CAAD Arbitration 672/2017-T: IRC Corporate Tax Depreciation (Amortizações) Dispute Resolution 2018

ARBITRAL DECISION (see full version in PDF)

The arbitrators Counsellor Jorge Lopes de Sousa (arbitrator-president), Dr. José Eduardo Mendonça da Silva Gonçalves and Prof. Doctor Paulo Jorge Nogueira da Costa (arbitrator members), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 06-03-2018, agree as follows:

1. Report

LABORATORY A..., S.A., with headquarters at Street ..., no. ..., ..., ..., ..., legal entity no. ... (hereinafter referred to as "Claimant") submitted a request for arbitral pronouncement in order to assess the illegality of the tax assessment act for Corporate Income Tax (IRC) no. 2015..., and corresponding compensatory interest, maintained following the dismissal order of the hierarchical appeal no. ...2017..., issued by the Sub-Director-General of the Tax and Customs Authority by subdelegation, on 20-09-2017, and notified to the Claimant on 03-10-2017.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant further requests compensation for damages resulting from payment of the assessment, with condemnation of the Tax and Customs Authority to pay indemnificatory interest.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 27-12-2017.

In accordance with the provisions of paragraph a) of article 2 of article 6 and paragraph b) of article 1 of article 11 of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators of the collective arbitral tribunal the first two signatories and Mr. Prof. Doctor Carlos Lobo who communicated acceptance of the assignment within the applicable time periods.

On 14-02-2018 the parties were duly notified of this designation, and did not manifest willingness to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11 no. 1 paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provisions in paragraph c) of article 1 of article 11 of RJAT, in the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 06-03-2018.

Following resignation, Mr. Prof. Doctor Carlos Lobo was replaced by Mr. Prof. Doctor Paulo Jorge Nogueira da Costa.

The Tax and Customs Authority responded, arguing that the request should be ruled unfounded.

By order of 30-04-2018, it was decided, without opposition from the Parties, to attach to the case the recording of evidence produced in case no. 543/2017-T.

On 03-07-2018, a meeting was held in which witness evidence was produced and it was decided that the case would proceed with written submissions.

The Parties submitted their submissions.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of Decree-Law no. 10/2011, of 20 January, and is competent.

The parties are duly represented, enjoy legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same diploma and article 1 of Order no. 112-A/2011, of 22 March).

The case is not vitiated by nullities and there are no exceptions or any obstacle to the assessment of the merits of the case.

2. Matter of Fact

2.1. Proven Facts

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

• The Claimant is the parent company of a group of companies subject to the Special Tax Regime for Groups of Companies (RETGS), provided for in CIRC;

• Under OI 2015... the taxable profit of the group for the period of 2012 was corrected in the amount of €2,600,000.00, as a result of a correction made under OI 2014... to the individual results of the dominated company "B... – Pharmaceutical Products, Lda" (hereinafter "B...");

• On 23-12-2009, the "Asset Purchase Agreement" was entered into between the Claimant and C... S.A., a copy of which is contained in the administrative case, the content of which is reproduced herein;

• Through this contract, the Claimant acquired from C... S.A., for the value of €15,600,000.00, the following assets relating to the D... brand:

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

  • "Registrations": comprising the product registration dossiers and marketing authorizations;

  • "Trademarks": comprising the "D..." brand, but also the brands "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..." and updated registrations;

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

• In the contract, no reference was made to the deadline or restriction of exclusive use of the brand.

• Through the Asset Purchase Agreement, C..., S.A. committed itself to make efforts to ensure, without any additional cost, the assignment of its position in all distribution agreements it had entered into, as well as the supply agreements to Group E... and Group F... and also, within the scope of the supply and manufacturing agreements entered into with Laboratories G... and H... (clauses 9.3 and 9.4 of the contract);

• The Claimant notified the competition authority of this operation (documents nos. 5 and 6 attached with the request for arbitral pronouncement, the contents of which are reproduced herein);

• On 18-09-2010, B... acquired from the Claimant the "D..." brand and the aforementioned assets, through a capital increase subscribed by the Claimant (shareholder), carried out by means of contribution in kind, this intangible asset being assigned the net value of €14,518,555.43;

• The Claimant and B... – Pharmaceutical Products, Lda. proceeded with the depreciation of the intangible asset considering, first, that the asset had a useful life of 6 years and, subsequently based on a useful life of 10 years;

• Company B... proceeded in the period of 2012 to account for expenses with depreciation/amortization of the asset designated as "D... Brands/Rights", in the amount of € 2,600,000.00;

• The useful life period of the asset 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.

  • In the absence of investment, at least some of the acquired assets would become technically, technologically and commercially obsolete within the estimated useful life period;

• The "D..." brand and its products are included in a sector that requires constant evolution, in which new products are frequently launched on the market, with new properties and with greater scope of use;

• The regulation of the sector of the products referred to sometimes requires the cessation of marketing or reformulation of products included in the referred asset;

• The market in which the products referred to are inserted is very competitive, with other products and brands on the market with high levels of promotion, which makes constant investment in technology and image associated with each of the products necessary to maintain the competitiveness of the products;

• The products referred to associated with the "D..." brand were subject to various updates and modifications over time, either by regulatory requirements or by force of competition, with some being discontinued;

• Following the inspection, the Tax and Customs Authority issued the IRC assessment no. 2016... and its corresponding account statement, relating to tax and compensatory interest in the total amount of €285,563.77 (documents nos. 1 and 2 attached with the request for arbitral pronouncement, the contents of which are reproduced herein);

• The Claimant filed a gracious complaint against the aforementioned assessment, which was dismissed by order of 16-12-2016;

• The Claimant appealed the gracious complaint decision, which was dismissed by order of 20-02-2017, issued, by subdelegation, by the Sub-Director-General of the Tax and Customs Administration;

• In the Tax Inspection Report drawn up in the inspection action carried out at the Claimant, the contents of which are reproduced herein, the following is referred to, among other things:

III.1.1 - Corrections to the individual taxable profit of the company "B... - Pharmaceutical Products, Lda." - Years 2011, 2012 and 2013

In compliance with Service Orders OI2014..., OI2014... and OI2014... with order of 2014.09.17, the internal inspection procedure relating to the periods 2011, 2012 and 2013 was carried out at company B... – Pharmaceutical Products, Lda (NIF:...).

