Process: 710/2016-T

Date: May 2, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Process 710/2016-T examined IRC corrections totaling €1,701,831.04 for fiscal year 2013, challenging the Tax Authority's application of Article 32(2) of the Statute of Fiscal Benefits (EBF) and Circular 7/2004 regarding non-deductible financial charges on capital holdings (€1,693,446.56), and the rejection of depreciation expenses on unused real estate under Articles 23 and 29 CIRC (€8,384.48). The petitioner, a management holding company (SGPS) subject to the special group taxation regime, contested corrections affecting both itself and subsidiary companies. Key factual findings included that in 2013 the petitioner neither acquired nor disposed of capital participations nor contracted financing for share acquisitions, raising questions about the Tax Authority's basis for applying the financial charges limitation. Regarding the real estate depreciation issue, the property was registered as investment property and was available for lease or sale, though not generating income at the time. The case addresses fundamental IRC principles including the burden of proof in tax corrections, the proper interpretation of EBF anti-abuse provisions limiting interest deductibility on participation financing, the application of administrative circulars versus statutory law, and the conditions for deducting depreciation on temporarily unproductive assets held for income generation purposes under the accrual principle.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Nuno Cunha Rodrigues and Luís Baptista, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal:

I – REPORT

On 29 November 2016, A… – Management Company of Capital Participations, S.A., Corporate Person No. …, with registered office in …, Place of …, …, …-… …, …, filed a petition for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the Corporate Income Tax assessment act increased by No. 2015…, of 05-11-2015, relating to the fiscal year 2013, in the amount of € 292,211.18, and of the administrative appeal decision No. …2016…, which was its subject matter.

To substantiate its petition, the Petitioner alleges, in summary, that the said assessment:

i. in the part relating to the correction of € 548,555.18 in the sphere of the Petitioner, and of €1,144,891.38 in the sphere of "B… SGPS, S.A.", relating to "non-deductible financial charges relating to capital shares", in which it applied the provisions of Circular No. 7/2004, of 30 March, which embodies the interpretation of the Tax Authority of the provision in Article 32, No. 2 of the Statute of Fiscal Benefits, is illegal, due to error in the factual premises, error in interpretation and application of law, violation of the inquisitorial principle, improper resort to indirect evaluation and various breaches of essential formalities, with further violation of the constitutional principle of legality;

ii. in the part relating to the correction of € 8,384.48, relating to "C…", concerning "Costs with depreciation and amortization not accepted in determining the Corporate Income Tax result", suffering from error in the factual premises and erroneous interpretation and application of law – namely the provisions of Articles 23, No. 1 and 29, No. 3 of the Corporate Income Tax Code.

On 30-11-2016, the petition for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Petitioner did not proceed with the appointment of an arbitrator, and therefore, in accordance with the provisions of subparagraph a) of No. 2 of Article 6 and subparagraph a) of No. 1 of Article 11 of the RJAT, the President of the Deontological Council of the CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the engagement within the applicable timeframe.

On 25-01-2017, the parties were notified of these appointments and did not manifest any intention to challenge any of them.

In accordance with the provisions of subparagraph c) of No. 1 of Article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 09-02-2017.

On 10-03-2017, the Respondent, having been duly notified for that purpose, presented its response, defending itself solely by way of impugning.

Taking into account the general procedural principles of procedural economy and the prohibition of unnecessary acts, in accordance with the provisions of subparagraphs c) and e) of Article 16, and No. 2 of Article 29, both of the RJAT, the meeting referred to in Article 18 of the RJAT was dispensed with, as well as the presentation of pleadings by the parties, and a period of 45 days was fixed for the delivery of the final decision.

The Arbitral Tribunal has material jurisdiction and is regularly constituted, in accordance with Articles 2, No. 1, subparagraph a), 5 and 6, No. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Regulation No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the case.

