Process: 670/2017-T

Date: November 9, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 670/2017-T) addresses the tax deductibility of amortizations for intangible assets under Portuguese IRC (corporate income tax) rules. The case involves A... S.A., which acquired the 'B...' pharmaceutical brand assets for €15.6 million in 2009, including manufacturing technology, know-how, trademarks, registrations, and marketing materials. The company treated these as a single intangible asset with an estimated useful life initially of 6 years (later revised to 10 years) and claimed depreciation deductions. The Tax Authority challenged IRC self-assessment 2015, issuing a correction assessment of €191,795.66. The taxpayer challenged both the assessment and the dismissal of its hierarchical appeal, arguing violation of law due to insufficient reasoning and error in denying deductibility of depreciation expenses. Key issues include: whether composite intangible assets can be amortized as a single asset; the application of CIRC Article 34 on intangible asset depreciation; burden of proof in self-assessment challenges; and whether acquired brands with indefinite useful lives qualify for tax-deductible amortization. The case illustrates fundamental principles of Portuguese tax law regarding intangible asset valuation, the distinction between finite and indefinite useful life assets, taxpayer obligations in self-assessment regimes, and procedural requirements for administrative appeals including adequate legal reasoning in tax decisions.

Full Decision

ARBITRAL DECISION

I – REPORT

On 22 December 2017, A..., S.A., NIPC..., with headquarters at Rua ..., no. ..., ... floor, ..., ..., filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the corporate income tax (IRC) assessment act no. 2015..., in the amount of €191,795.66, as well as the decision dismissing the hierarchical appeal that had the same as its subject.

To substantiate its request, the Claimant alleges, in summary:

  • Defect of violation of law due to manifest insufficiency of the reasoning of the decisions on the administrative review and hierarchical appeal;
  • The partial illegality of the IRC self-assessment no. 2015... and demonstration of assessment no. 2015..., due to error of fact and law concerning the deductibility of expenses with depreciation/amortisation relating to the intangible asset "B...".

On 27-12-2017 the request for constitution of the arbitral tribunal was accepted and automatically notified to AT (Tax Authority).

The Claimant did not proceed to appoint an arbitrator, therefore, pursuant to the provisions of article 6(2)(a) and article 11(1)(a) of the RJAT, the President of the Deontological Board of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable deadline.

On 14-02-2018, the parties were notified of these appointments and did not manifest any intention to refuse any of them.

In accordance with the provisions of article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 06-03-2018.

On 17-04-2018 the Respondent, duly notified for this purpose, presented its response defending itself solely through impugnation.

By order of 09-05-2018, pursuant to article 421 of the Code of Civil Procedure, applicable under article 29(1)(e) of the RJAT, it was determined that the testimony of witnesses C... and D..., given in CAAD case no. 543/2017T, should be used.

On 05-09-2018 the meeting referred to in article 18 of the RJAT took place, where the witness presented by the Claimant was questioned at the hearing, and the deadline referred to in article 21(1) of the RJAT was extended.

Having been granted a deadline for the submission of written submissions, these were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

The deadline referred to in article 21(1) of the RJAT was extended for a second time.

It was indicated that the final decision would be notified by the end of the deadline provided for in article 21(1) of the RJAT, duly extended.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal standing and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Administrative Rule no. 112-A/2011, of 22 March.

The case is not affected by nullities.

Thus, there is no obstacle to the assessment of the case.

In view of all the foregoing, it is incumbent upon us to deliver

II. DECISION

A. MATTERS OF FACT

A.1. Facts established as proven

The Claimant was, in the fiscal year 2014, the parent company of a group of companies operating in the pharmaceutical sector, producing and marketing products in this area and holding various brands operating in the healthcare sector in general.

At the time of the facts, the Claimant was subject to the Special Tax Regime for Groups of Companies.

The group of companies to which the Claimant belongs was composed, inter alia, of E..., Lda. (hereinafter, E...).

On 23-12-2009, the Claimant and F..., S.A. entered into an "Asset Purchase Agreement" through which the former acquired from the latter, for the value of €15,600,000.00, the assets "B..." related to the activity of production, development, marketing and commercialisation of pharmaceutical and dermocosmetic products of this brand.

