CAAD 671/2017-T: IRC Amortization of Indefinite-Life Intangible Assets and Tax Assessment Grounds

DECISION (consult full version in PDF)

The arbitrators Judge José Poças Falcão (arbitrator chairman), Professor Doctor Clotilde Celorico Palma and Dr. Luís Alberto Ferreira Alves, (arbitrator members), appointed by the CAAD Ethics Council to form the Arbitral Tribunal, constituted on 6-3-2018, agree as follows:

REPORT

Laboratory A..., S.A., with registered office at Street..., No...., ..., ..., ..., legal entity No...., came under the provisions of articles 2.º, No. 1, paragraph a) and 10.º of Decree-Law No. 10/2011, of January 20 ("Legal Regime of Arbitration in Tax Matters"), in the version introduced by articles 228.º and 229.º of Law No. 66-B/2012, of December 31, to submit a request for arbitral pronouncement (PPA), for assessment of the illegality of the tax act of collection of Corporate Income Tax ("IRC") No. 2015..., and corresponding compensatory interest, maintained following the dismissal decision of Hierarchical Appeal No. ...2017..., delivered by the Honorable Deputy Director-General (by subdelegation), on September 20, 2017, and notified on October 4, 2017.

1.1 The Request

To support the request it was alleged:

• The Claimant was notified of the IRC collection No. 2015..., relating to the tax year 2011, now challenged (see copy of the respective collection, which is now attached as Document 1 and is deemed to be fully reproduced for all legal purposes) and of the Reconciliation Statement No. 2015..., pursuant to which it should make payment of the total amount of € 890,573.97, including compensatory interest until February 1, 2016 (see copy of the respective Reconciliation Statement, which is now attached as Document 2 and is deemed to be fully reproduced for all legal purposes);

• An amount that the Claimant came to pay on February 1, 2016, that is, within the voluntary payment period (see supporting payment document that is now attached as Document 3 and is deemed to be fully reproduced for all legal purposes), being aware that, pursuant to article 9.º, No. 3 of the General Tax Law ("LGT"), and insofar as it avoids, in this way, the payment of default interest and costs in the context of tax enforcement proceedings, the payment of taxes does not preclude the right of taxpayers to claim and contest the underlying tax collection acts, if they consider them, as is the case, to be illegal, in order to obtain reimbursement of amounts paid unduly, increased by indemnity interest, in accordance with No. 2 of article 43.º of the LGT and No. 3 of article 61.º of the CPPT;

• The Claimant is the parent company of a Group of Companies, being, at the time, applicable the special regime for taxation of groups of companies provided for in articles 69.º and following of the IRC Code, in the version in force for the tax year 2011, whereby the collection sub judice results from individual corrections regarding the Claimant and company B..., Lda. (which, among others, was and is part of the respective group of companies) made in the context of the inspection action to which those were subjected;

• Thus, in accordance with Service Order No. OI2015..., the Tax Authority ordered an internal inspection action, for the tax year 2011, with a view to analyzing the periodic income statement of the group in which the Claimant is inserted (see copy of the Report of Conclusions of the Inspection Action, which supports the collection sub judice, which is now attached as Document 4 and is deemed to be fully reproduced for all legal purposes);

• In the context of the said inspection action, the Tax Authority decided to make a correction to the taxable income of B..., Lda., because it was not increased for purposes of determining the taxable profit for the tax year 2011 the amount of € 2,600,000.00, relating to reinstatements and depreciation recorded as cost and not accepted fiscally, allegedly pursuant to article 34.º, No. 1, paragraph a) of the IRC Code;

• Indeed, in accordance with the conclusions of the inspection action, carried out individually on B..., Lda., (see Annex A of Document 4), in the context of Service Order No. OI2014..., it is stated that B...Lda. "did not increase for purposes of determining the taxable profit for the tax year 2011 (...), the amounts of € 2,600,000.00 (...) relating to reinstatements and depreciation recorded as cost and not accepted fiscally (...) arising from the acquisition of trademark C... (...) and was assigned to this intangible asset C.., the net value of € 14,518,555.43";

• This because, allegedly "From the analysis of the contract, signed by the taxpayer Laboratory A..., S.A. and by company D... S.A., we can conclude that the acquisition of trademark C..., constitutes an intangible asset with no defined useful life, as no time limit or restriction of exclusive use of the trademark is mentioned, and no elements determining the useful life of the asset under analysis were detected", concluding that "As there is no foreseeable limit for the period during which the asset is expected to generate net cash inflows for the entity, we can conclude that the useful life of the intangible asset is indefinite, and not finite, as considered by the taxpayer, so that in accordance with NCRF-6, the recognized asset should not be depreciated" (emphasis added by the Claimant);

• As results from the reports of conclusions (consolidated and individual) of the inspection action (see Document 4), on December 23, 2009, the Claimant and D..., S.A. entered into an "Asset Purchase Agreement", with a view to the acquisition, for the value of € 15,600,000.00, of various intangible assets, which included the "C..." assets related to the activity of production, development, marketing and commercialization of pharmaceutical and dermoesthetic products of this brand; consequently, the Claimant proceeded to record the realities in question as intangible assets, having made the respective depreciation and considered the same as tax-deductible, insofar as we are dealing with assets with defined useful life and subject to depreciation;