Having examined all matters, it is proper to deliver the following

II. DECISION

A. MATTER OF FACT

A.1. Facts established as proven

  1. The Petitioner is the dominant company of a group of companies which is classified, for Corporate Income Tax purposes, under the Special Tax Regime for Groups of Companies.

  2. The Petitioner was subject to an internal inspection action which had as its object the analysis of the special tax regime of the group of companies of which it was the dominant company, for the fiscal year 2013.

  3. From this procedure resulted the Tax Inspection Report (RIT), in which the Tax Authority, by reference to the aforementioned fiscal year 2013, made the following corrections:

a. a purely arithmetical correction to the individual fiscal result in Corporate Income Tax of the Petitioner, in the amount of € 548,555.18;

b. a purely arithmetical correction to the individual fiscal result in Corporate Income Tax of "B… SGPS, S.A.", in the amount of € 1,144,891.38;

c. a correction to the individual fiscal result in Corporate Income Tax of the company "C… S.A." in the amount of € 8,384.48.

  1. The corrections referred to in subparagraphs a) and b) of the preceding number were based on No. 2 of Article 32 of the Statute of Fiscal Benefits, as amended by Law No. 32-B/2002, of 30.12, interpreted in accordance with Circular 7/2004, of 30 March, of the Corporate Income Tax Directorate.

  2. The correction referred to in subparagraph c) of No. 3 above relates to costs with depreciation and amortization not accepted in determining the Corporate Income Tax result of the year 2013, in accordance with Articles 23 and 29 both of the Corporate Income Tax Code and was based on the fact that amortizations of real estate registered as investment properties that were not being used and had not generated, at the time, income subject to Corporate Income Tax were considered as losses.

  3. The said real estate, in the year in question, was available for lease or sale.

  4. The aforementioned corrections are reflected in the inspection report with service order No. OI2015…, in which the Tax Authority proceeded, concomitantly, to correct the fiscal result of the group of companies headed by the Petitioner – in the total amount of €1,701,831.04.

  5. The Petitioner proceeded with voluntary payment of the assessment subject to the present arbitration action.

  6. The Petitioner filed an administrative appeal, processed at the Finance Directorate of … under No. …2016…, which was expressly denied on the basis of the grounds contained in the draft decision.

  7. In the fiscal year 2013 the Petitioner did not acquire or dispose of any capital participations, nor did it contract any financing for the acquisition of capital shares.

  8. "C…" had, at the date of the taxable event, as its actual activity the "Purchase and sale of real estate and management of those it owns, namely, through their lease".

A.2. Facts established as not proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of the proven and not proven matter of fact

Regarding the matter of fact, the Tribunal need not pronounce on all that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish between proven and not proven matter (see Article 123, No. 2, of the Tax Procedure and Process Code and Article 607, No. 3 of the Civil Procedure Code, applicable by virtue of Article 29, No. 1, subparagraphs a) and e), of the RJAT).

Thus, the facts pertinent to the judgment of the case are chosen and delineated in function of their legal relevance, which is established in attention to the various plausible solutions of the legal question(s) (see former Article 511, No. 1, of the Civil Procedure Code, corresponding to the current Article 596, applicable by virtue of Article 29, No. 1, subparagraph e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of Article 110/7 of the Tax Procedure and Process Code, the documentary evidence and the arbitration process attached to the file, the above-listed facts were considered proven, with relevance to the decision.

B. ON THE LAW

As stated above, at issue in the present proceedings is the examination of the legality of the Corporate Income Tax assessment act increased by No. 2015…, of 05-11-2015, relating to the fiscal year 2013, in the amount of € 292,211.18, and of the administrative appeal decision No. …2016…, which was its subject matter, with respect to the following corrections made in the aforementioned assessment:

  • correction of € 548,555.18 in the sphere of the Petitioner, and of €1,144,891.38 in the sphere of "B… SGPS, S.A.", relating to "non-deductible financial charges relating to capital shares", in which the provisions of Circular No. 7/2004, of 30 March were applied, which embodies the interpretation of the Tax Authority of the provision in Article 32, No. 2 of the Statute of Fiscal Benefits;

  • correction of € 8,384.48, relating to "C…", concerning "Costs with depreciation and amortization not accepted in determining the Corporate Income Tax result".