Pursuant to Clause 2 of said contract, the acquisition in question included:

  • "Manufacturing Technology and Know-How", comprising the know-how relating to product formulation, production methods and technology used;
  • "Registrations", comprising product registration dossiers and marketing authorisations;
  • "Trademarks", comprising the "B..." trademark, but also the trademarks "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..." and updated registrations;
  • "Marketing and Promotional Documents", comprising the customer list, marketing and promotion plans, sales force training manuals, among others, existing at the date of the transaction.

In the context of said contract, various assets beyond the "B..." trademark were transferred.

The contract made no reference to a deadline or restriction on exclusive use of the trademark.

Through the "Asset Purchase Agreement", F..., S.A. committed itself to guarantee, at no additional cost, the assignment of position in all distribution contracts it had concluded, as well as supply contracts with Group G... and Group H... and furthermore, in the context of supply and manufacturing contracts concluded with laboratories I... and J....

Simultaneously with this contract, a "Toll Manufacturer Agreement" ("TMA") was concluded between the parties, whereby F..., S.A. was granted the right to exclusive production of certain products for a maximum period of 24 months, after which E... would directly manufacture all products.

The acquisition of the "B..." assets was aimed at reinforcing the leading position in the OTC market, in an area where it had no presence, and maximising the use of available production capacity in the Group, enhancing technological innovation and the consequent acquisition of third-party production contracts with better margins.

On 31-08-2018, the Claimant subscribed to a capital increase of E..., in kind, in the amount of €990,000.00, embodied in the transfer to it of "the assets constituting the entirety of the assets allocated to the line of business of the contributing company, (...) of import, export, production and marketing of Medicines not subject to medical prescription and cosmetics", among which were included the assets previously acquired from F..., S.A., with the net value of €14,518,555.43.

The Claimant notified the Competition Authority with respect to this transaction.

Both the Claimant and, subsequently, E... proceeded to account for the assets in question as intangible assets, having effected the respective amortisations and considered them as deductible for tax purposes.

Both proceeded to account for such assets as a whole, that is to say, as if they were a single asset without qualifying each of the components as identifiable assets capable of generating economic benefits separately and recorded them in the depreciation and amortisation schedules under the designation "Trademark/Rights".

The useful life of the asset was initially estimated at 6 years and subsequently at 10 years, having been determined based on the following criteria:

  • typical life cycles of the assets;
  • technical, technological and commercial obsolescence;
  • competition;
  • level of maintenance expenditure required to obtain the expected future economic benefits from the assets.

The Claimant estimated that, after the 6-year period, subsequently re-evaluated to 10 years, should there be no significant investments and developments, it would not be possible to maintain the net cash inflows generated at the time of acquisition.

The amortisations of the "B..." assets were calculated based on the straight-line method and recorded as expenses of the fiscal year from the 2010 tax period onwards.

The "B..." trademark and its products, as well as the remaining intangible assets in question, fall within a sector markedly affected by a need for constant evolution, in which, almost daily, new products are launched, with new properties and with broader use coverage, therefore there is a constant need to invest in the technology and image associated with each of the products.

Such products, together with the "B..." trademark, would become technically, technologically and commercially obsolete should they not be subject to regular investment.

The products associated with the "B..." trademark were subject to several updates and modifications over time, as required by regulatory requirements and due to competition, with some being discontinued as they did not present the desired profitability.

In 2014, a new regulation was published (EU Regulation no. 358/2014 of the Commission, of 9 April 2014) where the use of a raw material called Phenonip was prohibited from 16 October 2014 and disposal until 15 July 2015.

This regulation required the reformulation of products ... and ....

Also in 2014, two new regulations were published (EU Regulation nos. 1003/2014 and 1004/2014 of the Commission, of 18 September 2014) on amendments to the annexes of permitted substances in cosmetics, their concentrations and conditions.

Pursuant to these regulations, the use of Propylparaben and Butylparaben, among others, would be prohibited in non-rinse products, intended for application in the area covered by diapers in children under 3 years of age, and such regulations apply to ..., which necessitated its reformulation.

Until fiscal year 2013, inclusive, the expenses relating to amortisations were deducted for purposes of determining the taxable income.

The Tax Inspection Services in their inspection actions on companies of the group to which the Claimant belongs corrected values in the depreciation and amortisation items of the intangible asset "Trademark B...", in the fiscal years 2010 to 2013.

In fiscal year 2014, E... proceeded to account for its respective amortisations, in the amount of €1,061,296.13.