• Meanwhile, on August 31, 2010, the Claimant subscribed to a capital increase of B..., Lda, in kind, in the value of € 990,000.00, consisting of the transfer, to it, "of the assets constituting the totality of the assets allocated to the line of business of the contributing company, (...) of importing, exporting, production and commercialization of Non-Prescription Medications and Cosmetics" (see Annex I of Document 4), among which were included the aforementioned assets, with the net value of € 14,518,555.43, previously acquired from D..., S.A., and the assets in question were transferred at the same values they had in the Claimant and which resulted "from the application of the provisions of the IRC Code, as they appear in the balance prepared for this purpose by the contributing company, as of June 30, 2010, thereby complying with the tax neutrality regime provided for in the IRC Code, applicable to the operation of entry of the assets in question";

• In this sense, B..., Lda, in the tax year 2011, adopted the same accounting treatment that had been followed by the Claimant, recording the respective depreciation;

• Now, pursuant to the reports of conclusions (consolidated and individual) of the inspection action carried out on B..., Lda., it is possible to verify that the corrections promoted have as their sole basis the fact that the depreciation allowances recorded as cost allegedly arising from the acquisition of trademark "C..." were not added to the taxable income;

• In this sense, the Tax Authority promoted the corrections in question only because, from the analysis of the contract concluded between the Claimant and company D... S.A., it concluded that, allegedly, the trademark "C..." constitutes an intangible asset with no defined useful life "as no time limit or exclusive use of the trademark is mentioned, and no elements determining the useful life of the asset under analysis were detected" (emphasis added by the Claimant), based, allegedly, on the concept of useful life of the intangible asset as set out in the Accounting Standard for Financial Reporting ("NCRF") 6;

• However, having analyzed the "Asset Purchase Agreement" entered into between the Claimant and company D... S.A. (see Annex 2/A of Document 4), it is possible to observe that, by virtue of such contract, various realities were transmitted beyond the trademark "C... and which were not subject to any analysis by the Tax Authority; indeed, in terms of clause 2 of the aforementioned acquisition contract (see Annex 2/A of Document 4), various assets were acquired, namely:

  • "Manufacturing technology and know-how": comprising all know-how relating to product formulation, quality control, packaging, formulas, complaint records, assessments, processes, technology used, etc.;

  • "Registrations": comprising product registration dossiers and commercialization authorizations;

  • "Trademarks": comprising the trademark "C...", but also the trademarks "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..." and the updated registries;

  • "Marketing and promotional documents": comprising the customer list, marketing and promotion plans, sales force training manuals, among others, existing at the time of the transaction.

• Furthermore, another evidence that the Tax Authority did not care to analyze, results from clauses 9.3 and 9.4., pursuant to which D... S.A. undertook to make efforts to guarantee, at no additional cost, the assignment of position in all distribution contracts it had concluded, as well as in supply contracts to (i) Group E... and (ii) Group F... and also in supply and manufacturing contracts concluded with Laboratories G..., H... and I...;

• In any case, at the appropriate time, the Claimant notified the Competition Authority regarding this operation, making it quite clear from that notification and the consequent Competition Authority decision that it does not reduce to the acquisition of the trademark "C..." (see copies of the said notification and decision, which are now attached as Documents 5 and 6 and are deemed to be fully reproduced for all legal purposes);

• In light of the foregoing, it is clear that the assets acquired by the Claimant and, subsequently, by B..., Lda., include many more realities than the trademark "C...", with the Tax Authority having not taken care to analyze the assets in question with rigor;

• Indeed, it is repeated, the Tax Authority reduces all its line of argument to the fact that the trademark "C..." constitutes an asset without defined useful life; whereby the reports (consolidated and individual) of conclusions of the inspection action are completely silent as to the period of useful life, finite, indefinite or infinite, of the remaining assets acquired by the Claimant and, subsequently, by B..., Lda.

Regarding Intangible Assets

r) The trademark "C...", as well as its respective technology and know-how, cannot be considered as assets with indefinite useful lives, being limited by external factors and being subject to depreciation;

s) In fact, considering that the trademark "C...", and its products, 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 greater scope of use, it is inevitable that the technology and methods acquired by the Claimant, and currently held by B..., Lda., together with the trademark "C...", have a limited period of life that can be measured, since they would become technically, technologically and, especially, commercially obsolete, in light of the constant innovations occurring in the sector, if they were not subject to constant investment; regarding the need for alteration and updating of the technology used, see, by way of example, the alterations suggested by D... in 2012, following complaints in the quality scope for product ... (see copy of communication from D... which is now attached as Document 7 and is deemed to be fully reproduced for all legal purposes);

t) Also in this sense, note that, in 2014, a new Regulation (EU Regulation No. 358-2014 of the Commission, of April 9, 2014) was published where the use of a raw material called Phenonip was prohibited from October 16, 2014 and disposal until July 15, 2015, so this Community Regulation required the reformulation of products ... and ...;

u) Also in 2014, two new Regulations (EU Regulations Nos. 1003/2014 and 1004/2014 of the Commission, of September 18, 2014) were published on changes to the annexes of substances allowed in cosmetics, their concentrations and conditions; within the scope of the aforementioned Regulations, the use of Propylparaben and Butylparaben, among others, in non-rinsing products, designed for application to the area covered by diapers in children under three years of age, is now prohibited, and the regulations in question apply to ... diaper rash cream, which led to the need for its reformulation;

v) Furthermore, the market in which the products associated with the trademark "C..." are inserted is quite competitive, with other products/brands in the market with high levels of promotion, so there is a constant need to invest in technology and image associated with each of the products; in this sense, the assertion of the Tax Authority, set forth in the individual report of conclusions of the inspection action carried out on B..., Lda. is accepted in the sense that "The existence of competing brands is inherent to all brands and transversal to all sectors of activity, so it does not justify, by itself, that the useful life of the asset is defined";