Let us proceed.

i.

Article 32, No. 2 of the Statute of Fiscal Benefits provides, inter alia, that "the financial charges incurred with the (...) acquisition [of capital participations held for a period of not less than one year] do not contribute to the formation of taxable profit" of Management Companies of Capital Participations, Limited Partnerships by Shares and Credit Institutions Governed.

In turn, Article 120 of the applicable Corporate Income Tax Code requires Corporate Income Tax taxpayers to present their periodic income tax return, in accordance with the law, such return being, as a rule, the basis for the tax assessment, as provided in Article 90, No. 1, a) of the same Code, and it is certain that the return form made available contains a specific field for the value referred to in the above-mentioned provision of Article 32, No. 2 of the Statute of Fiscal Benefits, namely Table 07, in fact, and in this case, completed by the Petitioner.

Thus, Corporate Income Tax taxpayers to whom the provision of the article in question of the Statute of Fiscal Benefits is applicable have the obligation to state in their periodic Corporate Income Tax return the amount of financial charges incurred with the acquisition of capital participations held for a period of not less than one year, and cannot exempt themselves from such obligation by alleging, for example, that it is not possible for them to establish any direct allocation of the financial charges incurred to the capital participations held.

Indeed, not only does the principle of legality not require that an expense be accepted by force of the subjective difficulty or impossibility of demonstrating the premises on which the law makes its deductibility depend (in this case, that they were not incurred with the acquisition of capital participations held for a period of not less than one year), but, concretely, such difficulty will – exclusively and in the first place – always be objectively imputable to the taxpayer who, being the one who incurs the expenses with financial charges and who determines their use, is the one who can best demonstrate, better than anyone, whether, and which of such expenses were incurred for the purpose of acquiring capital shares held for a period of not less than one year.

Thus, regardless of the greater or lesser difficulty – or even the impossibility – subjective in determining the relevant value for purposes of Article 32, No. 2 of the Statute of Fiscal Benefits, taxpayers covered by the respective provision will be obliged to state in their respective tax return a value for that purpose – even if it is zero – and cannot exempt themselves from such obligation on the pretext that it is difficult, or impossible, to determine such value.

The stated value, provided that the respective prerequisites are met, will enjoy the presumption of truthfulness enshrined in Article 75, No. 1 of the General Tax Law, and therefore, once the value that, in the taxpayer's judgment, is the appropriate one is declared, it will be incumbent upon the Tax Authority, if it disagrees with it, to produce proof that such value is not correct, either by demonstrating a direct allocation of the financial charges incurred to the acquisition of capital participations, or by using a direct criterion – direct evaluation – or by resorting to methods of indirect taxation, in accordance with the general provisions of the General Tax Law, provided that the respective prerequisites are met, which includes the "Impossibility of direct and exact proof and quantification of the elements indispensable to the correct determination of the tax matter of any tax" (Article 87, No. 1, b) of the General Tax Law).

In this case, as it is a corrective action by the Tax Authority, it bears the burden of proof that the legal premises of its action are met, in accordance with Article 74, No. 1 of the General Tax Law[1].

Thus, and as it is a purely arithmetical correction to the value to be considered for purposes of Article 32, No. 2 of the Statute of Fiscal Benefits, it is considered that the burden of proof that rests with the Tax Authority consists in demonstrating what the correct value is for purposes of the said rule, and not, merely, that it is not possible for it to indicate a value, or that it is "extremely difficult to determine with exactitude what the specific application of own capital obtained through a particular loan is."[2]

Now, in the case, the said demonstration is not, admittedly and in any way, made, and therefore the assessment subject to the present arbitration process, and the administrative appeal that maintained it in the legal order, suffer, from the outset, from error in the respective factual premises.

