Process: 680/2015-T

Date: April 20, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 680/2015-T) addresses the proper classification of an association's income under IRC (Corporate Income Tax) regulations. The claimant, a private association conducting training activities, challenged an additional IRC assessment of €35,750.12 for fiscal year 2009, requesting partial annulment to reduce the taxable base from €157,350.91 to €35,779.69. The central dispute concerns whether €1,537,650.85 in subsidies received for training programs should be classified as non-taxable income under Article 54(3) of the IRC Code or as taxable Category B income. The Tax Authority reclassified €1,567,078.22 from non-taxable to taxable income, arguing the association's accounting failed to properly segregate exempt, non-subject, and taxable revenues by IRS categories as required by Article 116 of the IRC Code. The claimant contended that subsidies financing statutory training purposes are explicitly non-subject to IRC under Article 54(3), which exempts subsidies intended to finance statutory objectives. The association emphasized that AT had treated identical subsidies as non-taxable in prior fiscal years (2007-2008) without legislative changes justifying the reversal. Additional arguments included violations of legal certainty, legitimate expectations, and the constitutional principle of taxation based on actual income (Article 104(2) CPR), as the reclassification resulted in taxable income exceeding actual economic capacity. The case illustrates critical compliance requirements for associations: maintaining separate accounting records for different income categories, distinguishing between subsidies for statutory purposes versus commercial activities, and properly allocating expenses between taxable and non-taxable operations. The dispute highlights tensions between formalistic accounting requirements and substantive analysis of whether association activities constitute commercial operations or statutory mission fulfillment.

Full Decision

ARBITRAL DECISION

  1. REPORT

A..., with registered office at..., Street..., ...-... Porto, with tax identification number ... (hereinafter referred to as Claimant), hereby, pursuant to the provisions of Article 2, No. 1, subparagraph a), of Decree-Law No. 10/2011, of January 20, which approved the Legal Regime of Arbitration in Tax Matters (LRAT), requests an arbitral pronouncement in which the Tax and Customs Authority (AT) is the Respondent, submitting to the Arbitral Tribunal the request to assess the legality of the additional assessment of Corporate Income Tax (CIT) for the fiscal year 2009 with No. 2013..., in the total amount of €35,750.12, requesting its partial annulment, on the grounds of the illegality of the qualification of income and expenses made by the Respondent.

The Claimant further requests that the taxable matter determined by AT be reduced from €157,350.91 to €35,779.69, with the consequence that the tax assessment be reduced from €35,750.12 to €7,155.94, annulling the difference of €28,594.18, corresponding to the value of the case.

The following are, in summary, the grounds invoked by the Claimant:

a. The Claimant was subject to external inspection procedures for the fiscal years 2007 to 2011, in whose reports it was classified as being "a CIT taxpayer in accordance with subparagraph a) of No. 1 of Article 2 of the CIT Code, whose tax is levied on global income, corresponding to the algebraic sum of income from the various categories considered for purposes of Personal Income Tax (IRS)... taking into account that it does not exercise, as its principal activity, a commercial, industrial or agricultural activity...";

b. The Claimant agrees with that classification, as well as agreeing that, in accordance with Article 116 of the CIT Code, in the version in force at the date of the facts, it was obligated to maintain the record of its income organized according to the various categories as defined for purposes of IRS, as well as the record of expenses specific to each category of income, separately from expenses not specific to a certain category (Article 5 of the brief);

c. In the fiscal year 2009, AT concluded that the Claimant's accounting did not comply with those requirements, stating that "the general accounting, considering the chart of accounts used, is not structured to allow identification of the different types of income obtained: exempt, non-subject and subject (by IRS categories)"; the tax inspection reports for the fiscal years 2007, 2008, 2010 and 2011 reached the same conclusion;

d. In all those fiscal years, AT proceeded to requalify income by IRS categories and separated the expenses it considered to be associated with a certain type of income from the remaining general expenses;

e. The Claimant agrees that income from unsubsidized training (seminars, conferences and similar events) be requalified as income from Category B of IRS, subject to CIT; however, it cannot agree with the remaining criteria for requalification of income and expenses used by AT in the context of the tax inspection action and which formed the basis for the disputed assessment (Article 9 of the brief);

f. With respect to the fiscal year 2009, AT only made corrections to non-taxable income, in the amount of €1,567,078.22, which it requalified as income subject to CIT (Category B), on the grounds that "this income results fundamentally from the following economic operations: conducting seminars, conferences and similar events, provision of training services (subsidies), leasing of space and other service provision";

g. The Claimant completely disagrees with the tax treatment given by AT to subsidies associated with training, in a total amount of €1,537,650.85, following the statement that "...the subsidies obtained associated with training are considered positive components in determining income...insofar as they do not meet the requirements to benefit from the exemption provided for in No. 2 of Article 55 of the Tax Benefits Statute, either as to the nature of the taxpayer or as to the recipients of the training, who are not limited to the taxpayer's members" (Articles 28 and 29 of the brief);

h. The aforementioned provision is not applicable to A..., as this is not an employers' association or trade union, nor a legal entity created by law to ensure the discipline and representation of the practice of liberal professions, but rather a private law association whose purpose is, in accordance with Article 2 of its Bylaws, the carrying out and development of the activities provided therein (Article 31 of the brief);

i. A... is subject to the general CIT regime applicable to entities that do not exercise, as their principal activity, a commercial, industrial or agricultural activity, as provided for in Articles 53 and 54 of the CIT Code;

