Process: 695/2016-T

Date: October 11, 2017

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 695/2016-T addresses whether a €100,000 payment from a company to its shareholders constitutes a repayment of shareholder loans (suprimentos) or taxable profit distribution subject to IRS withholding tax. The Tax Authority assessed IRS withholding tax and compensatory interest totaling €39,006.38 for fiscal year 2012, arguing the company failed to provide adequate documentation proving the payment was a loan repayment. The company contested, claiming it had demonstrated shareholder credits exceeding the transferred amount. The arbitral tribunal examined extensive documentation, including accounting records, bank statements, and shareholder loan accounts. The tribunal found mixed evidence: some transactions were properly documented with shareholder loan account entries and supporting bank records, while others lacked proof of fund origin or proper accounting entries. The tribunal rejected the company's procedural argument regarding lack of reasoning, finding the tax inspection report provided sufficient grounds for the assessments. The core legal issue centered on Article 5(2)(h) and Article 6(4) of the IRS Code, which establish a legal presumption that payments from companies to shareholders constitute taxable income unless proven otherwise through comprehensive documentation. The decision underscores that Portuguese tax law places a strict burden of proof on taxpayers to maintain detailed accounting documentation, including: complete shareholder loan accounts (conta corrente de sócios), bank statements evidencing both inflow and outflow of funds, consistent accounting entries recording loans as liabilities, and traceability of fund origins. The case demonstrates that partial or incomplete documentation is insufficient to overcome the legal presumption of taxability, and that taxpayers must provide a complete audit trail showing the entire cycle of shareholder loans from initial advance through repayment.

Full Decision

ARBITRAL DECISION

The Arbitrator, Nuno de Oliveira Garcia, appointed by the Ethics Council of the Administrative Arbitration Centre (CAAD) to constitute the Single Arbitral Tribunal, constituted on 06-02-2017, decides as follows:

REPORT

On 24.11.2016, the company 'A…, Lda.', Tax Registration Number …, filed a request for constitution of the arbitral tribunal, pursuant to Articles 10 et seq. of Decree-Law No. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to only as LFTA), in which the Tax and Customs Authority is the Respondent.

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

The Claimant did not proceed to appoint an arbitrator, whereby, pursuant to Article 6, No. 2, subsection a) of the LFTA, the Ethics Council appointed the undersigned as arbitrator of the present Arbitral Tribunal, who confirmed acceptance of the appointment within the applicable deadline, and both Parties were notified of this appointment on 20.01.2017.

On 06.02.2017, the present arbitral tribunal was constituted.

On 17.03.2017, the Tax Authority submitted its Response to this Tribunal and attached the respective administrative file.

On 21.06.2017, this Tribunal issued an order dispensing with the holding of a hearing for examination of witnesses, since both parties base their claims on the sufficiency or insufficiency of documents proving that a certain amount delivered by the Claimant to one of its shareholders consisted of the repayment of shareholder loan(s).

On the same date, the Tribunal requested the Claimant to, within a period of 20 days, submit and deliver to this Arbitral Tribunal the following elements from its accounting records; namely:

a. Statements of account # 26 821 relating to shareholder B… and concerning the fiscal years and periods 2010 and 2011;

b. Statement of the bank account (# 12 and/or # 13) in which the "repayments" of the alleged shareholder loans in question are recorded;

c. Legible copies of the bank statements already delivered by the Claimant, but which are illegible on the CAAD platform.

On 23.08.2017, and given that the aforementioned order was only validly notified to the Claimant's Representative almost one month after its issuance, the Arbitral Tribunal, in light of Articles 15 and 21, No. 1, and pursuant to Article 21, No. 2, all of the Tax Arbitration Procedure Regulation, determined the extension of the present case for a period of 2 months.

Finally, and following the submission by the Claimant of the documents requested by the Arbitral Tribunal, this issued an order on 9.10.2017 dispensing with final submissions.

In dispute is the assessment of Income Tax (Withholding) No. 2016… and the assessment of compensatory interest No. 2016…, both relating to the fiscal year 2012, with a total amount of €39,006.38.

The Claimant sustains its request as follows, in summary:

- There is a lack of reasoning with respect to the disputed acts;

- There is illegality in the classification of the alleged repayments of shareholder loans as capital income;

- There is no taxable event;

- There is a defect in law in the assessment of compensatory interest.

