Summary
Full Decision
ARBITRATION DECISION
The Arbitrators, Dr. José Poças Falcão (Presiding Arbitrator), Dr. Mariana Vargas and Dr. Henrique Fiúza (Member Arbitrators), designated by the Deontological Council of the Administrative Arbitration Centre (CAAD) to constitute the Collective Arbitration Tribunal established on 9 February 2017, agree as follows:
I. REPORT
On 30 November 2016, the company A…, SA, with the tax identification number … and with registered office at …, n.º … –…, in Lisbon (hereinafter referred to as the Claimant), pursuant to Article 2.º, n.º 1, of Decree-Law n.º 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (RJAT) and Ordinance n.º 112-A, of 22 March, requested the constitution of an Arbitration Tribunal, in which the Tax and Customs Authority (hereinafter AT or Respondent) is the Respondent, with a view to declaring the illegality and consequent annulment of the assessment for Corporate Income Tax (IRC) n.º 2016…, relating to the year 2012, and respective compensatory interest, in the total amount of € 109 816.80, for vice of material violation of law, also requesting the condemnation of the Respondent to payment of indemnity interest on the amount paid, from the date of payment until the date of its full reimbursement.
Summary of the Parties' Positions
a. Of the Claimant:
There being no contested factual matters, what is at issue is merely a question of law, namely, whether the costs with bank financing incurred by the Claimant, intended for the granting of unremunerated loans to entities in which it has stakes, should be recognized as a tax-deductible cost, insofar as they are related to its business activity.
The AT does not so understand, on the grounds that the obtaining of income by a taxpayer cannot result from an investment made in a different legal entity, however direct and strong the connection between them may be.
The Claimant has as its activity the management and operation of hotel establishments and similar operations, and may, pursuant to its articles of association, provide technical administration and management services to the companies in which it holds stakes.
The Claimant maintains that, in accordance with Article 23.º of the IRC Code, in the wording in force for the fiscal year in question, the deductibility of a tax cost is not limited to the direct and immediate causal connection between the cost and the correlative income, as the activity of a company is not only constituted by its operational activity, but also includes the acquisition and reinforcement of financial stakes, from which a future economic return is expected. Accordingly, the loans it makes to its subsidiaries and associated companies are intended to promote and obtain income for itself, since the loans aim at the growth of the respective activities which, in turn, will have an impact on its own growth.
Both doctrine and CAAD jurisprudence have been in the direction that indispensability does not mean a necessary causal connection between costs and income, but rather depends on business motivation (business purpose), taking into account that financial stakes constitute company assets, and the entities in which they have stakes are not strangers to the Claimant's activity, nor are the costs it incurs to finance them alien to it.
For the reasons stated, the Claimant concludes that the IRC assessment challenged is illegal, for vice of violation of law, requesting its annulment and the condemnation of the Respondent to restitution of the unduly paid amount, plus indemnity interest, in accordance with the law.
b. Of the Respondent:
Notified in the terms and for the purposes provided in Article 17.º of the RJAT, the AT submitted a Response and attached the administrative file (PA), defending the legality and maintenance of the assessment which is the subject of the present request for arbitral pronouncement.
The Respondent maintains that the financial charges arising from loans made by the Claimant in the fiscal year 2012, accounted for in the various sub-accounts of account SNC 25 (Financing Obtained), cannot be accepted as tax expense, in light of the provisions of Article 23.º of the CIRC, given that, at the same time that it bore financial charges, namely interest on bank financing, resulting from loans contracted, it granted loans to other companies, its associated entities, and was not remunerated for the value of the loans granted.
That, in order for these expenses to be accepted for tax purposes, their indispensability would be necessary with a view to the realization of income subject to taxation or for the maintenance of the income-producing source, that is, it would need to be proven that they were used in its activity as an autonomous entity; the assessment of the tax deductibility of the cost depends, thus, on a causal and justified relationship with the productive activity developed by the company itself and not by other companies, even if related to it.
That the criterion of indispensability created by the legislator prevents the tax consideration of expenses that, even though accounted for as costs, were made for the pursuit of third-party interests, as is the case with interest borne by a company, arising from loans whose funds are diverted from its own operations to those of another entity with which it is related.
Invoking jurisprudence from the Superior Courts, the AT concludes that, in the matter sub judice, "there is no doubt that the correction made by the SIT (contested in these proceedings) is valid and legitimate, embodying in itself a correct subsumption of the facts to the applicable law, thus falling away (all) the grounds invoked by the now Claimant", and the request for arbitral pronouncement should be judged unfounded and the challenged assessment maintained.
Subsequently, the Parties submitted written submissions, in which they reiterated their respective arguments.
II. SANITATION
1. The request for arbitral pronouncement was filed at CAAD on 30 November 2016 and was automatically notified to the AT on 13 December 2016.
2. The Arbitration Tribunal is competent and was regularly constituted on 9 February 2017, in accordance with Articles 2.º, n.º 1, subparagraph a), 5.º and 6.º, all of the RJAT.
3. The parties have legal personality and capacity, are legitimate and are legally represented, in accordance with Articles 4.º and 10.º of the RJAT, and Article 1.º of Ordinance n.º 112-A/2011, of 22 March.
