Process: 673/2017-T

Date: September 19, 2018

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 673/2017-T) addresses the tax deductibility of trademark amortization under Portuguese Corporate Income Tax (IRC) law. A pharmaceutical holding company challenged a tax assessment that disallowed €1,560,000 in amortizations related to the acquisition of the B brand and other intangible assets for fiscal year 2013. The Tax Authority rejected these deductions, arguing the acquisition contract specified no end date for brand usage, thus classifying it as an indefinite-life intangible asset ineligible for amortization under IRC rules. The taxpayer contested this on three grounds: (1) insufficient reasoning in the tax assessment act, (2) failure to consider all factors determining useful life beyond contractual terms, and (3) contradictory reasoning between the inspection report and appeal decisions. The case examines fundamental principles of tax law, including the requirement for proper substantiation of administrative acts and the methodology for evaluating intangible asset useful life. The tribunal considered whether technical obsolescence, market conditions, competition, and maintenance requirements should influence useful life determination, even absent explicit contractual duration limits. This decision carries significant implications for pharmaceutical and other companies acquiring brands and intangible assets, establishing precedent on evidentiary standards for demonstrating finite useful life and the Tax Authority's burden to adequately justify corrections to declared amortizations.

Full Decision

ARBITRAL DECISION

It is agreed in arbitral tribunal

I – Report

A... – Pharmaceutical Products, S.A., with registered office at street..., no...., ..., ..., ..., legal entity no...., lodged a request for constitution of an arbitral tribunal, pursuant to the provisions of articles 2.º, no. 1, paragraph a), and 10.º of Decree-Law no. 10/2011, of 20 January, to assess the legality of the tax act for assessment of corporate income tax (IRC) no. 2015... and corresponding compensatory interest, in the total amount of € 443,889.32, upheld following the rejection of an administrative appeal and hierarchical appeal.

The petition is grounded on the following terms.

Through the impugned tax act, the Tax Authority made corrections to the taxable income due to the failure to add to the taxable profit for the fiscal year 2013 the sum of € 1,560,000.00 relating to reintegrations and amortizations resulting from the acquisition of various intangible assets, among which was included the brand B....

The Petitioner had recorded the amortizations resulting from this acquisition as tax-deductible costs, insofar as these were assets with defined useful lives and subject to depreciation, whereas the Tax Administration based its corrections on the sole ground that the contract did not refer to any end date for use of the brand B..., and there were no other elements determining the useful life of that asset, disregarding that the said contract included the acquisition of different assets, and furthermore encompassed the assignment of contractual position in distribution and supply contracts.

Being completely silent regarding the useful life period of the remaining assets acquired by the Petitioner, the tax act suffers from a defect of lack of substantiation.

Subsidiarily, the Petitioner imputes to the impugned act the defect of violation of law for having disregarded the amortization of intangible assets as a tax cost based solely on analysis of the acquisition contract, without taking into account all factors that define the useful life of an asset, namely through technical, technological and commercial obsolescence, stability of the sector in which the asset operates, competition, the level of maintenance expenditure required to obtain the expected future economic benefits from the assets, and dependence on the methods and know-how acquired.

Also subsidiarily, the Petitioner invokes the defect of lack of substantiation in relation to the draft rejection decision of the administrative appeal and, consequently, to the act rejecting the hierarchical appeal, in the point where it concludes that the corrections are not of an accounting nature, but of a tax nature, which is in contradiction with the conclusions of the inspection report, evidencing inconsistent substantiation.

The Tax Authority, in its response, maintains that substantiation of an administrative act is a relative concept that varies according to the legal type of act and the circumstances of the specific case, being sufficient when it allows a normal recipient to understand the cognitive and evaluative itinerary followed by the author of the act, and that, in this case, the motivation that determined the non-acceptance of amortizations relating to the intangible asset consisting of the brand B... is set out both in the administrative appeal proceedings and in the hierarchical appeal proceedings.