The conclusions of the inspection action were communicated to the company in accordance with the grounds under no. 1 of article 77 of the General Tax Law and are contained in the tax inspection report prepared by the tax inspection services of the Finance Directorate of Lisbon on 2014-12-12, a copy of which is attached and which constitutes Annex A, with 55 pages, which was communicated to the taxpayer in accordance with no. office no. ... of 2014-12-12.

Following the aforementioned inspection action, corrections were identified to the declared tax result, made on an individual basis to the aforementioned company totalling € 2,600,000.00, € 2,600,000.00 and € 1,560,000.00, for the years 2011, 2012 and 2013 respectively, and concern:

• Depreciation / amortization not accepted as costs - article 34, no. 1 paragraph a) of CIRC

The taxpayer did not add to the taxable profit calculation for the years 2011, 2012 and 2013 the amounts of € 2,600,000.00, € 2,600,000.00 and € 1,560,000.00 respectively, concerning reversals and amortizations recorded as cost and not accepted fiscally, in accordance with paragraph a) of no. 1 of article 34 of CIRC and Regulatory Decree 25/2009 resulting from the acquisition of the D... brand, through a capital increase on 2010.09.18 (in accordance with information contained in the commercial certificate), subscribed by the shareholder Laboratory A..., S.A., carried out by means of contribution in kind, this intangible asset D... being assigned the net value of €14,518,555.43.

The expenses recorded as depreciation/amortization in the amounts of € 2,600,000.00, € 2,600,000.00 and € 1,560,000.00, are not accepted fiscally in accordance with paragraph a) of no. 1 of article 34 of the Code for Corporate Income Tax (CIRC) combined with Regulatory Decree 25/2009 of 14 September 2009.

Thus, the individual taxable profit was corrected, for the years 2011, 2012 and 2013, based on the grounds contained in points III - 1.1, of the Inspection Report annexed and which forms an integral part of this Tax Inspection Report (Annex A).

• In the inspection carried out at A... the Tax Inspection Report contained in the administrative case was prepared, the contents of which are reproduced herein, in which reference is made, among other things, to the following:

From the analysis of the profit and loss statement of the taxpayer for the years under analysis we can conclude the following:

• In the three years under analysis, the positive results before depreciation, financing costs and taxes are subsequently absorbed by the amounts relating to amortization of the D... brand, thus resulting in negative results before taxes of €527,246.57 and €1,289,015.26, in the years 2011 and 2012 respectively, and a reduced positive result of €59,032.57 in the year 2013, as is better evidenced in the following table.

(...)

• It should be noted that the positive result before taxes, in the amount of €59,032.57, in the year 2013, stems from the change in the useful life estimate, from 6 to 10 years, relating to the accounting of the amortization of the intangible fixed asset D... The annual amortization of € 2,600,000.00 recorded in the years 2011 and 2012, changed in 2013 to €1,560,000.00.

(...)

III. DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO THE TAXABLE MATTER

III.1 - Corporate Income Tax - Years 2011, 2012 and 2013

III.1.1 - Corrections to Taxable Profit

III.1.1.1 - Depreciation / amortization not accepted as costs - article 34, no. 1 paragraph a) of CIRC

The taxpayer did not add to the taxable profit calculation for the years 2011, 2012 and 2013 the amounts of € 2,600,000.00, € 2,600,000.00 and €1,560,000.00 respectively, concerning reversals and amortizations recorded as cost and not accepted fiscally, in accordance with paragraph a) of no. 1 of article 34 of CIRC and Regulatory Decree 25/2009, resulting from the acquisition of the D... brand, through a capital increase on 2010.09.18 (in accordance with information contained in the commercial certificate), subscribed by the shareholder Laboratory A... – Pharmaceutical Products, S.A., carried out by means of contribution in kind, this intangible asset D... being assigned the net value of €14,518,555.43. Annex I

The following information contained in minutes no. 15 is transcribed:

"a) to be realized by means of contribution in kind in the amount of €990,000.00 (nine hundred and ninety thousand euros), embodied in the transfer to the Company of assets constituting the whole of the assets allocated to the business activity of the contributing company, the shareholder Laboratory A... – Pharmaceutical Products, S.A., of import, export, production and marketing of Non-Prescription Medicines and Cosmetics and which is identified in the Report of I..., SROC, S.A,, registered with the Order of Official Auditors under no. 143, prepared in accordance with article 28 of the Commercial Companies Code, which is attached to these minutes and which forms an integral part thereof."

It should also be noted that the D... brand had been previously acquired by the company Laboratory A... Pharmaceutical Products, S.A. from C... S.A. – NIF..., for the value of €15,600,000.00, in accordance with the contract entered into between the parties on 23 December 2009, drafted in English, and no Portuguese translation was provided despite being requested - Annex 2.

The expenses recorded as depreciation / amortization in the amounts of, € 2,600,000.00, € 2,600,000.00 and €1,560,000.00, relating to the years 2011, 2012 and 2013 respectively - Annex 3, are not accepted fiscally in accordance with paragraph a) of no. 1 of article 34 of the Code for Corporate Income Tax (CIRC) combined with Regulatory Decree 25/2009 of 14 September 2009, as follows:

Article 34 of CIRC - Expenses not deductible for tax purposes

1- The following are not accepted as expenses:

a) Depreciation and amortization of elements of assets not subject to deterioration;

On the other hand, Regulatory Decree no. 25/2009, of 14 September "System of Depreciation and Amortization for Corporate Income Tax purposes" indicates the following in its article 16:

Intangible Assets

1 - Intangible assets are amortizable when subject to deterioration, namely by having a finite time duration.

2 — The following intangible assets are amortizable:

• Development project expenses;

• Elements of industrial property, such as patents, trademarks, licenses, production processes, models or other assimilated rights, acquired onerous and whose exclusive use is recognized for a limited period of time.

The accounting of intangible assets is provided for in the Accounting Standard for Financial Reporting NCRF - 6.

Regarding the useful life of the intangible asset, let us see what NCRF-6 stipulates:

87- An entity should assess whether the useful life of an intangible asset is finite or indefinite and, if it is finite, the duration of, or the number of production or similar units constituting, such useful life. An intangible asset should be viewed by the entity as having an indefinite useful life when, based on an analysis of all relevant factors, there will be no foreseeable limit for the period during which the asset is expected to generate net cash inflows for the entity.

88- The accounting of an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized, and an intangible asset with an indefinite useful life is not.