4. No exceptions were raised that require examination.
5. The proceedings do not suffer from defects that would invalidate it.
III. REASONING
III.1. FACTUAL MATTERS
The factual matter relevant to the understanding and decision of the case, after critical examination of the documentary evidence attached to the initial petition (PI) and the administrative file (PA), not contested by the Parties, is established as follows:
A – Proven Facts
1. In accordance with its articles of association, the corporate purpose of the Claimant "(…) consists in the management and operation of hotel establishments or similar" (Article 3.º), within the scope of which "(…) it may provide technical administration and management services to companies in which it holds stakes or with which it has entered into subordination contracts, as well as develop other activities that are legally permitted to it" (Article 4.º) and "(…) acquire and dispose of stakes in companies, of national or foreign law, with an object equal to or different from that referred to in Article three, in companies regulated by special laws, in companies with unlimited liability, as well as associate with other legal entities to, in particular, form new companies, complementary business groupings, European economic interest groupings, consortia and partnerships" (Article 5.º), (Doc. 3, attached to the PI);
2. The share capital of the Claimant is held in the majority (85.76%) by B…, SGPS, SA, with tax identification number … (Article 8.º of the PI and page 8 of the Tax Inspection Report – hereinafter RIT);
3. For its part, the Claimant, which is registered for the activity Hotels with restaurant (CAE 055111), covered by the general IRC taxation regime, has as its actual activity "the management and operation of hotel establishments, either through direct operation of hotel units that are owned by Group companies, (Hotel C… and Hotel D…), or with regard to operational management of hotel units that have entered into hotel management contracts with the taxpayer, namely: 1. E…, SA, nipc…; 2. F…(Porto), SA, nipc…; 3. G…, SA, nipc…; 4. H…, Ltd., nipc…; 5. I…, SA, nipc… and 6. Hotel J…, Ltd., nipc…" (page 7 of the RIT), holds social stakes in various other entities in the same sector, among which those identified at pages 7 to 9 of the RIT:
| Tax ID | Company Name | % Stake | Value of Stake € |
|---|---|---|---|
| … | K…, SA | 25.0 | 375 000 |
| … | L…, SA | 25.0 | 625 000 |
| … | M…, LDA | 40.0 | 10 000 |
| … | N…, SA | 51.0 | 12 750 |
| … | O…, LDA | 25.0 | 2 500 |
| … | P…, LDA | 98.5 | 295 500 |
| … | E…, SA | 49.75 | 995 000 |
| … | R…, SA (R…) | 70.0 | 700 000 |
| … | S…, SA | 33.34 | 666 800 |
| … | T…, SA | 70.0 | 70 000 |
| … | U…, SA | 22.8 | 22 800 |
| … | V…, SA | 30.0 | 150 000 |
| … | I…, SA | 99.8 | 1 497 000 |
| … | D…, SA | 61.8 | 927 000 |
4. Under the terms of the hotel management contracts concluded between the Claimant, in its capacity as Manager, and the companies E…, SA and R…(Porto), SA, in force in the fiscal year 2012, the remuneration paid to the Claimant for management services includes a fixed base commission and variable commissions, namely as a function of the results of operations (Doc. 5, attached to the PI);
5. Regarding the fiscal year 2012, the Claimant was subject to an external inspection procedure, which was based on service order n.º OI2015…, initiated on 16 March 2016, with the signature of the service order by one of its administrators, and concluded on 3 June 2016, in accordance with Article 61.º of the Complementary Regime of Tax and Customs Inspection Procedures – RCPITA (cf. Tax Inspection Report – Department B, Div. III, Team 33, of the Financial Direction of Lisbon – Doc. 4, attached to the PI and PA);
6. According to the RIT, the inspection action had general scope and was intended to control various situations, including those relating to the analysis of "Expenses not accepted for tax purposes (…) in accordance with Article 23.º of the IRC Code", which resulted in merely arithmetic corrections to taxable income;
7. At the hearing stage on the draft report, exercised on 29 June 2016, following the notification letter from the Financial Direction of Lisbon, dated 9 June 2016, the Claimant, regarding the proposed correction of financial charges, briefly alleged that "The analysis was made crystallizing in time (31.12.2012) balances of financing accounts (accounts 25xxx), accounts of financial investments (accounts 41xxx) and third parties (accounts 26/7xxx).
… Not being possible to establish a direct relationship between financing obtained and credit granted … as per the table below, the financing was carried out over time, as the company needed support for current treasury operations, and/or to contribute equity capital to investment projects underway within the subsidiary and associated companies.
Conversely, the debtor balances of the accounts in the table below (41xxx and 26/27xxx) arose over time, without direct connection to the financing and without being able to determine what part resulted from financing and what part resulted from own capital available to the company, such that:
Accounts 41xxx correspond to supplementary contributions.
Accounts 26/27xxx correspond to advances, being normal operations between companies in the same economic group.
Furthermore, even though indirectly, A…, SA being the company holding stakes in the companies mentioned, despite interest not having been charged, there is economic benefit from these loans:
a) As soon as investments in the subsidiary companies are completed.
b) In the medium and long term, distribution of dividends is expected." – cf. pages 41 and 42 of the RIT;
8. Previously, in response to the clarification request made through the notification of 5 May 2016, "regarding the loans granted to the aforementioned companies, the total amount of which is €7,186,687.66, namely whether the said loans granted have the purpose of obtaining income by the taxpayer A…, SA, since no interest and similar income obtained are recorded in the accounting", the Claimant clarified that "the amount of €7,186,687.66 (balance on 31.12.2012) relating to loans granted to subsidiary companies, in the form of supplementary contributions and/or advances was financed through the use of own capital and bank loans in the modalities of secured current accounts and medium/long-term financing … most of the loans in question were intended for investments by the company itself in subsidiary companies in the form of equity stakes, supplementary contributions and advances, thereby creating a dynamic of business growth through the development of new business units (…) The financing mentioned in account 25110613, contracted in 2004, was intended for the refurbishment of Hotel C…. The financing mentioned in accounts 2510671 and 25110672, contracted in 2010, was intended for the refurbishment of D…" – cf. page 26 of the RIT and Doc. 5, attached to the PI;
9. And, in point 5 of the said clarifications, the Claimant specified that "(…) in the development of its commercial activity and new businesses in the area of hotel operation and management, it develops and maintains the operation and/or management of hotel units operating under brands that are its property (…) for protection of the development of a brand linked to the word "…" several variants were registered at the national and community level with the aim of promoting a hotel category distinction associated with the respective name. In 2012, it proceeded to register the brands "W…" intended for the 4-star segment and "X…" reserved for the 5-star segment (…)";
10. After analysis of the Claimant's hearing, the following merely arithmetic corrections in respect of IRC were maintained, which gave rise to assessment n.º 2016…, relating to the fiscal year 2012, which is the subject of the proceedings (page 45 of the RIT):
| Item | Amount |
|---|---|
| Taxable Profit declared | 604 782.56 |
| Corrections: | |
| Expenses not accepted for tax purposes (point III-1) | 8 043.74 |
| Expenses not accepted for tax purposes (point III-2) | 361 792.12 |
| Total value of corrections | 369 835.86 |
| Corrected Taxable Profit | 974 618.42 |
11. The expenses not accepted as costs of the fiscal year 2012, referred to in point III-1 of the RIT, in the amount of € 8,043.74, had the following origins (pages 23 and 24 of the RIT):
a. It accounted for in account 65512 – Travel and accommodation, expenses in the amount of € 3,789.06, relating to an invoice accounted for in the name of another taxpayer;
b. It accounted for in account 65512 – Travel and accommodation, expenses in the amount of € 1,614.84, whose supporting document was issued in the name of another taxpayer;
c. It accounted for in account 65512 – Travel and accommodation, expenses in the amount of € 609.68, relating to airline tickets assigned to entities unrelated to the taxpayer;
d. It verifies the accounting of expenses in the amount of € 2,030.16, in account 68111 – IMI (Property Tax). The taxpayer is not the owner of any real property;
12. The non-acceptance of financial charges, in the amount of € 361,792.12, is justified in point III-2 of the RIT (pages 24 to 31), as follows:
a. "Financing Obtained – From the analysis carried out on the accounting elements of the fiscal year 2012, it was found that the taxpayer resorts to bank financing, which are accounted for in the various sub-accounts of account SNC 25 (Financing Obtained), which present" (…) a credit balance, on 31/12/2012, in a total of € 6,934,717.53:
| Account | Credit Balance on 31/12/2012 |
|---|---|
| 25110511 –Y…– 10003022957 | 2 547 000.00 |
| 25110611 – Z… | 2 495 000.00 |
| 25110613 –Z…– C. MUT | 248 705.93 |
| 25110616 –Z…– PME | 300 000.00 |
| 25110671 –Z…– …– ITP | 279 183.88 |
| 25110672 –Z…– …-PROT | 418 968.55 |
| 25110911 –AA…– A…– CONT | 145 859.17 |
| 25110911 –AA…– A…– PME | 500 000.00 |
| TOTAL | 6 934 717.53 |
b. "Loans granted to Group companies
| Loans Granted | Debtor Balance on 31/12/2012 |
|---|---|
| 41302– E… | 1 802 019.00 |
| 41303– F… | 140 000.00 |
| 41304– BB… | 928 509.39 |
| 2683908– CC… SA | 1 201 788.14 |
| 2682101- DD… | 24 221.35 |
| 2683906– CC…SA | 50 402.13 |
| 2788224– EE… | 35 000.00 |
| 2788230– M… | 215 596.64 |
| 2788233– K… | 16 065.00 |
| 2788247– FF… | 1 558 433.15 |
| 2788257– CC… | 99 722.86 |
| 2788263 – E… | 749 930.00 |
| 2788264– S… | 365 000.00 |
| TOTAL | 7 186 687.66 |
Thus, it is found that the taxpayer, while bearing financial charges (…) resulting from loans contracted, granted loans to other companies, its associated entities, and was not remunerated for the value of the loans granted.