However, given the corrections to the taxable income made in fiscal years 2010 to 2013, E... did not deduct the cost in question for purposes of determining the taxable income, having instead opted to add, in box 07, Field 719 of the Individual Periodic Income Tax Return Model 22, the amount of €1,061,296.13, calculated by applying the rate of 6.803% to the acquisition cost of assets identified as Trademark/Rights B....

This situation resulted in the determination of a taxable profit in the amount of €1,195,827.51.

Consequently, when filing the periodic income tax return Model 22 for the Group, the Claimant determined a total IRC to be paid in the amount of €285,900.54.

The Claimant made payment of the tax self-assessment.

The Claimant did not accept the IRC self-assessment made, considering that E... should not have added, in Box 07, Field 719 – "Losses from impairment of current assets and depreciation and amortisation, not accepted as expenses", the amount of €1,061,296.13.

As the parent company subject to the Special Tax Regime for Groups of Companies, the Claimant filed on 17-12-2015 the administrative review no. ...2015... of the IRC self-assessment act.

On 13-07-2016, the Claimant was notified of the draft decision of the administrative review.

On 29-07-2016, the Claimant exercised its right to be heard.

On 31-08-2016, the Claimant was notified of the order dismissing the administrative review.

On 29-09-2016, the Claimant filed hierarchical appeal no. ...2016... of the decision dismissing the administrative review.

On 26-09-2017, the Claimant was notified of the decision dismissing the hierarchical appeal.

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the matter of fact proven and not proven

Regarding matters of fact, the Tribunal does not have to rule on everything alleged by the parties; rather, it is incumbent on it to select the facts that matter for the decision and to distinguish the proven matter from the unproven (see article 123(2) of the Tax Procedure and Process Code (CPPT) and article 607(3) of the Civil Procedure Code (CPC), applicable by virtue of article 29(1)(a) and (e) of the RJAT).

In this manner, the facts pertinent to the judgment of the case are selected and delineated according to their legal relevance, which is established in view of the various plausible solutions to the legal question(s) at issue (see former article 511(1) of the CPC, corresponding to the current article 596, applicable by virtue of article 29(1)(e) of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110(7) of the CPPT, the documentary and testimonial evidence, and the case file attached to the proceedings, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the Southern Administrative Court of 26-06-2014, delivered in case 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not impugned".

Statements made by the parties and presented as facts, consisting of strictly conclusive assertions, incapable of proof and whose truth must be assessed in relation to the concrete matter of fact consolidated above, were not established as proven or not proven.

B. LAW

The matter at issue in the present arbitral action was already the subject of examination in the context of the arbitral case no. 543/2017T of CAAD[2], relating to fiscal year 2010 of the present Claimant.

Given that the same questions are raised by the Claimant, the factual situation underlying them is distinct, and therefore a different solution must be given to them.

Indeed, whereas in said arbitral case no. 543/2017T the question was the assessment of the legality of the official assessment made by the Tax Authority following corrections made during tax inspection, in the present case the assessment concerns the legality of the self-assessment act performed by the Claimant itself, which was the subject of an administrative review, followed by a hierarchical appeal, an administrative review and appeal that were dismissed by the Tax Authority.

This circumstance has immediate repercussions both at the level of burden of proof and at the level of assessment of the defect of lack of reasoning invoked by the Claimant.

Thus, and as the Claimant itself acknowledges, this defect is restricted to the decisions of the administrative review and the hierarchical appeal, not extending to the self-assessment, whose annulment the Claimant seeks, because this was effected by the Claimant itself.

Now, as stated by Carla Castelo Trindade[3], "This is the first matter that must be clear: the object of the arbitral proceeding is the act of (...) self-assessment".

The same Author continues, clarifying that "the acts of second or third degree may always be arbitrable, insofar as they themselves involve, and only to that extent, the (il)legality of the assessment acts in question".

A consequence of what has been said is that "the defects peculiar to acts of dismissal of administrative reviews, hierarchical appeals or requests for revision of the tax act are not arbitrable because they fall outside the material scope of tax arbitration."[4].

As the same Author further illustrates[5], included in these defects peculiar to acts of second and third degree are the formal defects that affect them, including their lack of reasoning.