89- Many factors are considered in determining the useful life of an intangible asset, including:

a) the expected use of the asset by the entity and whether the asset could be efficiently managed by another management team;

b) typical life cycles for the asset and public information about useful life estimates for similar assets used in a similar manner;

c) Technical, technological, commercial or other types of obsolescence;

d) The stability of the sector in which the asset operates and changes in market demand for products or services produced by the asset;

e) Expected actions by competitors or potential competitors;

f) The level of maintenance expenditure required to obtain the expected future economic benefits of the asset and the entity's ability and intention to achieve such a level;

g) The period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases, and the dates of the end of the concession period

h) Whether the useful life of the asset is dependent on the useful life of other assets of the entity.

90- The term "indefinite" does not mean "infinite". The useful life of an intangible asset reflects only the level of future maintenance expenditure required to maintain the asset at its performance standard assessed at the time of estimation of the useful life of the asset, and the entity's ability and intention to achieve such a level. A conclusion that the useful life of an intangible asset is indefinite should not depend on planned expenditure beyond that required to maintain the asset at that performance standard.

92- The useful life of an intangible asset may be very long or even indefinite. Uncertainty justifies estimating the useful life of an intangible asset on a prudent basis, but this does not justify choosing a useful life that is unrealistically short.

94- There may be both legal and economic factors that influence the useful life of an intangible asset. Economic factors determine the period during which future economic benefits will be received by the entity. Legal factors may restrict the period during which the entity controls access to those benefits. Useful life is the shorter of the periods determined by these factors.

106- An intangible asset with indefinite useful life should not be amortized.

From the analysis of the contract, signed by the taxpayer Laboratory A... – Pharmaceutical Products S.A. and by company C... S.A., we can conclude that the acquisition of the D... brand, embodies an intangible asset with no defined useful life, as no time limit or restriction of exclusive use of the brand is mentioned, and no elements have been detected that determine the useful life of the asset under analysis.

As there is no foreseeable limit to 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 in accordance with NCRF-6, the asset recognized should not be amortized. In accordance with article 16 of DR 25/2009 — "Intangible Assets are amortizable when subject to deterioration, namely by having a finite time duration."

Conclusion

For the facts already described, the amounts of € 2,600,000.00, € 2,600,000.00 and €1,560,000.00, relating to the years 2011, 2012 and 2013, are not considered expenses in accordance with paragraph a) of no. 1 of article 34 of CIRC combined with article 16 of Regulatory Decree no. 25/2009, of 14 September "System of Depreciation and Amortization for Corporate Income Tax purposes", so the correction of Taxable Profit is proceeded with, for the years 2011, 2012 and 2013 as demonstrated in the following tables:

(...)

VIII. 2. Prior Hearing

(...)

On 1 December 2014, the taxpayer, under the provisions of articles 60 of the General Tax Law and 60 of the Supplementary Procedure Regime for Tax and Customs Inspection, exercised its right of hearing - Annex 5, based on the grounds that stand out and are transcribed below:

(...)

In summary, the taxpayer argues in the exercise of the right of hearing, based on the factors considered in determining the useful life of an intangible asset, contained in paragraph 89 of NCRF 6 of the Accounting Normalization System, that the "D..." brand constitutes an intangible asset with a defined useful life, and is therefore amortizable during its useful life. The taxpayer also alleges that in 2013 it changed the estimate it had made of the useful life limit of said asset to ten years, thus increasing it in relation to the previous estimate of six years, the year in which a decrease in sales of products of that brand was observed.

It is true that the assessment of the useful life of any asset should be made by the company that holds it, so the concept of useful life is different from the concept of economic life. However, this assessment should be guided by objective criteria, contained in paragraph 89 of NCRF 6.

Having analyzed the arguments invoked by the taxpayer, the alleged factors that were the basis of the assessment of the useful life of the asset, it is not considered that they demonstrate clearly the occurrence of factors capable of asserting that the referred asset has a defined useful life of six years, subsequently changed to 10 years.

In fact, as there are no legal factors restricting the period during which the entity controls access to these economic benefits, there is also no foreseeable limit to the period during which the asset should generate positive net cash flows for the entity so that the asset in question should be attributed an indefinite useful life.

Similarly, it will always be said that the subject should change the estimate of the useful life of the asset based on the factors contained in the same paragraph of NCRF 6. Now, analyzing the arguments that allegedly underlie the increase in the useful life of the asset (decrease in sales of products of the "D..." brand), the assessment made by the taxpayer cannot be understood, since the useful life of an asset consists of the foreseeable limit of the period during which it is expected to generate net cash inflows. The figure of amortization, both in Accounting and in Tax Law, is conceived on the basis of this reasoning and not on the opposite reasoning.

Let us then see:

It is true that, notwithstanding the contract for the purchase of the brand ("Asset Purchase Agreement") from company C..., S.A., does not provide any period, either the company Laboratory A... Pharmaceutical Products, S.A., or the taxpayer could assign a finite useful life to this asset.

Nevertheless, based on the arguments we refer to below, it is not verified that the taxpayer demonstrates that the useful life of the asset is defined.

Furthermore, in the brand purchase contract, it is verified that the company Laboratory A... Pharmaceutical Products, S.A. purchases the brand, as well as all elements called "Manufacturing Technology and Know-how" (clause 2.3.1) - elements that constitute the production, packaging and marketing process of the brand's products -, without providing any period. Now, given the specificity of the pharmaceutical product and its respective legislation (governing production, storage and marketing), it could be concluded that there would be no conditions/requirements that are not contained in the industrial property already held. Moreover, the object of industrial property is itself that know-how which will include production, storage and marketing conditions.

The taxpayer alleges that the pharmaceutical sector is "very competitive, with a large quantity and variety of supply, which has the consequence of the demand for this type of products being volatile, very permeable to factors such as price, promotions, advertising, innovation itself and poorly loyal to a single brand", invoking the competition from other brands existing on the market as "..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ...".

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 an asset is defined.

The taxpayer further invokes as factors influencing useful life "constraints of technological and scientific innovation, as well as the product renewal cycle of its products, which, after a certain period of time, will become obsolete", as well as "great investment in the level of technological innovation and marketing and advertising, to obtain competitive advantages over competitors".

However, the taxpayer does not present any element that proves the occurrence of said "technological obsolescence" of the brand after six years.