j. Therefore, the non-taxability of CIT of the subsidies received by A... within the scope of the training programs it conducts in accordance with its Bylaws (Article 2, No. 1, subparagraph e) results from the application of No. 3 of Article 54 of the CIT Code, whose provision expressly provides that "income not subject to CIT includes contributions paid by members in accordance with the bylaws, as well as subsidies intended to finance the carrying out of the statutory purposes" (Article 34 of the brief);

k. Given that it is unequivocal that the subsidies obtained by the Claimant to develop training actions are intended to finance the carrying out of its statutory purposes, the correction made by AT is illegal, due to erroneous qualification of income, and the tax assessment act should be annulled with respect to the qualification of income from subsidies, in accordance with subparagraph a) of Article 99 of the Code of Tax Procedure and Process (CTPP) (Article 37 of the brief);

l. In the tax inspection reports for the fiscal years 2007 and 2008, AT considered that the income from those years derived from subsidies intended for the carrying out of training actions were income not subject to CIT, having made no correction or requalification thereof;

m. In the tax inspection report for the fiscal year 2009, without there having been any legislative change, to A...'s Bylaws or to the level of training carried out by it, AT unexpectedly and radically changed its understanding, without any justification for such fact;

n. Therefore, the administrative act in question violates the principles of legal certainty and protection of legitimate expectations and should consequently be annulled, pursuant to Article 99 of the CTPP (Article 48 of the brief);

o. By operation of Article 104, No. 2 of the Constitution of the Portuguese Republic (CPR), the taxation of legal entities is based fundamentally on their actual income (increase in assets during the fiscal year), as an expression of their respective ability to pay;

p. The excess of the fiscal result determined by AT in the year 2009 (€157,350.91) over the accounting result of the same fiscal year (€85,649.49) results exclusively from the requalification, carried out by AT, of the categories of income and expenses (whether specific or as general) incurred in the fiscal year, and leads to a final result (to a taxable matter) exceeding its ability to pay, violating the principle of taxation based on actual income;

q. The tax act should be annulled, in accordance with Article 99 of the CTPP, for violation of Article 104, No. 2 of the CPR (Article 126 of the brief).

Notified in accordance with the terms and for the purposes provided for in Article 17 of the LRAT, AT presented a response in which it defends itself by way of exception and by contesting the claim, arguing for the maintenance of the disputed act:

I – By way of exception:

a. The tax acts disputed have their origin in an inspection action of the Inspection Services of the Finance Directorate of ... (SIT), following a VAT refund request made by the Claimant, from which corrections to CIT resulted;

b. The Claimant contests part of the correction to the taxable matter (CIT) for the fiscal year 2009, requests the partial annulment of the consequent assessment and petitions that (i) "the taxable matter be reduced from €157,350.91 to €35,779.69" and that (ii) "the value of the tax assessment be fixed at €7,155.94";

c. From the combined reading of the provisions of Decree-Law No. 10/2011, of 20/01 and Ordinance 112-A/2011, of 22/03, it results that the competence of arbitral tribunals is restricted to the declaration of illegality of tax assessment acts, there being no rule that grants arbitral tribunals established under the aegis of CAAD competence to determine the value of taxable matter or to calculate the amount of tax ultimately due;

d. The object of the present arbitral action should be limited to the corrections to taxable matter in dispute, under penalty of the Tribunal exceeding its jurisdiction;

II – By contesting the claim:

e. The Claimant accepts the tax treatment contained in the Tax Inspection Report, as well as the fact that, in accordance with Article 116 of the CIT Code (at the date of the facts), it was obligated to maintain the record of its income by IRS categories and the record of expenses, so as to distinguish expenses not specific to a certain category;

f. However, since 2007 the Claimant knew that it did not comply with that provision, without, until the beginning of the inspection for the fiscal year 2009, having made any change to the chart of accounts (Article 30 of the Response);

g. The taxpayer did not include in the annual declaration of accounting and tax information the respective Annex D, in which it should have specified the nature of the income earned and proceeded to determine the taxable matter, with indication of common costs attributable to taxable income;

h. AT understands that income derived from training subsidies is income from Category B, in accordance with the provision of Article 3 of the Personal Income Tax Code (CITC);

i. In the case in question, the subsidies are obtained by the Claimant in the context of the exercise of an activity of provision of training services, which is not intended only for its members, providing a service remunerated via subsidy (Articles 50 and 51 of the Response);

j. AT understands that the provision contained in No. 3 of Article 54 of the CIT Code is not applicable in the case in question, with the rules of the Personal Income Tax Code applying, given the classification of the taxpayer as an entity that does not exercise, as its principal activity, a commercial, industrial or agricultural activity;

k. The training subsidies are considered positive components in determining commercial, industrial or agricultural income (net result), for not meeting the requirements of No. 2 of Article 55 of the Tax Benefits Statute, either as to the nature of the taxpayer or as to the recipients of the training (Article 54 of the Response);

l. Considering that AT understands that income derived from training subsidies, unsubsidized training, seminars, conferences and similar events are taxable income, it would have to consider that all expenses associated with them are specific expenses of taxable income, classified in Category B;

m. The jurisprudence of the Superior Administrative Court (STA) has consistently held that the justification of an act is a relative concept that varies depending on the type of act and the circumstances of the specific case, being sufficient when it allows a normal recipient to understand the cognitive and evaluative process followed by its author, that is, when the recipient may know the reasons that led the author of the act to decide in that manner and not another;

