Process: 685/2015-T

Date: May 9, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 685/2015-T) addresses the application of autonomous taxation rates under Portugal's Corporate Income Tax (IRC) regime for groups of companies (RETGS). The claimant, A... S.A., serving as parent company of Group B..., challenged the IRC self-assessment for fiscal year 2012, disputing €1,500,077.34 in autonomous taxation.

The central legal issue concerned whether the 10% increase in autonomous taxation rates under article 88(14) of the IRC Code applies based on the group's consolidated fiscal result or each individual company's result. The group reported consolidated fiscal losses of €548,787,856.36, triggering the automatic application of increased autonomous taxation rates totaling €5,714,878.53. The claimant argued the increase should only apply to individual group companies with losses, calculating the correct amount at €4,214,801.20.

The Tax Authority defended its position based on a 2012 binding ruling, arguing that under RETGS (articles 69-71 IRC Code), taxable income is determined through algebraic summation of all group companies' results. Therefore, the condition triggering increased autonomous taxation rates must be assessed at the consolidated group level, not individually.

The draft decision supported the Tax Authority's interpretation, emphasizing that while individual companies retain their legal personality and tax capacity under RETGS, their role in tax assessment is limited to determining their individual taxable income for subsequent aggregation. The decision noted that corporate groups must be treated differently from individual companies, with RETGS specifically designed to accommodate tax peculiarities of group structures.

The claimant initially filed an administrative appeal on 28-05-2015, which was dismissed. Following this dismissal, the company exercised its right to seek arbitration through CAAD under the RJAT framework (Decree-Law 10/2011). The arbitral tribunal was constituted on 29-01-2016, with both parties having proper legal standing. The claimant sought partial annulment of the self-assessment, reimbursement, and compensatory interest for the allegedly excessive autonomous taxation.

Full Decision

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-chair), Prof. Dr. Nuno Cunha Rodrigues and Dr. João Gonçalves da Silva, appointed by the Deontological Board of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 29-01-2016, agree as follows:

1. REPORT

A..., S.A., legal entity no. ..., registered in the Commercial Registry Office of Lisbon with the same number, with registered office at Avenida..., n.º..., ...-...Lisbon, (hereinafter "the Claimant"), in its capacity as the parent company of Group B..., taxed under the Special Tax Regime for Groups of Companies (abbreviated as "RETGS"), filed a petition for constitution of an arbitral tribunal, in accordance with the combined provisions of articles 2.º, no. 1, sub-paragraph a), 6.º, no. 2, sub-paragraph b), and 10.º et seq. of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as "RJAT").

The respondent is the TAX AUTHORITY AND CUSTOMS AUTHORITY.

The Claimant requests that the illegality be declared and the self-assessment of Corporate Income Tax and autonomous taxation for the fiscal year 2012 be partially annulled, as well as the act of dismissal of the administrative appeal that upheld it, and the consequent condemnation of the Tax Authority and Customs Authority to reimburse the Claimant the amount of € 1,500,077.34, plus the payment of corresponding compensatory interest.

The petition for constitution of an arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority and Customs Authority on 27-11-2015.

In accordance with the provisions of sub-paragraph a) of no. 2 of article 6.º and sub-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 Board appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated their acceptance of the assignment within the applicable deadline.

On 14-01-2016 the parties were duly notified of this appointment and did not express any intention to challenge the appointment of the arbitrators, in accordance with the combined provisions of article 11.º, no. 1, sub-paragraphs a) and b), of the RJAT and articles 6.º and 7.º of the Deontological Code.

Thus, in conformity with the provision contained in sub-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, the Arbitral Tribunal was constituted on 29-01-2016.

The Tax Authority and Customs Authority filed a response in which it opposed the claims.

By order of 08-03-2016, it was decided that the proceedings would continue with written submissions.

The Parties submitted their arguments.

The Arbitral Tribunal was duly constituted and has jurisdiction.

The Parties are duly represented, possess legal personality and legal capacity, and the Claimant has standing (articles 4.º and 10.º, no. 2, of the same statute and article 1.º of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities and no exceptions were raised.