Indeed, there is no proof that the amounts incurred with financial charges with the acquisition of capital participations relevant for purposes of the rule of Article 32, No. 2 of the Statute of Fiscal Benefits in question is, not the amount declared by the Petitioner, which, as seen, is presumed true, but that considered by the assessment in question.

Indeed, what the Tax Authority says is that it cannot determine a value for that purpose. Now, thus being, as the Respondent admittedly acknowledges, a situation of either insufficiency of proof, or at least, of founded doubt is generated, which would always have to be resolved against the party burdened with the burden of proof.

That is, and in sum: once a value is declared by the taxpayer, in accordance with the law, the assessment will be made on the basis of the return filed, as required by Article 90, No. 1, a) of the Corporate Income Tax Code, as amended in the applicable provision. Such assessment may only be annulled, due to error of fact or law, provided that the party seeking such annulment, whether it be the Tax Authority or the taxpayer, fulfills the burden of proof that rests with it, demonstrating such error, which, in the case, passes through the effective demonstration (beyond any reasonable doubt) of the amount of tax to be assessed, and not – as occurs in the case with the Respondent – with the demonstration of a difficulty or even impossibility in indicating the correct value, and subsequent application of a criterion discretionarily determined, without any legal support therefor.

Thus, it will not matter what the subjective motivation is for the indication of a corrected value or what calculation method was used to arrive at it. In order to proceed with the correction of a declared value, in terms that entail its replacement by another, by means of a purely arithmetical correction, it becomes necessary to demonstrate, beyond any reasonable doubt, that the new value to be considered is, in fact, the correct one.

Now, in the case, the Tax Authority does not do so; it does not demonstrate, nor even alleges, that the new value to be considered for purposes of the tax assessment, in the matter that is relevant in these proceedings (charges relevant to the second part of Article 32, No. 2 of the Statute of Fiscal Benefits), which would justify the partial correction of the Petitioner's self-assessment, is the correct one.

What the Tax Authority did, in the case, was effectively and admittedly[3], and as pointed out by the Petitioner, the application of an indirect method of determining the taxable matter, without following the procedures legally imposed for that purpose.

Indeed, as was written in the recent Decision of the Supreme Administrative Court of 08/03/2017, delivered in proceeding 0227/16[4], "Point 7 of Circular No. 7/2004, of 30.03, of the Corporate Income Tax Directorate, establishes an indirect method, presumptive, of allocation of financial charges in disrespect of Articles 87 to 90 of the General Tax Law and is, therefore, illegal."

Now, as had already been written in the decision of the North Central Administrative Court of 15-01-2015, delivered in proceeding 00946/09.0BEPRT[5]:

"1. During the validity of No. 2 of Article 31 of the Statute of Fiscal Benefits in the wording introduced by Law No. 32-B/2002, of 30 December, capital gains and capital losses realized by Management Companies of Capital Participations through onerous transfer of capital shares, provided they are held for a period of not less than one year and likewise the financial charges incurred with their acquisition, do not contribute to the formation of the taxable profit of the companies.

  1. The method for determining which financial charges were incurred with the acquisition of those capital shares must aim at a criterion of direct and real attribution and not the indirect or presumed criterion provided for in Circular No. 7/2004, of 30 March."

Thus, as was written in the also recent decision of the North Central Administrative Court of 25-05-2016, delivered in proceeding 00264/10.1BECBR[6]:

"IV. By virtue of Article 74, No. 1 General Tax Law, it is incumbent upon the Tax Administration to raise and prove the unnecessary nature of the cost sought, in order to exercise its right to correct the intended deductions of the respective amounts as tax costs.

V. It is the Tax Administration that bears the burden of proving the existence of all the premises that determined it to make corrections to what was declared by the taxpayer, and it is therefore incumbent upon it to inquire into the verification of the taxable fact that it claims to have existed, through the performance of all necessary steps to discover the material truth.