n. The Tax Inspection Report explains the grounds for AT's decision, widely understood, referenced and contested by the Claimant, without need to resort to the mechanism provided for in Article 37 of the Code of Tax Procedure and Process (CTPP);

o. By way of example, it cites an arbitral tribunal decision on this same alleged defect of lack of justification of the tax act, which decided: (...) "the defect of lack of justification occurs only when it is not possible for a normal recipient to perceive the reasons why the person who decided took the decision they took and not when the understanding adopted is wrong, because in this latter case, if the error actually occurs, one would be faced with a defect of error as to the factual presuppositions or error as to the legal presuppositions" – case No. 86/2012-T;

p. The Claimant invokes the illegality of the change in AT's understanding as against what was established in the Tax Inspection Reports of previous fiscal years, for violation of the fundamental principles of legal certainty and protection of legitimate expectations of taxpayers;

q. However, nothing prevents the Respondent from changing its understanding regarding a particular matter within its competence, except for the commands set forth in statutory law or administrative doctrine on the matter in question (Article 100 of the Response);

r. As was stated in the arbitral decision rendered in case No. 12/2013-T, «(...) taxpayers do not, as a rule, have any right or legally protected expectation in the sense of preventing AT from changing its understanding on specific tax matters, especially if they do not have any formal instrument to protect them (binding ruling, official letter or administrative decision). The change in AT's understanding does not violate good faith and, in general, taxpayers do not have a right to something that, according to AT's new interpretation, is not in conformity with the law.»;

s. The corrections to the taxable matter for the fiscal year 2009 comply with the rules of taxation according to actual income, insofar as, using the cost center accounting prepared by the Claimant itself, it was possible to distinguish taxable income and non-taxable income, as well as the respective expenses specific to each type of income, for determining the value of global income (Article 112 of the Response);

t. In the case in question, AT took care to consider the costs actually incurred by the Claimant, directly related to each type of income, based on the extra-accounting documentation provided by the Claimant itself, with no indication of how taxpaying capacity may not have been respected (Article 116 of the Response).

The request for constitution of the Arbitral Tribunal was filed with CAAD on November 17, 2015, having been accepted by the Honorable President of CAAD and automatically notified to AT.

The Claimant did not appoint an arbitrator, whereupon, under the provisions of No. 1 of Article 6 of the LRAT, the undersigned was appointed arbitrator by the Honorable President of the Deontological Council of CAAD, a responsibility which she accepted within the legally prescribed period, without objection from the Parties.

The Singular Arbitral Tribunal was duly constituted on January 22, 2016.

The Parties enjoy legal personality and capacity, are entitled to participate and are properly represented (Articles 4 and 10, No. 2 of the LRAT and Article 1 of Ordinance No. 112-A/2011, of March 22).

The case does not suffer from any nullities.

Neither of the Parties requested the production of additional evidence, whereupon the meeting provided for in Article 18 of the LRAT was dispensed with, determining that the case proceed with successive written submissions, for 10 days, in order to allow the exercise of the right to contradict on the issues raised by AT in its response, in particular on the invoked exception of lack of jurisdiction of the Arbitral Tribunal to resolve the dispute.

The Parties presented submissions in which they reiterated, in substance, the positions expressed in the prior procedural documents.

As to the exception invoked by AT, the Claimant came to request the reduction of the claim to the assessment of the illegality and partial annulment of the disputed tax act.

AT continued to defend the occurrence of the exception of lack of jurisdiction of the Arbitral Tribunal, ratione materiae.

  1. MATTER OF FACT

2.1. Facts deemed proven:

a. The inspection action carried out by the Tax Inspection Services (SIT) – Division II, of the Finance Directorate of..., from which the additional CIT assessment for the fiscal year 2009 resulted, was authorized by Official Instruction 2012..., commenced on 05/04/2013 and ended on 23/09/2013, had general scope and was motivated by the analysis of a VAT refund request for the period 2012.06T, with the respective conclusions being notified to the Claimant on November 1, 2013;

b. In accordance with the Tax Inspection Report (TIR), the following are the grounds for the correction of the taxable matter for the fiscal year 2009:

a. The Claimant is "a CIT taxpayer (Article 2, No. 1, subparagraph a) of the CIT Code), whose tax is levied on global income, corresponding to the algebraic sum of income from the various categories for purposes of IRS and, as well, of increments in assets obtained by gratuitous title, taking into account that it does not exercise, as its principal activity, a commercial, industrial or agricultural activity, in accordance with the provision of subparagraph b) of No. 1 of Article 3 of the CIT Code, whose taxation is levied on global income" which, notwithstanding having been granted the status of public utility (declaration published in the Official Gazette No. ..., 2nd Series, of 12/04/1990), does not benefit from the exemption provided for in subparagraph c) of No. 1 of Article 10 of the CIT Code, because this lacks, in accordance with No. 2 of that article, recognition by the Minister of Finance, at the request of those interested;

b. A... began its activity on 29/09/1988, under the CAE ... – Activities of Economic and Employers' Organizations, being characterized, in accordance with Article 1 of its Bylaws, as "a private law association whose purpose is to bring together young entrepreneurs and promote entrepreneurship, with a view to satisfying their common interests and to better developing their professional activities, in particular in the areas of training, information, technical support and respective provision of services and, in general, in the representation of interests and in the identification and establishment of the means and instruments that allow access to and development of business activity";

c. The competencies of the Claimant, among others, are those provided for in Article 2, No. 1, subparagraph e) and No. 2 of its respective Bylaws:

"1. For the accomplishment of its purpose, it shall be the responsibility of A... to:

(...)

e) Promote the professional training of its members and the community in general and its integration and relationship with the business environment;

(...)