In fact, through the website D...pt/pt/, the A... group conveys to economic operators an image of the "D..." brand as being established on the national market since 1950, in constant economic growth, effective and safe, as is transcribed below:

"The D... ointment, a non-prescription medicine, was introduced in Portugal in 1950 (...). A success story with more than 60 years and a leading market brand can only be achieved with excellence in product quality and in permanent attentive response to consumer expectations. Since its launch, over 60 years ago, the D... brand has never stopped growing. Outstanding market leader in cicatrizants, D... ointment has Zinc Oxide as its active substance. To be present in so many homes, being a leader in the protection and treatment of baby and the whole family's skin, D... ointment has always demonstrated constant safety and effectiveness, evolving according to the needs and expectations of consumers".

On the www.A...pt website, it appears that one of the brand's products was chosen by consumers as the best product, among 441 brands, as is transcribed: "consumers elected ... as "consumer choice 2014" in diaper cream (...) ... was evaluated by a group of mothers who preferred the D... brand in deference to other brands on the market (...)".

Thus, it is the A... group itself that describes the "D..." brand in a manner opposite to the arguments it invokes to support the assessment of a useful life of the same of six years.

The taxpayer further argues as follows: "In fact, as shown in the financial return calculations presented, although in 2011 there was a positive variation of 6% in sales growth compared to the previous year, in the following year, there was a decline of 9% in sales, compared to 2011, and for 2013, despite an increase in the amounts invested in Marketing and Samples, a decline in sales of 2% was still found compared to 2012 (as per calculations in the annex)".

In the same way, we understand that the said decline in sales of products of the "D..." brand is not sufficiently significant to consider that this asset has a finite useful life or to change its estimated useful life. In fact, it can be said that in the years in question a general decline in the pharmaceutical industry occurs, which may be reflected in sales of the "D..." brand, without, however, being a significant factor to influence the useful life of the brand (which, moreover, happened inversely, as mentioned above, since the taxpayer increased the useful life of the asset to ten years).

It is reiterated that one of the brand's products was considered the consumer's choice in 2014, a fact that contradicts the image of decline and finiteness of this asset that the taxpayer intends to convey in this right of hearing.

Moreover, it is noted that it is public knowledge that the decline in the pharmaceutical industry, like other industries in the context of the national economy, dates back to the time when Laboratory A... Pharmaceutical Products, S.A. entered into the contract to purchase the brand. Facts that could always lead to the conclusion that despite the decline in the pharmaceutical industry in general, that company chose to acquire the "D..." brand, which it did with the objective that all companies pursue: profit.

In light of the above, no elements/clarifications were presented in the exercise of the right of hearing that would change the conclusions contained in the draft report.

Thus, the amounts of € 2,600,000.00, € 2,600,000.00 and € 1,560,000.00, are not considered expenses in accordance with paragraph a) of no. 1 of article 34 of CIRC combined with article 16 of Regulatory Decree no. 25/2009, of 14 September "System of Depreciation and Amortization for Corporate Income Tax purposes", so the correction of Taxable Profit proposed for the years 2011, 2012 and 2013 is maintained.

• The decision dismissing the gracious complaint refers for its grounds to an opinion contained in the administrative case, the contents of which are reproduced herein, in which reference is made, among other things, to the following:

The Tax Inspection Services in inspection actions to companies of the LABORATÓRIO A... PHARMACEUTICAL PRODUCTS SA group (claimant in its individual sphere) and B... – PHARMACEUTICAL PRODUCTS, LDA, corrected amounts in the depreciation and amortization items of an intangible asset designated "D... Brand, in the years 2010 to 2013, in accordance with copies of the inspection cases attached (see pages 44 to 55 of this record).

The motivation of the claimant in presenting this gracious complaint is based on two opinions issued, one by J..., Lda. and another by K..., SROC, SA. In the year 2015, in which it bases its dispute with the AT in not considering as a tax cost the referred depreciation/amortization, which is summarized in the following points:

1. The fact that the IT did not accept fiscally as expenses of the year the amortizations relating to the intangible asset "D... Brand", in accordance with paragraph a) of no. 1 of article 34 of CIRC and article 16 of Regulatory Decree 25/2009, given that the contract for acquisition of the brand does not provide for useful life and the claimant bases itself on its experience, on knowledge of the market for products of that brand, on their renewal cycles and on the technological and scientific evolution necessary for such products, to determine its useful life. However, at no time, in the context of inspection proceedings, did it try to explain how it initially arrived at 6 years and the fact that it subsequently changed the useful life of the brand to 10 years.

Given this situation, the IT added to the taxable profit of the aforementioned company (dominated) the corrections relating to amortizations not accepted fiscally, in accordance with paragraph a) of article 34 of CIRC, given that it was not proven by the claimant that the intangible asset "D... Brand" has a finite or limited useful life:

a. It was not proven that there is a foreseeable limit for an expected period that the asset "D... Brand" will generate net cash inflows, so according to paragraph 87 of NCRF-6 we are in the presence of an intangible asset with an indefinite useful life, that is, we are faced with an impossibility of predicting the moment from which the brand ceases to generate financial inflows;

b. In paragraph 87 of the accounting standard for financial reporting mentioned in the previous paragraph it expressly states that an intangible asset with indefinite useful life is not amortizable;

c. In article 16 of Regulatory Decree no. 25/2009, of 14 September, it expressly states in paragraph b) of no. 2 that intangible assets "brands", to be amortized, their use has to be recognized for a limited period of time.

d. The two opinions in attempting to justify the useful life attributed to the intangible asset "brand D...": - one from "J..., Lda" on the accounting treatment to be performed on the referred asset, where it is expressed that the accounting made by the claimant is in accordance with the principles emanated by the above-mentioned NCRF, which notes that the tax and legal impacts of the referred accounting were not analyzed; - the other from "K...", which argues that the asset "brand D..." is an intangible asset with a defined or finite useful life of 6 years, based on the "Marketing Authorization" (MA) which is on average 5 years, based on the know-how necessary to operate with the cream reactor, acquired by the claimant, whose useful life is 8 years and by the high consumption of financial resources in expenses for innovation and promotion and marketing due to market fluctuation.

Opinion

From the analysis of the facts explained in the previous item (Facts) we find that the claimant argues in these proceedings that in accordance with the accounting standards emanated by NCRF 6, even if very subjectively, it first adopted a period of useful life for the intangible asset "D... Brand" of 6 years and subsequently corrected it to 10 years and assumes that they have effects on depreciation and amortization accepted fiscally.

The issue raised by the inspection services that led to the corrections under the companies of the group, supra identified are not of an accounting order but, only concern the fiscal area, so in the inspection procedures the increases to table 07 of models 22 in the individual sphere of each of the aforementioned companies and in the respective years were recommended in the amounts to be added to the collectible matter of the group, relating to depreciation/amortization not considered fiscally by national tax legislation.