Regarding the non-deductibility of amortizations as a tax cost, the Tax Administration contends that the Petitioner recorded the various components of the acquired assets as if they were a single asset without qualifying these components as capable of generating economic benefits separately and generating different types of depreciation or amortization, which is evidenced by the fact that the contract only refers to the overall value of the assets covered.

Moreover, the factors that may influence the determination of the useful life of intangible assets do not assume, in this case, specific relevance, given that the contract contains no clauses restricting the time period for use of the assets, and the economic factors that may be considered do not allow, on a sustained basis, determination of an expected period of use, thus explaining that the duration of the useful life of the brand B... was initially fixed at 6 years, and subsequently revised to 10 and 14 years.

Concluded for dismissal of the petition.

  1. In the course of proceedings, the meeting referred to in article 18.º of the RJAT was dispensed with, as well as the production of testimonial evidence, and the use of testimonial evidence produced in Case no. 543/2017 was granted, pursuant to article 421.º, no. 1, of the CPC, as the same disputed issues were at stake, although relating to a different fiscal year, and the witnesses questioned were the same as those called in the present Case.

In arguments, the parties reiterated their previous positions.

  1. The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority in accordance with applicable regulations.

Pursuant to the provisions of paragraph a) of no. 2 of article 6.º 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 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories hereto, who communicated acceptance of their appointment within the applicable period.

The parties were properly and timely notified of this appointment and did not manifest a desire to reject it, 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 Deontological Code.

Thus, in accordance with the provision in 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 31 December, the collective arbitral tribunal was constituted on 3 March 2018.

The period for issuance of the decision was extended by two months given the complexity of the case and the need to hear the testimonial evidence produced in Case no. 543/2017 and also the circumstance that the initial six-month period fell immediately after the judicial recess.

The arbitral tribunal was regularly constituted and is substantively competent, under the provisions of articles 2.º, no. 1, paragraph a), and 30.º, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties have legal personality and capacity, are legitimate and are represented (articles 4.º and 10.º, no. 2, of the same act and 1.º of Ordinance no. 112-A/2011, of 22 March).

The proceedings are not affected by nullities and no exceptions were raised.

It falls to us to decide.

II – Substantiation

Factual Matters

  1. The facts relevant to the decision of the case are as follows.

  • The Petitioner is a holding company of a group of companies operating in the pharmaceutical sector, producing and marketing products in this area and holding various brands that operate in the healthcare sector in general;

  • At the date of the facts, the Petitioner was subject to the special tax regime for groups of companies;

  • By means of Service Order 2015... the taxable profit of the group relating to fiscal year 2013 was corrected in the amount of € 1,560,000.00 relating to reintegrations and amortizations recorded as cost and accepted for tax purposes;

  • The correction was determined following an inspection action carried out pursuant to Service Order 2014... on the individual results of the subsidiary company "C..., Lda.", which was part of the group;

  • On 23-12-2009, an Asset Purchase Agreement was executed between the Petitioner and D... S.A., a copy of which is on file in the administrative proceedings and is reproduced herein;

  • Through said contract, the Petitioner acquired from D... S.A., for the amount of €15,600,000.00, the brand B..., comprising the following assets:

    • Manufacturing technology and know-how: comprising all know-how relating to product formulation, quality control, packaging, formulas, complaints register, evaluations, processes, technology used;

    • Registrations: comprising product registration dossiers and marketing authorizations;

    • Trade Marks: comprising the brand B..., but also the brands..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and updated registrations;

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

  • In the contract, no reference was made to an end date or restriction on exclusive use of the brand.

  • Through the Asset Purchase Agreement, D... S.A. committed to take steps to ensure, at no additional cost, the assignment of position in all distribution contracts it had entered into, as well as supply contracts to Group E... and Group F..., and also, under supply and manufacturing contracts entered into with G... and H....

  • The Petitioner notified the competition authority of this transaction.