VI. Thus, it is the Tax Administration that bears the burden of proof of the verification of the legal premises binding its action, that is, the burden of proving that the assessment cannot be based on the elements provided by the taxpayer and that recourse to indirect methods became the only way to calculate the tax to be assessed.

VII. And being incumbent upon it, to specify the reasons for the impossibility of direct and exact proof and quantification of the taxable matter, knowing that the Tax Administration acts in the exercise of strictly bound powers, subject to the principle of legality, enjoying no margin of discretion regarding the choice of method (direct or indirect) for evaluating the tax matter, and, once such proof is made, the burden falls on the taxpayer to demonstrate that those premises do not exist or that, if they do exist, there was error or excess in the quantification (Article 74, No. 3 of the General Tax Law)."

Thus, in addition to suffering from error in the factual premises, insofar as it proceeded with the application of purely technical corrections, the assessment subject to the present arbitration action suffers, in the part now in question, from a procedural defect and error in the legal premises, by applying an indirect method for determining the taxable matter, without following the procedures legally prescribed therefor, and on the basis of the premises of direct evaluation.

In light of all the foregoing, in this part, the arbitral petition should succeed.

ii.

Also at issue in the present proceedings is a correction of € 8,384.48, relating to "C…", concerning "Costs with depreciation and amortization not accepted in determining the Corporate Income Tax result".

This correction, as results from the matter of fact, relates to costs with depreciation and amortization not accepted in determining the Corporate Income Tax result of the year 2013, in accordance with Articles 23 and 29 both of the Corporate Income Tax Code and was based on the fact that amortizations of real estate registered as investment properties that were not being used and had not generated, at the time, income subject to Corporate Income Tax were considered as losses.

The Tax Authority understands, in sum, as appears from the Inspection Report, that such costs with amortizations do not fall within Article 23 of the Corporate Income Tax Code, inasmuch as, in the judgment of that authority, such costs were not necessary to the activity of the Petitioner.

The question sub iudice is then, in the first place and directly, linked with the application of Article 23 of the Corporate Income Tax Code.

From a general point of view, the essential features of the path established by national doctrine and jurisprudence on the matter of indispensability of expenses, can be summarized as follows:

  • the judgment on the indispensability of expenses incurred implies that their contribution to the obtaining of income or gains subject to tax or to the maintenance of the productive source be verified, and therefore "The legal notion of indispensability is carved out, therefore, from an economic-business perspective, by direct or indirect fulfillment of the ultimate motivation of contribution to the obtaining of profit" and "the tax deductibility of the cost depends, only, on a causal and justified relationship with the company's activity." (Decision of the Supreme Administrative Court, delivered on 30-11-2011, in proceeding No. 0107/11[7]);

  • "the costs (...) cannot but respect, from the start, the very taxpayer company itself. That is, for a certain amount to be considered a cost of that company, it is necessary that the respective activity be conducted by it itself, not by other companies." (Decision of the Supreme Administrative Court, delivered on 30-05-2012, in proceeding No. 0171/11);

  • "a concept of indispensability that, definitely departing from the idea of causality between expenses and income, places emphasis on the relationship of expenses with the activity pursued by the taxpayer, that is, considering that the said concept of indispensability is verified whenever expenses are incurred in the interest of the company, in the pursuit of its respective activities." (Decision of the Supreme Administrative Court, delivered on 04-09-2013, in proceeding No. 0164/12);

  • the concept of indispensability is of case-by-case determination, and the nexus of economic causality cannot be disconnected from the factuality of the specific case, such that "the Tax Authority cannot evaluate the indispensability of costs in light of criteria focusing on the opportuneness and merit of the expense. A cost is indispensable when it relates to the company's activity, and costs unrelated to the company's activity will be only those in which it is not possible to discern any causal nexus with the income or gains (or with the income, in the current expression of the code - see Article 23, No. 1, of the Corporate Income Tax Code), explained in terms of normality, necessity, congruence and economic rationality." (Decision of the South Central Administrative Court, delivered on 16-10-2014, proceeding No. 06754/13);