That is to say, and in sum, article 2 of the RJAT takes as its object the competence of arbitral tribunals, the primary acts ("acts of tax assessment, self-assessment, withholding at source and payment on account"), with secondary acts only relevant as elements providing timeliness of the impugned claim, as results from article 10(1)(a) of that Regime, which requires that requests for constitution of an arbitral tribunal be submitted within 90 days, counted from the facts provided for in articles 102(1) and (2) of the Tax Procedure and Process Code.

Therefore, in the first place, in the present proceeding we are examining the legality of the Claimant's IRC self-assessment act (direct object of the competence of arbitral tribunals), with the legality of the secondary act of administrative review – whose primary function is to ensure the timeliness of the Claimant's opportunity to challenge before arbitration the primary act – being merely reflexive or derived from the legality thereof, a question that will be addressed hereinafter.

Indeed, the possible annulment of the act deciding the administrative review, for incorrect reasoning, when – as is the case – it is concluded that the illegalities argued against the primary act have not been verified, would always result in a useless act, and as such prohibited, since, bound by res judicata, the Tax Authority would do nothing more in the new act than, necessarily, confirm what was decided in the judicial forum, which, moreover, is reflected in the regime of article 163(5)(c) of the new Administrative Procedure Code (CPA), which is deemed applicable in that case.

Indeed, as will be seen hereinafter, if it is not concluded that the (self-)assessment act subject of the present arbitral proceedings should be annulled, it must necessarily be concluded that the second-degree acts, in light of the facts established, would have been adopted with the same content (dismissal).

Thus, and from the foregoing, given that the object of the present arbitral action is the self-assessment act, and the acts deciding the administrative review and the hierarchical appeal only and insofar as they incorporate the (il)legality of that first act, not including therein, therefore, the defects peculiar to such acts, including their lack of reasoning, this Tribunal cannot rule on this defect argued by the Claimant, and therefore the arbitral request is, in this regard, unfounded.

Having reached this point, it is necessary to address the second line of divergence between the situation before us and the one that was the subject of examination in arbitral case no. 543/2017T.

Thus, whereas in that other case the question was the assessment of the legality of an official assessment act, performed by the Tax Authority correcting an earlier assessment based on the taxpayer's declaration, the burden of proof of the legality of the corrections made would, in the first place, rest with the Tax Authority to prove the legal prerequisites for the correction it made[6].

In the present case, it is the Claimant that appears in court petitioning for the illegality of the assessment made on the basis of its own declaration.

In this case, not only does the Claimant not enjoy the presumption of truthfulness of its declaration, enshrined in article 75(1) of the General Tax Law (LGT) (since it comes to court precisely against the content of the declaration it filed pursuant to law), but it is the Claimant itself that bears the burden of proof of the illegality of the act whose annulment it seeks[7].

In view of the foregoing and in light of the Claimant's claim, the question at stake in the present arbitral action is not only whether facts are demonstrated that support the conclusion that the B... trademark and the assets associated with it should, or should not, be considered an intangible asset with finite and limited duration and, therefore, subject to amortisations that may be recognised as a tax-relevant expense, but also, contrary to what occurred in the aforementioned arbitral case 543-2017T, the question of whether facts are demonstrated that support the conclusion that the amortisation periods should be those indicated by the Claimant.

Given what has been said, the burden of such proof rests, in the present case, with the Claimant.

Article 34(1)(a) of the Corporate Income Tax Code (CIRC), in the applicable version, provides that "The following are not accepted as expenses: (a) Depreciation and amortisation of elements of assets not subject to deterioration".

Regulatory Decree no. 25/2009, of 14 September provides in its article 16(1) that "Intangible assets are amortisable when subject to deterioration, namely by having a limited temporal scope/duration."

In the concrete case, the Claimant seeks recognition of a reduction to its taxable profit, based on the inclusion in field 719, of box 07 of the individual Model 22 tax return of E..., Lda., of amortisations/depreciation, in the amount of €1,061,296.13.

The aforementioned amortisations/depreciation relate to the following group of assets, acquired by the Claimant on 23-12-2009, for the value of €15,600,000.00 and later transferred to E..., Lda, following the subscription of a capital increase in kind:

  • "Manufacturing technology and know-how": comprising all know-how relating to product formulation, quality control, packaging, formulas, complaint records, evaluations, processes, technology used;
  • "Registrations": comprising product registration dossiers and marketing authorisations;
  • "Trademarks": comprising the "B..." trademark, but also the trademarks "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..." and updated registrations;
  • "Marketing and promotional documents": comprising the customer list, marketing and promotion plans, sales force training manuals, existing at the date of the transaction;
  • The assignment of contractual position in all distribution contracts that the transferor of the assets had concluded, including supply contracts to Group G... and Group H...;
  • The assignment of contractual position of the transferor of the assets in the context of the supply and manufacturing contracts concluded with Laboratories I... and J....