For its part, the Tax Authority concluded as follows:

- The reasoning contained in the tax inspection report is sufficiently clear and unequivocal;

- The Claimant never provided proof that the amount of €100,000 in question was paid as repayment of shareholder loans;

- The provision in No. 4 of Article 6 of the Income Tax Code establishes a legal presumption, whereby the taxable event is not non-existent;

- The assessment of compensatory interest results from the breach of said provision of the Income Tax Code, whereby its assessment is lawful.

PROVEN AND UNPROVEN FACTS

II.I. The Tribunal considers the following essential facts proven for the purpose of this claim:

- Bank account No. … at [Bank Name] is held in the names of both shareholders B… and D… – fact confirmed as undisputed by the Tax Authority (cf. p. 2 of the Tax Authority's Response).

- The transfer, on 24 February 2012, of the amount of €100,000 from company A… to the aforementioned bank account held by the two shareholders identified above – fact undisputed as between the Parties.

- With respect to the acquisition of real property at R. …, No. …, the price was paid by bank check drawn from the aforementioned account, and both the deed of sale and the accounting records of A… (# 31162 Inventory) demonstrate that it was this company that was the purchaser.

- Further with respect to said acquisition, there is a record of the respective shareholder loan (# 26822) in favour of D….

- With respect to the transfers of €50,000 and €2,500 with reference to 'E…', there is a record of shareholder loan (# 26822) and entry (# 121 Deposits).

- With respect to the remaining transfers in favour of A…, receipt is confirmed according to account statement.

II.II. The Tribunal considers the following facts as unproven:

- With respect to the transfers of €50,000 and €2,500 with reference to 'E…', their outflow is not demonstrated, that is to say, it is not proven that they are funds originating from shareholders B… and D….

- With respect to the remaining transfers in favour of A…, there is no record in A…'s accounting that confirms them as shareholder loans, nor even as entries such as deposits.

THE LAW

III.I. THE LEGAL FRAMEWORK AND THE PARTIES' POSITION THEREON

In dispute in the present case is the transfer, on 24 February 2012, of the amount of €100,000 originating from company A… to a bank account held by the two shareholders. In the course of a tax inspection, the Tax Authority requested accounting evidence that could prove what one of the shareholders claimed, namely that such amount consisted of the repayment of a shareholder loan.

Several documents were submitted in order to demonstrate the existence of shareholder credits on the part of the shareholders of A… that could justify said repayment of shareholder loan(s). Also in the course of the present proceedings, documents were submitted by the Claimant to that effect, as requested by this Tribunal.

The Tax Authority maintains the position that the documentation delivered does not allow it to determine that the payment of the €100,000 was indeed a return of shareholder loans advanced by shareholder B…. To that extent, it urges the maintenance of the assessment on the grounds that such amount constitutes advancement of profits placed at the disposal of the shareholders, pursuant to subsection h) of No. 2 of Article 5 of the Income Tax Code, further on the basis of the provision in No. 4 of Article 6 of the Income Tax Code.

Company A… maintains the position that it has proven the existence of shareholder credits in an amount exceeding the amount transferred to the shareholders, and that there is no taxable event.

III.II. THE ALLEGED DEFECTS

Regarding the alleged lack of reasoning of the assessment acts

The documents attached to the present proceedings are more than sufficient for the Tribunal to be convinced that an inspection procedure occurred prior to the issuance of the assessment acts in dispute. Moreover, this fact is not even contested by the Claimant. Furthermore, in the inspection procedure there are expressly contained, it should be noted, the reasons why the Tax Authority (rightly or wrongly, that is another matter) understood that a certain payment by A… to the shareholders constituted an advancement of profits, which would require assessment under the Income Tax provisions, as indeed occurred.

The Claimant itself, at the beginning of its request for constitution of an Arbitral Tribunal, makes reference to the inspection procedure, revealing knowledge that the disputed acts result from that procedure.

Accordingly, the absence of express reasoning in the assessment acts themselves is not sufficient for their annulment, as their respective reasoning is contained in an inspection procedure which not only addressed the analysis of the €100,000 payment in question, but preceded such acts. In this respect, the Claimant's invocation regarding the defect of lack of reasoning of the disputed acts is not upheld.

Regarding the alleged non-existence of a taxable event

Equally, the Claimant is not correct in alleging that there is no taxable event. As the Tax Authority correctly points out, the provision in No. 4 of Article 6 of the Income Tax Code establishes a presumption that payments to shareholders, when they do not result from loans, constitute advancements of profits, which requires assessment at source, as was indeed carried out by the Tax Authority.