| Expenses accounted for, borne with bank financing | |
|---|---|
| 6911 – Interest on financing obtained | 334 264.33 |
| 6918 – Other interest | 51 079.92 |
| TOTAL | 385 344.25 |
(…)".
c. "Legal Framework of Financial Expenses
Given the fact that the taxpayer is bearing financial charges (…) resulting from loans which it has contracted and, at the same time, is granting loans to associated companies, unremunerated, it is necessary to assess whether or not these charges are accepted for tax purposes, in light of the provisions of Article 23.º of the CIRC.
In accordance with n.º 1 of the said article, in its wording at the date of the facts "…Expenses are considered those which are proven to be indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source, in particular: (…)
c) Of a financial nature, such as interest on third-party capital applied in operations …"
It is thus required that such expenses, in order to be fiscally accepted as tax expenses, are proven (documentary evidence) and that the indispensability thereof is verified with a view to the realization of income subject to taxation or for the maintenance of the income-producing source.
(…) In the case under analysis, it is found that the taxpayer contracted loans, bearing charges with the same, and, simultaneously, "grants" financing, unremunerated, to the related companies listed in the Table "Loans Granted".
From this it results that part of the said charges is not directly related to the activity of the taxpayer, whose corporate purpose (…) consists in the management and operation of hotel establishments, either through direct operation of hotel units either with regard to operational management of hotel units that have entered into hotel management contracts with the taxpayer, activity that is classified under CAE-055111 – Hotels with restaurant. (…)
(…) expenses are accepted for tax purposes in the amount of 23,552.13 €, corresponding to financial charges intended for refurbishment works of the hotels operated by the taxpayer (…).
In view of all the foregoing, expenses in financing accounted for in accounts 6981 – other expenses relating to financing, 6911 – interest on financing, 6918 – other interest, in the amount of 361,792.12 € (385,344.25 € - 23,552.13€) are not accepted for tax purposes";
13. Schedule 03A – Statement of Results by Nature, of the Statement of Results of the Claimant, for the fiscal year 2012, transcribed at pages 13 and 14 of the RIT, presents in the item A5003 – Profits/losses attributed to subsidiaries, associated companies and joint ventures, the positive balance of € 415,430.07, registering a variation of 48.19% in relation to the fiscal year 2011;
14. The RIT, in its final version, was notified to the Claimant through letter n.º…, of the Tax Inspection Services of the Financial Direction of Lisbon, dated 4 July 2016 (Doc. 4, attached to the PI);
15. On 7 July 2016, the IRC assessment for fiscal year 2012, with number 2016…, in the amount of € 80,954.30 was issued, and on 14 July 2016, the statement of interest calculation and the statement of account settlement, in the total amount of € 109,816.80, with a deadline for voluntary payment on 9 September 2016 (Doc. 1, attached to the PI);
16. The collection document relating to the statement of account settlement was paid on 6 September 2016, at the Finance Treasury of Lisbon … (Doc. 2, attached to the PI).
B – Unproven Facts
It was not proven to what extent the unremunerated loans granted by the Claimant to the companies of the economic group to which it belongs originated from the financing it obtained from the Banking sector, nor what part came from own capital.
III.2. ON LAW
1. The Question to be Decided:
The question that falls to the Tribunal to decide consists in knowing whether financial charges, arising from bank loans obtained and borne by a company, may be deducted from the respective taxable income of a given fiscal year, when the same company grants unremunerated financing to other companies in which it has stakes, of whose share capital it is not the sole holder.
Specifically, it must be decided whether, in light of n.º 1 of Article 23.º of the IRC Code, in the wording in force at the date of the facts, the financial charges in the amount of € 361,792.12, borne by the Claimant during the fiscal year 2012 with the contracting of bank financing, whose balance on 31 December 2012 amounted to € 6,934,717.53, should be considered or not as a tax-deductible expense, given that it granted credits, whose balance on that date was € 7,186,687.66, without, with regard to the loans granted, having received any kind of remuneration.
Such costs being proven by documents and recorded in the accounting of the Respondent, constituting accounting expenses, it is not, therefore, a question of proof, but rather of the qualification of such expenses as deductible or non-deductible, that is, their subsumption in the indeterminate concept of "indispensability".
In order to answer such a question, it will be necessary, previously, to interpret the normative content of n.º 1 of Article 23.º of the IRC Code, with a view to its application to the specific case, without losing sight of the fact that, in accordance with n.º 1 of Article 11.º of the General Tax Law (LGT), the rules and general principles of interpretation of laws apply to the interpretation of tax rules, in particular Article 9.º of the Civil Code (CC), with special emphasis, when there remains "doubt about the meaning of the tax rules to apply", on the "economic substance of the tax facts" (cf. n.º 3 of Article 11.º of the LGT).
But there will also be a need to question whether, in the absence of complete control by the Claimant over its subsidiaries, the expenses incurred in their financing, even though such expenses may be qualified as indispensable for the activity of the Claimant, are fully deductible for the purposes of determining the taxable income of the fiscal year under analysis. We would be, in this case, faced with a problem of quantification, in the domain of proof and burden of proof.
1.1. On the Interpretation of n.º 1 of Article 23.º of the IRC Code – the Concepts of Indispensability and of Income-Producing Source:
The wording of n.º 1 of Article 23.º of the IRC Code, in force for the year 2012, was as follows:
"Article 23.º - Expenses
1 — Expenses are considered those which are proven to be indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source, in particular:
(…)
c) Of a financial nature, such as interest on third-party capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and issue of bonds and other securities, redemption premiums and those resulting from the application of the effective interest method to financial instruments valued at amortized cost;
(…)".