2. FACTUAL MATTERS

2.1. Established Facts

The following facts are considered established:

a) The Claimant is the parent company of a group of companies taxed for Corporate Income Tax purposes under the special tax regime for groups of companies (RETGS);

b) The Claimant completed and filed the periodic income statement for Group B... for the fiscal year 2012, in which it calculated fiscal losses in the amount of € 548,787,856.36 and an amount to recover of € 7,779,349.05 (Form 22 statement in substitution attached with the petition for arbitral ruling as document no. 2, filed on 24-07-2014);

c) During fiscal year 2012, various companies in Group B... incurred expenses subject to autonomous taxation under article 88.º of the IRC Code;

d) The computer program for completion and filing of Form 22 determined the automatic application of a 10% increase in the applicable autonomous taxation rates, provided for in article 88.º, no. 14 of the IRC Code, to all companies in the group, because the group presented fiscal losses;

e) The Claimant recorded autonomous taxation in the amount of € 5,714,878.53;

f) On 28-05-2015, the Claimant filed an administrative appeal regarding the said substitution statement of Corporate Income Tax self-assessment, in which it argued, inter alia, that it should have paid, under autonomous taxation, the amount of € 4,214,801.20, because the application of increased rates pursuant to no. 14 of article 88.º of the IRC Code should only apply to entities that, individually, presented fiscal losses (document no. 3 attached with the petition for arbitral ruling, the content of which is reproduced herein);

g) In the administrative appeal procedure, a draft decision was prepared, a copy of which is attached as document no. 1 with the petition for arbitral ruling, the content of which is reproduced herein, which states, inter alia, the following:

§ V.II. Regarding Tax Calculation

§ V.II.I. Autonomous Taxation

§ V.II.I.I. Arguments of the Appellant

  1. As stated above, the appellant contends the partial annulment of the Corporate Income Tax assessment no. 2014..., of 30.07.2014, based on an alleged error regarding the determination of autonomous taxation of the tax group.

(...)

§ V.II.I.II. Assessment

  1. Having compiled the elements contained in the record and examined the arguments presented to us by the Appellant, we are of the opinion that his position should not be upheld.

  2. For on the matter in question, binding guidance was issued by the Tax Administration, through a binding ruling issued in case no. 2011..., by order of the Deputy Director-General, dated 30-03-2012, the tenor of which is contrary to that argued by the Appellant herein.

  3. And, in our view, rightly so, because although autonomous taxation has specific features, this institution depends, for the purposes of applying no. 14 of article 88º of the Code of this tax, on the Corporate Income Tax regime for determining taxable income.

  4. Given that the IRC Code, in articles 69.º to 71.º, provides a special regime for taxation of groups of companies, which is the situation of the Appellant, and the latter opted, as the law permits, for the application of this regime for determining the aggregate taxable matter in relation to all companies in the group, the determination of taxable income, for Corporate Income Tax purposes, is calculated through the algebraic sum of the taxable income and fiscal losses calculated in the individual statements of the companies belonging to the group.

  5. And, thus determined the taxable income/fiscal loss for Corporate Income Tax purposes, the prerequisite upon which the application of no. 14 of article 88.º of the IRC Code depends is necessarily established.

  6. Despite the Appellant's attempt, in this context, to minimize the fact that it is part of a group of companies, it cannot be overlooked that this reality, both in corporate and tax terms, must be viewed differently than how one views an individual company.

  7. It was in order to accommodate the tax peculiarities of this legal-corporate institution that the special regime for taxation of groups of companies was established within the Corporate Income Tax system.

  8. And the argument that the individual company does not lose autonomy and tax capacity in the context of applying the RETGS is of no avail, since with respect to the tax assessment when the regime is applicable, the role of individual companies in that procedure is limited merely to determining their taxable income, for purposes of its aggregation in accordance with article 70.º of the Corporate Income Tax Code.

  9. In this sense, reference is made to the Judgment of the Supreme Administrative Court, of 01.09.2013, case no. 01302/12, which states that "(...) the individual profits contained in those statements have no effect on tax assessment, serving only to verify the consolidated taxable income that was calculated and reported by the parent company of the tax group."

  10. In summary, it may be stated that in situations involving taxation where the special regime for taxation of groups of companies is invoked, the general rule is that the term "taxable income" should be understood as meaning the taxable income of the group.