  • "The indispensability of the cost must simply result from its connection to business activity. If the cost is not unrelated to the company's activity, that is, if it relates to the normal activity of the company (regardless of whether the degree of intensity or proximity is greater or lesser), and if its existence is accepted (we are not dealing with an apparent or simulated cost), the cost is indispensable." (Decision of the North Central Administrative Court, delivered on 20-12-2011, proceeding No. 01747/06.3BEVIS);

  • "the legal notion of cost provided by Article 23 of the Corporate Income Tax Code does not result in the Tax Authority being able to call into question the principle of management freedom, examining the correctness and opportuneness of the company's management decisions and considering that only those from which directly accrue benefits for the company or which prove convenient for the company can be fiscally assumed. The indispensability to which Article 23 of the Corporate Income Tax Code refers as a condition for a cost to be deductible does not refer to necessity (the expense as a sine qua non condition of income), nor even to convenience (the expense as convenient for business organization), under pain of intolerable interference by the Tax Authority in the taxpayer's autonomy and freedom of management, but requires, solely, a relationship of economic causality, in the sense that it suffices that the cost be incurred in the interest of the company, in order, directly or indirectly, to obtain profits.

The legal notion of indispensability is carved out, therefore, from an economic-business perspective, by direct or indirect fulfillment of the ultimate motivation of contribution to the obtaining of profit. Indispensable costs are equivalent to expenses incurred in the interest of the company or, in other words, in all acts abstractly subsumable under a lucrative profile. This objective brings, purposefully, the economic and tax categories closer together, through a primarily logical and economic interpretation of legal causality. The essential expense is equivalent to every cost incurred in order to obtain income and which represents an economic decline for the company. As a rule, therefore, the tax deductibility of the cost depends, only, on a causal and justified relationship with the company's activity. And outside the concept of indispensability will fall only the acts inconsistent with the corporate purpose, those that do not fit within the company's interest, above all because they do not aim at profit." (Decision of the Supreme Administrative Court, delivered on 30-11-2011, proceeding No. 0107/11);

  • "The rule is that correctly accounted expenses be tax costs; the criterion of indispensability was created by the legislator, not to allow the Tax Administration to interfere in the company's management, dictating how it should apply its resources, but to prevent the tax consideration of expenses which, although accounted as costs, do not fall within the scope of the company's activity, were incurred not for its pursuit but for other interests. Strictly speaking, these are not true costs of the company, but expenses which, in view of their object, were abusively accounted as such. Without the Administration being able to evaluate the indispensability of costs in light of criteria focusing on their opportuneness and merit.

The concept of indispensability not only cannot be made equivalent to a strict judgment of absolute necessity, as has already been said, but also cannot be based on a judgment about the convenience of the expense, necessarily made a posteriori. For example, expenses made with an advertising campaign that proved fruitless cannot, solely on the basis of that result, be affirmed to be unnecessary.

The judgment on the opportuneness and convenience of expenses is exclusive to the entrepreneur. If he decides to make expenses in order to pursue the object of the company but is unsuccessful and those expenses prove, ultimately, unproductive, they do not cease to be tax costs. But any expense that he accounts as a cost and proves unrelated to the company's purpose is not a tax cost, because not indispensable.

We understand (...) that, under pain of violation of the principle of ability to pay, the Administration can only exclude expenses not directly ruled out by law under strong motivation that convinces that they were incurred beyond the corporate objective, that is, in the pursuit of another interest that is not business, or, at least, with clear excess, deviant, against the objective needs and capacities of the company." (Decision of the Supreme Administrative Court, delivered on 29-03-2006, proceeding No. 01236/05).