  1. To pursue its objectives, A... shall promote meetings with its members, sectoral gatherings, seminars, conferences, debates, exhibitions, business missions, support programs and instruments and all other activities that the Board of Directors deems appropriate and in accordance with what is stipulated in its Internal Regulations";

d. In the declaration Form 22 of CIT for the fiscal year 2009, in which null taxable matter was determined, field 2 was marked in box 03 – Type of Taxpayer, relating to "Resident who does not exercise as principal activity commercial, industrial or agricultural activity" and, in box 04 – Income Tax Regime, the Claimant marked field 01, relating to the general regime and field 03, relating to definitive exemption (page 4 of the TIR);

e. The annual declaration of accounting and tax information (IES) for the fiscal year 2009 does not include Annex D, to be submitted by resident entities that do not exercise, as their principal activity, commercial, industrial or agricultural activity and that obtain taxable income and non-exempt income (page 4 of the TIR);

f. The corrections made to the taxable matter of A..., for the fiscal year 2009, without recourse to indirect methods, were due to the fact that the SIT concluded that "Given the trial balances available, it is verified that the general accounting, considering the Chart of Accounts used, is not structured to allow identification of the different types of income obtained. Exempt, non-subject and subject (by IRS category)", in accordance with the following table:

[Table content preserved as in original]

g. "With respect to revenue, it should be noted that service provision is subdivided into VAT exempt and VAT subject, which in turn are subdivided by headquarters and regional centers – North, Center, Lisbon and Tagus Valley (LVT), Alentejo (ATO) and Algarve (ALG)" and, "With respect to costs, the different line items are subdivided by headquarters and regional centers" - (page 7 of the draft TIR/2009);

h. After being requested to do so, A... presented the following classification regarding the income recorded in the accounting, as per tables 5 and 6:

[Tables content preserved as in original]

i. According to the TIR, "In accordance with the classification defined by the taxpayer, it is verified that it considered as income not subject to CIT, income exempt from VAT plus subsidies, namely: contributions, training, conferences, seminars and similar events and subsidies to operations and investment. (...) Among the set of income considered non-subject by the taxpayer is income obtained from training, conferences, seminars and similar events, which are not referenced in No. 3 (non-subject) and No. 4 (exempt) of Article 54 of the CIT Code" (Page 9 of the TIR/2009);

j. With a view to the classification of commercial, industrial or agricultural income, the SIT prepared Annex 1 to the TIR, based on the verification "of all entries recorded in the accounting, relating to revenue, with the assignment of each of those to the category of income to which it relates" – (Page 10 of the TIR/2009);

k. As set forth in that Annex 1, "prepared based on accounting records", revenue was determined and qualified as commercial, industrial or agricultural income, in a total of €5,337,989.03, which resulted "fundamentally from the provision of training services (subsidies), leasing of space and other service provision";

l. Thus, AT considered that, with respect to the provision of subsidized training services, "the subsidies obtained associated with training are considered positive components in determining commercial, industrial or agricultural income (net result), insofar as they do not meet the requirements to benefit from the exemption provided for in No. 2 of Article 55 of the Tax Benefits Statute, either as to the nature of the taxpayer or as to the recipients of the training, who are not limited to the taxpayer's members. This provision provides for CIT exemption for income of trade unions and public legal entities, of an associative type, created by law to ensure the discipline and representation of the practice of liberal professions, derived from training actions provided to their respective members, within the scope of their statutory purposes. From the foregoing, in accordance with subparagraph g) of No. 2 of Article 3 of the Personal Income Tax Code, such subsidies are considered business income" and, as for "leasing of space and remaining service provision, they fall under subparagraph a) of No. 1 of Article 3 of the Personal Income Tax Code", concluding that "the amounts referred to are revenue with the nature of commercial, industrial or agricultural income, as classified under Personal Income Tax" (Pages 10 and 11 of the TIR/2009);

m. For the determination of costs that it deemed as specific costs, directly associated with commercial, industrial or agricultural income, the SIT prepared Annex 2 to the TIR, in which, "based on accounting records and cost center information", they quantified it at the amount of €4,847,876.52, noting that:

i. "All cost centers with initial digits 211 relate to the training activity and total the amount of €1,621,808.76";

ii. "The cost centers ... and ... relate to B..., national and international, respectively. The income earned by the taxpayer in these events has two distinct natures: non-taxable income, corresponding to the part of the project not financed, and taxable income, corresponding to other income with the nature of commercial, industrial or agricultural. Given the detailed information provided by A..., of the respective cost centers, there is considered to be sufficient information to effect a distribution of the total value of costs incurred among the income obtained (subject and non-subject or exempt) (page 11 of the TIR/2009). Thus, the specific costs of the taxable income earned were determined, as per the following table:"

[Table content preserved as in original]

iii. "The same procedure was applied with respect to the cost center ... relating to C..., as per the following table:"