As has already been noted, the concept of indispensability contains the criterion for distribution between non-accepted expenses and those fiscally accepted as negative elements in the determination of taxable profit, "constituted by the algebraic sum of the net result for the period and the positive and negative changes in assets and liabilities occurring in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with this Code", as provided in n.º 1 of Article 17.º of the IRC Code.
It should be said, from the outset, that this concept of indispensability has been applied, in its concrete application, according to a restricted perspective, requiring direct correlation between an expense borne and income obtained (principle of necessity) and in a broader sense, which admits the deductibility of any expense incurred within the scope of operations related to the corporate purpose (economic-business perspective).
The most relevant doctrine on the matter has been defending that "(…) Indispensability subsumes any act carried out in the interest of the company (…) The legal notion of indispensability represses, therefore, acts that do not conform to the corporate purpose, not insertable in the corporate interest (…)"[1], that "Only costs can be subject to direct correction, in accordance with Article 23.º of the CIRC, when these are facts that, by nature and univocity, are evidently alien to the objects and to the global economic and managerial purpose of the company"[2], that " (…) The solution adopted among us (at least in doctrine), following the understandings advocated by Italian doctrine, has been to interpret indispensability as a function of the corporate purpose (…)"[3] and that "The invocation of the rule of indispensability of costs can never be made to replace the judgment of convenience and opportunity of the charges assumed, as they resulted from the decision of the corporate bodies, with another judgment, also of a business nature, made by the tax administration or by the courts. A cost does not cease to be one (should not cease to be considered as such for tax purposes) because, in an a posteriori assessment, it proves to be useless or ineffective (e.g. because it does not prove to be a generator of income) or, simply, excessive in the light of tax interests.".[4]
Indispensability is referred to "the realization of income subject to taxation or the maintenance of the income-producing source".
In this way, the legislator, by placing, in the alternative, the indispensability of expenses as a condition for their fiscal acceptance, in relation to the realization of income subject to taxation or to the maintenance of the income-producing source, "the proof, a posteriori, of the absence of income directly related to the expense is not a relevant factor to conclude for the non-deductibility of the cost. If it were, the charges borne with investment projects that proved to be non-profitable would never be tax-deductible costs. Such a position is certainly not defensible."[5]
It is concluded, therefore, that the realization of income is not a sine qua non condition of the fiscal deductibility of expenses incurred by the company. It remains, therefore, to analyze what constitutes the "maintenance of the income-producing source".
The income-producing source of a company, as a set of technical, human and financial means, organized with a view to the achievement of a specific economic purpose, includes the assets (tangible, intangible, biological, financial and other) that allow it to pursue its activity, and the definition of an asset is contained in § 49 of the Conceptual Framework (CF) of the Accounting Normalization System (SNC) as being "a resource controlled by the entity as a result of past events and from which it is expected that future economic benefits will flow", with the concept of future economic benefits specified in §§ 52 to 58 of the same CF, in particular in §§ 52 and 54 to 56:
"52 – The future economic benefits embodied in an asset are the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. The potential may be a productive potential that is part of the entity's operating activities. It may also take the form of convertibility into cash or cash equivalents or the ability to reduce cash outflows, such as when an alternative manufacturing process lowers production costs.
54 – The future economic benefits embodied in an asset may flow to the entity in different ways. For example, an asset may be:
(a) Used alone or in combination with other assets in the production of goods or services to be sold by the entity;
(b) Exchanged for other assets;
(c) Used to settle a liability; or
(d) Distributed to the owners of the entity.
55 – Many assets, for example, tangible fixed assets, have a physical form. However, physical form is not essential to the existence of an asset; hence patents and copyrights, for example, are assets if it is expected that future economic benefits will flow from them to the entity and if they are controlled by the entity.
56 – Many assets, for example, accounts receivable and property, are associated with legal rights, including the right of ownership.".
In turn, the SNC Chart of Accounts individualizes, in account 4, the types of assets (investments), including financial investments, which include social stakes:
"4 - INVESTMENTS
41 Financial investments
42 Investment properties
43 Tangible fixed assets
44 Intangible assets
45 Investments in progress
46 Non-current assets held for sale".
As it follows from the cited regulations, the potential for generating future economic benefits of an asset for the entity that controls it, can both "be a productive potential that is part of the entity's operating activities", and can be a potential "associated with legal rights, including property rights" (§ 56 of the Conceptual Framework).
Hence it is understood that the activity of a company is not exhausted in its productive or operational activity, but rather, as was reasoned in the Decision issued in case n.º 695/2015-T, of 18 May 2016 which, with due deference, is transcribed:
"In that sense, the activity of a company will consist of the operations resulting from the use of its assets, in particular of its assets and the management of its liabilities. That is, in the manner in which its management will use the business assets within the scope of the various operations (productive, commercial, investment and disinvestment, general financing, acquisition of financial stakes and others) that, taken together, allow the entity in question to fulfill its economic purpose: the pursuit (immediate or long-term) of an economic surplus (profit).
(…) the "activity" of a company is not exhausted, as it often seems to emerge from some interpretations, in the set of productive or operational operations. "Activity" is also the set of operations aimed at the realization of investments or the disposal of assets, the acquisition of financial stakes and their subsequent disposal, the application of liquidity in investments or short-term securities and their management, receipts and payments resulting from operating or non-operating income and expenses, and many others not expressly mentioned here.".
As stated by Rui Duarte Morais, "The expression maintenance of the income-producing source cannot be understood in a static sense (preservation of the company as it exists), but in a dynamic sense. Companies aim for their development, their growth".[6], being free in their management choices, within the scope of their capacity to act. Therefore, continues the Author[7], "(…) the question of whether or not a cost should be deemed indispensable should be resolved based on the objective intent of the transaction (that is, by resorting to the business purpose test, current in Anglo-Saxon doctrine and jurisprudence)" or the "French theory of abnormal management acts. An abnormal management act is one which, although legitimate, was not motivated by corporate interest".
For the reasons stated above, we follow the reasoning of the Arbitration Decision issued in case n.º 12/2013-T of CAAD, in which Tomás Tavares was the sole Arbitrator, under which "A company can obtain funds (and pay interest) and then deliver those funds to a subsidiary without any direct causal remuneration – and still properly exercise its activity, within its capacity and profit-making scope: it can carry out a capital increase (Article 25.º of the Commercial Companies Code), supplementary or accessory contributions without interest (Articles 210.º and 287.º of the Commercial Companies Code) or advances without interest (Article 243.º of the Commercial Companies Code) – and in any of these cases acts totally within its capacity to act and with profit-making intent and in the exercise of its activity".