x) However, neither the Claimant nor B..., Lda., sustained that the competition of brands, by itself, would justify that the useful life of the asset is defined, but rather that, by virtue of the aggressiveness of such competition, a substantial investment is required, in promotion and technology, to maintain the competitiveness of the product, which, as will be better demonstrated below, contributes to the qualification of the intangible asset as having a defined period of useful life; it is noted that the products associated with the trademark "C...", an integral part of the totality of the assets acquired, were subject to several updates and modifications over time, both due to regulatory requirements and due to competition itself, and some were even discontinued as they did not present the desired profitability;

z) Considering that the technology, know-how and product dossiers acquired need constant updating and renewal, with their value decreasing over time if such updates are not carried out, it must be concluded that the assets in question have a finite life, in particular the trademark "C...", the only asset subject to analysis by the Tax Authority;

aa) In support of the accounting and tax treatment adopted by B..., Lda, see the "Opinion on the accounting treatment of the acquisition of the assets 'C... '", prepared by J..., Lda (see copy of the Opinion which is now attached as Document 8 and is deemed to be fully reproduced for all legal purposes), as well as the Opinion prepared by K..., S.A. (see copy of the Opinion which is now attached as Document 9 and is deemed to be fully reproduced for all legal purposes) that analyzes the "definition of the existence of finite useful life of the reality transferred" from D..., S.A. to the now Claimant and, subsequently, to B..., Lda.

Regarding the Gracious Procedure

bb) Insofar as the Claimant did not conform to the collection crisis, by virtue of the said corrections made by the Tax Authority being manifestly illegal, it presented, on May 25, 2016, a Gracious Claim against the collection crisis (see copy of the Gracious Claim, which is now attached as Document 10 and is deemed to be fully reproduced for all legal purposes), which argued for the illegality (partial) of the said collection, arguing, in brief summary, an error in the calculation in the collection, which the Tax Authority came to recognize in the context of the analysis of the Gracious Claim, although with reference to the tax year 2010, as well as the illegality of the corrections identified above, which was amply demonstrated;

cc) However, the Tax Authority failed to grasp the facts and legal arguments presented by the now Claimant, proposing the dismissal of the Gracious Claim through the Draft Decision notified on October 21, 2016 (see copy of the respective notification which is now attached as Document 11 and is deemed to be fully reproduced for all legal purposes);

dd) However, the Draft Decision contained omissions, contradictions and errors of interpretation of matters of fact and law that led to the maintenance of the illegalities pointed out and proven in the Gracious Claim presented, errors that were pointed out by the Claimant when exercising the Right to Hearing in a request submitted on November 4, 2016 (see copy of the Right to Hearing which is now attached as Document 12 and is deemed to be fully reproduced for all legal purposes);

ee) In brief summary, the Claimant alleged that from the Draft Decision there resulted no reference, analysis or conclusion, even if contradictory, regarding:

• The defect of lack of legally required reasoning that vitiates the tax inspection report;

• The consideration as a tax cost of the depreciation of intangible assets; or further,

• The Opinions issued by J..., Lda. and by K..., S.A., which confirm and justify the position of the now Claimant,

ff) This in addition to the fact that the Draft Decision, after the collection crisis was founded (partially) on the understanding accounting that the trademark "C..." constitutes an intangible asset without defined useful life based on the concepts provided for in NCRF 6, comes to conclude that, the "corrections in the head of the companies of the group identified above are not of an accounting nature, but only relate to the tax area"...;

gg) In light of the foregoing, there was no doubt that the Draft Decision itself, besides being contradictory with the inspection report to which it allegedly refers and reiterates, suffered from the defect of lack of reasoning (emphasis added);

hh) So the content and meaning of the Draft Decision should have been changed, concluding on the illegality (partial) of the collection crisis, as well as the respective collections of compensatory interest; notwithstanding all the reasons and irrefutable evidence presented by the now Claimant that contradicted the "grounds" on which the Draft Decision was based, the Gracious Claim came to be dismissed; thus, on December 27, 2016, as mentioned above, the now Claimant was notified of the decision of the Honorable Deputy Director of Finance (in a substitute regime), delivered on December 16, 2016, dismissing the Gracious Claim (see copy of the respective notification, which is now attached as Document 13 and is deemed to be fully reproduced for all legal purposes);

ii) Consequently, the Claimant presented, on January 25, 2017, a Hierarchical Appeal from the decision dismissing the Gracious Claim (see copy of the body of the Hierarchical Appeal which is now attached as Document 14 and is deemed to be fully reproduced for all legal purposes), where it demonstrated, from the outset, that the Final Decision repeated, in its almost entirety, all the errors contained in the Draft Decision, as it revealed an almost complete reproduction of the same;

jj) Which showed that no arguments presented by the now Claimant had been considered, in the context of exercising the right to prior hearing;

kk) Therefore, the errors invoked by the now Claimant had not been remedied, nor, strictly speaking, were all the facts and arguments presented observed, even if the Tax Authority disagreed with them;

ll) Indeed, once again, and similarly to what happened in the context of the inspection actions, the Tax Authority centered all its line of argument on the fact that, allegedly, the trademark "C..." constitutes an intangible asset without defined useful life based on the concepts provided for in NCRF 6 and, for that reason, the depreciation recorded as cost could not be accepted fiscally;

mm) However, as the Claimant has always pointed out and demonstrated, the depreciation allowances subject to correction by the Tax Authority do not refer, exclusively, to the asset trademark "C...", whereby this fact justified, by itself, the annulment of the collection crisis, given the manifest defect of lack of legally required reasoning, as the Claimant had the opportunity to demonstrate in the Gracious Claim, as well as when exercising the right to hearing after notification of the Draft Decision for dismissal;