  • On 18-09-2010, C..., Lda., a company belonging to the Petitioner's group, acquired from it the brand "B..." and the aforementioned assets, through a capital increase subscribed by shareholder Laboratory A..., S.A., executed through contribution of assets in kind, the intangible asset being assigned the net value of €14,518,555.43.

  • C..., Lda., recorded amortizations on the asset designated as Brands/Rights B....

  • C..., Lda. proceeded with amortization of the intangible asset, first considering that the asset had a useful life of 6 years, and later based on a useful life of 10 years.

  • The useful life period of the asset was determined by considering the following criteria:

    • Typical life cycles of the assets;

    • Technical, technological and commercial obsolescence;

    • Competition;

    • The level of maintenance expenditure required to obtain the expected future economic benefits from the assets.

  • In the absence of investment by the Petitioner, at least part of the acquired assets would become technically, technologically and commercially obsolete within the useful life period estimated by the Petitioner.

  • The brand B... and its products are included in a sector markedly affected by a need for constant evolution, in which almost daily new products are launched, with new properties and broader scope of use.

  • In 2014, Commission Regulation EU no. 358-2014, of 9 April 2014, was published, which prohibited the use of a raw material called "Phenonip" from 16 October 2014 and disposal until 15 July 2015, which required reformulation of the products "B... Body Emulsion" and "B... Bath Gel".

  • Also in 2014, two new Regulations (Commission Regulations EU nos. 1003/2014 and 2004/2014, of 18 September) were published on amendments to the annexes of substances permitted in cosmetics, their concentrations and conditions.

  • Under the said regulations, the use of "Propylparaben" and "Butylparaben", among others, was prohibited in non-rinsed products designed for application in the area covered by diapers in children under three years of age, which led to the need for reformulation of "B... diaper change cream".

  • The market in which products associated with the brand B... are located is quite competitive, with other products and brands in the market with high levels of promotion, which leads to the constant need to invest in technology and image associated with each product.

  • The aggressiveness of competition in said market requires substantial investment in promotion and technology to maintain product competitiveness.

  • Products associated with the brand B... have been subject to various updates and modifications over time, both due to regulatory requirements and due to competition itself, with some being discontinued.

  • In 2012, alterations were suggested by D... AG, following complaints regarding quality for the product B... Derma Cream.

  • The Petitioner was subject to an inspection procedure relating to fiscal year 2013, through Service Order no. OI 2015..., aimed at analyzing the income statement of the group, including company C..., Lda.

  • The inspection report contains the following:

"The taxpayer did not add for purposes of determining the taxable profit for fiscal years 2011, 2012 and 2013 the amounts of € 2,600,000.00, € 2,600,000.00 and €1,560,000.00, respectively, relating to reintegrations and amortizations recorded as cost and not accepted for tax purposes, in accordance with paragraph a) of no. 1 of article 34.º of the Corporate Income Tax Code and Regulatory Decree no. 25/2009 resulting from the acquisition of the brand B..., through a capital increase on 2010-09-18 (…), subscribed by shareholder A..., S.A., executed through contribution of assets in kind, the intangible asset B... being assigned the net value of € 14,518,555.43.

The costs recorded as amortizations/depreciation in the amounts of € 2,600,000.00, € 2,600,000.00 and €1,560,000.00, are not accepted for tax purposes as provided in paragraph a) of no. 1 of article 34.º of the Corporate Income Tax Code combined with Regulatory Decree no. 25/2009, of 14 September.