  11. This rule, however, has certain exceptions, which are expressly identified by the legislator in the legal text. In this regard, we have the cases of the State Levy (article 87.º A of the IRC Code) and the Municipal Levy (article 14.º, no. 8, of the Local Finance Law, in the wording given by article 57º of Law no. 64-B/2011, of 30 December), situations in which the taxable income determined at the level of the individual company, not the group, is relevant.

  12. Now, considering that the regime established in article 88.º of the Corporate Income Tax Code does not include any provision similar to those found to be applicable, in the case of applicability of the RETGS, for the state and municipal levies, one can only infer that the legislator did not intend to adapt the regime of autonomous taxation, in case of applicability of the RETGS, along the lines of the regime established for those taxes.

h) The administrative appeal was dismissed by order of 21-08-2015, issued by the Deputy Director of the UGC, as substituting authority (document no. 1 attached with the petition for arbitral ruling, the content of which is reproduced herein);

i) The order dismissing the administrative appeal manifested agreement with Information no. …-…/2015, a copy of which is attached as document no. 1 with the petition for arbitral ruling, the content of which is reproduced herein, which states, inter alia, the following:

§ II. CONCLUSION

In accordance with what is stated above and having examined all the elements of the record, in particular our earlier "Draft Decision" and the procedural documents submitted by the Taxpayer, here the Appellant, namely the initial petition and its request for a hearing, insofar as this Office of Large Taxpayers is constrained to no other understanding than that referred to above, it appears to us that the request in the record should be dismissed, in accordance with the contents of the summary table mentioned in the introduction of this our Information, with all legal consequences, in particular, where applicable, regarding the provisions of article 163.º of the Code of Administrative Procedure and, as well as, compliance with what is provided in article 100.º of the General Tax Law.

j) On 19-11-2015, the Claimant filed the petition for arbitral ruling that gave rise to the present proceedings.

2.2. Unproven Facts

There are no facts relevant to the decision that have not been proven.

2.3. Grounds for the Determination of Factual Matters

The established facts are based on documents submitted by the Claimant and which are also contained in the administrative record.

3. LEGAL MATTERS

3.1. Issue to be Addressed

Article 88.º of the IRC Code provides for various autonomous taxation instances in Corporate Income Tax with their respective rates.

In no. 14 it establishes the following:

"14 - The autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers that present fiscal loss in the tax period to which any of the taxable facts referred to in the preceding numbers relate."

The issue that is the subject of the present proceedings is whether, when the special regime for taxation of groups of companies is applicable, the fiscal losses relevant to determine this increase in autonomous taxation rates are those of the groups or those of each one of the individual entities that comprise them.

The Claimant contends that it is the fiscal losses of each of the companies in the group that are relevant for this purpose, whereas the Tax Authority and Customs Authority contends that it is the fiscal loss of the group that determines the increase in the rates.

The issue is today legislatively resolved, in the sense advocated by the Tax Authority and Customs Authority, through the addition, made by Law no. 7-A/2016, of 30 March, of no. 20 to article 88.º of the IRC Code, which establishes the following:

"20 - For the purposes of the provisions of no. 14, when the special regime for taxation of groups of companies established in article 69.º is applicable, the fiscal loss calculated under article 70.º is considered."

Article 135.º of this Law no. 7-A/2016, of 30 March, conferred an interpretative nature on this new wording of no. 20 of article 88.º of the IRC Code.

However, the Claimant contends that this attribution of interpretative nature "implies the conferral of retroactive effect on said provision, being materially unconstitutional due to violation of article 103.º, no. 3, of the Constitution of the Republic which prohibits retroactive tax norms, unconstitutionality which is expressly argued herein."

The Tax Authority and Customs Authority contends that the interpretation made by no. 20 of article 88.º of the IRC Code is one that should have already been adopted previously.

Thus, the primary issue to be addressed is whether it is constitutionally admissible for the authentic interpretation effected by Law no. 7-A/2016, of 30 March. If it is concluded that it is inadmissible, the issue of which of the two interpretations to adopt will need to be addressed.