oo) On the other hand, the Tax Authority came again to allege that the "issue posed by the inspection services that led to the corrections in the head of the companies of the group identified above are not of an accounting nature but, only relate to the tax area"; which seemed to indicate that the accounting treatment given by B..., Lda., would be correct but could not be relevant for tax purposes;

pp) This when, in the context of the report of conclusions of the inspection actions (consolidated and individual), it maintained that the intangible asset trademark "C..." could not have been depreciated pursuant to NCRF 6 because, allegedly, the useful life of the asset is indefinite and not finite; which, by itself, is revealing of the inconsistency of the Tax Authority's understanding expressed at different times; without prejudice, it is not possible to maintain, in the terms in which the Tax Authority did in the decision dismissing the Gracious Claim, that the accounting treatment given by the Claimant is correct and, simultaneously, allege that it cannot be accepted for tax purposes;

qq) Primarily, because it contradicts the reasoning of the collection crisis presented by the Tax Authority in the Tax Inspection Report and, if B..., Lda. depreciated the intangible assets based on NCRF 6, it means that it is recognized that they have a finite useful life; so that, consequently, it will be necessary to recognize that such asset is subject to depreciation, having a limited temporal validity;

rr) On the other hand, the Tax Authority insists that the Claimant failed to demonstrate that the intangible asset under analysis has a defined useful life, this because it detected an alleged difficulty on the part of the Claimant in justifying the number of years of useful life attributed to the asset, given that it initially estimated a useful life of 6 years and subsequently extended that useful life to 10 years; now, naturally, the same objective criteria that served as support for the initial estimate of 6 years for the assets in question, involved, after re-evaluation, the increase in the estimated useful life to 10 years, having been demonstrated, exhaustively, throughout the gracious procedure, which criteria were used; a well different issue is the fact that the Tax Authority does not accept as justification such criteria or considers them as not proven, without, however, ever demonstrating or reasoning it;

ss) As the Claimant had the opportunity to explain in the gracious procedure, the initial period of 6 years, subsequently increased to 10 years, was determined based on the following criteria:

• Typical life cycles of assets;

• Technical, technological and commercial obsolescence;

• Competition;

• Level of maintenance expenditure required to obtain the expected future economic benefits of the assets.

tt) Thus, it was estimated that, at the end of the 6-year period, subsequently re-evaluated to 10 years, if there were no significant investments and developments it would not be possible to maintain the net cash inflows generated at the time of acquisition, not only with reference to the useful life of the main equipment used in production, but also based on the history of customer turnover in the markets in which the 'C...' products are inserted and also based on the analysis that it would be necessary to maintain a certain level of costs to support the assets on pain of, at the end of the said period, the same becoming obsolete and with gradual loss of value; indeed, in order to maintain the performance, at the time of acquisition and in the long term, of the assets in question and, in particular, of the products associated with the trademark "C...", constant investment is required in the maintenance or improvement of the resources inherent to the same, such as scientific or technical knowledge, the maintenance, design and implementation of new products, market knowledge, and commercial objectives, and that, in the absence of such investment, the assets in question would lose value or benefit, according to internal management analysis, at the end of the 10-year period;

uu) Thus, in light of the very evolution of the sector in which the Claimant and B..., Lda. are inserted, in which, almost daily, new products are launched, with new properties, and with greater scope of use, it is verified that, in the absence of investment by B..., Lda., the assets would become technically, technologically and, especially, commercially obsolete, in the estimated period of life;

vv) In this sense, at the time of the transfer of the intangible asset, the Claimant applied its best estimate for the overall useful life of the acquired assets, which, given the variables of the various components of such assets, had to be subsequently re-evaluated;

xx) In light of the foregoing, and contrary to what the Tax Authority alleged, the Claimant justified which criteria supported the determination of the useful life of the intangible assets, not having, by contrast, the Tax Authority, presented objective elements capable of questioning the period of useful life attributed to such assets; furthermore, another well different issue from stating that the assets do not have a defined useful life lies in the alleged lack of explanation of why the Claimant initially estimated a period of useful life of 6 years and, subsequently, altered that same period;

zz) Indeed, without prejudice to the Claimant's understanding that it has justified why such an alteration, were it true that the Claimant did not manage to justify it properly, which it is not, we would not be faced with a question of determining whether the assets have defined useful life or not but rather with a lack of demonstration of what would then be the period of useful life, so that, at most, the Tax Authority could only question the value of the depreciation, if it understood that the 10-year period has no justification;

aaa) However, this is not the line of argument of the Tax Authority, nor is it the basis of the corrections in crisis, and therefore cannot, simply, sustain that the assets do not have defined useful life merely because the Claimant allegedly failed to justify the alteration made;

bbb) Nevertheless, on October 4, 2017, the Claimant was notified of the Decision of the Honorable Deputy Director-General, of September 20, 2017, dismissing the aforementioned Hierarchical Appeal (see copy of the decision which is now attached as Document 15 and is deemed to be fully reproduced for all legal purposes);

ccc) In these terms, given the fact that the collection crisis is based on omissions, contradictions and errors of interpretation of matters of fact and law carried out by the Tax Authority throughout the entire gracious procedure, the Claimant cannot therefore conform to this decision, seeing itself, thus, obliged to resort to this Arbitral Tribunal to settle the dispute opposing it to the Tax Authority, which it does in time, pursuant to the provisions of articles 2.º, No. 1, paragraph a) and 10.º of Decree-Law No. 10/2011, of January 20, in the version introduced by articles 228.º and 229.º of Law No. 66-B/2012, of December 31.