As can be seen, the asset in question comprises very diverse realities such as, in addition to various commercial trademarks, properly understood, manufacturing and production techniques and knowledge, product registrations and marketing authorisations, customer lists, marketing and promotion plans, sales force training manuals, and assignments of various contractual positions in distribution and supply contracts.

It is this entire group of assets that the Claimant acquired on 23-12-2009 from F... S.A. for the value of €15,600,000.00, and that were subsequently transferred to E... following a capital increase, that the Claimant seeks to amortise in total, in fiscal year 2014, with reference to a useful life period of 10 years.

Now, upon examination of the matter of fact established as proven, it does not appear to be beyond reasonable doubt that the majority of the assets analysed here and referred to above are capable of being contained within a defined useful life period. The same reasoning can be applied to the assets corresponding to commercial trademarks.

Indeed, and for starters, in this matter, as in others (as will be seen hereinafter), the Claimant conflates 21 trademarks, treating them equally, with no distinction drawn between them and with no understanding of whether, and why, they should be subject to the same treatment at the level of the prerequisites and conditions of their tax amortisation.

On the other hand, and somewhat as a consequence of the approach adopted, the Claimant's reasoning regarding the fulfilment of the prerequisites for tax amortisation of the commercial trademarks in question, as reflected in the matter of fact proven, amounts to generic circumstances, applicable by nature to the generality of commercial trademarks.

Now, as is well known, commercial trademarks, notwithstanding the factors indicated by the Claimant (and established as proven), such as the need for investments in the market and technology, are, in principle, assets without a defined duration, as the legislator came to recognise by introducing in the 2014 revision of the CIRC article 45-A of the CIRC, where it provided, contrary to what had been the case until then, that "It is accepted as a tax expense, in equal installments, during the first 20 tax periods following initial recognition, the acquisition cost of the following intangible assets when recognised separately, in accordance with accounting standards, in the individual accounts of the taxpayer: (a) Elements of industrial property such as trademarks, (...) acquired for consideration and that do not have limited temporal scope;".

On the other hand, the aforementioned trend towards indefinite duration of trademarks does not conflict with the normal and natural, over time, discontinuation of (product lines) covered by the same commercial trademark, as well as the launch of new (product lines) covered by such trademark, due to regulatory changes or market conditions, which will not affect the use and intention of use for an indeterminate period of the trademark, but rather the period of use of items associated such as "manufacturing and production techniques and knowledge, product registrations and marketing authorisations, customer lists, marketing and promotion plans, sales force training manuals, and assignments of various contractual positions in distribution and supply contracts".

In this manner, subsequent expenditures after acquisition made with those items associated with the commercial trademark will not affect, in principle, the indefinite useful life of the intangible asset (as per paragraphs 89(f) and 90 of NCRF6) and not amortisable, and should not, in principle, be considered as additions to the intangible asset that is the commercial trademark or replacements of part thereof (as per paragraph 20 of NCRF6, and its referral to the treatment provided for in paragraph 62 of NCRF6).

Note that the fact that the commercial trademark, as an intangible asset, has an indefinite useful life, does not prevent it from suffering impairment losses, but the accounting treatment of such losses will not be framed by the consideration of a finite useful life and the consequent recording of amortisations, but by the recording of impairment losses (as admitted by paragraph 107 of NCRF6); and that also, impairment losses on intangible assets could be accepted fiscally as expenses, pursuant to articles 35 and 38 of the CIRC (version prior to Law no. 2/2004), therefore the fiscal legislation, on this matter, did not call into question the application of the constitutional principle of taxation based on actual profit, which would be the case if, while not admitting fiscally the amortisations, it did not admit fiscally impairment losses (losses in value) in those intangible assets.

In light of the foregoing, and in sum, it is considered that it is not proven, beyond any reasonable doubt, in the case, that the 21 trademarks that make up the assets now under consideration all have a defined useful life period, and that, as such, should be considered an intangible asset with finite and limited duration, subject to amortisations and depreciations, that may be recognised as a tax-relevant expense.