3.2. Interpretative or Innovative Nature of No. 20 of Article 88.º of the IRC Code

Article 135.º of Law no. 7-A/2016, of 30 March, by conferring an "interpretative" nature on that new no. 20 of article 88.º, combined with article 13.º of the Civil Code (which is the only rule that defines the concept of an interpretative law), embodies a legislative intention to apply the new regime to earlier situations in which there are no "effects already produced by fulfillment of the obligation, by a final judgment, by a settlement, even if not approved, or by acts of analogous nature."

BAPTISTA MACHADO teaches regarding interpretative laws:

"The reason why an interpretative law applies to previous facts and situations fundamentally resides in that it, in coming to establish and fix one of the possible interpretations of the old law with which the interested parties could and should have reckoned, is not susceptible to violating safe and legitimately founded expectations. We may consequently say that those laws are interpretative in nature which, on matters or questions in which the applicable legal rules are uncertain or their meaning controversial, come to establish a solution that the courts could have adopted. It is not necessary that the law come to establish one of the earlier jurisprudential currents or a strong earlier jurisprudential current. All the more so because the interpretative law often emerges before such jurisprudential currents even form. But if this is the case, and if in the meantime a uniform jurisprudential current formed that made practically certain the meaning of the old norm, then the new law that comes to establish an interpretation different from the same norm can no longer be considered truly interpretative (although it may be by legislative determination), but innovative.

For a new law to be truly interpretative, two requirements are therefore necessary: that the solution of the prior law be controversial or at least uncertain; and that the solution defined by the new law fall within the bounds of the controversy and be such that the judge or interpreter could reach that solution without exceeding the limits normally imposed on the interpretation and application of law. If the judge or interpreter, in view of old texts, could not feel authorized to adopt the solution that the new law comes to establish, then this is decidedly innovative."

Thus, the first issue to be addressed, which may be decisive, is whether the provision in no. 20 of article 88.º of the IRC Code is truly interpretative in nature.

The expression "taxpayers that present fiscal loss" contained in no. 14 of article 88.º of the IRC Code can, by its own literal meaning, be interpreted as referring to the losses of the group or to those of each one of the companies that comprise it.

In fact, even when taxation is based on the taxable income of the group, the fiscal losses of each one of the companies that comprise it continue to be determined, as results from article 70.º, no. 1, of the IRC Code.

On the other hand, the fact that article 88.º, no. 14, of the IRC Code makes reference to "taxpayers" and the IRC Code does not list groups of companies among the taxpayers indicated in its article 2.º does not exclude the possibility that the interpretation of that expression encompasses them, because article 18.º, no. 3, of the General Tax Law attributes such designation to "a natural or legal person, the estate or the organization de facto or de jure that, in accordance with the law, is bound to fulfill the tax obligation, whether as a direct taxpayer, substitute, or responsible party." Now, in the case of taxation of groups of companies, "payment of Corporate Income Tax falls upon the parent company," in the first instance, as results from article 115.º of the IRC Code, whereby it is also, in that capacity, a taxpayer for Corporate Income Tax.

Furthermore, the Report of the State Budget for 2011, which introduced said no. 14 in article 88.º of the IRC Code, is not clarifying regarding the scope of the reference to "taxpayer," for it only states that "a rule that in narrower terms already appeared in article 88.º of the Corporate Income Tax Code is broadened and it is determined, with general application, that autonomous taxation rates undergo an increase of 10 percentage points whenever taxpayers present fiscal losses, with the intent to give a clear signal of better management practices in companies with respect to expenses such as travel allowances or representation expenses."

Furthermore, if it is true that the most coherent and logical position is that, being the unitary taxation of income the justification for the existence of a special regime for taxation of groups of companies and there being no reference to autonomous taxation in the Subsection of the IRC Code that establishes this regime, the latter would not be covered by it, it is also equally true that autonomous taxation reveals an evident, persistent, and growing legislative disregard for the coherence of the system of taxation of companies which should be based fundamentally on actual income, by force of the provision in article 104.º, no. 2, of the Constitution of the Republic.

And, in fact, the lack of clarity in the solution must be admitted, as is demonstrated by the divergent arbitral jurisprudence on this matter, namely the judgments of 01-09-2014, issued in case no. 239/2014-T and of 24-04-2015, issued in case no. 659/2014-T.

