IRC Withholding Tax on Interest Paid to Non-Residents: Double Taxation Convention and Proof Requirements (CAAD 715/2014-T)

ARBITRAL DECISION

Following the learned judgment delivered by the Central Administrative Court of the South on 16/12/2015, which has now become final and binding, declaring the nullity of the decision rendered in the present proceedings, it is necessary to render a new arbitral decision.

In this sense, a new arbitral decision is hereby rendered:

Arbitral Decision

I. REPORT

A…, S.A., with registered office at Rua …, …, … floor, Room …, …, …-… Porto, holder of the sole registration and identification number for a legal person …, hereinafter simply designated as Claimant, filed a request for constitution of an arbitral tribunal in tax matters and a request for arbitral ruling, pursuant to the provisions of Articles 2º no. 1 a), 10º no. 1 a) and 5º no. 3 a), all of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter abbreviated as RJAT), petitioning for a declaration of illegality and consequent annulment of the assessments of Corporate Income Tax (IRC), relating to the years 2009, 2010 and 2011, in the total amount of € 246,206.38, as well as the annulment of the act of dismissal of the corresponding administrative claim, the restitution to the Claimant of the amount paid, increased by the corresponding compensatory interest and default interest.

Subsidiarily, the Claimant also petitions the partial annulment of the challenged assessment acts, in the part corresponding to the amount of excessive withholding effected in relation to payments attributable to B… and the consequent restitution of the total value of € 117,915.41, increased by the corresponding compensatory interest and default interest.

To support its request, it alleges, in summary:

a) The Claimant was the subject of an inspection action by the Tax Directorate of …, with the objective and temporal scope of IRC for the fiscal years 2009, 2010 and 2011;

b) In the course of this inspection action, it was concluded that there were failures to effect source withholdings corresponding to interest paid to non-resident entities, in the fiscal years 2009, 2010 and 2011, from financing obtained from the banking consortium led by C…;

c) According to the Respondent, in view of the non-submission by the Claimant of Form Mod. 21-RFI, certified by the Swedish authorities, where C… is resident, the withholdings effected would have applicable rates of 20%, in the fiscal years 2009 and 2010, and a rate of 21.5%, in the fiscal year 2011;

d) Also within the scope of the inspection action, the Claimant voluntarily paid part of the amounts owing as source withholding;

e) After the conclusion of the inspection action, the Claimant submitted Forms Mod. 21-RFI relating to C… and to the entities belonging to the banking consortium, D…, E… and F…, requesting that these be certified and taken into consideration in the IRC assessments outstanding;

f) Following the delivery of these forms, the Tax Authorities promoted the revision of the IRC assessments relating to the years 2009 to 2011, in the part concerning the entities in respect of which the Claimant delivered the respective Forms Mod. 21-RFI;

g) As to the withholdings relating to B… and E…, the Claimant's request was dismissed, with the Tax Authorities arguing that it was necessary to present, as to the first, the Form Mod. 21-RFI, certified by the authorities of the State of residence and, as to the second, that a withholding rate of 15% would be applicable as provided in the Convention for the Avoidance of Double Taxation concluded between Portugal and Norway;

h) Notified of the assessments in dispute, the Claimant filed an administrative claim, arguing that the prerequisites provided in the respective Conventions for the Avoidance of Double Taxation concluded between Portugal and the States of residence of entities B… and E… were met;

i) Although the Claimant had not submitted the Form Mod. 21-RFI for the first of these entities, a document was submitted that was issued by the local authorities of the United Kingdom, certifying that B…, plc was resident in the United Kingdom, within the meaning of the respective Convention for the Avoidance of Double Taxation concluded between Portugal and the United Kingdom, during the years 2009 to 2013;

j) Proof of residence in another State may be effected by other means than Form Mod. 21-RFI, namely through the accompanying certificate of residence, such submission of Form Mod. 21-RFI being merely a formality ad probationem and not ad substantiam;

k) The administrative claim filed was dismissed by the Tax Authorities, because the Claimant had not submitted Form Mod. 21-RFI relating to B…, which according to the Tax Authorities was the sole means of proving that this entity is resident in the United Kingdom;

l) The reasoning put forward by the Tax Authorities to dismiss the administrative claim is not contained in the Tax Inspection Report, and the Tax Authorities cannot, in the course of an administrative claim, produce new arguments;

m) Given that the Tax Inspection Report concluded that there was a failure to effect source withholdings because Form Mod. 21-RFI relating to the State of residence of C… had not been submitted, and this form was subsequently submitted by the Claimant, the disputed assessment acts must be annulled;

n) The submission of Form Mod. 21-RFI does not flow from the Convention concluded, so its requirement violates the principle of proportionality and the Convention itself, and is therefore unconstitutional.

The Claimant submitted eight (8) documents and did not call any witnesses.

In the request for arbitral ruling, the Claimant chose not to appoint an arbitrator, so, pursuant to the provisions of Article 6º no. 2 of the RJAT, the signatories were appointed by the Ethics Council of the Administrative Arbitration Centre, with the appointment being accepted in the terms legally provided.

The arbitral tribunal was constituted on 23 December 2014.

Notified in accordance with and for the purposes of Article 17º of the RJAT, the Respondent filed a response, defending itself both by exception and on the merits.

By way of exception, it argued, in summary, that in the administrative claim filed by the Claimant nothing was alleged regarding the withholdings owing for the interest paid to C…, so the decision became final and, consequently, unchallengeable.