Thus, when analyzing from a fiscal point of view the matter disputed in these proceedings regarding the depreciation/amortization now in issue, we have in paragraph b) of no. 2 of article 16 of DR 25/2009, that they are amortizable when acquired onerous and whose exclusive use is recognized through the acquisition contract for a limited period of time, which is not the case here. Thus, fiscally the said depreciation/amortization cannot be relevant for tax purposes, and therefore their values are increased in table 07 of the respective Model 22 declaration, of the company dominated by the claimant (B... – PHARMACEUTICAL PRODUCTS. LDA), in accordance with paragraph a) of no. 1 of article 34 and article 31-B, both of CIRC.

Thus, unless we are mistaken, the request to consider fiscally the depreciation/amortization of the intangible asset "D... Brand" must be denied, taking into account the grounds emanated by the tax inspection services and reiterated in these complaint proceedings.

• The hierarchical appeal decision refers for its grounds to the reasoning of an information that is contained in document no. 15 attached with the request for arbitral pronouncement, the contents of which are reproduced herein, in which reference is made, among other things, to the following:

V - Hierarchical Appeal

Not conforming to the decision dismissing the gracious complaint, the Appellant came to present a hierarchical appeal, reiterating the allegations made in the petition whose order is appealed.

V.1 - Arguments of the Appellant

The Appellant requests the revocation of the order issued in the gracious complaint proceedings, with the consequent annulment of the aforementioned IRC assessment, arguing, on the one hand, that the correction underlying it lacks grounds, and on the other hand, that the reversals/amortizations practiced must be accepted fiscally. For this purpose it alleges, in summary:

1. That the content of the reports that ground the assessment in issue suffers from insufficient grounds, which amounts to lack of grounds, and constitutes a breach of law.

2. That, as results from clause 2 of the contract signed between the Appellant and "C..., SA" various assets were transferred in addition to the "D..." brand.

3. That the Tax Authority sums up its entire line of argument on the asset acquired corresponding to the "D..." brand, overlooking all other assets, so it does not establish, minimally, the disregard, as a tax cost, of the amortization of the same.

4. That in the reports of the inspection actions that ground the assessment, there is no cognitive and evaluative path followed for the consideration of all assets acquired by the Appellant, and currently held by "B... - Pharmaceutical Products, Lda", as intangible assets with no defined useful life, nor are any evidentiary elements presented that would allow such a conclusion to be reached.

5. That such vague and generic argument does not fulfill the burden of proof imposed on the Tax Authority.

And, without disclaiming, argues:

1. That the "D..." brand has a period of useful life limited to the constraints of technological and scientific innovation, as well as to the product renewal cycle of its products, which, after a certain period of time, will become obsolete, which requires constant investment.

2. That to analyze whether a given asset has a period of defined or indefinite useful life, it is not sufficient to analyze whether it is capable of generating cash inflows, it is also necessary to analyze whether to maintain such cash inflows constant investment is necessary.

3. That the "D..." brand and its products are included in a sector markedly affected by a need for constant evolution, so they cannot be considered as assets with indefinite useful lives.

4. That even if it is understood that the intangible asset "D..." does not have a defined useful life period, this does not prevent its amortization once it is subject to deterioration.

Concluding, by invoking:

1. That the understanding it made regarding the deterioration of the assets in question and the useful life of the same is corroborated by technical opinions issued by "J..., Lda" and "K..., SA".

V.2 - Opinion

Following the elements that integrate the record and the grounds presented by the Appellant "LABORATORY A... – Pharmaceutical Products, SA" in hierarchical appeal proceedings, it is for us to decide.

Regarding the defect of lack of grounds

1. The Appellant comes to challenge the legality of the assessment arguing that the assessment act should be annulled for insufficient grounds.

2. The Appellant imputes to the assessment act in issue the defect of lack of grounds, alleging that the reports drawn up as a result of inspection actions and which motivated the assessment suffer from insufficient grounds, regarding the corrections resulting from non-addition to taxable profit of the amount recorded as reversals and amortizations of the "D..." brand.

3. However, it happens that grounds constitutes a relative concept. The relative concept of grounds is assumed by diverse doctrine, and necessarily implies that grounds must be assessed in concrete.

4. On this point the STA ruling of 30.12.2012 issued in Case 03896/10 states: "...As is uniform and constant case law, grounds is a relative concept that varies depending on the specific type of each act and the concrete circumstances in which it is practiced ... Grounds is contextual when it is integrated in the act itself and is contemporary with it... Grounds is clear when such reasons allow understanding without uncertainties or perplexities what was the cognitive-evaluative «iter» of the decision, being congruent when the decision emerges as a necessary logical conclusion of such reasons... As for grounds of law, it has been the understanding of the STA that in the grounds of law of administrative acts the express reference to legal provisions is not required, the reference to the relevant legal principles, to the applicable legal regime or to a specific regulatory framework being sufficient... It should also be said that the grounds of acts serves purposes of intelligibility and clarification, and should [we are dealing with an intangible asset - D... Brand - acquired onerous, but whose exclusive use was not recognized for a limited period of time, so, under no. 3 of the same article, such asset will only be amortizable in case of actual deterioration duly proven, recognized by the AT.

5. The Requester further invokes that, "even if it is understood that the intangible asset sub judice does not have a limited temporal duration, it would still not cease to be amortized and reported for tax purposes, provided it is understood that the assets in question are subject to deterioration."

6. The Requester justifies the existence of this deterioration with the need to make constant and new investments in the maintenance or improvement of inherent resources, due to constraints of technological and scientific innovation, in order to prevent the asset from losing value.

7. Now, it is important to note that the arguments invoked by the Requester, of the need for constant investment in order for the asset not to lose value, are based on predictions and studies that could easily change, given variations in the market in which the brand is inserted, so this does not guarantee that over the coming years there will be actual deterioration of that asset.

8. Therefore, as not established, under no. 3 of article 16 of DR 25/2009, that deterioration, the amortizations practiced on the asset in question cannot be accepted fiscally under paragraph a) of no. 1 of article 34 of CIRC.

9. Also, and in line with the tax legislation, the Accounting Normalization System refers in NCRF 6, paragraph 87 that:

"An intangible asset should be viewed by the entity as having an indefinite useful life when, based on an analysis of all relevant factors, there will be no foreseeable limit for the period during which the asset is expected to generate net cash inflows for the entity."