On the other hand, the fact that there exists a Binding Information issued by the Tax Authority and Customs Authority dated 30-03-2012, in the sense that this Authority defends in the present proceedings, is decisive in concluding that this was an interpretation with which taxpayers could rely, since binding information is published and this was published as of 21-06-2012. ([1])

Furthermore, there were already some doctrinal positions in the sense that came to be followed in no. 20 of article 88.º, namely that "being a corporate group integrated into the special tax regime at issue, it has been understood that, for the purposes of calculating the increase in autonomous taxation, account should be taken of the circumstance that the group presents profit or loss, and not merely the result of each one of the companies. That is, if there are companies in the group with fiscal loss, but, in the overall computation, the group calculates consolidated taxable income, the 10% increase should not be considered." ([2])

In light of the said positions, the interpretative nature attributed to no. 20 of article 88.º of the IRC Code in article 135.º of Law no. 7-A/2016, of 30 March, is not to be ruled out, under the teachings of BAPTISTA MACHADO, for the solution provided therein regarding the inapplicability of the increase in autonomous taxation provided for in no. 14 of article 88.º of the IRC Code passes the test set forth by this Author:

– the solution resulting from the literal wording of article 88.º, no. 14, of the IRC Code was controversial and the solution defined by the new law falls within the bounds of the controversy;

– the judge or interpreter could reach that solution without exceeding the limits normally imposed on the interpretation and application of law, as did the jurisprudence and doctrine referred to above.

3.3. Compatibility of the Interpretation Adopted by the Tax Authority and Customs Authority with the Principles of Legality, Equality, and the Prohibition of Tax Retroactivity

The Claimant contends that the interpretation advocated by the Tax Authority and Customs Authority, which came to be followed in no. 20 of article 88.º of the IRC Code, violates the principles of equality and legality for the following reasons:

"it results in the case where the tax group presents taxable income, but some companies in that group record fiscal loss individually and have been subject to autonomous taxation, those companies that have recorded fiscal loss are benefited relative to other companies not covered by the RETGS. The punitive character of article 88.º, no. 14, of the Corporate Income Tax Code reveals that this rule was designed since its entry into force in 2011 to punish companies that presented fiscal loss, whether or not they belonged to a tax group. Only this interpretation is consonant with the principle of equality in taxes. From another angle: the interpretation supported by the Tax Authority violates the principle of equality as it benefits companies that individually record fiscal losses and that belong to a tax group that records taxable income, vis-à-vis companies that record fiscal losses but which are not part of a tax group, in the same way that it prejudices companies that individually record taxable income and that belong to a tax group that records fiscal loss, vis-à-vis companies that record taxable income but which are not part of a tax group.

Given the fact that until 2016 the existence of a tax group was relevant only for purposes of determining the aggregate taxable matter (see the systematic inclusion of the RETGS in Chapter III of the Code called "Determination of Aggregate Taxable Matter") and not for purposes of determining autonomous taxation (nor of the state levy which is found in the same Chapter as autonomous taxation), it is evident that the interpretation that the Tax Authority makes of article 88.º, no. 14, of the IRC Code violates the principle of equality as it treats, for purposes of autonomous taxation, companies in a similar situation in different ways. Reason why, also through this route, the legislative solution established in the State Budget for 2016 has innovative content.

Moreover, even though the violation of the principle of equality may have been overcome by number 20 of article 88.º which comes to extend the application of the RETGS to the regime of the increased rate for autonomous taxation and which, to that extent, by legislative choice ceased to be merely a special regime for determination of aggregate taxable matter, the truth is that the interpretation of article 88.º, no. 14, of the IRC Code, effected by the Tax Authority according to which in the case of corporate groups covered by the RETGS article 88.º, no. 14 refers to the fiscal loss of the group, violates the principle of legality of taxes enshrined in article 103.º, no. 2, of the Constitution, in its aspect of typicality, because the norms of tax incidence – as is the case – must be established by law and article 88.º, no. 14, at the level of subjective incidence only refers to taxpayers, a concept which is defined in article 2.º of the Code and which does not include groups of companies, but only companies individually considered, unconstitutionality which is expressly argued herein.