On the merits, it argued that:

a) Although the interest owing was paid by the Claimant to C…, the truth is that this banking entity only received these amounts as agent for the entities making up the consortium, and is not the effective and complete beneficial owner of these income;

b) The verification of the existence of the prerequisites provided in the Conventions for the Avoidance of Double Taxation must be assessed in relation to each of the entities making up the consortium;

c) The certificate of residence submitted by the Claimant relating to B… does not constitute evidentiary material capable of assessing the verification of the prerequisites provided in the Convention for the Avoidance of Double Taxation concluded between Portugal and the United Kingdom;

d) Moreover, such certificate of residence is drafted in a foreign language, with the Claimant having submitted no translation, nor having the certificate been legalized through the affixing of the appropriate apostille provided for in Article 3 of the Convention on the Abolition of the Requirement of Legalization of Foreign Public Documents;

e) Article 98º of the CIRC requires the submission of Form Mod. 21-RFI as a prerequisite for the application of any Convention for the Avoidance of Double Taxation;

f) Having not been submitted by the Claimant the said Form Mod. 21-RFI completed and certified by the United Kingdom authorities, nor having adequately justified the impossibility of such submission, the Convention for the Avoidance of Double Taxation cannot be applied to the interest paid to this entity;

g) As regards the payments made to E…, this entity being based in Norway, and Form Mod. 21-RFI having been submitted by the Claimant, the prerequisites for the application of the Convention for the Avoidance of Double Taxation concluded between Portugal and Norway are met, so the source withholding rate applied was that provided in Article 11º no. 2 of the Convention, that is, 15%, with nothing to be altered in this regard;

h) There is no existence of any new elements in the reasoning presented in the decision on the administrative claim by reference to the reasoning presented in the Tax Inspection Report;

i) The requirement to submit Form Mod. 21-RFI does not violate the principle of proportionality, nor the Convention for the Avoidance of Double Taxation, and therefore there is no unconstitutionality.

It concludes by petitioning for the success of the exception invoked and the consequent maintenance of the disputed assessment acts, or if this is not upheld, the dismissal of the claim, with the legal consequences.

The Respondent submitted a copy of the administrative file and did not call any witnesses.

In its reply, the Claimant argued that the object of the request for arbitral ruling is the assessment acts and not the act that decided the administrative claim, and is therefore irrelevant to the grounds invoked in the administrative claim.

It concludes by petitioning for the dismissal of the exception invoked by the Tax Authorities.

Given the position assumed by the parties and the absence of any need for additional evidence, the meeting referred to in Article 18º of the RJAT was dispensed with.

The Parties submitted written pleadings, in which they maintained and developed the positions previously assumed and argued in their pleadings.

A final decision was rendered on 16-06-2015, which by judgment of the Central Administrative Court of the South on 16/12/2015, which has now become final and binding, was declared null.

II. ISSUES TO BE DECIDED

In the present proceedings it is necessary to determine:

a) Whether, the Claimant having not raised any issue when it filed an administrative claim against the assessments made regarding the interest paid to C…, questions relating to that part may now be considered;

b) Whether, given that the Tax Inspection Report concluded that there were failures to effect source withholdings in the absence of submission of Form Mod. 21-RFI relating to C…, the Tax Authorities may subsequently require submission of the same form in relation to each of the entities making up the consortium led by said C…;

c) Whether submission of Form Mod. 21-RFI is an essential requirement for verification of the prerequisites for the application of the Convention for the Avoidance of Double Taxation or whether, on the contrary, such verification may be effected by any other means of proof;

d) Whether the certificate of residence issued by local authorities constitutes a suitable means of proof of verification of the prerequisites for the application of the Convention for the Avoidance of Double Taxation.

III. FACTS

a. Proven Facts:

With relevance for the decision to be rendered in the present proceedings, the following facts were established as proven:

• In the fiscal years 2009, 2010 and 2011, the Claimant paid accrued interest relating to financing obtained from banking entities that made up a consortium led by C…;

• By dispatch of 23/02/2012 an order was issued for the issuance of an External Inspection Order of partial scope, having as its object the IRC of the fiscal years 2009 and 2010;

• By dispatch of 26/11/2012 an extension was determined of the Inspection Order issued, now also covering the fiscal year 2011;

• The inspection action took place between 13/09/2012 and 07/08/2013;

• By dispatches of 11/02/2013 and 20/05/2013 the periods of the inspection procedure were extended by two additional periods of three months;

• In the course of the inspection action it was concluded that there were failures to effect source withholdings corresponding to interest paid to non-resident entities, namely to C…, D…, E…, F… and B…, from financing obtained from the banking consortium led by C…;

• By letter dated 09/08/2013, the Claimant was notified of the draft Tax Inspection Report and to exercise, if desired, the respective right of hearing;

• On 28/08/2013 the Claimant made payments corresponding to the amounts that would be owing in the event that, in relation to all entities referred to above, the respective Conventions for the Avoidance of Double Taxation would be applicable;

• On 6/09/2013, the Claimant exercised its right of hearing, attaching copies of certificates of residence for C… issued and certified by the Swedish tax authorities, relating to the years 2009 to 2011;

• By letter dated 12/09/2013, the Claimant was notified of the Tax Inspection Report, which concluded that proof had not been made of the verification of the prerequisites provided in the Convention for the Avoidance of Double Taxation concluded between Portugal and Sweden, so it was considered that the source withholdings of IRC on the interest paid should have been effected at a rate of 20% in the years 2009 and 2010 and 21.5% in the year 2011;

• Following the conclusions of the Tax Inspection Report, IRC assessments no. 2013…, 2013… and 2013…, relating to the fiscal years 2009, 2010 and 2011 respectively, were issued on 17/09/2013;

• These assessments included the amounts relating to source withholdings that the Tax Authorities understood to be owing regarding payments made to entities C…, D…, E…, F… and B…, applying a rate of 20% as to the fiscal years 2009 and 2010, and 21.5% as to the fiscal year 2011;

• On 23/09/2013, 03/10/2013 and 22/10/2013, the Claimant submitted to the Tax Directorate Services Forms Mod. 21-RFI duly certified by the respective tax authorities, relating to C…, D…, E… and F…, concerning the fiscal years 2009 to 2011, in the terms and with the contents stated in pages 300 to 305 and 375 and 376 of the attached Administrative File, which are hereby fully reproduced;

• The Tax Authorities proceeded to a partial revision of the assessments made, partially annulling the withholdings relating to payments made to entities C…, D…, F… and E…;

• The assessments in dispute include the source withholdings calculated by application of rates of 20%, in the fiscal years 2009 and 2010, and 21.5% in the fiscal year 2011, regarding interest paid to B… and the source withholdings calculated by application of 15% regarding interest paid to E….