Concluding, therefore, that, provided they are directed to the interest of the entity and inserted in its profit-making scope, the financial charges borne by a company that grants unremunerated financing to other companies in which it has stakes constitute deductible charges for the purposes of determining its taxable income, in accordance with Article 23.º, n.º 1, subparagraph c) of the IRC Code.
1.2. The Quantification of Non-Deductible Financial Charges. The Proportionality Condition.
The doctrine and jurisprudence cited above emphasize the relationship between the deductibility of expenses and the pursuit of corporate interest, even if indirectly, through unremunerated financing to subsidiary companies, equating, for that purpose, financing without interest to a true investment.
Because, as observed by Fernando Carreira de Araújo and António Fernandes de Oliveira[8], "The expression "unremunerated advance" is, especially when used in the fiscal arena, highly misleading (…) this investment via advance without interest is not unremunerated in anything (…)".
And, continue the Authors[9], "What is remunerated financing? From a strictly legal perspective, in the civil law sense of the term, we would say it would be that in which, at the time of financing, a given remuneration is agreed as a counterpart (…). Financing via subscription of share capital does not meet, in our legal system, this requirement, this narrow, formal legal concept of onerous financing (…). And yet, it is known that this investment via share capital aims to obtain remuneration, and in potential terms could generate much higher remuneration than financing with a counterpart fixed at the outset: remuneration will be a function of the business success of the company, and will be received in the form of dividends, capital gains (valuation of the social stake) or liquidation share.
For tax law in the context of income taxation (…), both forms of financing (with and without agreed interest) fit into the very same category: that of capital applications, or investments, with business causation, that is, with profit-making purposes.".
Ending by establishing an equivalence between investments via share capital, via supplementary contributions and via unremunerated advances, because "If the investment in subsidiaries is carried out via share capital, it will give rise to capital shares (…) and if it is carried out via supplementary contributions or so-called "unremunerated" advances it will give rise to credits or expectations of reimbursement for the shareholder (…) they reinforce the financial capacity of the subsidiary and, with it, enhance its investments and activities, so they have indirectly the very same economic effect for the investor shareholder as an additional capital contribution: reinforcement of the subsidiary's capacity to generate additional returns, that is, strengthening of the profit-making potential of the shareholder's investment in the subsidiary".
However, in order for the financing charges to be fully deductible in the sphere of the shareholding company, it is necessary that the latter be the sole shareholder or, if not, that all the remaining shareholders of the subsidiary accompany the investment made in proportion to their respective social stakes (condition of proportionality), so that the "potential return of the investment benefits the shareholder making it"[10].
Should this not happen and the company that does not hold the entirety of the share capital of the subsidiary to which it lends money without interest, be the sole contributor to the financing of the subsidiary, it cannot be said that the return on its investment will benefit it exclusively, rather having a character of liberality, insofar as it benefits the remaining shareholders of the subsidiary.
It cannot then be said that, in this situation, in which financing benefits third parties, the expenses borne should be fully deductible for the purposes of determining the taxable income of the company that provided it to its subsidiary; however, neither will the logic of "all or nothing" apply, of the non-acceptance for tax purposes of the part of the expenses borne in proportion to the social participation in the financed company.
And, should the remaining shareholders of the subsidiary to which a company provided unremunerated financing and the latter be linked to each other by "special relationships", as frequently happens among companies of an economic group, would it not be appropriate to invoke here the transfer pricing regime in order to make the necessary corrections to the taxable income? We believe so. The question is that the financial charges borne by the participating company are correctly determined and quantified, the percentage of participation in the share capital of the subsidiary and the existence of special relationships between the financing company and the remaining shareholders of the financed company.
1.3. The Challenged Assessment. The Determination of Financial Charges Borne by the Claimant.
Reverting to the situation in the proceedings, it is found that, in accordance with point III-2 of the Tax Inspection Report (RIT), pages 24 to 31, the merely arithmetic corrections to the taxable profit of the Claimant for the fiscal year 2012 are based on the following facts:
a. "Financing Obtained – From the analysis carried out on the accounting elements of the fiscal year 2012, it was found that the taxpayer resorts to bank financing, which are accounted for in the various sub-accounts of account SNC 25 (Financing Obtained), which present (…) a credit balance on 31/12/2012, in a total of € 6,934,717.53;
b. "Loans granted to Group companies
| Loans Granted | Debtor Balance on 31/12/2012 |
|---|---|
| 41302 – E… | 1 802 019.00 |
| 41303 – F… | 140 000.00 |
| 41304 – BB… | 928 509.39 |
| 2683908 –CC… SA | 1 201 788.14 |
| 2682101 – DD… | 24 221.35 |
| 2683906 –CC… SA | 50 402.13 |
| 2788224 – EE… | 35 000.00 |
| 2788230 – M… | 215 596.64 |
| 2788233 – K… | 16 065.00 |
| 2788247 – FF… | 1 558 433.15 |
| 2788257 – CC… | 99 722.86 |
| 2788263 – E… | 749 930.00 |
| 2788264 – S… | 365 000.00 |
| TOTAL | 7 186 687.66 |
c. Expenses accounted for, borne with bank financing
| Item | Amount |
|---|---|
| 6911 – Interest on financing obtained | 334 264.33 |
| 6981 – Other interest | 51 079.92 |
| TOTAL | 385 344.25 |
There is, from the outset, that attention be paid to the fact that accounts 41302 –E…, SA, 41303 – F…, SA and 41304 – BB…, SA are accounts for "Financial Investments" which, according to what the Claimant states and the AT does not dispute, reflect supplementary contributions in favor of companies whose share capital is participated in by the Claimant at 49.75%, 70% and 61.8%, respectively, percentages capable of significantly influencing the management decisions of the subsidiary companies.
Articles 209.º and 287.º of the Commercial Companies Code do not impose the onerousness of supplementary contributions, certainly because the legislator considered that they represent investments in the company, made in the interest of the shareholders.
Accounts 26 and 27 correspond, according to the Claimant, to advances, although it is not demonstrated in the proceedings the Claimant's participation in the share capital of the companies EE… and FF….
Neither does Article 243.º of the Code prevent the gratuitousness of advances, for the same reason above.
There is, however, a need to distinguish between unremunerated loans granted by the Claimant to companies in which it holds significant social stakes and those granted to companies of which it is not proven to be a shareholder, cases in which, naturally, the financial charges borne cannot be accepted as tax-deductible expenses, as it is not proven that they respect corporate interest.
However, the AT appears to have limited itself to establishing the comparison between the total value of the credit balances of the accounts relating to financing obtained by the Claimant from the banking sector with the financing granted by it to other Group companies and the financial charges resulting from the contracting of those loans, concluding that those financial charges corresponded to those the Claimant would not have borne with its productive activity, had it not channeled those funds, gratuitously, to its subsidiaries.
A reasoning that seems to contain "another judgment, also of a business nature, made by the tax administration (…)", which doctrine rejects, as it is not consonant with the principle of freedom of company management.