Finally, article 135.º of Law no. 7-A/2016, of 30 March (in providing that "[t]he wording given by the present law (...) to nos. 20 and 21 of article 88º (...) of the Corporate Income Tax Code has an interpretative nature"), by conferring an interpretative character on number 20 of article 88.º of the Corporate Income Tax Code (which provides that "[f]or the purposes of the provisions of no. 14, when the special regime for taxation of groups of companies established in article 69º is applicable, the fiscal loss calculated under article 70" is considered), which refers to number 14 of the same article (which in turn provides that "[t]he autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers that present fiscal loss in the period to which any of the taxable facts referred to in the preceding numbers relating to the exercise of an activity of a commercial, industrial or agricultural nature not exempt from Corporate Income Tax relate"), implies the conferral of retroactive effect on said provision, being materially unconstitutional due to violation of article 103.º, no. 3, of the Constitution of the Republic which prohibits retroactive tax norms, unconstitutionality which is expressly argued herein."

3.3.1. Principle of Legality

Regarding the principle of legality of taxes, if it must be concluded that the position advocated by the Tax Authority and Customs Authority was defensible in light of the wording of article 88.º, no. 14, of the IRC Code in effect during the period of formation of the taxable event and, possibly, even was the solution most widely adopted, ([3]) it must also be concluded that no violation of this principle occurs.

In fact, from this perspective, the interpretation advocated by the Tax Authority and Customs Authority was, at least, one of the possible ones, and the principle of legality does not require that tax norms have an indisputable interpretation, which, in law, is practically impossible, given the multiple interpretative criteria that must be applied concurrently, generally provided for in articles 9.º of the Civil Code and 11.º of the General Tax Law.

On the other hand, the principle of legality does not require that the interpretation of fiscal law correspond to the literal wording, it being sufficient that it have a minimum of verbal correspondence therein, as results from no. 2 of article 9.º of the Civil Code, applicable by force of the provision in no. 1 of article 11.º of the General Tax Law, and this minimum exists in no. 14 of article 88.º of the IRC Code, by mere declaratory interpretation, taking into account, as stated, articles 18.º, no. 3, of the General Tax Law, and 115.º of the IRC Code, which allow attributing the qualification of taxpayer to the parent companies of groups covered by the RETGS.

3.3.2. Principle of Equality

Regarding the principle of equality, the differentiated treatment of companies that are part of groups and those that are not results not from the interpretation applied by the Tax Authority and Customs Authority, but from the very application of the RETGS.

The application of this regime, which is optional (article 69.º, no. 1, of the IRC Code), may bring tax advantages or disadvantages for all companies that comprise it in relation to the taxation that would be applicable based on the individual taxation of each of those companies.

As the RETGS is a taxation system comprised of various rules, the choice by parent companies for its application implies acceptance of all the provisions applicable within that regime, with the implicit acquiescence in relinquishing the application of the rules applicable when the individual taxation regime applies. In fact, it is not admissible, in light of the principle of legality, to seek the application of a third mixed taxation regime not provided for in law, comprised of some of the rules of the RETGS and some applicable under the individual taxation regime.

Thus, on the assumption that the interpretation of no. 14 of article 88.º of the IRC Code advocated by the Tax Authority and Customs Authority was admissible, it must be concluded that the consideration of the fiscal losses of the group instead of the individual losses of each company is one of the components of the RETGS itself, covered in the choice for its taxation. Indeed, it is to be noted that from the application of the interpretation followed by the Tax Authority and Customs Authority do not necessarily result fiscal disadvantages for companies taxed under the RETGS, for, in cases where there are no group losses, the increase provided for in no. 14 of article 88.º of the IRC Code is not applicable, even if there are companies in the group that have individual losses and which would see their autonomous taxation increased if these were the relevant ones. For this reason, neither can it be ventured that this interpretation of no. 14 of article 88.º constitutes a disadvantageous component of the RETGS capable of necessarily influencing the choice to apply the regime.

By the foregoing, it is understood that it is not materially unconstitutional the differentiated treatment given to companies covered by the RETGS and those not covered by that regime, including what results from no. 14 of article 88.º of the IRC Code, in the interpretation advocated by the Tax Authority and Customs Authority.