• On 17/12/2013, the Claimant proceeded to payment of the amounts assessed regarding E… and B…, in the total value of € 246,206.49, on the dates stated in the document attached with the initial petition under no. 7, the contents of which are hereby fully reproduced;

• The Claimant filed an administrative claim against the assessments issued regarding the source withholdings owing for the payments made to E… and B…, attaching a certificate of residence issued by the competent local authorities of the United Kingdom, certifying that B…, plc was resident in the United Kingdom, within the meaning of the respective Convention for the Avoidance of Double Taxation concluded between Portugal and the United Kingdom, during the years 2009 to 2013, and was, in that period, subject to tax on the income of legal persons without possibility of exemption;

• By fax sent on 14/08/2014, the Claimant was notified of the draft dismissal of the administrative claim and to exercise, if desired, within 15 days, the right of hearing provided for in Article 60º of the General Tax Law;

• On 16/09/2014, the Claimant exercised the right of hearing;

• By letter dated 30/09/2014, the Claimant was notified of the dispatch of dismissal of the administrative claim, with the grounds stated in document no. 6 submitted by the Claimant with the initial petition.

b. Unproven Facts:

With interest in the proceedings, there is no factual matter that remains unproven.

c. Substantiation of the Facts:

The conviction regarding the facts established as proven was based on the documentary evidence submitted by the Claimant, indicated in relation to each point.

Regarding the certificate of residence, drafted in a foreign language, submitted by the Claimant under number 8, the probative value of which was questioned by the Respondent, both because it had not been translated and because it had not been legalized, the following should be noted:

Although the document submitted was not accompanied by any translation, the truth is that it is drafted in English, which may be considered as known to all the procedural participants and to the tribunal itself.

Furthermore, the terms in which such document is drafted cannot be considered other than "commonplace," with no special knowledge of English being required for its proper interpretation.

That said, Article 134º no. 1 of the Code of Civil Procedure provides:

"When documents written in a foreign language are offered which lack a translation, the judge, ex officio, or at the request of any of the parties, orders that the presenter submit one" (emphasis added).

Given the clearly evident simplicity of the document submitted, it seems evident that it does not require translation, so translation is dispensed with.

Having said that, upon analysis of the document in question, it is verified that the seal of the issuing services was affixed to it, thus constituting an authentic document – Articles 370º, no. 1 and 369º, both of the Civil Code.

It is true that, as emphasized by the Respondent, this document is not legalized in accordance with and for the purposes of Article 440º of the Code of Civil Procedure.

However, as expressly results from no. 2 of Article 365º of the Civil Code, legalization of the document will only be required pursuant to the rules of procedure in the event there are "founded doubts regarding its authenticity or the authenticity of its acknowledgment."

Indeed, as is today unanimously accepted and upheld by jurisprudence, the legalization of documents executed in a foreign country is not a requirement of their authenticity, which only becomes necessary when founded doubts are raised regarding that authenticity – in this sense see, among others, Judgments of the Supreme Court of Justice of 05DEZ2002 and 12JUL2011, cases 02B3970 and 987/10.5YRLSB.S1, both in www.dgsi.pt.

In the same sense, doctrine has held that the requirement for legalization of documents executed in a foreign country, in conformity with that country's law, has in principle been abolished. Courts, like any public authorities, must therefore attribute full probative value to such documents, regardless of legalization. This, however, may become obligatory if doubts arise regarding its authenticity or the authenticity of its acknowledgment – see PIRES DE LIMA and ANTUNES VARELA, Annotated Civil Code, Volume I, 4th Edition, page 324; in the same sense, see JOSÉ LEBRE DE FREITAS, A. MONTALVÃO and RUI PINTO, Annotated Code of Civil Procedure, Volume II, 2nd Edition, page 474.

That said, it is necessary to verify whether, upon analysis of the document submitted by the Claimant, any doubt is raised regarding its authenticity.

And the answer to this question cannot but be negative: the document in question raises no doubt to this tribunal regarding its authenticity.

Thus, there being no doubts regarding the authenticity of this document, it is not necessary to proceed with its legalization pursuant to the rules of procedure.

B. LAW

As a preliminary matter to the consideration of the merits of the case, the Tax Authorities raise the question that:

(1) Given that the Claimant did not challenge in the administrative claim the decision-making segment regarding C…;

(2) Nor did it challenge the dispatch that dismissed the request for official revision, obscuring the substance inherent in the submitted form, it thus became horizontally final, and from that moment forward, became unchallengeable, wherefore, the Tax Authorities submit, the content of the arbitral request should be declared without merit in that part, as unchallengeable, and consequently, the Respondent absolved of the claim, in accordance with clause c), no. 1, Article 89º of the Administrative Procedure Code, applicable by virtue of Article 29º, no. 1, clause c) of Decree-Law no. 10/2011, of 20 January.

As the Claimant correctly notes, however, "the real object of the request for arbitral ruling is the assessment act and not the act that decided the administrative claim, such that the defects of the assessment act are in dispute."

In that sense, Article 99º of the Tax Procedure Code, applicable by force of Article 29º/1 of the RJAT, provides that "Any illegality (…) constitutes a ground for challenge," in accordance with the exemplary enumeration provided there.

Thus, and as was decided, among others, in the Judgment of the Supreme Administrative Court of 18-05-2011, rendered in case 0156/11:

"I - The real object of the challenge is the assessment act and not the act that decided the administrative claim, so it is the defects of that act and not this dispatch that are truly in dispute.

II - The challenge is not, therefore, limited by the grounds invoked in the administrative claim, and may be based on any illegality of the tax act."

The preliminary objection raised by the Tax Authorities is therefore without merit.

The first issue raised by the Claimant concerns the understanding that "Given that the assessment acts in dispute were based in the Tax Inspection Report on the absence of submission of Form Mod. 21-RFI relating to C…, to whom the interest was paid, certified by the Swedish tax authorities, and this same form was subsequently submitted by the Claimant, there is no other alternative but the annulment of the disputed assessment acts."

With all due respect, it is understood that the Claimant is missing the proper framing of the tax procedure that has taken place.