1.2 The Respondent is the TAX AUTHORITY AND CUSTOMS.

1.3 The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs.

1.4 Pursuant to the provisions of paragraph a) of No. 2 of article 6 and paragraph b) of No. 1 of article 11.º of the RJAT, in the wording introduced by article 228.º of Law No. 66-B/2012, of December 31, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the assignment within the applicable period.

1.5 Having the parties been duly notified of this appointment, having manifested no will to refuse the appointment of the arbitrators, pursuant to the combined provisions of article 11.º No. 1 paragraphs a) and b) of the RJAT and articles 6.º and 7.º of the Ethical Code.

1.6 Thus, in accordance with the provisions of paragraph c) of No. 1 of article 11.º of the RJAT, in the wording introduced by article 228.º of Law No. 66-B/2012, of December 31, the collective arbitral tribunal was constituted on 6-3-2018.

1.7 Response of the TA

Within the regulatory period, a response was submitted by the TA alleging, essentially, and regarding the alleged defect of lack of reasoning, that:

• The Claimant proceeded, in the period of 2011, to record expenses with depreciation of the trademark "C...;

• These expenses were not fiscally accepted considering the provisions of paragraph a) of No. 1, of article 34.º, of the CIRC, in conjunction with article 16.º, of Regulatory Decree No. 25/2009, of 14/9, and further reasoning described in the Tax Inspection Report (RIT) integrated in the instructional administrative proceeding attached to the files (PA);

• Having been presented a Gracious Claim, this was dismissed by the Deputy Director of Finance of the Finance Directorate of Lisbon, in the terms contained in the PA;

• Presented a hierarchical appeal, this was likewise dismissed with the reasoning summarized in 12. of the Response;

• Throughout the entire administrative procedure are latent and explicit the reasons that support the Tax Authority's position and which were understood and referenced and attacked by the Claimant in its PPA;

• So it is that the reasons for non-acceptance as a tax-deductible expense of the reinstatements and depreciation practiced in relation to the intangible asset constituted by the trademark "C...", are perfectly explicit and without the alleged contradictions;

• The use of the expression, in the reasoning, "trademark C..." aimed only to abbreviate the form of mentioning all realities associated with the trademark and transmitted together with it.

2. Case Management

This Arbitral Tax Tribunal is competent.

The parties are duly represented, enjoy judicial personality and capacity and have standing (articles 4.º and 10.º, No. 2, of the same diploma and article 1.º of Ordinance No. 112-A/2011, of March 22).

There are no exceptions or preliminary issues to address.

The proceeding is not affected by nullities.

3. Reasoning

3.1. Proven Facts

• The Claimant is the parent company of a Group of Companies operating in the Pharmaceutical Sector, producing and commercializing products in this area and holding several brands of the respective Sector;

• Of this Group, in 2011, was part the company B..., Lda.;

• The Claimant was then (2011) included in the so-called "special regime for taxation of groups of companies" [articles 69.º and following of the IRC Code, in the wording in force for the tax year 2011];

• On December 23, 2009, through the so-called "Asset Purchase Agreement" the commercial company Laboratory A..., SA, acquired from company D..., SA, the trademark "C..." for the value of €15,600,000.00;

• Subsequently, the commercial company B..., Lda., acquired the trademark "C..." by virtue of a capital increase effected on 18-9-2010, through a contribution in kind by the partner "Laboratory A..., SA";

• In accordance with Service Order No. OI2015..., the Tax Authority ordered an internal inspection action, for the tax year 2011, with a view to analyzing the periodic income statement of the group in which the Claimant is inserted (see copy of the Report of Conclusions of the Inspection Action, which supports the collection sub judice);

• In the sequence of that inspection, the Tax Authority decided to make a correction to the taxable income of B..., Lda., because it was not increased for purposes of determining the taxable profit for the tax year 2011 the amount of € 2,600,000.00, relating to reinstatements and depreciation recorded as cost and not accepted fiscally, allegedly pursuant to article 34.º, No. 1, paragraph a) of the IRC Code;

• The TA concluded that B..., Lda. "did not increase for purposes of determining the taxable profit for the tax year 2011 (...), the amounts of € 2,600,000.00 (...) relating to reinstatements and depreciation recorded as cost and not accepted fiscally (...) arising from the acquisition of trademark C... (...) and was assigned to this intangible asset C..., the net value of € 14,518,555.43";

• This because, allegedly, "From the analysis of the contract, signed by the taxpayer Laboratory A..., S.A. and by company D... S.A., we can conclude that the acquisition of trademark C..., constitutes an intangible asset with no defined useful life, as no time limit or restriction of exclusive use of the trademark is mentioned, and no elements determining the useful life of the asset under analysis were detected" ...;

• Concluding in the sense that "As there is no foreseeable limit for the period during which the asset is expected to generate net cash inflows for the entity, we can conclude that the useful life of the intangible asset is indefinite, and not finite, as considered by the taxpayer, so that in accordance with NCRF-6, the recognized asset should not be depreciated";

• The Claimant and D..., S.A., a company also of Portuguese law, with registered office at Rua Alfredo da Silva, 16, in Amadora, entered into the aforementioned "Asset Purchase Agreement", with a view to the acquisition, for the value of € 15,600,000.00, of various intangible assets, which included the "C..." assets related to the activity of production, development, marketing and commercialization of pharmaceutical and dermoesthetic products of this brand;