Regarding the remaining elements comprising the B... asset, above detailed, namely the manufacturing and production techniques and knowledge, product registrations and marketing authorisations, customer lists, marketing and promotion plans, sales force training manuals, and assignments of various contractual positions in distribution and supply contracts, it is believed, as was already noted, that evidence points beyond reasonable doubt that they comprise assets of defined duration, with it being immediately apparent that at least some of these assets will, in fact and by nature, have a finite period of duration.

Thus, and for example, manufacturing and production techniques and knowledge will be subject to obsolescence, namely, and as the factual matter established indicates, due to regulatory changes.

On the other hand, product registrations and marketing authorisations, in light of their respective legal regulations, have periods of validity, even if subject to renewal, and customer lists, marketing and promotion plans and sales force training manuals, will not, in principle, be usable indefinitely, especially given that the majority of the products at issue are intended for a transitional market segment (parents of newborns and very young children).

Finally, the distribution and supply contracts whose position was acquired by the Claimant from F... also have a period of validity, even if subject to renewal.

Nothing indicating that such assets are devoid of value (being, on the contrary, evident that such assets do incorporate actual economic value for their owner), or that their respective value is not included in the amount of €15,600,000.00 paid by the Claimant to B..., and to which the amortisations/depreciation that the Claimant seeks to rely on refer, there remain no reasonable doubts that we are dealing with assets fiscally eligible for purposes of depreciation/amortisation.

However, we are dealing with assets of heterogeneous nature, and insufficient elements were gathered that would allow it to be concluded that, for each and every one of them, the amortisation period that the Claimant now seeks to rely on is adequate.

Indeed, notwithstanding it being proven that in setting the amortisation periods it upholds, the Claimant weighed the typical life cycles of the assets, technical, technological and commercial obsolescence, competition, and the level of maintenance expenditure required to obtain the expected future economic benefits from the assets, the fact is that it is impossible for this Tribunal to verify whether, and to what extent, the aforementioned factors apply to each of the various types of assets at issue.

It is thus concluded, in sum, that the Claimant has not demonstrated with reliability, asset by asset, what the useful life of the intangible assets acquired in question should be, acknowledging that the assets it acquired through the contract are diverse, with different useful lives, but having opted to amortise everything at an average rate, without any material and legal basis being discernible to validate such choice.

Now, for accounting to be reliable, it must be verifiable, that is, it must permit its recalculation, and none of the elements in the case file, it is considered, permits the recalculation of the useful life of the assets in question, therefore, even if it is admitted that the useful life of the assets now under consideration is finite, it is considered that the concrete determination of their respective useful life has not been fully demonstrated.

In this framework, and in light of the provisions of article 74(1) of the General Tax Law, nothing more is incumbent on this Tribunal than to judge the arbitral request entirely without merit.

C. DECISION

We hereby decide in this Arbitral Tribunal to judge the arbitral request filed entirely without merit and, in consequence:

  • Absolve the Respondent from the claim; and
  • Condemn the Claimant in the costs of the proceeding, in the amount set out below, taking into account what has already been paid.

D. Value of the proceeding

The value of the proceeding is fixed at €191,795.66, pursuant to article 97-A(1)(a) of the Tax Procedure and Process Code, applicable by virtue of articles 29(1)(a) and (b) of the RJAT and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €3,672.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Claimant, given that the request was entirely without merit, pursuant to articles 12(2) and 22(4) of the RJAT and article 4(4) of the aforementioned Regulation.

Notify the parties.

Lisbon, 9 November 2018

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Nuno Maldonado Sousa)

The Arbitrator Member

(Sérgio Pontes)

[1] Available at www.dgsi.pt, as with the remaining case law cited without indication of source.

[2] Available at: https://caad.org.pt/tributario/decisoes/decisao.php?listPage=1&listPageSize=100&s_processo=&s_data_ini=&s_data_fim=&s_resumo=amortiza&s_artigos=&s_texto=&id=3513.

[3] "Legal Regime of Tax Arbitration - Annotated", Almedina, 2016, p. 69.

[4] Ibid., p. 70.

[5] Ibid., p. 71.

[6] See, in this sense, for example, the Decision of the Northern Administrative Court of 15-11-2013, delivered in case 00201/06.8BEPNF.

[7] See, in this sense, the Decision of the Supreme Administrative Court of 27-06-2012, delivered in case 0982/11.