Indeed, the decision of the administrative claim procedure is a second-level act, which has as its object the primary assessment act, which may legitimately be revoked, in whole or in part (see Article 138º of the Administrative Procedure Code).

Now, precisely this is what happened; the Tax Authorities, confronted with the factual error evidenced by the submission of Form Mod. 21-RFI relating to C…, certified by the Swedish tax authorities, revoked, within the scope of their legal powers, the primary assessment act, and instead issued the decision act of the administrative claim, in the terms established as proven.

Thus, contrary to what the Claimant wishes to argue, the alleged circumstance does not obtain that "In response to the administrative claim filed, the Tax Directorate attempted new reasoning for the assessments in question, different from the reasoning contained in the Tax Inspection Report."

It is not, obviously, reasoning after the fact, but rather the reasoning of the decision act of the administrative claim, which is an autonomous tax act capable of producing its own legal-tax effects.

The alleged "defect of factual and legal reasoning" raised by the Claimant not obtaining, to the extent that the part to which it refers was revoked and replaced by the decision act of the administrative claim, should, in this part, the arbitral request be dismissed.

It remains to consider whether, for application of the Double Taxation Convention with the United Kingdom, regarding the interest payments attributable to B…, submission of Form Mod. 21-RFI is indispensable, as the Tax Authorities argue, or whether the declaration issued by the tax authorities of the United Kingdom, referred to in point 17 of the proven facts, is sufficient, as the Claimant argues.

To this end, the Tax Authorities argue that "Dispatch no. 4743-A/2008, of 8/2, of the Minister of Finance, approved models of forms for verification of the prerequisites upon which the application of conventions on international double taxation depends, intended to request total or partial exemption from source withholding. In this context, given that in domestic law there is a rule such as Article 98º of the CIRC, which requires compliance with the submission of Form Mod. 21-RFI, there is no doubt that, to trigger a convention for avoidance of double taxation concluded by Portugal, the use of the official model form is indispensable."

The Tax Authorities further note that "the United Kingdom does not appear on the list of countries that reported the impossibility of certifying Forms Mod. 21 RFI, as appears from the Tax Authorities website."

And it adds that "said form contains specific fields that allow verification and certification that a particular entity is not resident in Portuguese territory, and also allows certification of other information that is, moreover, listed in domestic law:

a) Identification of the effective beneficial owner of the payments attributable to the paying company;

b) Identification of the nature of the income in question;

c) Confirmation of the existence or non-existence of a permanent establishment in Portuguese territory;

d) Confirmation of participation equal to or greater than 10% in the capital of the debtor entity;

e) Identification of the non-resident financial intermediary;"

The Tax Authorities conclude that the non-submission of the certificate "makes it impossible for the Claimant to benefit from the application of the Convention for the Avoidance of Double Taxation concluded between Portugal and the United Kingdom."

Let us examine this.

Article 90º-A of the CIRC and the current Article 98º of the same code provided:

"1 - There is no obligation to effect source withholding of IRC, in whole or in part, as appropriate, regarding the income referred to in no. 1 of Article 94º of the IRC Code, when, by force of a convention intended to eliminate double taxation or another international agreement binding the Portuguese State, or by domestic legislation, the authority to tax the income earned by an entity that does not have its seat or effective management in Portuguese territory and does not possess a permanent establishment to which the same are attributable is not attributed to the source State or is only attributed in a limited way.

2 — In the situations referred to in the preceding number, as well as in clause g) of no. 4 of Article 87º, the beneficiaries of the income must make proof to the entity obligated to effect source withholding, until the end of the term established for delivery of the tax that should have been deducted in accordance with the applicable legal rules:

a) Of the verification of the prerequisites arising from a convention intended to eliminate double taxation or another international agreement or from the applicable domestic legislation, through submission of a form model to be approved by dispatch of the Minister of Finance certified by the competent authorities of the respective State of residence: (...)."

Now, in the present case, it is verified that, to provide proof of the exemption from the obligation to effect source withholding regarding interest paid, the Claimant submitted to the respective services the Forms Mod. 21-RFI duly certified by the tax authorities of the States of residence of all the beneficiary entities of the income, with the exception of that relating to B…, plc.

As regards B…, plc, the Claimant only delivered, together with the administrative claim filed, a certificate of residence issued by the competent legal authorities of the United Kingdom, certifying that B…, plc was resident in the United Kingdom, within the meaning of the respective Convention for the Avoidance of Double Taxation concluded between Portugal and the United Kingdom, during the years 2009 to 2013, and was, in that period, subject to tax on the income of legal persons, without possibility of exemption.

Given that the Claimant did not submit the Form Mod. 21-RFI required by the Tax Authorities, it is necessary to analyze whether submission of this form is considered an essential requirement for verification of the prerequisites for the application of the Convention for the Avoidance of Double Taxation or whether, on the contrary, such verification may be effected by any other suitable means of proof.

As has been increasingly upheld by jurisprudence, submission of Form Mod. 21-RFI is merely a formality ad probationem and not ad substantiam, so proof of residence in another State may be effected by any other suitable means and not exclusively and solely by the aforementioned form.

See, in this sense, the Judgment of the Supreme Administrative Court, case no. 0283/11, of 22JUN2011, available at www.dgsi.pt, which considers that:

"III - These forms do not constitute requirements "ad substantiam," residence proof being merely a requirement "ad probationem," since certification of residence is an act of mere acknowledgment of the prerequisites of the benefits provided for in the conventions, with the Tax Authorities limited to confirmation of those prerequisites, such that what truly matters is the effective verification of the respective prerequisites, so these forms should not constitute the sole means of proof necessary to certify residence.

IV - Thus, although not corresponding to the current official model, with the certificates of residence submitted attesting to residence and showing themselves certified by the respective tax authority, they should be accepted by the Tax Authorities as effective proof of the residence of those entities" (emphasis added).

It is understood, therefore, that verification of the prerequisites for the application of the Convention for the Avoidance of Double Taxation is not exclusively dependent on submission of Form Mod. 21-RFI, such that proof of those prerequisites may be made by any other suitable means.

Having established that proof of verification of the prerequisites provided in the Double Taxation Convention may be effected by any suitable means, and not solely through submission of Form Mod. 21-RFI, let us now examine whether the certificate of residence submitted by the Claimant constitutes a suitable means to such proof.