1. And in its paragraph 88 that:

"The accounting of an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized, and an intangible asset with an indefinite useful life is not".

1. We can therefore, with complete certainty, conclude that the "D... Brand" is a Fixed Intangible Asset whose useful life is indefinite, in view of which it is not amortizable.

2. In view of the above, the amount considered as an expense is not accepted fiscally, and should be added in table 07 of the Model 22 income statement of the aforementioned company and in consequence alter the collectible matter of the Group, in view of the provision in paragraph a) of no. 1 of article 34 of CIRC combined with article 16 of Regulatory Decree no. 25/2009, of 14 September, so it is considered that the corrections now contested are correctly made.

3. Finally, and lastly, it should be noted that the technical opinions issued by "J..., Lda" and "K..., SA", and attached to the case by the Appellant, are precisely that "Technical Opinions" issued by independent entities which, in the present case, were auxiliary instruments that confirm the Appellant's decision-making regarding the accounting of said intangible asset, but on which the Tax Administration has no obligation to comment on their content.

VI - Proposed Decision

In view of the above, the present appeal should be dismissed.

VII - Right of Hearing

Given that the Tax Administration has already ruled on the matter in dispute, in gracious complaint proceedings, without the taxpayer having brought new elements, as can be inferred from the above.

And considering that in appeal proceedings no new facts were invoked which the taxpayer had not commented on, prior hearing should be dispensed with in accordance with no. 3 of article 60 of LGT.

• In the notification of the hierarchical appeal decision, points 24 to 49, if they existed, were not included, passing from point 23 to point 50;

• On 05-02-2016, the Claimant made the payment of the amount assessed (document no. 3 attached with the request for arbitral pronouncement, the contents of which are reproduced herein);

• On 22-12-2017, the Claimant submitted the request for arbitral pronouncement that gave rise to this case.

2.2. Unproven Facts and Grounds for the Decision on the Matter of Fact

It was not proven that the hierarchical appeal decision contains grounds with points 24 to 49 that are not found in the decision notified to the Claimant. The Tax and Customs Authority did not attach to the case a copy of the hierarchical appeal decision, so its content is only known through the copy presented by the Claimant.

There are no other relevant facts for decision of the case that have not been proven.

The proven facts are based on the documents presented by the Claimant, the administrative case and witness evidence.

The witnesses appeared to testify with impartiality and with knowledge of the facts they reported.

3. Matter of Law

The Tax and Customs Authority made a correction to the taxable matter of B... and the Claimant relating to amortizations concerning an asset described in accounting as "D... Brands/Rights".

The grounds for the corrections that were concretized in the assessment under challenge are contained in the Tax Inspection Report and consist of the Tax and Customs Authority's understanding that this asset should be considered, in its entirety, an intangible asset without finite and limited duration and therefore not subject to amortizations and depreciations that may be recognized as a tax-relevant expense.

The legal grounds for the corrections invoked includes paragraph a) of no. 1 of article 34 of CIRC, in the wording of Decree-Law no. 159/2009, of 13 July (in force in 2012), which establishes that "are not accepted as expenses" "depreciation and amortization of elements of assets not subject to deterioration", combined with article 16 of Regulatory Decree no. 25/2009, of 14 September, which establishes the following (also in the wording in force in 2012), as far as is relevant here:

Article 16

Intangible Assets

1 - Intangible assets are amortizable when subject to deterioration, namely by having a limited time duration.

2 - The following intangible assets are amortizable:

a) (...)

b) Elements of industrial property, such as patents, trademarks, licenses, production processes, models or other assimilated rights, acquired onerous and whose exclusive use is recognized for a limited period of time.

3 - Except in case of actual deterioration duly proven, recognized by the General Tax Directorate, the following are not amortizable:

a) (...)

b) Elements mentioned in paragraph b) of the previous number when the conditions referred to therein are not met.

The Claimant defends a contrary position, understanding that the assets in question are subject to deterioration and the amortizations made should be relevant for tax purposes.

However, the Claimant primarily imputes the assessment under challenge with the defect of lack of grounds, so it is important to define the order in which the defects should be assessed.

3.1. Order of Assessment of Defects

In accordance with the provisions of article 124 of CPPT, subsidiarily applicable to arbitral proceedings by virtue of the provisions of article 29, no. 1, of RJAT, with no defects being imputed to the act under challenge that would lead to a declaration of non-existence or nullity, nor a relationship of subsidiarity being indicated, defects whose findings would determine, according to the careful judgment of the judge, more stable or effective protection of the injured interests, should be assessed with priority.

Underlying the establishment of an order of assessment of defects is a legislative choice to the effect that the findings of one of the defects prejudices the assessment of the remaining ones, for if it were always necessary to assess all defects, the order in which their assessment proceeded would be indifferent.

The imputation of defects in a relationship of subsidiarity is expressly permitted by article 101 of CPPT.

When the challenger establishes a relationship of subsidiarity between the defects it imputes to the act under challenge, their assessment is made in the order indicated by it, as prescribed by paragraph b) of no. 2 of article 124 of the same Code.

Under article 469, no. 1, of CPC, "an ancillary request is one that is presented to court to be taken into account only in the event that a previous request does not proceed".

In the case at hand, as can be inferred from the express content of article 158 of the request for arbitral pronouncement, the Claimant imputes to the assessment under challenge "defect of lack of grounds" (articles 97 to 157) and only subsidiarily imputes to the assessment defect of illegality for not having been considered as a cost for tax purposes, the amortizations recorded.

Therefore, it is necessary to first assess the defect of lack of grounds and only in the event that the request is considered unfounded will the remaining matter need to be assessed.

3.2. Defect of Lack of Grounds

In administrative and tax terminology, the term "grounds" is used with two meanings: that of "material grounds" and that of "formal grounds".

Formal grounds "can be understood as a statement setting out the reasons or grounds for the decision", while material grounds corresponds to "the recurrence of what was decided to an evaluative parameter that justifies it: in the first sense, the formal aspect of the operation is privileged, associating it with the transparency of the decision perspective; in the second, substance is given to the substantive suitability of the act, integrating it in a reference system in which it finds grounds for legitimacy". (...)

It is with this latter meaning that case law has spoken of lack of "substantive grounds" or "substantial grounds", which recurs to the lack of demonstration of the substantive assumptions of the corrective action of the tax administration. (...)

"The duty of express grounds obliges the administrative body to indicate the reasons of fact and law that determined it to practice that act, externalizing, in its decisive features, the internal procedure of formation of the decision-making will. The duty is fulfilled as soon as there is a statement expressing a discourse that intends to justify the decision, regardless of whether that reasoning". (...)