[Table content preserved as in original]

iv. "Net result of the fiscal year – Following the amounts determined regarding revenue subject to taxation and the respective specific costs, a net result of the fiscal year is determined and consequently a commercial, industrial or agricultural income of the amount of €490,112.51 (€5,337,989.03 - €4,847,876.52";

n. The determination of capital income, in the amount of €15,031.00, was made in accordance with "Annex 3, prepared based on accounting records"; the real estate income recorded in the accounting, in the amount of €20,713.27, was not considered for purposes of taxation and income from capital gains, in the amount of €700.00, were determined based on "accounting records, entry No. ... of journal 131 (invoice No....)";

o. Having determined the net income from each of the categories, the SIT determined global income of €505,843.51, corresponding to the sum of the income previously identified (Table 9 – page 13 of the TIR/2009);

p. In accordance with Annex 4, also "prepared based on accounting records and cost center information" of the taxpayer, non-subject or exempt income was identified in the amount of €3,105,973.19;

q. Based on Annex 5, "prepared based on accounting records and cost center information", the determination was made of the total costs specifically linked to obtaining non-subject or exempt income, in the amount of €2,996,209.12, regarding which the following observations were made:

i. "(...) there was a weighting of the income earned, with allocation of total costs and to determine the specific costs, as per the following table:"

[Table content preserved as in original]

ii. "The same procedure was applied with respect to the cost center ... relating to C..., as per the following table:"

[Table content preserved as in original]

iii. "With respect to cost centers ... –D..., ...– E..., ...– F... and ... – G..., the income earned by the taxpayer in this event has solely the nature of non-subject income. Given the detailed information provided by A... of the respective cost centers, with sufficient information for a coherent distribution of specific costs, the allocation of the respective specific costs was made, as per the following table:"

[Table content preserved as in original]

iv. "The cost centers indicated in Annex 5 with No. 215 relate to the corresponding amortization of subsidies to investment;

r. According to AT, the accounting records of the Claimant did not allow identification of costs specifically related to taxable and non-exempt income, beyond what was considered for purposes of the determined income values, capable of full deduction from global income, in accordance with subparagraph a) of No. 1 of Article 54 of the CIT Code;

s. Thus, having regard to the allocation already made of costs to taxable and non-exempt income and to non-subject or exempt income, the SIT determined common costs in the amount of €550,671.40, to be allocated proportionally to both types of income, in accordance with subparagraph b) of No. 1 of Article 54 of the CIT Code (Page 15 of the TIR/2009);

t. The common costs deductible from global income, calculated in the proportion of taxable and non-exempt income to total income, were determined in the amount of €348,492.60, with the taxable matter being determined by deducting those common deductible costs from global income;

u. Thus, the taxable matter determined and which formed the basis for the disputed assessment was quantified at €157,350.91;

v. There was no change in the total value of the Claimant's revenue or costs in the fiscal year 2009, but only its requalification, as indicated;

c. The Claimant was subject to an inspection action for the fiscal years 2007 and 2008, in the context of which AT did not proceed to requalify the income from subsidies and having AT considered that the respective returns constituted specific costs of non-subject income (pages 25 and 26 of doc. 1 attached to the brief and doc. 7 of the case file);

d. Dissatisfied with assessment No. 2013..., issued on 11/11/2013 based on the taxable matter determined in the TIR for the fiscal year 2009, with a deadline for voluntary payment until 13/01/2014, A... presented a gracious appeal on 9/05/2014, requesting its partial annulment, with the same grounds as the present request for arbitral pronouncement;

e. The gracious appeal, registered under No. ...2014..., was dismissed, as notified to the taxpayer by official letter No. .../... from the Finance Directorate of..., of 16/07/2015, received on 21/07/2015;

f. On 19/08/2015, an administrative appeal of that decision was filed, without, until the date of submission of the request for arbitral pronouncement on 17/11/2015, notification of the respective conclusions being received;

g. In the course of submissions, the Claimant reduced the initial claim to the declaration of partial illegality of the disputed assessment.

2.2. Justification of the matter of fact deemed proven:

The Tribunal's conviction regarding the matter of fact deemed proven resulted from the critical analysis of the documentary evidence attached to the request for arbitral pronouncement and to the administrative case file attached by the Respondent.

2.3. Facts not proven

There are no facts relevant to the decision of the case that should be deemed not proven.

  1. MATTER OF LAW – JUSTIFICATION

3.1. On the exception of lack of jurisdiction of the Arbitral Tribunal

Both in its response and in its submissions, the Respondent invokes the exception of lack of jurisdiction of the Arbitral Tribunal to assess the Claimant's claims regarding the reduction of the taxable matter that was set for it and the reduction of the amount of tax ultimately due.

As this is a matter of priority assessment, in accordance with No. 1 of Article 608 of the Code of Civil Procedure (CCP), of subsidiary application to tax arbitral proceedings by referral of Article 29, No. 1, subparagraph e) of the LRAT, we shall proceed immediately to its assessment.

AT bases the Arbitral Tribunal's lack of jurisdiction on the provisions of the LRAT and Ordinance No. 112-A/2011, of 22/03, through which the former Directorate-General for Taxes (DGCI) and former Directorate-General for Customs and Special Consumption Taxes (DGAIEC) bound themselves to the jurisdiction of arbitral tribunals functioning at CAAD, with respect to the assessment of claims relating to taxes administered by them, identified in No. 1 of Article 2 of the LRAT, with the exception of those indicated in Article 2 of the aforementioned Ordinance, in particular and as it concerns the situation of the present case, those indicated in subparagraph b), namely the exception of "Claims relating to acts of determination of taxable matter and acts of determination of taxable base, both by indirect methods, including the decision of the review procedure".