To this end, Articles 11º nos. 1 and 2 of the Convention under analysis provide:

"1) Interest arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

1. However, such interest may be taxed in the Contracting State from which it arises and in accordance with the law of that State; but, when the resident of the other Contracting State is subject to tax therein for such interest, the tax so imposed in the first-mentioned State shall not exceed 10 per cent of the amount of the interest." (emphasis added).

Thus, for the Double Taxation Convention to be applicable to the circumstances of the present case, it will be necessary to prove that (i) B… is resident in the United Kingdom and (ii) B… is subject, in the United Kingdom, to tax on the interest paid by the Claimant.

And that proof was made, as results from the proven facts – point 17 - through the certificate of residence issued by the competent local authorities of the United Kingdom, certifying, moreover, that the entity in question was, in the periods 2009 to 2013, resident there and subject in the United Kingdom to tax on the income of legal persons, without possibility of exemption.

Note that the certificate of residence submitted ends up fully accomplishing the objectives sought with submission of Form Mod. 21-RFI, that is, proof of tax residence of the beneficiary entity of the income subject to taxation in another Contracting State.

So much so that, similar to the field "III - Certification by the Competent Tax Authorities of the State of Residence of the Effective Beneficial Owner" of the respective form, the certificate of residence submitted declares exactly the same as the form, that is, that the beneficiary entity of the income is tax resident in the United Kingdom, for purposes of the Convention for the Avoidance of Double Taxation concluded between Portugal and the United Kingdom, in the years 2009 to 2013, having been subject to such tax during the indicated period.

Nor may it be said, as the Respondent does, that Form Mod. 21-RFI contains other information besides what is contained in the certificate of residence submitted by the Claimant.

It is true that Form Mod. 21-RFI contains other elements not listed in the certificate of residence submitted, namely, (i) as to the credits: their nature, date of constitution and value; (ii) as to the beneficiary: information on the existence or non-existence of a permanent establishment in Portugal; confirmation of participation in the capital or governing bodies of the debtor; and signature; and (iii) identification of the debtor.

But are these elements essential to verification of the prerequisites provided in the Double Taxation Convention? It seems evident that they are not.

Indeed, the only essential element not contained in the certificate of residence submitted would be identification of the nature of the credits, in order to determine which regime provided in the Double Taxation Convention would apply.

In the case of the present proceedings, however, at the time of the disputed assessments, the Respondent already possessed that element, which became known in the course of the inspection action.

The prerequisites upon which Article 11º of the Double Taxation Convention makes the possibility of its application dependent are thus met.

And this, note well, despite the current Article 98º no. 2 of the CIRC (as well as the prior 90º-A no. 2) providing that proof of verification of the prerequisites provided in the Double Taxation Convention be effected by the end of the term established for delivery of the tax, with no. 5 of the same article providing that, if such proof is not effected, the tax substitute remains obligated to deliver the entirety of the tax that should have been deducted in accordance with the law.

For, as expressly results from no. 6 of the same provision, the responsibility to which the preceding number refers (that is, the responsibility for delivery of the entirety of the tax that should have been deducted in accordance with the law) may be eliminated whenever the tax substitute proves verification of the prerequisites for total or partial exemption from withholding.

This no. 6 thus provides that proof of verification of the prerequisites provided in the Double Taxation Convention may be effected subsequently, without prejudice to administrative liability.

This means that, despite the Claimant not having made proof of verification of the prerequisites provided in the Double Taxation Convention within the legally fixed term, it is not thereby obligated to deliver the entirety of the tax that should have been deducted in accordance with the law, in view of the fact that it subsequently made such proof.

To this end, see, among others, the Judgment no. 0732/09 of the Supreme Administrative Court, of 24/02/2010, available at www.dgsi.pt:

"As results from these provisions, although the non-submission of the form referred to in clause a) of no. 2, by the beneficiaries of the income, by the end of the term established for delivery of the tax generates the obligations of the tax substitute to effect IRC withholding and, when it has not effected it, deliver the entirety of the tax that should have been deducted, it is admitted, in no. 6, that this responsibility be eliminated whenever the tax substitute proves with the document referred to in no. 2 verification of the prerequisites for exemption from withholding."

In the same sense, the Supreme Administrative Court understood, in Judgment no. 0518/09, of 21OUT2009, available at www.dgsi.pt, that, having resulted proven that the claimant submitted to the record certificates of tax residence issued by the tax authorities of the countries of the societies beneficiary to the income, the requisites provided in the cited rule are met to eliminate the responsibility of the tax substitute for failure to deliver the entirety of the tax that should have been deducted.

In the same way, it results from the Judgment of the Supreme Administrative Court, case no. 0810/08, of 21JAN2009, available at www.dgsi.pt, that having been submitted to the record certificates of tax residence issued by the tax authorities of the respective countries relating to the societies beneficiary to the income paid, the duty to deliver the entirety of the tax that should have been deducted was consequently eliminated. A fact that in itself caused the prerequisite of legal responsibility to disappear from the legal order that conferred lawfulness on the disputed additional assessment.

Such that, by submitting the certificate of residence relating to B…, issued by the competent local authorities of the United Kingdom, certifying that this entity, during the fiscal years 2009 to 2013, was resident there and subject to tax on income, without possibility of exemption, the Claimant succeeded in eliminating the responsibility for delivery of the tax, to which no. 5 of Article 98º of the CIRC refers (and no. 5 of the prior 90º-A).

In light of the foregoing, although at the time of the assessments made the Respondent did not have elements that would allow it to conclude verification, as to interest paid to B…, of the prerequisites provided in the Double Taxation Convention, the fact remains that, having subsequently to the assessments the Claimant submitted the certificate of residence referred to above, the prerequisite of legal responsibility disappeared from the legal order that conferred lawfulness on the disputed assessments, so their annulment is required, in this part – in this sense, see Judgment of the Supreme Administrative Court of 21JAN2009, already cited.

It is now necessary to analyze whether the Claimant is correct in what it states regarding the rate that it argues should be applicable to the source withholdings for interest paid to E….