With regard to unremunerated financing to subsidiary companies, the Claimant justified the corporate interest at the hearing stage on the draft Report that was notified to it, transcribed at pages 41 and 42 of the RIT, to the effect that "The analysis was made crystallizing in time (31.12.2012) balances of financing accounts (accounts 25xxx), accounts of financial investments (accounts 41xxx) and third parties (accounts 26/7xxx). … Not being possible to establish a direct relationship between financing obtained and credit granted … as per the table below, the financing was carried out over time, as the company needed support for current treasury operations, and/or to contribute own capital to investment projects underway within the subsidiary companies.
Conversely, the debtor balances of the accounts in the table below (41xxx and 26/27xxx) arose over time, without direct connection to the financing and without being able to determine what part resulted from financing and what part resulted from own capital available to the company, such that:
Accounts 41xxx correspond to supplementary contributions.
Accounts 26/27xxx correspond to advances, being normal operations between companies in the same economic group.
Furthermore, A…, SA being the company holding stakes in the companies mentioned, despite interest not having been charged, there is economic benefit from these loans:
a) As soon as investments in the subsidiary companies are completed.
b) In the medium and long term, distribution of dividends is expected.".
Furthermore, even though indirectly, leveraging the subsidiaries with which the Claimant has established hotel management contracts will allow them to increase their productive capacity, with implications for the remuneration paid for the provision of those management services, as is apparent from the contracts with copies attached to the proceedings, concluded between the Claimant in its capacity as Manager and the companies E…, SA and F… (Porto), SA, in force in the fiscal year 2012, remuneration that includes a fixed base commission and variable commissions, namely as a function of the results of operations (Doc. 5, attached to the PI).
It is not understood, therefore, why the AT accepted as tax-deductible the financial charges borne by the Claimant, in the amount of € 23,552.13, relating to the refurbishment of C… and D…, which although directly operated by it, are owned by other Group companies, and does not accept the remaining financial charges, it being proven that they served the profit-making interest of the investor.
As it follows from the proven facts, the companies to which the Claimant granted unremunerated financing are, in their large majority, its subsidiaries, although the Claimant is not the sole shareholder.
There being no doubt that the said financing, in the form of supplementary contributions and/or unremunerated advances, are related to the corporate purpose (the profit-making interest and the maintenance of the income-producing source, as appears to derive, moreover, from the profits attributed to subsidiaries, associated companies and joint ventures recorded in the Statement of Results by Nature – page 13 of the RIT), it would be incumbent on the AT to prove that the Claimant was not accompanied by the remaining shareholders of its subsidiary companies in order to meet a condition of proportionality, as a key for distribution between deductible and non-deductible financial charges in the sphere of the Claimant, making use, if necessary, of the rules relating to transfer pricing, to make the corrections that would be necessary in light of those rules, should it conclude that, between the remaining shareholders of companies participated in by the Claimant and the latter, there are special relationships, as they are companies belonging to the same economic group.
Failing the AT to prove that the unremunerated financing granted by the Claimant to its associated companies was not exclusively in its own corporate interest, benefiting third parties (the remaining shareholders of the subsidiaries), it must be concluded that they are fully deductible for the purposes of determining the taxable income, because, demonstrating these a profit-making purpose, they cannot but be deemed indispensable for the maintenance of its income-producing source.
With regard to unremunerated financing granted by the Claimant to companies of which it is not proven to be a shareholder (EE… and FF…), we have already advanced that the financial charges borne cannot be accepted as tax-deductible expenses, as it is not proven that they respect corporate interest.
The question is that such charges are properly quantified, since quantification is one of the aspects that integrate the objective element of the tax fact or presupposition of fact of the tax obligation, allowing measurement of its material aspect, generally associated with a manifestation of contributory capacity[11].
Notwithstanding, the AT does not indicate what allocation key was used to allocate the financial charges it did not accept as deductible expenses to the loans granted to each of the beneficiary companies, participated (percentage of participation in the share capital of those companies? Other?) and not participated in by the Claimant: it does not indicate, in particular, the initial and final term of each of the loans granted to each of the Group companies or the temporal coincidence between the loans granted and the financing obtained – serving as an example the clarifications provided by the Claimant within the scope of the tax inspection procedure, transcribed at page 26 of the RIT, that "…The financing mentioned in account 25110613, contracted in 2004, was intended for the refurbishment of C…. The financing mentioned in accounts 2510671 and 25110672, contracted in 2010, was intended for the refurbishment of D…", which the AT does not contest (although it accepted the deductibility of the respective expenses for different reasons). Nor does it take into account that part of the financing granted by the Claimant to the Group companies comes from funds obtained from the Banking sector or what part was financed with the use of own capital.
Now, it not being possible to determine the amount of financial charges borne by the Claimant with unremunerated loans granted to companies of which it is not a shareholder, the doubt about the quantification of such tax fact remains.
Indeed, even in situations in which the determination of taxable income is made by indirect methods, which is not the case in the proceedings, in which the corrections made are merely arithmetic, the AT is not dispensed from substantiating and quantifying the facts that serve as the basis for the tax act of assessment.
Let us cite, in this regard, the Decision issued by the Supreme Administrative Court on 26 February 2016, in case 0329/14, available at www.dgsi.pt:
"I - With respect to the quantification of taxable income, the substantiation that enables the addressee to know the reasons why the determination was in that specific amount, enabling him to conform or react against it graciously and contentiously, should be considered sufficient.
II - Thus, even if the AT is legitimated to resort to indirect methods for the determination of taxable income, in the respective decision it must indicate what criterion it used for quantification, which, having to constitute an adequate method of approximation to reality, must present itself as adequate and rationally justified.
(…)".
If this is so in the case of determination of taxable income by indirect methods, all the more so will it be when such determination resorts to merely arithmetic corrections, no longer based on indications or presumptions, but on facts, the burden of proof of which rests with whoever invokes them (in accordance with n.º 1 of Article 74.º of the General Tax Law (LGT)).
The lack of indication of the criterion for allocation of financial charges borne by the Claimant, attributable to unremunerated loans granted by it to companies EE… and FF…, leaves well-founded doubts about their quantification.
And, in accordance with the provisions of n.º 1 of Article 100.º of the Tax Procedure and Process Code "1 - Whenever from the evidence produced there results well-founded doubt about the existence and quantification of the tax fact, the challenged act should be annulled.".
In conclusion: taking into account the evidence produced and the facts alleged, the financial charges borne by the Claimant with bank financing obtained and by it channeled to subsidiary companies, in the form of supplementary contributions and/or unremunerated advances, should be qualified as indispensable to its activity, regardless of the respective quantification, as they enhance the profit-making purpose, being, for this reason, fully deductible for the purposes of determining the taxable income of the fiscal year 2012, annulling the tax assessed by reference to the disregard of such expenses, due to the vice of violation of law from which it suffers, due to misinterpretation of the concept of "indispensability", to which Article 23.º, n.º 1 of the IRC Code alludes.