Now, as it is proven in the case that, in accordance with the TIR, the corrections to the Claimant's taxable matter are merely arithmetic in nature, no indirect methods having been used, it is concluded that AT, as successor to the DGCI and DGAIEC (see Article 12 of Decree-Law No. 118/2011 of 15/12), is bound by the decisions of arbitral tribunals assessing the claims identified in No. 1 of Article 2, subparagraphs a) and b) of the LRAT, in the wording given to them by Article 160 of Law No. 64-B/2011, of December 30 (Budget Law for 2012), according to which:

"Article 2 – Competence of arbitral tribunals and applicable law

1 – The competence of arbitral tribunals includes the assessment of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable base when this does not give rise to the assessment of any tax, of acts of determination of taxable matter and of acts of determination of property valuations.

2 – (...)"

However, even if this were not understood, the competence of this Arbitral Tribunal would still exist to resolve the dispute, since the Claimant, in its submissions, reduced the claim to the declaration of partial illegality of the disputed assessment, as allowed by the first part of No. 2 of Article 265 of the CCP (Article 3 of the Submissions).

Having found the exception of lack of jurisdiction of the Arbitral Tribunal not to be satisfied and having regard to the reduction of the claim by the Claimant, it is on the (partial) illegality of the tax act that we shall focus.

3.2. On the (il)legality of the CIT assessment for fiscal year 2009, due to error in the qualification and quantification of income

Both Parties agree that the Claimant is a CIT taxpayer, in accordance with Article 2, No. 1, subparagraph a) of the CIT Code, as it is a private law entity with registered office in national territory which, not exercising as its principal activity a commercial or agricultural activity, is taxed on the global income of the fiscal year, determined in accordance with Article 3, No. 1, subparagraph b) of the same Code, "corresponding to the algebraic sum of income from the various categories considered for purposes of IRS and, as well, increments in assets obtained by gratuitous title".

Although in the fiscal year 2009 the Claimant obtained, in addition to Category B income, Category E income (capital) and Category G income (capital gains), it is on the quantification of that first type of income that the dispute opposing it to AT centers, resulting from the requalification carried out by AT of the revenue from subsidies which, according to the Claimant, is non-subject income, as it is intended to finance the training activity developed in pursuit of statutory purposes. On the other hand, AT considers such income as falling within the provision of Article 3, No. 2, subparagraph g) of the Personal Income Tax Code, constituting "positive components in determining commercial, industrial or agricultural income (net result), insofar as it does not meet the requirements to benefit from the exemption provided for in No. 2 of Article 55 of the Tax Benefits Statute, either as to the nature of the taxpayer or as to the recipients of the training, who are not limited to the taxpayer's members".

The requalification of the Claimant's income for fiscal year 2009 was motivated by the fact that, similar to what occurred during the course of tax inspection actions for fiscal years 2007 and 2008, it was verified that although having organized accounting, considering the Chart of Accounts used, it was not structured in such a way as to allow identification of the different types of income, exempt, non-subject and subject, by IRS categories, in breach of the provision of Article 116 of the CIT Code (Simplified accounting regime), in the version in force at the date of the facts, and also that it had not submitted Annex D to the IES.

In accordance with AT (Annex 1 of the TIR/2009), the total revenue from Category B determined in the context of the inspection action for fiscal year 2009, based on the Claimant's accounting records, totals €5,337,989.03, resulting fundamentally from the conducting of seminars, conferences and similar events, provision of training services (subsidies), leasing of space and other service provision, with revenue obtained from the conducting of seminars, conferences and similar events being business income, in accordance with subparagraph b) of No. 1 of Article 3 of the Personal Income Tax Code, while leasing of space and remaining service provision fall under subparagraph a) of No. 1 of that Article 3 of the Personal Income Tax Code.

Let us examine whether AT is right.

As results from the provisions of the subjective scope of the Personal Income Tax Code, the taxable persons of the tax are not only business entities, also encompassing non-profit entities, such as associations and foundations, which do not exercise, as their principal activity, but only as an accessory activity, activities of a commercial, industrial or agricultural nature.

As for these, the legislator makes a distinction between "associative income" and "business income", taxing only the latter, given that, in the words of Saldanha Sanches, "in associations it is the material side of the legal test (certain income) that becomes determinative for the law's provision" of the object of the tax, with the validity of "the principle according to which it is from the nature of the income that results its taxation or non-taxation, with the seat of the decision located in the Personal Income Tax".[1]

However, as Casalta Nabais well warns, although the CIT of these entities is determined by the rules of the Personal Income Tax Code, Category B income is excepted, "which by force of the referral of Article 32 of the Personal Income Tax Code, is determined based on the rules of the CIT Code. Therefore, with respect to that income, there is, as it were, a circular referral – from the CIT Code (No. 1 of Article 3) to the Personal Income Tax Code and then from the Personal Income Tax Code (Article 32) to the CIT Code. Global income to which there must then be made the deductions corresponding to tax losses and capital losses, on the one hand, and to common costs and other expenses, in accordance respectively with Article 53 and Article 54 of the CIT Code"[2].