As to this interest, the Claimant argues that the rate of 10% should apply, as provided in the Convention for the Avoidance of Double Taxation concluded between Portugal and Sweden, and not the rate of 15%, provided in the Convention for the Avoidance of Double Taxation concluded between Portugal and Norway.

This is because, according to the Claimant, as E… is part of a consortium based in Sweden, the Double Taxation Convention concluded between Portugal and the country of the seat of the banking consortium would apply, that is, Sweden.

But this is without merit, as we shall see.

In fact, for purposes of application of the Double Taxation Convention, what matters is knowing which entity is the actual beneficiary of the income paid by the Claimant.

In the case at hand, it was proven – see point 6 - that the income owing by way of interest was paid not to the consortium led by C…, based in Sweden, but rather to each of the entities that make it up.

Thus, for purposes of determining the applicable Double Taxation Convention, account must be taken of the country of the seat of each of those entities.

In the case, E…, as expressly results from Form Mod. 21-RFI at pages 304 and 305 of the attached Administrative File, has its seat in Norway, so to the income paid to this entity only the convention concluded with that country may be applicable and not the convention concluded with Sweden.

Wherefore, the Claimant is without merit in this regard, and the disputed assessments should not, in consequence, be annulled, in this part.

Lastly, it is necessary to address the Claimant's request regarding payment of compensatory interest.

The question of possible payment of this interest arises only as to the part relating to the annulled assessments, since as to the part of the assessments not annulled, the Respondent would never have had the right to receive any interest.

To this end, no. 1 of Article 43º of the General Tax Law provides:

"Compensatory interest is owing when it is determined, in an administrative claim or judicial challenge, that there was error imputable to the services resulting in payment of the tax debt in an amount greater than legally owing."

In the case of the present proceedings, as results from the above, at the time of preparation of the disputed assessments (17/09/2013), the Tax Authorities did not possess any elements that would allow them not to assess the tax owing for the interest paid to B… at the rate at which they did.

This is because the Claimant only submitted the certificate of residence relating to B… after preparation of the assessments, specifically upon filing the administrative claim.

Thus, it cannot be argued that the disputed assessments were determined by erroneous application of law or error imputable to the services. Rather, the assessments were made based on a prerequisite (non-existence of proof of verification of the prerequisites provided in the Double Taxation Convention) that existed at that time and which, by fact not imputable to the Tax Authorities, subsequently disappeared (upon submission, by the Claimant, of the certificate of residence relating to B…).

Therefore, the requested condemnation of the Tax Authorities to payment of compensatory interest is without merit.

In light of the foregoing, the disputed assessments should be partially annulled, in the part corresponding to the amount of excessive withholding effected regarding payments made to B…, plc with the consequent restitution of the total value of € 117,915.41, increased by default interest.

C. DECISION

Wherefore, this Arbitral Tribunal decides:

a) To render partially successful the claim for declaration of illegality of the disputed Corporate Income Tax assessments, with their consequent annulment, in the part relating to the withholdings owing for the interest paid to B…;

b) To order the Tax Authorities to proceed with reimbursement to the Claimant of the amount unduly paid, in the amount of € 117,915.41, increased by default interest at the legal rate, counted from the date of filing of the administrative claim until full restitution of the amounts paid;

c) To render unsuccessful the claim for payment of compensatory interest.

D. Value of the Proceedings

The value of the proceedings is fixed at € 246,206.38, in accordance with Article 97º-A, no. 1, a), of the Tax Procedure Code, applicable by force of clauses a) and b) of no. 1 of Article 29º of the RJAT and no. 2 of Article 3º of the Regulations of Costs in Tax Arbitration Proceedings.

E. Costs

In accordance with the provisions of no. 2 of Article 12º and no. 4 of Article 22º of the RJAT and Article 4º of the Regulations of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 4,284.00 in accordance with Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, to be paid by the Claimant and Respondent, in proportion to their respective failure to succeed, being € 2,052.61 at the charge of the Respondent and € 2,232.39 at the charge of the Claimant.

Notice to be given.

Lisbon, 15 September 2016.

The Presiding Arbitrator

(José Pedro Carvalho - Dissenting)

The Arbitrator Panel Member

(Alberto Amorim Pereira)

The Arbitrator Panel Member

(Carlos Lobo)

Text prepared by computer, in accordance with no. 5 of Article 131º of the Code of Civil Procedure, applicable by reference of clause e) of no. 1 of Article 29º of Decree-Law no. 10/2011, of 20/01, with its editing governed by old spelling.

DISSENTING OPINION

I voted against the decision because, essentially, it seems to me that a principled approach substantially different from the one upon which the decision is based would be appropriate.

Indeed, the prevailing decision treats the tax obligor and the tax substitute in the same manner, whereas in my view they are in distinct positions relative to Portuguese tax law, which justify differentiated treatment.

Thus, first of all, it seems to me that the tax relationship between the Portuguese State and the tax obligor is a matter of domestic law, to which the Double Taxation Convention will not directly apply, and contrary to what occurs with the tax obligor, the Double Taxation Convention. The regime of the latter will, in my better judgment, be a prerequisite of the obligations proper to the tax relationship proper to domestic law, and not itself the regime of the tax relationship between the Portuguese State and the tax obligor.

By contrast, the prevailing decision, as several passages of it demonstrate, seems to understand that the source of the rights and obligations of the Claimant (the tax substitute) is the Double Taxation Convention. And it is this understanding that underlies what was decided, as to the character ad probationem of Form Mod. 21-RFI certified, in the tax relationship between the Portuguese State and the Claimant.

In my view, that certificate will indeed have the referred character in tax relationships between the Portuguese State and the tax obligor, with that character ad probationem deriving not only from the interpretation of the Double Taxation Convention made by the prevailing decision, but from Article 73º of the General Tax Law itself.

One does not disagree, therefore, with the principle that, for purposes of application of the Double Taxation Convention, the "form model to be approved by dispatch of the member of the Government responsible for the finance area" is intended solely to verify residence in a foreign country, and cannot this form constitute the sole means of proof suited to certify such residence. But this will be valid solely in the relationship between the tax obligor (the tax obligor) and the Tax Authorities.