Frequently Asked Questions

Automatically Created

How are intangible asset depreciations treated for IRC (corporate income tax) purposes in Portugal?
Under Portuguese IRC law, intangible asset depreciations are governed by Article 34 of the IRC Code (CIRC). Intangible assets may be depreciated if they have a finite useful life and are used in business activities. The depreciation must reflect the pattern of consumption of economic benefits, typically using the straight-line method over the asset's useful life. Assets acquired in business combinations must be separately identified and valued. Taxpayers must maintain proper documentation justifying the useful life estimation, considering factors like technological obsolescence, competition, and maintenance requirements. Brands and trademarks with indefinite useful lives generally cannot be amortized for tax purposes unless the taxpayer demonstrates a finite period of expected economic benefit generation.
What is the burden of proof for taxpayers challenging IRC self-assessments before CAAD arbitral tribunals?
In CAAD arbitral proceedings challenging IRC self-assessments, the burden of proof follows Article 74 of the Tax Procedure and Process Code (CPPT) and the general rules of Administrative Procedure Code. When taxpayers challenge their own self-assessments (autoliquidação), they bear the burden of proving the facts supporting their claim that the self-assessment was incorrect. This differs from challenging Tax Authority-initiated assessments, where the burden typically rests with the Tax Authority. The taxpayer must present sufficient evidence demonstrating the error of fact or law in their self-assessment. This includes documentary evidence, accounting records, expert valuations, and witness testimony. The standard of proof is the balance of probabilities, and tribunals evaluate evidence according to free assessment principles, except where legal rules specify particular evidentiary requirements.
Can depreciation costs for intangible assets like brands be deducted as tax-deductible expenses under Portuguese IRC rules?
Depreciation costs for intangible assets like brands can be tax-deductible under Portuguese IRC rules, but with important limitations. According to CIRC Article 23 (expenses deductibility) and Article 34 (depreciations), amortization of intangible assets is deductible only if: (1) the asset has a finite useful life that can be reliably determined; (2) the asset is used in business activities generating taxable income; (3) proper accounting records are maintained; and (4) the depreciation reflects the consumption pattern of economic benefits. Brands acquired separately or in business combinations must be individually identified and valued. If a brand has an indefinite useful life (no foreseeable limit to the period over which it generates cash flows), it cannot be amortized for tax purposes, though it may be subject to annual impairment testing. Taxpayers must justify useful life estimates with business plans, market studies, and financial projections showing when economic benefits will cease.
What is the procedure for filing a hierarchical appeal after a tax grievance claim (reclamação graciosa) is denied in Portugal?
The procedure for filing a hierarchical appeal (recurso hierárquico) after denial of a tax grievance claim (reclamação graciosa) in Portugal follows Articles 66-67 of the CPPT. After the Tax Authority denies a reclamação graciosa challenging an assessment, the taxpayer may file a hierarchical appeal within 30 days of notification of the decision. The appeal is addressed to the hierarchical superior of the authority that issued the contested decision, typically the Director-General of the Tax Authority. The appeal must be submitted through the same tax office that issued the original decision. It should contain: identification of the contested decision, grounds for appeal (errors of fact or law), supporting evidence, and specific relief sought. The hierarchical superior must decide within prescribed timeframes. If the hierarchical appeal is denied or not decided within the legal deadline, the taxpayer may then pursue judicial review through administrative courts or, for eligible matters, CAAD tax arbitration under the RJAT regime.
What constitutes sufficient legal reasoning in administrative decisions on IRC self-assessment disputes?
Sufficient legal reasoning in administrative decisions on IRC self-assessment disputes requires compliance with Article 77 of the CPPT and general administrative procedure principles. Tax Authority decisions must contain: (1) clear identification of the factual basis, including specific facts found proven and evidence supporting those findings; (2) explicit legal grounds, citing applicable legal provisions and explaining their application to the facts; (3) logical connection between facts, law, and conclusion; and (4) response to principal arguments raised by the taxpayer. The reasoning must enable the taxpayer to understand why their position was rejected and must be sufficient for judicial review. Insufficient reasoning constitutes a substantive defect (vício de violação de lei) that can invalidate the decision. Generic statements, conclusory assertions without factual support, or failure to address key taxpayer arguments constitute inadequate reasoning. The defect affects decisions on both initial assessments and appeals (reclamação graciosa and recurso hierárquico), and can be grounds for annulment in arbitration or judicial proceedings.