Thus, the individual taxable profit was corrected for fiscal years 2011, 2012 and 2013, with the grounds set out in points III-1.1 of the Inspection Report attached and integral to this Tax Inspection Report (Annex A)";

  • In Annex A to which the inspection report refers and which is attached, in the part relating to amortizations not accepted as costs, the following is stated, in the relevant part:

"The taxpayer did not add for purposes of determining the taxable profit for fiscal years 2011, 2012 and 2013 the amounts of € 2,600,000.00, € 2,600,000.00 and €1,560,000.00 respectively, relating to reintegrations and amortizations recorded as cost and not accepted for tax purposes, in accordance with paragraph a) of no. 1 of article 34.º of the CIRC and Regulatory Decree 25/2009, resulting from the acquisition of the brand B..., through a capital increase on 2010.09.18 (in accordance with information contained in the commercial certificate), subscribed by shareholder A..., S.A., executed through contribution of assets in kind, the intangible asset B... 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 executed through contribution of assets in kind in the amount of €990,000.00 (nine hundred and ninety thousand euros), consisting of the transfer to the Company of assets constituting the entire assets relating to the line of business of the contributing company, shareholder A..., S.A., of importation, exportation, production and marketing of Medicines Not Subject to Medical Prescription and of Cosmetics and which is identified in the Report of I..., S.A., registered with the Order of Official Auditors under no...., prepared under article 28.º of the Code of Commercial Companies, which is annexed to these minutes and integral to them."

It should be noted that the brand B... had been previously acquired by company A..., S.A. from D... S.A. – tax no...., for the amount of €15,600,000.00, pursuant to contract executed between the parties on 23 December 2009, written in the English language, for which Portuguese translation was not made available despite being requested - Annex 2.

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

Article 34.º of the CIRC - Non-deductible expenses for tax purposes

1- The following are not accepted as expenses:

a) Depreciation and amortization of assets not subject to depreciation;

In turn, Regulatory Decree no. 25/2009, of 14 September, "Regime of Depreciation and Amortization for purposes of corporate income tax" provides the following in its article 16.º:

Intangible Assets

1- Intangible assets are amortizable when subject to depreciation, namely by having limited temporal validity.

2 - The following intangible assets are amortizable:

  • Expenses with development projects;

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

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

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

"87- An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the duration of, or the number of production or similar units constituting, that useful life. An intangible asset shall be viewed by the entity as having an indefinite useful life when, based on an analysis of all relevant factors, there is no foreseeable limit to 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) the typical life cycles for the asset and publicly available information on useful life estimates for similar assets that are used in a similar manner;

c) Technical, technological, commercial or other obsolescence;

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

e) Expected actions of 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 level;

g) The period of control over the asset and legal or similar limits on the use of the asset, such as lease expiration dates and concession period end dates;

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 keep the asset at its performance standard assessed at the time of the useful life estimate, and the entity's ability and intention to achieve such level. A conclusion that the useful life of an intangible asset is indefinite must 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- Both legal and economic factors may influence the useful life of an intangible asset. Economic factors determine the period during which the entity will receive future economic benefits. 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 A... S.A. and company D... S.A., we can conclude that the acquisition of the brand B... constitutes an intangible asset without defined useful life, as no end date or restriction on exclusive use of the brand is mentioned, and furthermore no elements determining the useful life of the asset under analysis were detected.

Not existing, therefore, a 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 according to NCRF-6, the recognized asset should not be amortized. In accordance with article 16.º of RD 25/2009 — "Intangible assets are amortizable when subject to depreciation, namely by having limited temporal validity."

Conclusion

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

  • The Petitioner was notified of the IRC assessment no. 2015... and the account adjustment statement no. 2015..., in the total amount of € 443,889.32, resulting from the individual corrections made in the course of the inspection procedure in relation to company C..., Lda.

  • On 25-05-2016, the Petitioner paid the determined tax amount.

  • On 21-05-2015, the Petitioner filed an administrative appeal against the IRC assessment act.

  • On 21-10-2016, the Petitioner was notified of the draft decision rejecting the administrative appeal.

  • On 4-11-2016, the Petitioner exercised the right to be heard.

  • On 6-12-2016, the Petitioner was notified of the decision of the Deputy Director of Finance rejecting the administrative appeal.

  • Dissatisfied with the decision, on 25-01-2017, the Petitioner filed a hierarchical appeal.