As to the tax obligor, this will not occur, because that entity, contrary to what appears to underlie the prevailing decision, is not being taxed.

That is: the assessment to the Claimant will not depend on whether the tax is owed, or not, and much less on it being owed by it, but solely on whether the source withholding should have been, or not, carried out. It is not being discussed, therefore, in the present case whether B… is or is not subject to IRC in Portugal, for the interest it earned, but merely whether the Claimant was, or was not, obligated to effect source withholding on the payments it made to it.

The tax obligation of the Claimant to the Portuguese State will thus derive, not from a manifestation of its own tax capacity, but from responsibility for non-compliance with an ancillary tax obligation incumbent upon it. The Claimant's source withholding obligation is thus founded, not on the Double Taxation Convention (whose application is not in question), but solely on domestic law. The question between the Claimant (tax substitute) and the Tax Authorities will be a domestic question. The source withholding obligation rests on it, as a resident entity that made a payment to a non-resident. It is an obligation proper to the Claimant, and may only be eliminated by presentation of the form, given the combined content of nos. 2 and 6 of the current Article 98º. With respect to the Claimant, the form is not intended to prove anything; it is intended to exempt it from the source withholding obligation, which will be an obligation distinct and independent of the tax payment obligation.

In sum, in the absence of the form, the Claimant was obligated to withhold, in the payments it made, a certain amount. And it will only be able to relieve itself, a posteriori, of that obligation by presenting the said form.

This is, moreover, what expressly results from no. 6 of Article 90º-A of the CIRC, in the form given by Law 67-A/2007, of 31 December (cited, in my view, contra legem, by the prevailing decision), in providing that:

"Without prejudice to administrative liability, the responsibility established in the preceding number may be eliminated whenever the tax substitute proves with the document referred to in no. 2 of this article and nos. 3 et seq. of Article 14º, as appropriate, verification of the prerequisites for total or partial exemption from withholding."

On the other hand, one cannot ignore the current form of Article 98º/7 of the CIRC, as given by Law no. 2/2014, of 16 January, which provides, alternatively to certification of the form approved by the Ministry of Finance, submission of "a document issued by the competent authorities of the respective State of residence, which attests to its residence for tax purposes in the period in question and subjection to income tax in that State," and which should be considered as having, in its scope of application, an interpretive character.

This rule, in its current form, reflects, on the one hand, the distinct situation of the tax substitute and the tax obligor in the matter at issue, and, on the other hand, in providing for the possibility of submission of "a document issued by the competent authorities of the respective State of residence, which attests to its residence for tax purposes in the period in question and subjection to income tax in that State" – which, note well, is the document the Claimant in the present case (which, recall, is the tax substitute) presents – only by the tax obligor, and not by the tax substitute, makes clear what must always have been the legislative intent to, with respect to the latter, and given the nature of the obligation (source withholding) incumbent upon it, as well as the economic neutrality of it, wish to limit to a strictly formal requirement, the operativity, or not, of that same obligation.

The legislative intent thus appears clear that the tax substitute is barred from review of the "materiality" of the prerequisites for application of the Double Taxation Convention. That entity will, in my better judgment, be limited to verifying whether, in light of the law, it is or is not obligated to effect source withholding. In the case, the tax substitute should only verify whether the form is presented to it in time and, being so, whether it is or is not compliant, withholding, in accordance with law, if it is not (or if not presented). The discussion of the "materiality" of application of the convention will always, in my better judgment, be legally reserved to the tax obligor, who, burdened with the withholding it deems undue, should discuss the matter directly with the Tax Authorities.

The understanding that prevailed will permit, from the outset, that even without having in its possession the document referred to in Article 98º of the CIRC, the tax substitute, if it possesses proof that, in its judgment, demonstrates the applicability of the Double Taxation Convention, will not, lawfully, effect any withholding!

It is clear that the needs for predictability and certainty underlying the source withholding regime, in general, and as to payments to non-resident entities, in particular, do not tolerate the disruption that the doctrine resulting from the prevailing decision instills in it.

Rather, considering, in sum, that:

• the position of the tax substitute should be one of, in doubt, effecting the withholding, transferring the burden of discussion of the legitimacy of taxation to the tax obligor;

• withholding, in a timely manner is economically neutral for the tax substitute, in that it is the tax obligor whose income sees the tax withheld deducted;

• the prevailing understanding should be that, as to the tax obligor, and in the framework of the current no. 7 of Article 98º of the CIRC, formalities have the character ad probationem;

• the tax obligor, as a contributor of the foreign State that should, as a rule, certify its tax residence and other requisites, will not have any considerable difficulty in obtaining the proof necessary to demonstrate those;

it is not perceived that any legitimate interests or, much less, rights of the tax substitute are unjustifiably subordinated, ensuring, competently, and in a manner proportionate and appropriate, the needs for certainty and legal security that the tax order postulates regarding the matter relating to payment of income owing to non-resident entities.

Given the regime legally in force, it may thus:

• there be withholding, legally owing and effected, and ultimately, it is verified that the tax was not owing (in which case the tax unduly withheld should be refunded to the tax obligor, and not to the tax substitute);

• there be no withholding, and this has been legally omitted, and the tax still be owing (in which case the legally owing tax should be exacted, solely, from the tax obligor, and not from the tax substitute);

in this way making evident the nature of the tax obligation of the tax obligor, as essentially distinct from the source withholding obligation of the tax substitute, in terms justifying the differentiated treatment that the law accords them and that, in this opinion, is sought to be recognized.

The understanding now proposed will not be contrary to the jurisprudence cited in the prevailing decision, but rather, generally speaking, corroborated by it.

Thus, as to the Judgment of the Supreme Administrative Court of 22-06-2011, rendered in case 0283/11, it is verified that the same is founded, in accordance with its own summary, on the circumstance that, contrary to what occurs in the situation now sub iudice, which occurs under the vigency of the form of the CIRC given by Law 67-A/2007, of 31 December, "at the time of occurrence of the tax facts, there did not exist in domestic law a rule that imposed compliance with the formalities that would subsequently be required by the Tax Authorities through Dispatch no. 11701/2003, of 28/5, of the State Minister and Minister of Finance, published in the Official Journal, II Series, no. 138, of 17/6/2003," being, in the logic of the ruling at hand, that the rationale of the understanding that, at that time, "could not be imposed on the parties the obligation to use, at that moment, such forms."