The Claimant is a non-profit association which, in pursuing its statutory purposes, in accordance with Article 2 of the Bylaws (transcribed at pages 2/3 of the TIR), is competent, in particular, to "Promote the professional training of its members and the community in general (...)" (No. 1, subparagraph e).

The income requalified by AT, in the amount of €1,537,650.85, relates essentially to subsidies intended for training (see pages 10/11 of the TIR), an activity which unequivocally integrates the Claimant's statutory purposes.

Such income, given the legal nature of the Claimant and the quality of the recipients of the training, which are not only its members but the "community in general", does not benefit from the exemption provided for in No. 2 of Article 55 of the Tax Benefits Statute, which provides:

"Article 55 – Associations and confederations

(...)

2 - Exempt from CIT are the incomes of trade unions and public legal entities of an associative type, created by law to ensure the discipline and representation of the practice of liberal professions, derived from training actions provided to their respective members within the scope of their statutory purposes.

(...)"

However, the Claimant's global income being required to be determined in accordance with the CIT Code, by referral of Article 32 of the Personal Income Tax Code, it is concluded that subsidies intended for training and other wholly subsidized activities qualify as non-subject income, in accordance with Article 49, No. 3 of that Code, in the version in force at the date of the facts (current Article 54, No. 3), a provision integrated into Chapter III – Determination of taxable matter, Section 3 – Legal entities and other resident entities that do not exercise, as their principal activity, commercial, industrial or agricultural activity, whose provision determines:

"Article 49 – Common costs and others

(...)

3 - Income not subject to CIT includes contributions paid by members in accordance with the bylaws, as well as subsidies intended to finance the carrying out of the statutory purposes.

(...)"

In light of the above, it is concluded that AT could not requalify that income as Category B Personal Income Tax income as it did, moreover, not during fiscal years 2007 and 2008, and that in proceeding to such requalification, it erred as to the legal presuppositions.

3.3. On the (il)legality of the CIT assessment for fiscal year 2009, due to error in the qualification and quantification of common costs and others

Having concluded that the subsidies received by the Claimant and intended for training and other wholly subsidized activities are not subject to CIT, let us examine the extent to which such conclusion affects the quantification of deductible costs.

Once again, the solution is provided by Article 49 of the CIT Code, now by its Nos. 1 and 2, which contain the rules for the deductibility of specific costs of income subject to tax and of common costs.

"Article 49 – Common costs and others

1 - Costs demonstrably necessary to obtain income that have not been considered in determining global income in accordance with the previous article and that are not specifically linked to obtaining non-subject or exempt income from CIT are deducted, in whole or in part, from that global income, for purposes of determining the taxable matter, in accordance with the following rules:

a) If they are only linked to obtaining taxable and non-exempt income, they are deducted in full from global income;

b) If they are linked to obtaining taxable and non-exempt income, as well as to obtaining non-subject or exempt income, the part of common costs that is attributable to taxable and non-exempt income is deducted from global income.

2 - For purposes of the provision of subparagraph b) of the previous number, the part of common costs to be attributed is determined through the proportional distribution of such costs to the total gross taxable and non-exempt income and non-subject or exempt income, or in accordance with another criterion considered more appropriate accepted by the Directorate-General for Taxes, the distribution being required to be shown in the income declaration.

(...)"

As shown on page 15 of the TIR, the total amount of costs recorded in the Claimant's accounting is €8,394,757.04, all of them necessary for the formation of income, to which AT, consistently, applied the rules of Nos. 1 and 2 of Article 49 of the CIT Code. Thus, not having identified costs specifically related to the income requalified as Category B Personal Income Tax income, which it considered subject to tax and non-exempt from it, AT proceeded to the proportional distribution of the costs it considered common to the income requalified by it and to the non-subject income, deducting from global income the part of common costs attributable to the subject income.

However, although coherent, the distribution of costs carried out by AT, given the requalification of training subsidies as Category B Personal Income Tax income, does not prove correct, since it is based on the erroneous premise that such subsidies constitute income subject to tax, when in fact they are non-subject income, in accordance with Article 49, No. 3 of the CIT Code.

Such qualification of the subsidies as non-subject income consequently alters the proportional distribution of costs made by AT, to be attributed to each type of income and to be deducted from global income.

3.4. On questions of knowledge being barred

In a judgment, the judge must pronounce on all questions that must be assessed, refraining from pronouncing on questions of which he must not have knowledge (final part of No. 1 of Article 125 of the CTPP, applicable subsidiarily to tax arbitral proceedings, by referral of Article 29, No. 1, subparagraph a) of the LRAT), with the questions on which the tribunal's powers of cognition fall being, in accordance with No. 2 of Article 608 of the CCP, "the questions that the parties have submitted to its assessment, except for those whose decision is barred by the solution given to others (...)".

In light of the solution given to the questions relating to the erroneous requalification of income from subsidies and to the consequent error in the determination of costs deductible from global income, solution which ensures effective protection of the Claimant's right, preventing the renewal of the disputed act with the same content, the knowledge of the remaining defects attributed to that act is barred.

  1. DECISION

Based on the facts and legal grounds set forth above, the decision is rendered that, finding the present request for arbitral pronouncement to be entirely well-founded, the illegality of the CIT assessment for the fiscal year 2009 is declared, determining its partial annulment, to the extent requested by the Claimant.

VALUE OF THE CASE: In accordance with the provisions of Article 306, Nos. 1 and 2 of the CCP, 97-A, No. 1, subparagraph a) of the CTPP and Article 3, No. 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the case is set at €28,594.18 (twenty-eight thousand five hundred and ninety-four euros and eighteen cents).