In the absence of elements that allow the exact quantification of financial charges borne with the granting of unremunerated financing to companies of which the Claimant is not a shareholder, with the Tribunal being in well-founded doubt about the quantification of the tax fact, the assessment act should, in that part, be annulled.
This is, however, a partial annulment, only as far as financial charges are concerned, with the merely arithmetic corrections subsisting to which point III.1 of the RIT refers (Expenses not accepted for tax purposes in the amount of € 8,043.74, in accordance with Article 23.º of the IRC Code), as these are expenses contained in documents processed in the name of other taxpayers, not attributable to its activity, which the Claimant does not challenge.
1.4. On the Request for Indemnity Interest
In accordance with the provisions of n.º 1 of Article 43.º of the General Tax Law (LGT), applicable subsidiarily to the tax arbitral procedure, in accordance with Article 29.º, n.º 1, subparagraph a) of the RJAT, "Indemnity interest is due when it is determined, in gracious reclamation or judicial challenge, that there was error attributable to the services from which payment of the tax debt in an amount higher than that legally owed results.".
Neither does the partial annulment of the tax act, divisible by nature, constitute an obstacle to this, as, in accordance with Article 100.º of the LGT, "The tax administration is obliged, in case of total or partial success of reclamations or administrative appeals, or of judicial proceedings in favor of the taxpayer, to immediately and fully restore the situation that would have existed if the illegality had not been committed, including the payment of indemnity interest, in the terms and conditions provided by law.".
The cumulative requirements of the right to indemnity interest are thus: " – that there be an error in an act assessing a tax; – that it be attributable to the services; – that the existence of that error is determined in a gracious reclamation or judicial challenge process; – that from that error has resulted the payment of a tax debt in an amount higher than that legally owed."[12].
On the other hand, the tax arbitral procedure was conceived as an alternative means to judicial challenge (cf. the legislative authorization granted to the Government by Article 124.º, n.º 2 (first part) of Law n.º 3-B/2010 of 28 April – State Budget Law for 2010), and it should be understood that the competence of the arbitration tribunals operating under the aegis of CAAD includes the same powers that, in judicial challenge proceedings, are attributed to tax courts, such as the power to assess error attributable to the services.
In the case at hand, it appears manifest that, once the illegality is declared and the consequent annulment, even if partial, of the assessment which is the subject of the request for arbitral pronouncement, the right of the Claimant to indemnity interest on the amount unduly paid must be recognized, from the date of the respective payment, as provided in n.º 5 of Article 61.º of the CPPT, since such illegality is exclusively attributable to the Tax Administration, which carried out that tax act without the necessary legal support.
IV. DECISION
Based on the factual and legal grounds stated above and, in accordance with Article 2.º of the RJAT, the Arbitration Tribunal decides:
1. To partially annul the challenged IRC assessment, in the part concerning the non-acceptance of financial charges borne by the Claimant, in the amount of € 361,792.12;
2. To condemn the AT to restitution of the amount of annulled tax;
3. To condemn the AT to payment of indemnity interest in favor of the Claimant, in accordance with Articles 43.º and 100.º, both of the LGT.
VALUE OF THE CASE: In accordance with the provisions of Article 306.º, n.ºs 1 and 2 of the CPC, 97.º-A, n.º 1, subparagraph a) of the CPPT and 3.º, n.º 2 of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at € 109,816.80 (one hundred and nine thousand, one hundred and sixteen euros and eighty cents).
COSTS: Calculated in accordance with Article 4.º of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached thereto, in the amount of € 3,060.00 (three thousand and sixty euros), to be allocated between the AT (€ 2,754.00) and the Claimant (€ 306.00), as this is the minimum arbitral fee provided for in the respective Table.
Lisbon, 22 September 2017.
The Arbitrators,
José Poças Falcão
(President)
Mariana Vargas
(Member)
Henrique Fiúza
(Member)
(Dissenting as per annex)
Text prepared by computer, in accordance with n.º 5 of Article 131.º of the CPC, applicable by referral of subparagraph e) of n.º 1 of Article 29.º of Decree-Law 10/2011 of 20 January.
The wording of this decision is governed by the 1990 spelling agreement.
Dissenting Opinion
The purpose of the present request for arbitral pronouncement consists in knowing, whether in light of Article 23.º of the Corporate Income Tax Code (CIRC), the costs with interest and other charges borne with bank loans contracted by the Claimant, to lend the entire amounts thus obtained to companies in which it has social stakes, should or should not be considered as fiscally relevant.
First and foremost, it is important to note that the Claimant is a trading company whose main activity is the operation of hotel units, and that managing social stakes does not appear in, nor could it appear in, its corporate purpose, because such purpose is exclusive to social stake management companies (SGPS). Neither is it a venture capital company (SCR). Its articles of association permit it, among others, "…to acquire and dispose of stakes in companies…"but the Claimant does not have as its purpose the management of social stakes, nor could it have.
Article 23º of the CIRC establishes, at the date of the facts, that:
1 — Expenses are considered those which are proven to be indispensable for the realization of income subject to taxation or for the maintenance of the income-producing source, in particular:
c) Of a financial nature, such as interest on third-party capital applied in operations, …
In turn, Article 45º of the CIRC establishes, at the date of the facts, that:
1 — The following charges are not deductible for the purposes of determining taxable profit, even when accounted for as expenses of the taxation period:
g) Charges not properly documented;
From the combination of the two CIRC rules indicated, it can be concluded that, in order for expenses to be considered deductible for tax purposes, it becomes necessary that:
- The expenses be proven to be indispensable for the realization of income subject to taxation (IRC) or for the maintenance of the income-producing source thereof; and that
- The expenses be properly documented.
The Claimant indebted itself to the banking sector to finance the companies in which it has stakes in the share capital (and other companies which it was not proven in the proceedings to be a shareholder – EE… and FF…), bearing the respective charges, having not charged the beneficiary companies of the financing with any financial charges.
Now, the Claimant and its subsidiaries are distinct legal and economic entities, with an obligation to prepare and submit separate accounts. Even when there is a relationship of control – and there is none in this case - companies have distinct legal personality and tax capacity and therefore cannot be confused to the point that one bears the expenses of another.
If it were otherwise, the exercise of one company's activity could be attributed to another with which it had some relationship (of participation, control, group or joint control).
Due to the fact that the participator and subsidiaries are legally and economically independent companies, as has been stated, with distinct legal personality and tax capacity, each of them must prepare its accounts for each period, presenting the results of its activity, based on its operations, calculated from the entirety of its income and expenses, and cannot one entity bear expenses and consider income that was generated by the activity of another.
Even in economic groups in which the subsidiaries are controlled by the participator, cases in which the participator is usually a social stake management company (SGPS) – which is not the case under examination - each of the companies that integrate this group is obliged to prepare individual accounts with total segregation of operations, not mixing income and expenses of some in the accounts of others.