The same rationale underlies the decision of cases 0518/09 and 0810/08 of the Supreme Administrative Court, both likewise cited in the prevailing decision, which relate to situations that occurred before implementation of the form referred to in the current Article 98º of the CIRC. Yet these decisions do not fail to clearly refer that "when the certificate of tax residence of the beneficiary entity of the income is not submitted by the end of the term established for payment of the tax (…) the tax substitute is obligated to deliver the entirety of the tax that should have been deducted," and that "The special regime of proof and the concept of punitive taxation established in Article 90º of the CIRC do not contravene the constitutional principles of legality, equality, proportionality, access to law and effective judicial protection, as well as taxation in accordance with tax capacity," adding itself in this latter ruling that:

"Indeed, before the need to safeguard the right of the State to effective tax collection, nothing justifying, in the case, the breach of the obligation of source withholding of the IRC owing by the beneficiaries of the income, given that they had not proven being tax non-residents, the measure of accountability of the tax substitute envisaged in no. 4 of Article 90º of the CIRC is presented as appropriate and adjusted.

In fact, the entity obligated to effect source withholding should only exempt itself from such obligation in the event the beneficiary proves being tax non-resident, although such proof may be made by the end of the term of payment of the tax, hence it is understood its accountability for payment of the tax owing."

Also the cited Judgment no. 0732/09 of the Supreme Administrative Court, of 24/02/2010, expressly refers, including in the part transcribed in the prevailing decision, that "it is admitted, in no. 6, that this responsibility be eliminated whenever the tax substitute proves with the document referred to in no. 2 verification of the prerequisites for exemption from withholding."

Beyond all the jurisprudence cited, which is considered, when properly interpreted, to corroborate the understanding on which the present dissent is based, other exists that reinforces it.

Thus, the Judgment of the Plenum of the Supreme Administrative Court of 24-02-2010, rendered in case 0732/09, refers that:

"II – The beneficiaries of the income must make proof to the entity obligated to effect source withholding, by the end of the term established for delivery of the tax that should have been deducted (no. 2 of the same article).

III – When such proof is not made, the tax substitute that has not effected the withholding is relieved of the obligation to deliver the entirety of the tax that should have been deducted, provided it proves with the document referred to in no. 2 of the same article verification of the prerequisites for total or partial exemption from withholding."

In order to leave no doubt, it is expressly stated in the text of this Plenum decision of the Supreme Administrative Court that "although non-submission of the form referred to in clause a) of no. 2, by beneficiaries of the income, by the end of the term established for delivery of the tax generates the obligations of the tax substitute to effect IRC withholding and, when it has not effected it, deliver the entirety of the tax that should have been deducted, it is admitted, in no. 6, that this responsibility be eliminated whenever the tax substitute proves with the document referred to in no. 2 verification of the prerequisites for exemption from withholding."

Also the Judgment of the Supreme Administrative Court of 31-01-2008, rendered in case 0888/07, understands that the obligation of the tax substitute to deliver to the State the tax that, unduly, it has not withheld, "does not violate the said international conventions, nor Articles 8º and 103º of the Portuguese Constitution, and much less Articles 4º and 11º of the Tax Code, as measures to avoid international economic and domestic double taxation are not tax benefits but rather tax reliefs (tax exclusions or situations of non-taxability)."

The understanding that, in principle, the tax substitute will only be able to relieve itself of the obligations incumbent upon it, demonstrating that the prerequisites of source withholding are not met, and not, attempting to demonstrate that the tax will not be owing by the tax obligor, shall impose itself even on grounds of procedural legitimacy. Effectively, it will be the tax obligor who, always in my better judgment, will have legitimacy to discuss this latter question (non-existence of the tax obligation), under penalty, even, that the res judicata formed between the tax substitute and the Tax Authorities will not cover the tax obligor and, consequently, generate contradictory decisions.

Thus, in sum and schematically, it is understood that:

è The Claimant is, in function of certain payments, obligated to effect source withholding;

è That obligation is eliminated, not if it, in its judgment, understands the legal prerequisites for application of the Double Taxation Convention to be met, but if the form to which the applicable Portuguese law refers is presented to it;

è If such form is not presented, the source withholding obligation is not eliminated, so non-withholding will be unlawful, with it being responsible for delivery of the amount unduly not withheld to the Portuguese State;

è None of this has to do with the prerequisites or regime of the Double Taxation Convention, being exclusively a matter of the relationship between the Portuguese State and a resident of it;

è In the same way, the apportionment, or not, of the amount withheld to the beneficiary entity of the payments will be a matter internal between it and the Claimant, with the Portuguese State being uninvolved, noting that if the Claimant had complied with its source withholding duty, as it was obligated in light of Portuguese law, who would bear the tax was the beneficiary entity, and it would be this entity which would have had to present itself before the Portuguese State to justify any claim for non-taxation;

è Having it been the Claimant that failed in compliance with the law (by not having, in the absence of the form, proceeded with the withholding that the law imposed on it), it should be she who assumes the inconveniences resulting therefrom (that is, to ensure apportionment of the withholding required of her to the beneficiary entity and transfer to the latter the burden of demonstrating that the tax is not owing);

è The requirement for delivery of the tax not withheld, in light of non-submission of the required form, will not constitute the imposition on the Claimant of an excessively onerous and/or unjust sacrifice, in that withholding itself does not constitute any sacrifice for the tax substitute, since she will have the right to apportion the withholding to the tax obligor, and if, for reasons exclusively imputable to her (omission of withholding when the beneficiary of the income did not present her the required documentation), that apportionment becomes difficult or onerous, this will not justify the grant of favored treatment, in contradiction to express law (in the case no. 6 of Article 98º).

Thus, and for all the foregoing, I voted against the prevailing decision.

Lisbon, 15-09-2016

(José Pedro Carvalho)