The taxable event is the payment by the company to the shareholder, which has the nature of capital income and which causes an increase in that person's tax capacity. As a rule, payments by companies to their shareholders are income to the latter. Only exceptionally is a payment to a shareholder not actual income thereof. This means, therefore, and as we shall see below, that the matter is one of proof; either the existence of a loan is demonstrated, or the presumption operates, and is not rebuttable.

In this respect, the Claimant's invocation regarding the non-existence of a taxable event is not upheld.

Regarding the classification of the amount delivered to the shareholders as capital income

From what has been stated above, it remains to determine whether there is documentation evidencing shareholder loans made by shareholders B… and D… that could justify the alleged repayment of shareholder loans.

First, it should be noted that the fact that bank account No. … at [Bank Name] is held by two persons, both shareholders, does not allow the Tax Authority to understand that the transfer was made only to one of them. Accordingly, when a transfer from said account is evidenced with the indication D…, this does not necessarily mean that she is the orderer, whereby a repayment of that credit to the same account but in favour of B… can be considered as an actual repayment of a shareholder loan to either holder.

In any case, what must exist is effective and unequivocal proof both of the movement of money entering the company and of the movement of exit, as well as proper accounting documentation.

Now, as was mentioned regarding the proven facts, with respect to the acquisition of real property at R. …, No. …, there is no doubt that the price was paid (movement of entry for the account of the company) by bank check drawn from bank account No. … at [Bank Name], and both the deed of sale and the accounting records of A… (# 31162 Inventory) demonstrate that it was this company that was the purchaser. Further with respect to said acquisition, there is recorded the respective shareholder loan (# 26822) in favour of D… (movement of exit). That is to say, the price of the acquisition of the real property was delivered by shareholders B… and D… on account of A…, and this was recorded in the company's accounting, precisely as a shareholder loan. Accordingly, it is to be accepted that the amount of €60,000 paid by the shareholders on account of their company, recorded as a shareholder loan, was indeed a loan, that is to say at that moment a shareholder credit arose. To that extent, the transfer of the €100,000 that gave rise to the disputed assessments finds, partially (to the extent of the €60,000), justification. This means that, with respect to the credit in the amount of €60,000, the Claimant's position is upheld.

However, the same does not apply to the other movements/transfers invoked. Indeed, the origin of the transfers of €50,000 and €2,500 with reference to 'E…' was not proven, that is to say, it is not established that they are funds originating from shareholders B… and D…, whereby one cannot inevitably conclude the existence of a 'shareholder loan'.

And the same conclusion applies with respect to the remaining transfers in favour of A…, regarding which there is no record in A…'s accounting that confirms them as shareholder loans (but only company account statements with mere reference to transfers originating from a third-party bank account and/or in the name of D…).

Regarding compensatory interest

Although we do not agree that the assessment of compensatory interest is a mandatory act, as the Tax Authority contends, the truth is that it has the right to such assessment when it is demonstrated, as it has been, that the delay or non-assessment of the tax was due, in part, to an action of the taxpayer.

Given that the inspection report contains sufficient grounds for the arithmetic correction to be reasoned (as we have argued above), and given that the action of the Tax Authority does not constitute a surprise decision (quite the contrary, in light of the various transfers which, as we have also seen above, are not fully recorded in the Claimant's accounting), the assessment of interest appears justified and explicit in a case such as the present in which there was delay attributable to the taxpayer in the assessment of part of the tax.

In any case, and having reached this point, we cannot but conclude that the assessment of compensatory interest must be annulled in proportion to the annulment of the Income Tax assessment also in dispute, since in that part there was no delay given that no tax is incurred.

DECISION

Accordingly, this Arbitral Tribunal decides:

a) To partially uphold the claim, in that of the total amount of €100,000, the amount of €60,000 should not be considered as capital income as it constitutes a repayment of a shareholder loan;

b) To declare, in consequence, the partial illegality of the assessment of Income Tax (Withholding) No. 2016… and the assessment of compensatory interest No. 2016…, both of which require correction in accordance with the foregoing point, with the inherent legal consequences;

c) To condemn both parties to pay the costs of this proceeding, in accordance with the partial success (ratio 60/40).