Having thus specified the criteria for assessing the indispensability of expenses, in light of Article 23 of the Corporate Income Tax Code, it remains, then, the operation of applying such criteria to the specific case, assessing, in that light, the arguments of the Tax Authority that support its position.

Having begun such an operation, it is meridianly clear that the understanding of the Tax Authority underlying the correction now in question is not capable of acceptance.

Indeed, and from the outset, integrating the real estate to which the disregarded amortizations refer into the assets of the Petitioner, and, as the Tax Authority itself recognizes and is proven, having the latter as its actual activity, among other things, the "Purchase and sale of real estate", there will be no margin for any reasonable doubt that the acquisition of the same was framed within the scope of the Petitioner's business activity, and that it entailed, from an objective point of view, the potential to generate income for it, thus existing "a causal and justified relationship with the company's activity."

This conclusion is not prejudiced by the circumstance, the basis of the correction made, that, in the year in question, the real estate in question did not generate income, since, as is, it is judged, today consensually recognized, the judgment to which Article 23 of the Corporate Income Tax Code refers is not measured in function of the results of the business option underlying the expense to be deducted.

Indeed, if, as transcribed above, "expenses made with an advertising campaign that proved fruitless cannot, solely on the basis of that result, be affirmed to be unnecessary", equally expenses incurred with the acquisition of real estate, by a company dedicated to the purchase and sale of real estate, and which, in the case, had them available for lease or sale, cannot be affirmed to be unnecessary, merely because, in a particular fiscal year, they did not generate income.

As was written in the Decision of the Supreme Administrative Court of 24/09/2014, delivered in proceeding 0779/12[8], "the Tax Authority cannot disregard the costs relating to the acquisition of two properties on the basis of failure to demonstrate indispensability, even if this business proves to be economically unprofitable".

It is not subscribed to, by the foregoing, the understanding sustained by the Respondent, according to which "only losses with amortizations of real estate registered as investment properties that have been used and have generated income subject to Corporate Income Tax can be accepted as deductible costs", and therefore "losses with amortizations of real estate registered as investment properties that have not been used and have not generated income subject to Corporate Income Tax cannot be deductible"[9].

It is concluded, thus, that this correction also suffers from error in the factual premises, and consequent error of law, and therefore, in this part as well, the arbitral petition should succeed.

C. DECISION

Wherefore it is decided in this Arbitral Tribunal to adjudge the arbitral petition filed to be well-founded and, in consequence:

a) To annul the Corporate Income Tax assessment act increased by No. 2015…, of 05-11-2015, relating to the fiscal year 2013, in the amount of € 292,211.18, and the administrative appeal decision No. …2016…, which was its subject matter;

b) To condemn the Respondent in the costs of the proceedings, fixed below.

D. Value of the proceedings

The value of the proceedings is fixed at € 292,211.18, in accordance with Article 97-A, No. 1, a), of the Tax Procedure and Process Code, applicable by virtue of subparagraphs a) and b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at € 4,284.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, payable by the Respondent, since the petition was completely well-founded, in accordance with Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of the cited Regulation.

Notify.

Lisbon, 2 May 2017

The Presiding Arbitrator

(José Pedro Carvalho - Relator)

The Arbitrator Member

(Nuno Cunha Rodrigues)

The Arbitrator Member

(Luís Baptista)

[1] In this sense, see, e.g., Decision of the South Central Administrative Court of 16-01-2007, delivered in proceeding 00911/03, available at www.dgsi.pt.

[2] See Article 48 of the Respondent's Response.

[3] See Article 49 of the Response.

[4] Available at www.dgsi.pt.

[5] Idem.

[6] Idem.

[7] Available at www.dgsi.pt, as with the remaining jurisprudence cited without indication of source.

[8] Available at www.dgsi.pt.

[9] Articles 63 and 64 of the Response.