  • On 20-09-2017, the Petitioner was notified of the decision of the Deputy Director-General of the Tax Authority rejecting the hierarchical appeal.

The tribunal formed its conviction on the proven facts based on the documents attached to the petition and contained in the administrative proceedings submitted by the Tax Authority with its response, and the testimonies produced in Case no. 543/2017, by effect of the use of evidence pursuant to article 421.º, no. 1, of the CPC.

Legal Questions

  1. The additional IRC correction underlying the impugned tax assessment act was determined on the basis that amortizations resulting from the acquisition of the brand B... through the contract executed between the Petitioner and D... S.A. were not accepted as tax deductible costs, given the understanding formulated by the Tax Administration that the brand does not constitute an intangible asset without defined useful life.

The Petitioner grounds the request for contentious annulment, according to a relationship of subsidiarity, on the defect of lack of substantiation attributable to the tax act itself, on the defect of violation of law related to the deductibility of amortizations as tax costs, and on the defect of lack of substantiation affecting the draft rejection decision of the administrative appeal and the decision rejecting the hierarchical appeal.

As provided in article 124.º of the Code of Tax Procedure and Process, in the decision to be rendered in the challenge process, the tribunal shall give priority to assessing defects that lead to a finding of non-existence or nullity of the impugned act, and then the defects raised that lead to its annulment (no. 1), with priority being given, in the first group, to assessing defects whose finding will, according to the prudent judgment of the judge, provide more stable or effective protection of the injured interests, and, in the second group, to the order indicated by the party raising the challenge, whenever it establishes a relationship of subsidiarity between them and no other defects are raised by the Public Prosecutor (no. 2).

In the present case, no defects are raised that lead to a finding of non-existence or nullity of the impugned act or others resulting from public enforcement, with only defects leading to annulment of the administrative act being at issue. Moreover, the Petitioner begins by raising the defect of lack of substantiation relating to the tax act itself, invoking the other illegalities only subsidiarily, so that, in application of the general criterion for the order of assessment of defects, it is this defect of lack of substantiation that we begin to analyze.

The substantiation of administrative acts, in addition to constituting a guarantee of the administered parties enshrined constitutionally (article 268.º, no. 3, of the Fundamental Law), is especially provided for in the General Tax Law, which, in its article 77.º, in the part most relevant to consider, provides:

1 - Procedure decisions are always substantiated by means of a succinct exposition of the facts and legal reasons that motivated them, and substantiation may consist of mere declaration of agreement with the grounds of prior opinions, information or proposals, including those forming part of the tax inspection report.

2 - Substantiation of tax acts may be carried out in summary form, and shall always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining taxable income and the tax.

(…).

In the present case, the Tax Authority based its position on the circumstance that the asset in question is not subject to depreciation nor conditioned by limited temporal validity. Starting from this qualification, the Administration concluded that there is no basis for amortizing the cost for tax purposes, applying the provisions of article 34.º, no. 1, paragraph a), of the Corporate Income Tax Code and article 16.º, no. 1, of the Regime for Depreciation and Amortization for purposes of Corporate Income Tax, as well as the Financial Reporting Accounting Standard (NCRF) 6.

In fact, according to the cited provision of the Corporate Income Tax Code, "the following are not accepted as expenses: depreciation and amortization of assets not subject to depreciation". And pursuant to the regulatory provision, "intangible assets are amortizable when subject to depreciation, namely by having limited temporal validity." Also, the Financial Reporting Accounting Standard points to the assignment of an indefinite useful life to an asset when, based on analysis of all relevant factors, there is no foreseeable limit to the period during which the asset is expected to generate net cash inflows for an entity.