• The Claimant proceeded to record the realities in question as intangible assets, having made the respective depreciation and considered the same as tax-deductible, insofar as "we are dealing with assets with defined useful life and subject to depreciation";

• On August 31, 2010, the Claimant subscribed to a capital increase of B..., Lda, in kind, in the value of € 990,000.00, consisting of the transfer, to it, "of the assets constituting the totality of the assets allocated to the line of business of the contributing company, (...) of importing, exporting, production and commercialization of Non-Prescription Medications and Cosmetics" (see Annex I of Document 4), among which were included the aforementioned assets, with the net value of € 14,518,555.43, previously acquired from D..., S.A.;

• The assets in question were transferred at the same values they had in the Claimant and which resulted "from the application of the provisions of the IRC Code, as they appear in the balance prepared for this purpose by the contributing company, as of June 30, 2010, thereby complying with the tax neutrality regime provided for in the IRC Code, applicable to the operation of entry of the assets in question";

• In this sense, B..., Lda, in the tax year 2011, adopted the same accounting treatment that had been followed by the Claimant, recording the respective depreciation;

• The Tax Authority promoted the corrections in question only because, from the analysis of the contract concluded between the Claimant and company D... S.A., it concluded that, allegedly, the trademark "C..." constitutes an intangible asset without defined useful life "as no time limit or exclusive use of the trademark is mentioned, and no elements determining the useful life of the asset under analysis were detected";

• Pursuant to clause 2 of the aforementioned acquisition contract (Asset Purchase Agreement - see Annex 2/A of Document 4 with the PPA), various assets were acquired, namely:

  (i) "Manufacturing technology and know-how": comprising all know-how relating to product formulation, quality control, packaging, formulas, complaint records, assessments, processes, technology used, etc.;

  (ii) "Registrations": comprising product registration dossiers and commercialization authorizations;

  (iii) "Trademarks": comprising the trademark "C...", but also the trademarks "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..." and the updated registries;

  (iv) "Marketing and promotional documents": comprising the customer list, marketing and promotion plans, sales force training manuals, among others, existing at the time of the transaction.

• In this contract no time limit or restriction of exclusive use of the aforementioned trademark was provided;

• And in that same document it was guaranteed, at no additional cost, the assignment of position in all distribution contracts concluded;

• The Claimant notified the Competition Authority regarding this operation (see copies of the said notification and decision - Documents 5 and 6 with the PPA);

• A Gracious Claim was presented by the Claimant, on May 25, 2016, against the collection crisis (see Document 10 with the PPA and which is deemed to be fully reproduced for all legal purposes), arguing for the illegality (partial) of the said collection;

• In the context of prior hearing to the decision that decided the Claim, the Claimant alleged that from the Draft Decision there resulted no reference, analysis or conclusion, even if contradictory, regarding: (i) The defect of lack of legally required reasoning that vitiates the tax inspection report; (ii) The consideration as a tax cost of the depreciation of intangible assets; or further, (iii) The Opinions issued by J..., Lda. and by K..., S.A., which confirm and justify the position of the now Claimant;

• The Gracious Claim came to be dismissed by decision of the Deputy Director of Finance (in a substitute regime), delivered on December 16, 2016 (see Document 13 with the PPA and which is deemed to be fully reproduced for all legal purposes);

• Consequently, the Claimant presented, on January 25, 2017, a Hierarchical Appeal from the decision dismissing the Gracious Claim (see Document 14 with the PPA and which is deemed to be fully reproduced for all legal purposes);

• On October 4, 2017, the Claimant was notified of the decision of the Deputy Director-General of Taxes, of September 20, 2017, dismissing the aforementioned Hierarchical Appeal (see Document 15 with the PPA which is deemed to be fully reproduced for all legal purposes);

• On February 1, 2016, the Claimant made the payment of the collections (additional IRC and compensatory interest) subject of the present challenge in the total amount of €890,573.97 (Document 3 with the PPA);

• On December 27, 2017, the Claimant presented to CAAD the present request for arbitral pronouncement.

3.2 Unproven Facts

There are no other essential facts among those alleged by the parties, proven and/or unproven.

3.3 Reasoning for Factual Decision

From all that is alleged by the parties in the course of the proceeding, the Tribunal selects what is relevant for the decision to be rendered and discriminates within that matter, the relevant facts proven and those unproven [see, e.g., articles 123º-2, of the CPPT, 607.º-3, of the CPC, applicable by force of the provisions of article 29.º-1/a) and e), of the RJAT].

The factual framework established by the Tribunal results from the critical analysis of the positions of the parties expressed in their respective pleadings, in conjunction with the instructional administrative proceeding and other documents attached to the files.

The Tribunal also considered the testimony of witness L... given in the context of CAAD case No. 543/2017-T and whose use for these files was requested and granted in light of the provisions of article 421.º of the Code of Civil Procedure.

4. Reasoning (continuation)

4.1 On the Law

The Claimant raises, among others, the question of illegality, by lack/insufficiency of reasoning of the acts challenged, pursuant to articles 268.º of the Constitution and 77.º of the LGT.

It is pointed out, from the outset, that the questions, of fact and of law, are similar (the difference being only that they are collections relating to different tax years) to those raised in CAAD case No. 543/2017-T [whose object were collections for the tax year 2010] and which was decided by decision of August 20, 2018, published on the respective website (www.caad.org.pt).

Thus, in both proceedings, the issue is the non-increase for purposes of determining the Claimant's taxable profit, of amounts relating to reinstatements and depreciation recorded as costs and not accepted fiscally [article 34.º-1/c), of the CIRC and Regulatory Decree No. 25/2009] relating to trademark C....