Frequently Asked Questions

Automatically Created

What does Article 32(2) of the EBF say about the deductibility of financial charges related to capital holdings for IRC purposes?
Article 32(2) of the EBF limits the deductibility of financial charges (interest expenses) related to the acquisition of capital holdings for IRC purposes. The Tax Authority applied this provision through Circular 7/2004 to disallow €548,555.18 in the petitioner's expenses and €1,144,891.38 in a subsidiary's expenses, interpreting these as non-deductible financing costs connected to shareholding acquisitions. However, the petitioner contested this application, arguing the corrections involved error in factual premises and legal interpretation, particularly since no capital participations were acquired or disposed of during fiscal year 2013, and no financing for share acquisitions was contracted in that period.
How did the CAAD rule on the application of Circular 7/2004 to determine non-deductible financial expenses?
The arbitral tribunal in Process 710/2016-T examined whether the Tax Authority properly applied Circular 7/2004 to determine non-deductible financial expenses under Article 32(2) EBF. The petitioner challenged the application as illegal, citing errors in factual premises, improper interpretation and application of law, violation of the inquisitorial principle, improper resort to indirect evaluation methods, and breaches of essential formalities including violation of the constitutional principle of legality. A crucial established fact was that the petitioner did not acquire or dispose of any capital participations nor contract any financing for share acquisitions in 2013, potentially undermining the Tax Authority's basis for disallowing the financial charges as non-deductible under the participation financing limitation rules.
Can depreciation costs on unused immovable property be deducted under Articles 23 and 29 of the CIRC?
Under Articles 23 and 29 of the CIRC, the deductibility of depreciation costs on unused immovable property depends on whether the asset is intended for and available to generate taxable income. The Tax Authority rejected €8,384.48 in depreciation expenses for C... SA's real estate registered as investment property, arguing the property was not being used and had not generated IRC-taxable income. However, established facts showed the real estate was available for lease or sale during the year in question, and the company's statutory activity included 'purchase and sale of real estate and management of those it owns, namely, through their lease.' The petitioner contested this correction as involving error in factual premises and erroneous interpretation of Articles 23(1) and 29(3) CIRC, arguing that property held available for income-generating purposes should qualify for depreciation deductions even during temporary vacancy periods.
What is the burden of proof in IRC corrections involving indirect assessment methods by the Portuguese Tax Authority?
In IRC corrections involving the Tax Authority's assessment methods, Portuguese tax law establishes that the burden of proof generally falls on the Tax Authority to demonstrate the factual basis and legal grounds for corrections, particularly when using indirect assessment methods or making presumptions. The petitioner in Process 710/2016-T alleged improper resort to indirect evaluation methods and violation of the inquisitorial principle in the financial charges corrections. The principle of official correction (correcção oficiosa) requires the Tax Authority to properly investigate and substantiate factual premises before making corrections. When the Tax Authority relies on interpretative circulars like Circular 7/2004 rather than express statutory provisions, it bears heightened responsibility to demonstrate the factual circumstances justifying application of anti-abuse or limitation rules, respecting the constitutional principle of legality in taxation.
What was the outcome of CAAD arbitration process 710/2016-T regarding the IRC liquidation for the 2013 tax year?
Process 710/2016-T concerned a Corporate Income Tax (IRC) assessment for fiscal year 2013 totaling €292,211.18, challenged by a SGPS management company acting as the dominant entity in a group taxation regime. The case involved corrections of €1,693,446.56 related to allegedly non-deductible financial charges under Article 32(2) EBF and Circular 7/2004, plus €8,384.48 for rejected depreciation on unused investment real estate under Articles 23 and 29 CIRC. The petitioner had paid the assessment voluntarily and filed an unsuccessful administrative appeal before seeking CAAD arbitration, arguing the corrections involved errors in factual premises, improper legal interpretation, and procedural violations. The arbitral tribunal, constituted on 09-02-2017, established key facts including that no capital participations were acquired/disposed nor financing contracted in 2013, and the real estate was available for lease/sale, facts potentially supporting the petitioner's challenges to both categories of corrections.