However, as emerges from the factual matter given as established, the contract executed between the Petitioner and D... S.A. included different types of assets, thus specified:

  • Manufacturing technology and know-how, comprising all know-how relating to product formulation, quality control, packaging, formulas, complaints register, evaluations, processes, technology used;

  • Registrations: comprising product registration dossiers and marketing authorizations;

  • Trade Marks: comprising the brand B..., but also the brands..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ..., ..., ..., ..., ..., ..., ..., ... and updated registrations;

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

  • Assignment of contractual position in all distribution contracts that the seller of the assets had entered into, including supply contracts to Group E... and Group F...;

  • Assignment of contractual position of the seller of the assets under supply and manufacturing contracts executed with G... and H....

Apparently - and as recognized in the response to the arbitral petition - the Tax Authority, in making the correction to the taxable income of the taxpayer due to non-deductibility as costs of depreciation and amortization related to the acquisition of the brand B..., intended to refer to the assets associated with the brand in its entirety, and therefore to the whole set of assets that were the subject of transaction by effect of the Asset Purchase Agreement.

However, in the inspection report, proceeding from mere analysis of the contractual terms, the Administration limits itself to stating that the acquisition of the brand B... constitutes "an intangible asset without defined useful life, as no end date or restriction on exclusive use of the brand is mentioned, and furthermore no elements determining the useful life of the asset under analysis were detected", going on to conclude that the "useful life of the intangible asset is indefinite, and not finite" as there is no "foreseeable limit to the period during which the asset is expected to generate net cash inflows for the entity". Omitting any reference to the remaining assets, of different nature, which include various trade marks, techniques and manufacturing and production know-how, product registrations and marketing authorizations, customer lists, marketing and product promotion plans, sales force training manuals, and assignments of contractual positions in distribution and supply contracts.

As is the prevailing case law understanding, substantiation of an administrative or tax act is a relative concept that varies according to the type of act and the circumstances of the specific case, and substantiation is sufficient when it allows a normal recipient to understand the cognitive and evaluative itinerary followed by the author of the act in reaching its decision, that is, when the recipient can know the reasons why the author of the act decided as it did and not otherwise. As further emerges from article 153.º, no. 2, of the Code of Administrative Procedure, subsidiarily applicable to tax proceedings, "equivalent to lack of substantiation is the adoption of grounds which, due to obscurity, contradiction or insufficiency, do not concretely clarify the motivation of the act".

In the specific case, the Administration limited itself to formulating a generic understanding as to the deductibility of amortizations as a tax expense, based on the non-existence, in contractual terms, of any limit or restriction on exclusive use of the brand and the non-demonstration of economic data allowing configuration of a foreseeable limit for the useful life of the asset, but without clarifying how this same criterion is applicable to all other assets of different kinds that were encompassed within the same acquisition contract.

As emerges from article 77.º of the General Tax Law quoted above, substantiation, although it may be carried out in summary form, should always contain, not only the applicable legal provisions, but also the qualification and quantification of the tax facts, so that it was incumbent on the Tax Authority to obtain, within the course of the inspection procedure, the necessary clarifications to adopt a decision that would allow understanding why all the remaining elements of the set of assets acquired by the Petitioner were not subject to depreciation, notwithstanding – as has been highlighted – that these are assets of different kinds.

Given that the Tax Authority refused to recognize the relevance of amortizations relating to the entire group of assets that the Petitioner acquired from D... S.A., the decision would have to be motivated separately in relation to each of these assets and specifically in relation to those that might be configured, by their own nature, as having finite duration, such as manufacturing and production techniques and know-how, product registrations and marketing authorizations, customer lists, product marketing and promotion plans, and distribution and supply contracts.

The absence of concrete substantiation in each of these cases affects the tax act with insufficiency of substantiation. Although it is understood that the content of sufficient substantiation varies depending on the type of act and the subject matter it covers, it is evident that generic or more general substantiation is not sufficient when the context of the decision involves very differentiated realities and circumstances.

It is therefore procedent, consequently, the defect of lack of substantiation.