It is important to note that the Claimant only contests the correction to the taxable income of B..., Lda., in the amount of € 2,600,000.00, and, considering that the total of corrections in the tax year 2011 corresponded to € 2,767,822.49, it means that the Claimant conforms with the corrections in the amount of € 167,822.49,

That is: if annulled, the collection crisis should be annulled proportionally, with the consequent partial reimbursement, of the amount paid of €890,573.97. That excess value will be €768,544.45 as shown below, considering the framework presented by the Claimant and which the Respondent did not contest (see article 321.º, of the PPA):

This matter will be assessed prioritarily in light of the criterion provided for in article 124.º, of the CPPT, applicable by force of article 29.º, of the RJAT.

Let us then see.

Article 77.º, of the LGT, provides:

"1. The decision of the procedure is always reasoned by means of a brief reasoned statement of the facts and legal reasons that motivated it, and the reasoning may consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that are part of the tax inspection report (...)".

Administrative and tax case law, which we dispense with citing given how vast it is, has translated the idea or concept of "reasoning of the act", administrative or tax, into the affirmation that the act is considered sufficiently reasoned when it allows one to know the cognitive and evaluative itinerary followed by the administration to decide in the terms in which it decided and not otherwise (emphasis added).

This legal requirement of reasoning aims, primarily, to allow those interested to know exactly the reasons that led the Tax Authority to act as it did with a view to the conscious choice of the taxpayer between acceptance of the legality of the act and/or its challenge, partial or total, particularly, contentious.

That is: this objective will only be truly fulfilled when to the normal recipient of the act it is possible to clearly perceive what was the cognitive, factual and evaluative itinerary, traveled by the author (of the act) in order to understand the legal and logical line that led to the decision in that sense and not another.

The lack or defect of legally required reasoning entails nullability of the decision to be declared in a proceeding to contest it, judicial, state or arbitral, [article 99cº-c), of the CPPT and 2cº, of the RJAT] and of a gracious claim [article 70cº-1, of the CPPT].

4.2 Subsuming:

At issue in these proceedings (as it was in the cited case No. 543/2017-T) is the correction to the Claimant's taxable profit due to the disregard, by the TA, of expenses recorded as depreciation/amortization, not accepted in light of the provisions of article 34.º, of the CIRC in conjunction with Regulatory Decree No. 25/2009, of September 14.

The cited depreciation/amortization refer to the group of assets of the Claimant, acquired on December 23, 2009 pursuant to the cited (see above, proven facts) "Asset Purchase Agreement" in which the Claimant, Laboratory A..., SA, acquired from company D..., SA, for the value of €15,600,000.00, the trademark "C...", with various assets namely, (i) "Manufacturing technology and know-how": comprising all know-how relating to product formulation, quality control, packaging, formulas, complaint records, assessments, processes, technology used, etc.; (ii) "Registrations": comprising product registration dossiers and commercialization authorizations; (iii) "Trademarks": comprising the trademark "C...", but also the trademarks "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..." and the updated registries; (iv) "Marketing and promotional documents": comprising the customer list, marketing and promotion plans, sales force training manuals, among others, existing at the time of the transaction [See proven facts, d) and r)]

The TA based itself on the conclusion that the acquisition of the trademark "C...", or, more exactly, that this trademark constituted an intangible asset, without defined useful life, because no time limit or restriction of exclusive use of the trademark was mentioned in the aforementioned contract (Asset Purchase Agreement).

Subsequently and already in the context of the Claimant's exercise of the right to hearing, the Respondent recognized that the former (the taxpayer) could assign to that asset (trademark "C...") a finite useful life. However, equal recognition did not occur as to the remaining assets in question, when it is manifest the finite nature of such assets or, at least, of some of them.

That is: this position of the TA does not allow one to ascertain the logical line (that cognitive itinerary) for the decision on the correction sub judicio that, certainly not being so, is not free from being objectively understood as a manifestation of discretion, which, against that same logical line, comes to consider the indefinite duration of these assets. One cannot understand it, in truth.

It should be noted that what is at issue is not the soundness or not of the decision but, solely and only, whether or not the grounds of the TA for the decision to disregard the assets depreciated by the Claimant and now in question are unknown or unapprehendable.

Hence the conclusion of the merits of the defect invoked of lack or insufficiency of reasoning for the decision to dismiss the hierarchical appeal and the consequent annulment of that act and of the IRC collection act.

It should be noted, moreover, and as is unanimous and current case law, that the relevant reasoning is only that contemporaneous with the act, that precedes or accompanies the act and that is contained therein directly or by reference, with post-hoc reasoning being irrelevant, including that which is invoked in the proceeding to contest contentiously (including, obviously, that which is done in the context of tax arbitration within CAAD).

In the case at hand, the relevant reasoning will be only and solely that which is contained in the Tax Inspection Report.

And this is in no way elucidative or explanatory of the reasons that led the TA to not grant the gracious claim and the hierarchical appeal presented by the Claimant and consequent collections, with emphasis being placed, in particular, on the fact that it was not only and solely the trademark "C..." that was at issue but a whole set of assets, and only with respect to that trademark was it decided that it is an intangible asset, without defined useful life and, consequently, in the perspective of the TA, bringing to bear Regulatory Decree No. 25/2009 (article 16.º) and NCRF-6 (Accounting Standard for Financial Reporting), should/cannot be depreciated.

More specifically: there is an omission in the conclusions of the tax inspection report as to the period of useful life (finite, indefinite or infinite) of the cited remaining assets acquired by the Claimant (and, subsequently, by the Group company, B..., Lda.), other than the trademark "C...".