3.3.3. Principle of Prohibition of Tax Retroactivity

Article 103.º, no. 3, of the Constitution of the Republic establishes that no one may be obliged to pay taxes that have a retroactive nature.

The interpretative law, integrating itself in the law being interpreted, in accordance with article 13.º of the Civil Code, necessarily has effects prior to its entry into force, at least that of eliminating one or more of the possible interpretations of the law being interpreted. ([4])

The constitutional prohibition of retroactivity of norms creating tax obligations derived from no. 3 of article 103.º of the Constitution of the Republic aims to prevent legislative violations of the principle of legal certainty, in its aspects of certainty in the guidance of taxpayer conduct and security of effects created by situations already occurred.

Following the teaching of BAPTISTA MACHADO, it should be understood that in situations where the interpretation given in the new law comes to fix one of the possible interpretations of the old law with which interested parties could and should have reckoned is not susceptible to violating safe and legitimately founded expectations, whereby the reasons justifying the prohibition of retroactivity do not verify.

As possible interpretations of the old law with which interested parties could and should have reckoned cannot be considered those that exceed, restrictively or extensively, its literal wording, at least while there are no doctrinal positions or jurisprudential practice that adopt them, but they certainly include those that are viable in light of the earlier legal text in a mere declaratory interpretation.

In the matter at hand, as already stated, the literal wording of no. 14 of article 88.º of the IRC Code allows, by mere declaratory interpretation, bearing in mind the expanded concept of taxpayer that results from articles 18.º, no. 3, of the General Tax Law, and 115.º of the IRC Code, attributing the qualification of taxpayer to the parent companies of groups covered by the RETGS, whereby the consideration of the losses of the group as the determining fact of the increase in autonomous taxation must be considered as an interpretation with which taxpayers could and should have reckoned previously.

Therefore, the authentic interpretation effected by no. 20 of article 88.º of the IRC Code, in the wording of Law no. 7-A/2016, of 30 March, does not offend the constitutional prohibition of retroactive tax norms.

4. Reimbursement of the Amount Paid and Compensatory Interest

Since the requests for declaration of illegality and partial annulment of the self-assessment and of the illegality of the decision on the administrative appeal that upheld it are unmeritorious, the requests for reimbursement of the amount paid plus compensatory interest, which would be consequences of that illegality, are also unmeritorious.

5. DECISION

In accordance with what is stated above, this Arbitral Tribunal agrees to:

a) Rule that the petition for arbitral ruling is unmeritorious;

b) Absolve the Tax Authority and Customs Authority of the claims.

6. Value of the Case

In accordance with the provisions of article 305.º, no. 2, of the Code of Civil Procedure and 97.º-A, no. 1, sub-paragraph a), of the Code of Tax Procedure and 3.º, no. 2, of the Regulations of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 1,500,077.34.

7. COSTS

In accordance with article 22.º, no. 4, of the RJAT, the amount of costs is fixed at € 20,196.00, in accordance with Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, charged to the Claimant.

Lisbon, 09 May 2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Nuno Cunha Rodrigues)

(João Gonçalves da Silva)

[1] According to the list published by the Tax Authority and Customs Authority on its website at:

http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/informacoes_vinculativas/rendimento/circ/Por_data_circ.htm

[2] In this sense, MARIA RITA DA GAMA LOBO RIBEIRO DE MESQUITA, in "Autonomous Taxation in the IRC Code – Its (In)coherence," Master's Dissertation in Tax Law prepared under the guidance of Professor Dr. Rui Duarte Morais.

Although without explicit grounding, the information that there is knowledge that this is the interpretation that has been followed does not cease to be significant, for purposes of whether the solution explained in no. 20 of article 88.º of the IRC Code is innovative or not.

Possibly, the recognition that this interpretation of no. 14 of article 88.º was being followed will be based on the fact that said binding information is published.

[3] As can be inferred from the text referred to in the preceding note.

[4] In the sense that interpretative law is necessarily retroactive, see OLIVEIRA ASCENSÃO. The Law - Introduction and General Theory, page 438:

  1. Law is a determination, and not a declaration of science. The legislator does not know better the true meaning of the law than any other person. Within an objectivist position, the fixing of a meaning of prior law as the only admissible one is a new injunction. It would be fiction to claim that the meaning now imposed by the legislator was always the true meaning of the source.