Only the lack of formal grounds will constitute a defect of form.

Lack of substantive grounds, in particular due to non-correspondence with the reality of the substantive assumptions invoked (which is equivalent to the lack of proof of those assumptions when the burden of proof falls on the Administration) or due to error of law, will constitute a defect of error regarding the substantive assumptions of fact or error regarding the substantive assumptions of law.

In the case at hand, with the generic reference to lack of grounds, the Claimant imputes to the assessment under challenge defects of both types, for, beginning with the lack of formal grounds, it ends up referring to the lack of proof of the assumptions invoked in the act, which is translated into the imputation of a defect of error regarding the substantive assumptions of fact.

The requirement for grounds for harmful administrative acts is contained in no. 3 of article 268 of the Constitution, in which it is established that "administrative acts are subject to notification to the interested parties, in the form provided by law, and lack express grounds and are accessible when they affect rights or interests legally protected".

Especially for the grounds of tax acts, article 77, nos. 1 and 2, of LGT, establish that "the decision of proceeding is always grounded by means of brief exposition of the reasons of fact and of law that motivated it, and the grounds can consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that integrate the tax inspection report" and that "the grounds of tax acts can be made in a summary manner, and should always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations of calculation of the taxable matter and the tax".

"It is equivalent to the lack of grounds the adoption of grounds which, due to obscurity, contradiction or insufficiency, do not clarify concretely the motivation of the act" [article 153, no. 2, of the Administrative Procedure Code of 2015, subsidiarily applicable under article 2, paragraph c), of LGT].

The Supreme Administrative Court has consistently understood that the grounds of the administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the specific case, but that the grounds is sufficient when it allows a normal recipient to perceive the cognitive and evaluative itinerary followed by the author of the act to issue the decision, that is, when he can know the reasons why the author of the act decided as he decided and not differently, so as to be able to trigger administrative or contentious mechanisms for challenging. (...)

As results from the evidence produced and is not disputed, the asset described in accounting as "D... Brands/Rights", to which the correction of amortizations underlying the assessment under challenge relates, includes various assets, in particular:

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

• "Registrations": comprising the product registration dossiers and marketing authorizations;

• "Trademarks": comprising the "D..." brand, but also the brands "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..." and updated registrations;

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

Moreover, the acquisition of the assets included the assignment of the contractual position of B..., S.A. in all distribution agreements it had entered into, including supply agreements to Group E... and Group F... and the assignment of the contractual position of the alienating party of the assets in the supply and manufacturing agreements entered into with Laboratories G... and H....

Although it is necessary to distinguish between the act of assessment and the act of notification through which it is communicated to the recipient, in the case at hand it was not proven that there is any other document referring to the assessment act other than the one reproduced in document no. 1 attached with the request for arbitral pronouncement, so one must proceed from the assumption that it is a copy of the act that was practiced, which will have no other content beyond what it contains.

As referred, the Tax and Customs Authority understood in the Tax Inspection Report that grounds the assessment under challenge that the expenses recorded by the Claimant as depreciation/amortization in the amount of € 2,600,000.00 should not be accepted fiscally, under the provisions in paragraph a) of no. 1 of article 34 of CIRC, combined with article 16, no. 1, of Regulatory Decree no. 25/2009 of 14 September 2009, which establish that "are not accepted as expenses: a) Depreciation and amortization of elements of assets not subject to deterioration" and that "Intangible Assets are amortizable when subject to deterioration, namely by having a finite time duration."

Initially, based on the contract entered into between the Claimant and C... S.A., the Tax and Customs Authority concluded that the acquisition of the D... brand, embodied an intangible asset with no defined useful life, because no time limit or restriction of exclusive use of the brand was mentioned and it was not demonstrated that the asset in question was subject to deterioration or had a limited useful life, in particular it was not demonstrated that it would be foreseeable the period during which the asset was expected to generate net cash inflows for its holder. (...)

Assessing the exercise of the right of hearing on the Tax Inspection Report, exercised by the Claimant, the Tax and Customs Authority recognized that although the contract for purchase of the asset ("Asset Purchase Agreement") from company C..., S.A., does not provide any period, the taxpayer could assign a finite useful life to this asset, but understood that it was not demonstrated that the useful life of the asset was defined, for the following reasons, in summary:

– "given the specificity of the pharmaceutical product and its respective legislation (governing production, storage and marketing), it could be concluded that there would be no conditions/requirements that are not contained in the industrial property already held. Moreover, the object of industrial property is itself that know-how which will include production, storage and marketing conditions";

– the competitiveness of the pharmaceutical sector and "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 an asset is defined";

– "the taxpayer does not present any element that proves the occurrence of said 'technological obsolescence' of the brand after six years";

– what appears on the website of the A... group (...pt/pt/) points to the fact that "since its launch, over 60 years ago, the D... brand has never stopped growing. Outstanding market leader in cicatrizants, D... ointment has Zinc Oxide as its active substance. To be present in so many homes, being a leader in the protection and treatment of baby and the whole family's skin, D... ointment has always demonstrated constant safety and effectiveness, evolving according to the needs and expectations of consumers" and that "one of the brand's products was chosen by consumers as the best product, among 441 brands, as is transcribed: 'consumers elected ... as "consumer choice 2014" in diaper cream (...) ... was evaluated by a group of mothers who preferred the D... brand in deference to other brands on the market (...)'...

– "there was a decline of 9% in sales, compared to 2011, and for 2013, despite an increase in the amounts invested in Marketing and Samples, a decline in sales of 2% was still found compared to 2012", but "the decline in sales of products of the 'D...' brand is not sufficiently significant to consider that this asset has a finite useful life or to change its estimated useful life. In fact, it can be said that in the years in question a general decline in the pharmaceutical industry occurs, which may be reflected in sales of the 'D...' brand, without, however, being a significant factor to influence the useful life of the brand (which, moreover, happened inversely, as mentioned above, since the taxpayer increased the useful life of the asset to ten years)";

– "one of the brand's products was considered the consumer's choice in 2014, a fact that contradicts the image of decline and finiteness of this asset that the taxpayer intends to convey in this right of hearing".

As can be seen, with this reasoning the Tax and Customs Authority aims to demonstrate that the "D..." brand does not have a defined useful life.