  1. The Petitioner, although beginning by attributing to the tax act a formal defect of lack of substantiation, at a second moment, and still in this context, also alleges – invoking the burden of proof of the Tax Authority – that no probative elements were presented that would allow concluding that the entirety of the assets acquired from D... S.A. are not characterizable as intangible assets without defined useful life.

This question is necessarily barred by the solution found regarding the formal defect.

The operation of the burden of proof would require that the tribunal pronounce on the material facts of the case and, verifying a situation of lack or insufficiency of proof regarding some or some of the facts indispensable for the legal decision, issue a decision adverse to the party who bore the burden of proving those facts, which would lead to a pronouncement on the merits.

Finding itself bound to give prior consideration to the defect of lack of substantiation, and having reached a finding of its merit, naturally it does not fall to us to analyze aspects relating to substantive law.

Having been rendered a decision annulling the tax act due to lack of substantiation, it is incumbent on the Tax Authority, in execution of the judgment, to produce a new act, properly substantiated, that defines the legal situation, whether as to the direction of the decision or as to the substantive grounds on which the decision must be based, and it is in this new light that any future dispute as to the deductibility of amortizations as tax costs may come to be raised.

In this sense, the assessment of the question relating to the burden of proof must be understood as barred.

  1. Questions of Barred Assessment

Since the arbitral petition is to be judged as meritorious regarding the defect imputed as principal to the impugned assessment, the assessment of the remaining questions raised subsidiarily is barred.

  1. Compensatory Interest

The Petitioner further requests a finding that the Tax Authority is liable for payment of compensatory interest, at the legal rate, calculated on the tax, until full reimbursement of the amount owed.

In accordance with the provisions of paragraph b) of article 24.º of the RJAT, the arbitral decision on the merits of the claim to which no appeal or challenge lies binds the Tax Authority, in the exact terms of the merit of the arbitral decision in favor of the taxpayer, and requires it to "restore the situation that would exist if the tax act subject to the arbitral decision had not been performed, adopting the necessary acts and operations for this purpose". This is in keeping with the provision in article 100.º of the LGT, applicable by force of the provision in paragraph a) of no. 1 of article 29.º of the RJAT.

Still pursuant to no. 5 of article 24.º of the RJAT "payment of interest, regardless of its nature, is due under the terms provided in the General Tax Law and in the Code of Tax Procedure and Process", which refers to the provisions of articles 43.º, no. 1, and 61.º, no. 5, of one and the other of these acts, requiring payment of compensatory interest from the date of payment of the tax unduly paid until the date of processing of the respective credit note.

There is thus place, in the wake of declaration of illegality of the IMT assessment act, for payment of compensatory interest, pursuant to the provisions of the cited articles 43.º, no. 1, of the LGT and 61.º, no. 5, of the CPPT, calculated on the amount that the Petitioner paid unduly, at the rate of legal interest (articles 35.º, no. 10, and 43.º, no. 4, of the LGT).

III – Decision

In view of the above, it is decided to judge the arbitral petition filed as meritorious and, in consequence:

a) Annul the tax assessment act of IRC no. 2015... and corresponding compensatory interest, in the total amount of € 443,889.32, as well as the hierarchical appeal decision relating thereto;

b) Bind to payment of compensatory interest from the date of payment of the tax until the date of issuance of the credit note, pursuant to articles 43.º of the LGT and 61.º of the CPPT.

Value of the Case

The Petitioner indicated as the value of the case the amount of € 443,889.32, which was not contested by the Respondent, and corresponds to the value of the assessment to which it sought to object (article 97.º, no. 1, paragraph a), of the CPPT).

Costs

Pursuant to articles 12.º, no. 2, and 24.º, no. 4, of the RJAT, and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings and Table I annexed thereto, the amount of costs is fixed at € 7,038.00, to be borne by the Respondent.

Let notice be given.

