when parties do not appoint their own arbitrators.
What conditions must be met for real estate amortization costs to be fiscally deductible under Portuguese corporate tax law?
For real estate amortization costs to be fiscally deductible under Portuguese corporate tax law, they must satisfy the indispensability requirement under Article 23(1) of the IRC Code, meaning the expenses must be necessary for obtaining or guaranteeing taxable income. Article 29(3) specifically addresses immovable property depreciation. Key conditions include: (1) the property must be actively used in income-generating activities or business operations; (2) the depreciation must correspond to actual wear and tear or obsolescence; (3) there must be a demonstrable connection between the expense and the company's taxable income; and (4) proper accounting records must be maintained. Properties merely held available for lease or sale, but not actually leased or generating income, may fail the indispensability test, as the Tax Authority can argue such depreciation expenses are not necessary for obtaining taxable revenue, even if classified as investment properties on the balance sheet.