It is noted, however, that the asset described in accounting as "D... Brands/Rights" encompasses assets of diverse nature, in particular various trade marks ("...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "...", "..."), manufacturing and manufacturing techniques and knowledge, product registration records and marketing authorizations, customer lists, marketing and promotional plans, sales force training manuals and assignments of contractual positions in distribution and supply contracts.

It was all this group of assets that the Claimant acquired from C... S.A., and it was to the amortizations relating to all of these that the Tax and Customs Authority refused to recognize the relevance as tax expenses.

Regarding the "D..." brand itself and the brands that include that designation, the grounds of the Tax and Customs Authority is understandable, with facts being invoked that, in principle, will have the potential to justify a conclusion to the effect that these are assets with no defined useful life. However, it was proven that "either by regulatory requirements or by force of competition", some products were discontinued, which demonstrates that at least some of the assets of that type were assets susceptible to deterioration, so not even in relation to all assets of that type can such a conclusion be justified.

But as regards the remaining elements of the set of assets acquired by the Claimant from C..., the grounds of the Tax and Customs Authority does not allow a normal recipient to perceive the reasons why it understood that they too were not subject to deterioration, in particular the manufacturing and manufacturing techniques and knowledge, the product registration records and marketing authorizations, the customer lists, the marketing and promotional plans, the sales force training manuals, and the assignments of various contractual positions in distribution and supply contracts.

Furthermore, there seem to be no reasons to doubt that at least some of these assets will, by their very nature, have finite duration, such as: manufacturing and manufacturing techniques and knowledge, which are normally being perfected; product registration records and marketing authorizations, which have time limitations; customer lists, marketing and product promotion plans that are intended primarily for parents of very young children, which will result in clientele with instability; distribution and supply contracts, which normally have a period of validity.

Having these assets patrimonial value and it not being questioned that their value is not included in the acquisition value, it is concluded that the grounds used by the Tax and Customs Authority does not clarify the reasons why it understood that they are not subject to deterioration, that is, why it understood that they have the potential to indefinitely "generate positive net cash flows for the entity".

Being so, the assessment under challenge suffers from lack of formal grounds, is obscure and insufficient, not clarifying concretely the motivation of the act [article 153 no. 2, of the Administrative Procedure Code of 2015].

Furthermore, being considered demonstrated that the assets of these latter types are subject to deterioration, it is also concluded that the assessment under challenge suffers from a defect of lack of substantive grounds, which recurs to error regarding the substantive assumptions of fact.

For this reason, the annulment of the assessment, in the respective part, is justified, for lack of grounds and error regarding the assumptions of fact, which constitutes a defect of violation of law, in accordance with the provisions of article 163, no. 1, of the Administrative Procedure Code subsidiarily applicable under article 2, paragraph c), of LGT.

3.3. Compensatory Interest

The assessment of compensatory interest has as its assumption the IRC assessment, so the defects affecting this also affect the assessment of compensatory interest.

For this reason, its annulment is justified, for the same reasons.

3.4. Quantification of Annulment

The Claimant only challenged the correction to the taxable matter of B... – Pharmaceutical Products, Lda., in the amount of € 2,600,000.00, accepting the correction in the value of € 9,121.17 resulting from improper deduction to the assessment, for double international taxation, in the individual sphere of the Claimant which the Tax and Customs Authority also made.

Thus, the findings on the merits of the request for arbitral pronouncement implies the annulment of the assessment under challenge as to the amount of € 275,615.95, in accordance with the demonstration made by the Claimant in article 312 of the request for arbitral pronouncement, which is not contested.

3.5. Issues of Prejudiced Assessment

Being to rule on the merits of the request for arbitral pronouncement regarding the defects imputed as principal to the assessment under challenge, the assessment of the remaining issues raised as subsidiary is prejudiced.

4. Indemnificatory Interest

On 05-02-2016, the Claimant made the payment of the amount assessed and requests the restitution of the amount of € 275,615.95, plus indemnificatory interest.

In accordance with the provisions of paragraph b) of article 24 of RJAT, the arbitral decision on the merits of the claim from which no appeal or challenge lies binds the Tax Administration from the end of the time period provided for appeal or challenge, and this must, in the exact terms of the findings of the arbitral decision in favor of the taxpayer and until the end of the time period provided for the spontaneous execution of sentences of tax judicial courts, "reestablish the situation that would exist if the tax act subject of the arbitral decision had not been practiced, adopting the acts and operations necessary for this purpose", which is in line with the provision of article 100 of LGT [applicable by virtue of the provision in paragraph a) of no. 1 of article 29 of RJAT] which establishes that "the tax administration is obliged, in case of total or partial findings in favor of the taxpayer of complaint, judicial challenge or appeal, to the immediate and full restoration of the legality of the act or situation subject of the dispute, including the payment of indemnificatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2, no. 1, paragraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral courts that operate within the CAAD, making no reference to condemning decisions, it should be understood that the competences include the powers that in judicial challenge proceedings are attributed to 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 RJAT, in which it is proclaimed, as the first directive, that "the tax arbitral process must constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge procedure, despite being essentially a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnificatory interest, as can be inferred from article 43, no. 1, of LGT, in which it is established that "indemnificatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was an error attributable to the services which resulted in payment of the tax debt in an amount greater than that legally due" and from article 61, no. 4 of CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the initial wording), that "if the decision that recognized the right to indemnificatory interest is judicial, the payment period counts from the beginning of the period of its spontaneous execution".

Thus, no. 5 of article 24 of RJAT, in saying that "payment of interest is due, regardless of its nature, under the terms provided for in the general tax law and in the Code of Procedure and Tax Process", should be understood as allowing the recognition of the right to indemnificatory interest in arbitral proceedings, as well as the reimbursement of the amount paid, which is the basis for calculating the interest.

It is thus necessary to assess the requests for reimbursement and indemnificatory interest.

In the case at hand, it is manifest that, following the partial illegality of the assessment, there is place for the reimbursement of the tax paid in the part corresponding to the value of the annulled assessment and for the payment of indemnificatory interest, since the illegality of the assessment act is attributable to the Tax Administration, which, on its own initiative, practiced it without legal support.

Consequently, the Claimant is entitled to indemnificatory interest, under article 43, no. 1, of LGT and article 61 of CPPT, regarding the amount of € 275,615.95.

The indemnificatory interest will be paid from the date on which the Claimant made the payment (05-02-2016) until the full payment of the amount of tax and compensatory interest to be reimbursed, at the supplementary legal rate, in accordance with articles 43, no. 4, and 35, no. 10, of LGT, article 61 of CPPT, article 559 of the Civil