Which inevitably leads to the conclusion of not being fulfilled the aforementioned requirement of reasoning of the acts and, consequently, to the annulment of the collections under challenge.

5. Indemnity Interest

The Claimant requests reimbursement of the tax unduly paid, in the amount, proportional, of €768,544.45, increased by indemnity interest, at the legal rate, pursuant to article 43.º of the LGT and 61.º of the CPPT.

As demonstrated, the Claimant paid, on February 1, 2016, the total amount of €890,573.97.

In accordance with the provisions of paragraph b) of article 24.º of the RJAT the arbitral decision on the merits of the pretension for which there is no appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of the sentences of the judicial tax courts, "restore the situation that would exist if the tax act subject of the arbitral decision had not been made, adopting the acts and operations necessary for that purpose", which is in line with the provisions of article 100.º of the LGT [applicable by force of the provisions of paragraph a) of No. 1 of article 29.º of the RJAT] which establishes that "the tax administration is obliged, in case of full or partial merit of a claim, judicial challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation object of the dispute, including the payment of indemnity interest, if applicable, from the end of the period of execution of the decision".

Although article 2.º, No. 1, paragraphs a) and b), of the RJAT, uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in CAAD, making no reference to condemnatory decisions, it should be understood that its competencies comprise the powers that in judicial challenge proceedings are attributed to the tax courts, and this is the interpretation that is in line with the sense of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that "the tax arbitration procedure should constitute an alternative procedural means to the judicial challenge proceeding and the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge proceeding, although it is essentially a proceeding for annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnity interest, as can be inferred from article 43.º, No. 1, of the LGT, where it is established that "indemnity interest is due when it is determined, in a gracious claim or judicial challenge, that there was an error attributable to the services from which results payment of the tax debt in an amount higher than legally due" and from article 61.º, No. 4, of the CPPT (in the version given by Law No. 55-A/2010, of December 31, which corresponds to No. 2 in the original version), which "if the decision recognizing the right to indemnity interest is judicial, the period for payment is counted from the beginning of the period of its spontaneous execution".

Thus, No. 5 of article 24.º of the RJAT in stating that "payment of interest is due, regardless of its nature, in the terms provided for in general tax law and in the Code of Procedure and Process Tax" should be understood as allowing the recognition of the right to indemnity interest in the arbitral proceeding.

In the case at hand, it is manifest that, in the sequence of the partial illegality of the collection act, there is place for reimbursement of the tax, by force of the cited articles 24.º, No. 1, paragraph b), of the RJAT, and 100.º of the LGT, for this is essential to "restore the situation that would exist if the tax act subject of the arbitral decision had not been made".

As regards indemnity interest, it is also clear that the illegality of the act is attributable to the Tax and Customs Administration, which, on its own initiative, acted without legal support, in this case, without reasoning the requirement for correction in the terms that were pointed out.

One is dealing with a defect of violation of substantive law, embodied in error in the legal presuppositions, attributable to the Tax Administration.

Consequently, the Claimant is entitled to indemnity interest, pursuant to article 43.º, No. 1, of the LGT, and article 61.º of the CPPT, calculated on the amount that, proportional in the terms pointed out, was paid unduly (€768,544.45).

Thus, the Tax and Customs Administration must give effect to this decision, in accordance with article 24.º, No. 1, of the RJAT, determining the amount to be refunded to the Claimant and calculating the respective indemnity interest, at the legal rate applicable to civil debts, pursuant to articles 35.º, No. 10, and 43.º, Nos. 1 and 5, of the LGT, 61.º, of the CPPT, 559.º of the Civil Code, and Ordinance No. 291/2003, of April 8 (or the diploma or diplomas that succeed it).

Indemnity interest is due from the date of payment (February 1, 2016), until that of processing of the credit note, in which they are included (article 61.º, No. 5, of the CPPT).

6. Decision

In accordance with the foregoing, the Arbitral Tribunal agrees to:

• Judge as meritorious, within the limits indicated, the requests for declaration of illegality of the additional IRC collection No. 2015..., of the adjustment No. 2015... and compensatory interest;

• Judge as meritorious the request for annulment, for formal defect, of the decision that dismissed the aforementioned hierarchical appeal;

• Annul the said collections and reconciliation of accounts;

• Judge as meritorious the request for restitution, partial, of the amount paid, in the requested amount of €768,544.45 and condemn the Tax and Customs Administration to refund it;

• Judge as meritorious the request for payment of indemnity interest and condemn the Tax and Customs Administration to pay it to the Claimant, calculated on the amount to be refunded, from the date of payment (February 1, 2016), until that of processing of the credit note, in which they must be included (article 61.º, No. 5, of the CPPT), at the legal rates in effect until payment, in accordance with article 559.º of the Civil Code and Ordinance No. 291/2003, of April 8 (or the diploma or diplomas that succeed it)

• Judge as moot all other questions raised in the proceedings; and

• Condemn the Tax and Customs Administration in the costs of the present proceeding.

Value of the Proceeding

In accordance with the provisions of article 306.º, No. 2, of the CPC and 97.º-A, No. 1, paragraph a), of the CPPT and 3.º, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is set at €890,573.97.

Costs

Pursuant to article 22.º, No. 4, of the RJAT, the amount of costs is set at € 12,546.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings (to be borne by the respondent Tax and Customs Administration as decided above).

Lisbon, 25-10-2018

The Collective Arbitral Tribunal

José Poças Falcão
(Arbitrator Chairman)

Clotilde Celorico Palma
(Assistant Arbitrator)

Luís Alves
(Assistant Arbitrator)