COSTS: Calculated in accordance with Article 4 of the Regulations on Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of €1,530.00 (one thousand five hundred and thirty euros), to be borne by the Tax and Customs Authority.

Lisbon, April 20, 2016.

The Arbitrator,

/Mariana Vargas/

Text prepared by computer, in accordance with No. 5 of Article 131 of the Code of Civil Procedure, of subsidiary application by referral of subparagraph e) of No. 1 of Article 29 of Decree-Law 10/2011, of January 20.

The editing of this decision is governed by the 1990 Orthographic Agreement.

[1] - SANCHES, J. L. Saldanha, "Manual of Tax Law", 3rd Edition, Coimbra Editor, 2007, page 359.

[2] - NABAIS. José Casalta, "The Dualism in the Taxation of Enterprises", in "Introduction to Tax Law of Enterprises", Almedina, Coimbra, 2013, pages 126 and 127.

Frequently Asked Questions

Automatically Created

How are association revenues classified for IRC purposes between exempt, non-subject, and taxable income?
Association revenues for IRC purposes are classified into three categories: (1) Exempt income - certain income specifically exempted by law, such as under Article 55(2) of the Tax Benefits Statute for qualifying associations; (2) Non-subject income - income explicitly excluded from IRC taxation under Article 54(3) of the IRC Code, including member contributions paid according to bylaws and subsidies intended to finance statutory purposes; and (3) Taxable income - revenues from commercial, industrial, or service provision activities classified according to IRS categories (typically Category B for professional/business income). For associations not primarily engaged in commercial activities, global income corresponds to the algebraic sum of income across various IRS categories. Proper classification depends on the nature of the activity (statutory mission versus commercial operation) and the source of funds (member dues, statutory subsidies, or commercial receipts).
What obligations do non-commercial associations have under Article 116 of the CIRC for organizing income records by IRS category?
Under Article 116 of the IRC Code, non-commercial associations have specific organizational obligations for their accounting records. They must maintain income records organized according to the various categories defined for IRS (Personal Income Tax) purposes, separately identifying exempt income, non-subject income, and taxable income by category. Additionally, they must maintain separate records of expenses specific to each category of income, distinguished from general expenses not attributable to a particular category. This segregation enables proper calculation of taxable income and ensures that only expenses related to taxable activities are deducted in computing the tax base. Failure to maintain properly structured accounting that allows identification of different income types can result in the Tax Authority reclassifying income and expenses, potentially converting non-taxable items to taxable status.
Can the Tax Authority reclassify an association's income and reallocate expenses when accounting records are not properly structured?
Yes, the Tax Authority has the power to reclassify an association's income and reallocate expenses when accounting records fail to comply with Article 116 requirements. When inspection reveals that the general accounting system is not structured to identify different types of income (exempt, non-subject, and taxable by IRS categories), AT may proceed with corrective reclassification. This includes requalifying income previously treated as non-taxable into taxable categories and separating expenses associated with specific income types from general expenses. However, such reclassification must be substantively correct and legally justified. Taxpayers can challenge reclassifications through arbitration (CAAD) under Article 2(1)(a) of Decree-Law 10/2011, arguing for annulment based on incorrect legal qualification of income (Article 99 CTPP), violation of legal certainty principles, or constitutional principles of taxation based on actual income.
How is the taxable base calculated for associations earning both subsidized and non-subsidized training income under IRC?
For associations earning both subsidized and non-subsidized training income, the taxable base calculation requires careful segregation. Non-subsidized training income (seminars, conferences, similar events) is generally classified as taxable Category B income. Subsidized training income receives different treatment depending on legal qualification: if subsidies finance statutory purposes under Article 54(3) of the IRC Code, they are non-subject to IRC; alternatively, if they constitute commercial activity income not meeting statutory purpose criteria, they may be taxable. The taxable base equals taxable income (by category) minus specific expenses attributable to generating that taxable income, plus a proportional allocation of general expenses. Expenses exclusively related to non-taxable activities cannot reduce taxable income. The critical determination involves whether subsidized training constitutes commercial service provision or statutory mission fulfillment, with factors including whether training is restricted to members, whether it advances associative purposes, and whether subsidies are governmental grants for public-benefit activities versus commercial revenue.
What are the grounds for requesting partial annulment of an additional IRC tax assessment through CAAD arbitration?
Grounds for requesting partial annulment of additional IRC assessments through CAAD arbitration include: (1) Illegal qualification of income or expenses - arguing AT incorrectly classified non-taxable income as taxable, particularly misapplying Article 54(3) IRC Code regarding subsidies for statutory purposes versus Article 55(2) of the Tax Benefits Statute (Article 99(a) CTPP); (2) Violation of legal certainty and legitimate expectations - when AT changes position from prior fiscal years without legislative changes or factual differences, creating inconsistent treatment; (3) Violation of constitutional principles - specifically Article 104(2) CPR requiring taxation based on actual income, where reclassification produces taxable amounts exceeding real economic capacity; (4) Procedural irregularities in the inspection or assessment process; and (5) Disproportionate expense allocation between taxable and non-taxable activities. The arbitration request must specify the contested amount, legal grounds, and desired outcome (reduction of taxable base and corresponding tax), with jurisdiction under Decree-Law 10/2011 for tax disputes.