Lisbon, 19 September 2018

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

Arbitrator Member

José Calejo Guerra

Arbitrator Member

Miguel Matos Torres

Frequently Asked Questions

Automatically Created

Can trademarks with indefinite useful life be amortized as deductible costs for IRC purposes in Portugal?
Under Portuguese IRC law, trademarks with indefinite useful life generally cannot be amortized as tax-deductible costs. The Tax Authority's position, as reflected in this case, is that intangible assets can only be amortized when their useful life is determinable and finite. When an acquisition contract contains no end date or duration limitation for trademark usage, and no other elements establish a defined useful life period, the asset is treated as having indefinite duration, making amortizations non-deductible. However, taxpayers may challenge this classification by demonstrating through technical, commercial, or market factors that the asset has a measurable finite useful life despite contractual silence on duration.
What are the requirements for proper reasoning (fundamentação) in tax assessment acts related to intangible asset amortization?
Proper reasoning (fundamentação) in tax assessment acts related to intangible asset amortization requires the Tax Authority to clearly explain the cognitive and evaluative process leading to the decision. The reasoning must allow a normal recipient to understand why amortizations were rejected. For intangible assets, this includes identifying which specific assets lack determinable useful life, explaining why contractual terms or other evidence fail to establish finite duration, and addressing taxpayer arguments regarding technical obsolescence, market conditions, or other factors affecting useful life. The reasoning must be consistent across inspection reports, administrative appeals, and hierarchical appeals, with any contradictions potentially constituting a substantiation defect that could invalidate the assessment.
How does the Portuguese Tax Authority evaluate the useful life of intangible assets acquired in business transactions?
The Portuguese Tax Authority evaluates the useful life of intangible assets acquired in business transactions primarily by examining the acquisition contract for explicit duration limitations or end dates. When contracts are silent on duration, the Authority considers whether other elements objectively determine a finite useful life period. The Authority scrutinizes how taxpayers initially recorded and classified asset components, whether assets were properly disaggregated when multiple intangibles were acquired together, and the consistency of useful life estimates over time. Changes in estimated useful life (such as revisions from 6 to 10 to 14 years) may indicate the absence of objective determination criteria, supporting classification as indefinite-life assets. However, the Authority must also consider substantiated evidence of technical, technological, or commercial factors that inherently limit asset utility.
What factors should be considered when determining the useful life of intangible assets for IRC tax deduction purposes?
When determining the useful life of intangible assets for IRC tax deduction purposes, several factors should be considered beyond contractual duration terms: (1) technical and technological obsolescence rates in the relevant industry sector, (2) commercial obsolescence driven by market evolution and consumer preferences, (3) stability and competitive dynamics of the sector where the asset operates, (4) maintenance expenditure levels required to preserve the asset's economic benefit-generating capacity, (5) dependence on specific methods, know-how, or complementary assets that may have limited lifespans, (6) regulatory or legal restrictions affecting asset usage, (7) historical patterns of similar asset utility in comparable markets, and (8) the nature of rights acquired, particularly whether distribution or supply contracts with defined terms were included. Taxpayers bear the burden of substantiating these factors with objective evidence to overcome contractual silence on duration.
Can a taxpayer challenge IRC corrections on intangible asset amortizations through arbitral tribunal proceedings at CAAD?
Yes, taxpayers can challenge IRC corrections on intangible asset amortizations through arbitral tribunal proceedings at CAAD (Centro de Arbitragem Administrativa). Under Decree-Law 10/2011, taxpayers may request constitution of an arbitral tribunal to assess the legality of corporate income tax assessments, including those involving technical determinations about asset useful life and amortization deductibility. The arbitral process provides an alternative to judicial courts for resolving tax disputes, with tribunals competent to evaluate both substantive tax law issues (such as proper classification of intangible assets) and procedural defects (such as insufficient reasoning in tax acts). As demonstrated in this case, the arbitral forum allows comprehensive examination of technical accounting and valuation questions, consideration of witness testimony, and cross-reference to related proceedings involving similar issues for different tax years.