VALUE OF THE ACTION

The value of the action is fixed at €39,006.38 pursuant to Article 97-A, No. 1, a), of the Tax Procedure and Process Code, applicable by virtue of subsections a) and b) of No. 1 of Article 29 of the LFTA and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Let notification be made.

Lisbon, 11 October 2017

The Arbitral Tribunal,

Nuno de Oliveira Garcia

Frequently Asked Questions

Automatically Created

What is the tax treatment of shareholder loan repayments (suprimentos) under Portuguese IRS rules?
Under Portuguese IRS rules, genuine shareholder loan repayments (suprimentos) are not subject to withholding tax as they constitute return of capital rather than income. However, Article 6(4) of the IRS Code creates a legal presumption that payments from companies to shareholders are taxable income unless the taxpayer proves otherwise with comprehensive documentation. To qualify as non-taxable loan repayments, companies must maintain detailed accounting records including: the original loan from shareholder to company, proper recording in shareholder loan accounts (conta corrente de sócios - typically account 26), matching bank documentation showing both the loan advance and repayment, and evidence of fund origins. The burden of proof rests entirely on the taxpayer to demonstrate the payment was a loan repayment rather than profit distribution.
When is withholding tax (retenção na fonte) applicable to payments made by a company to its shareholders?
IRS withholding tax (retenção na fonte) applies to payments made by companies to shareholders when they constitute capital income under Article 5(2)(h) of the IRS Code, including profit distributions, advances on profits (adiantamentos de lucros), or any amounts made available to shareholders. The Tax Authority can invoke the legal presumption in Article 6(4), which treats payments to shareholders as taxable income unless proven otherwise. Withholding tax does not apply to genuine shareholder loan repayments, but the company bears the burden of proving the payment's nature through complete documentation. In Process 695/2016-T, the Tax Authority assessed withholding tax on a €100,000 payment because the company could not adequately document that it represented loan repayment rather than income distribution.
What documentation is required to prove that a payment to a shareholder constitutes a loan repayment rather than taxable income?
To prove a payment constitutes a loan repayment rather than taxable income, companies must provide: (a) detailed shareholder loan account statements (conta corrente de sócios) showing the loan balance and movements; (b) bank statements evidencing both the original transfer from shareholder to company and the subsequent repayment; (c) proper accounting entries recording the loan as a liability in the appropriate accounts (typically account 26 for shareholders); (d) complete correspondence between accounting records and bank movements; and (e) traceable evidence of the origin of funds. In Process 695/2016-T, the CAAD tribunal found certain transactions adequately documented while others failed because fund origins could not be traced or proper accounting entries were missing. Partial documentation is insufficient to overcome the legal presumption of taxability under Article 6(4) of the IRS Code.
How does the CAAD arbitration tribunal handle disputes over IRS withholding tax on shareholder transactions?
The CAAD (Centro de Arbitragem Administrativa) arbitration tribunal handles IRS withholding tax disputes by examining both legal framework and factual evidence. The tribunal evaluates whether Tax Authority assessments were properly reasoned, analyzes compliance with IRS Code provisions (particularly Articles 5 and 6), and determines whether taxpayers met their burden of proof. In Process 695/2016-T, the tribunal: dispensed with witness hearings and focused on documentary evidence; specifically requested detailed accounting statements (shareholder loan accounts #26821 and #26822) and bank records; analyzed each transaction individually to determine which were adequately documented; and applied a rigorous standard requiring complete documentation showing the full cycle of shareholder loans. The tribunal rejected procedural arguments about lack of reasoning, finding the inspection report provided sufficient grounds for the contested assessments.
What are the consequences of insufficient documentation for shareholder loan repayments in Portuguese tax audits?
Insufficient documentation for shareholder loan repayments in Portuguese tax audits results in: (a) the Tax Authority treating payments as taxable profit distributions subject to IRS withholding tax under Articles 5(2)(h) and 6(4) of the IRS Code; (b) assessment of compensatory interest (juros compensatórios) for late payment of the tax due; (c) the company being held liable for both the withheld tax and interest, potentially resulting in substantial amounts (€39,006.38 in Process 695/2016-T for a €100,000 payment); and (d) the burden of proof remaining with the taxpayer in any subsequent arbitration or judicial proceedings. The legal presumption under Article 6(4) means that partial, incomplete, or inconsistent documentation is insufficient - taxpayers must provide comprehensive evidence tracing the complete flow of funds from shareholder to company and back, with proper accounting records throughout.