  2. There is retroactivity when a source acts upon the past. Now retroactive law, although it does not suppress the earlier source, is not confused with it. The title is necessarily composite, it also encompasses the new law. If the new law is regulating the past, then it is necessarily retroactive.

Frequently Asked Questions

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What are autonomous taxations (tributações autónomas) under Portuguese Corporate Income Tax (IRC)?
Autonomous taxations (tributações autónomas) are special tax rates imposed under article 88 of the Portuguese IRC Code on specific categories of company expenses, regardless of whether the company has taxable profit. These taxes apply independently of regular IRC and target expenses such as company vehicles, entertainment costs, and certain fringe benefits. The standard rates vary depending on the expense category and can range from 5% to 35%. Critically, article 88(14) provides for a 10% increase in these rates when a company reports fiscal losses, making autonomous taxation more burdensome for loss-making entities. Unlike regular corporate tax, autonomous taxation cannot be offset against tax credits or losses and represents a definitive tax liability calculated directly on the gross expense amount.
How does the Special Taxation Regime for Groups of Companies (RETGS) affect IRC self-assessments in Portugal?
The Special Taxation Regime for Groups of Companies (RETGS), regulated by articles 69 to 71 of the IRC Code, allows related companies to be taxed on a consolidated basis. Under RETGS, the parent company files a single consolidated tax return (Form 22) aggregating the taxable income and fiscal losses of all group members through algebraic summation. Each subsidiary company first determines its individual taxable income or loss, which is then consolidated at the group level. This consolidation can result in offsetting profits from some companies against losses from others, potentially reducing the overall tax burden. However, as demonstrated in this case, when the consolidated group result shows fiscal losses, the entire group may be subject to increased autonomous taxation rates under article 88(14), even if individual companies within the group are profitable.
Can a dominant company in a corporate group challenge an IRC self-assessment through CAAD tax arbitration?
Yes, a parent company acting as the dominant entity in a corporate group taxed under RETGS has full legal standing to challenge IRC self-assessments through the Administrative Arbitration Centre (CAAD). As demonstrated in this case, A... S.A. successfully initiated arbitration proceedings under the Legal Framework for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). The parent company, as the entity responsible for filing the consolidated tax return and making payments on behalf of the group, is directly affected by any assessment irregularities and therefore possesses the necessary legal interest to contest them. The arbitration request can challenge both the original self-assessment and any subsequent administrative appeal decisions. CAAD arbitration provides a faster alternative to traditional judicial proceedings in tax courts.
What is the procedure for filing a gracious complaint (reclamação graciosa) against an IRC assessment in Portugal?
While this case involved an administrative appeal (recurso hierárquico) rather than a gracious complaint (reclamação graciosa), both are pre-arbitration remedies available in Portuguese tax procedure. An administrative appeal is filed with the hierarchical superior of the entity that issued the contested decision and must be submitted within specific statutory deadlines, typically within three months of notification. The appeal requires detailed written arguments explaining the alleged illegality of the tax assessment. The Tax Authority examines the submission, may issue a draft decision for comment, and ultimately either upholds or modifies the contested assessment. If the administrative appeal is dismissed or only partially upheld, the taxpayer can then escalate to CAAD arbitration or judicial courts. This procedure allows the Tax Authority to reconsider its position before formal litigation commences.
Are compensatory interest (juros indemnizatórios) available when an IRC self-assessment is declared illegal by CAAD?
Yes, compensatory interest (juros indemnizatórios) are legally available when an IRC self-assessment is declared wholly or partially illegal by CAAD or courts. As evidenced in this case, the claimant specifically requested reimbursement of €1,500,077.34 plus corresponding compensatory interest. These interest payments compensate taxpayers for the financial loss suffered due to undue or excessive tax payments resulting from illegal assessments. The interest accrues from the date of payment until reimbursement and is calculated according to statutory rates defined in Portuguese tax legislation. Compensatory interest represents an important taxpayer protection mechanism, ensuring that illegally collected taxes are returned with fair compensation for the time value of money. The Tax Authority is obligated to pay these amounts when the underlying tax assessment is successfully challenged.