See in this regard the Special Regime for Taxation of Groups of Companies, provided for in Article 69º and following of the IRC Code, and in particular Article 70º.
Article 70.º
Determination of the taxable profit of the group
1 — With regard to each of the taxation periods covered by the application of the special regime, the taxable profit of the group is calculated by the parent company, through the algebraic sum of the taxable profits and tax losses determined in the individual periodic statements of each of the companies belonging to the group.
In summary, each company determines the net result for the period and consequently the taxable profit (or tax loss), following the provisions of accounting normalization and tax legislation, with such result being determined by the accounting of all operations carried out by it during a given period and possibly corrected in accordance with the CIRC.
The Claimant comes to allege that the financial charges it bore with the obtaining of financing to lend the money thus obtained to companies in which it participates in its share capital are expenses of its own because they form part of its activity, since "the loans it makes to its subsidiaries and associated companies are intended to promote and obtain income for itself, since the loans aim at the growth of the respective activities which, in turn, will have an impact on its own growth." (underlining ours)
Following this logic, any company that has a stake in the share capital of another company could bear any expenses of the subsidiary, alleging that that expense will have an impact on the income of the subsidiary which, in turn, will be reflected in the income of itself. And let it not be said that bearing financial charges is different from bearing other types of expenses, because all would be made to increase the income of the subsidiary and ultimately of the parent.
Continuing. Following the line of reasoning – whose conclusions we reject - if the Claimant intended to promote the services of its subsidiaries, it could organize advertising campaigns, bearing the respective costs, and allege that these are its own expenses that form part of its activity, since the advertising campaigns it carries out for its subsidiaries and associated companies aim to promote and obtain income for itself, since the advertising campaigns aim at the growth of the respective activities which, in turn, would have an impact on its own growth.
And if the Claimant continued to so understand its attributions, it could acquire machines that would reduce the time of execution of a task by half, bearing the respective costs, and allege that these are its own expenses that form part of its activity, since the supply of machines it makes to its subsidiaries and associated companies aims to obtain income for itself, since the machines aim at the growth of the respective activities which, in turn, would have an impact on its own growth.
And so on and so forth, leading to the expenses borne with the activity of the associated companies being considered expenses of the Claimant, without any economic, accounting or tax rationale.
It is clear that tax law does not prohibit the Claimant from making all these decisions nor from making the said investments or acquisitions of goods or services, what Article 23º of the CIRC does not accept is that the charges generated with decisions of the kind given as example be accepted as expenses for tax purposes in the calculation of the tax payable by the parent.
Managing a social stake is exercising the rights and duties that such a stake confers on its owner, in accordance with law and the articles of association.
The rights and duties of shareholders include, among others: sharing in profits, participating in general meetings, obtaining information from the company, being appointed or appointing members for the bodies of the company, but also making the capital contribution with money or other goods subject to seizure, sharing in losses, bearing the charges relating to the ownership of shares/quotas (guarding of certificates, registrations, notations, bank statements, travel to general meetings, etc), in which are also included financial charges relating to the ownership of the stakes.
However dynamic the management of social stakes may be, however much such management is carried out in a group business perspective, those are briefly the rights and duties of shareholders.
And they certainly do not include the obtaining of onerous financing to finance gratuitously the companies in which one has stakes.
Depending on the business organization of business groups, it may be group policy that the obtaining of financing is done by the parent (or other entity in the group), in order to optimize the respective costs of financing necessary to various or all subsidiary entities, but it certainly does not include bearing the costs that are due with such financing.
The financial charges borne, in the event they are accounted for as expenses of the company that obtained the financing and not of the companies that used the financial means thus obtained, will give rise to non-deduction for tax purposes of those expenses, as they are not indispensable for the realization of income subject to taxation or for the maintenance of its income-producing source.
The Claimant's argument does not hold when, justifying the need for financial means by the associated company to carry out works, it affirms that it was the participator and not the subsidiary that decided to carry out the works.
The decision to carry out works by a company is the responsibility of its management. When the powers of the management of a company are limited and do not allow for the carrying out of works, the decision is the responsibility of the general meeting of the company. Therefore, being the management and the general meeting bodies of the company, the statement made by the Claimant is devoid of any rationale or legal support.
Should works be carried out by a company, its decision was certainly made by the corporate body to which the law and articles of association attribute that power. Therefore, the Claimant's allegation not holding, the costs with financing are costs of the activity of the entity that used the respective financial means, that is, of the owner of the asset that underwent refurbishment works, that is, of the subsidiary company.
Nor does the claim made by the Claimant hold when it states that "This management (of social stakes) can require financing operations that form part of the activity of the Claimant and not of its subsidiaries". (interlined ours)
Such a statement is disconnected from any connection to Portuguese legal and business reality, as in no legal provision is it stated that it is not the duty of companies to obtain their own financing and that this duty falls on companies that have stakes in their share capital.
The Claimant, by not charging the respective financial charges to the subsidiaries (and other companies in which it does not participate in the share capital) to which it lent the money, bearing the respective charges, improperly deducted in the calculation of its taxable profit the interest paid to the banking sector, and the AT proceeded correctly in adding to the taxable profit the interest improperly deducted.
There is varied jurisprudence from the Supreme Administrative Court that decided in a manner similar to the opinion here defended, namely through the Decisions indicated below, applicable with the necessary adaptations to the case at hand:
- Decision of 7 February 2007 relating to case n.º 1046/05;
- Decision of 20 May 2009 relating to case n.º 1077/08;
- Decision of 30 November 2011 relating to case n.º 0107/11;
- Decision of 30 May 2012 relating to case n.º 0171/11
In the most recent of the said Decisions, which transcribes the essential points of the previous Decision of the Supreme Administrative Court of 20/05/2009, the following can be read:
"The purpose of the present appeal consists in knowing, whether in light of Article 23.º of the CIRC, the costs with interest and stamp taxes on bank loans contracted by the appealing party, even at its detriment and are not strictly necessary for the obtaining of its individual gains and profits, should or should not be considered as fiscally relevant, it being certain that between the appealing party and the benefited companies there is a relationship of total control".
The said legal provision provides "Costs or losses are considered those which are proven to be indispensable for the realization of profits or gains subject to taxation or for the maintenance of the income-producing source, in particular the following: …c) charges of a financial nature, such as interest on third-party capital applied in operations, discounts, premiums, transfers, exchange differences, expenses with credit operations, collection of debts and emission of shares, bonds and other securities and redemption premiums…".
Which is followed by the following justifying reasons:
"From this it results that the costs provided therein cannot but respect, from the start, the taxpayer company itself.
That is, in order for a given sum to be considered a cost of that company, it is necessary that the respective activity be developed by it itself, not by other companies.
If it were not for this, how could the exercise of one company's activity be attributed to another with which it had some relationship.
The amounts in dispute correspond to interest on bank loans and stamp tax contracted by the appellant and applied to the gratuitous financing of an associated company.
Such sums are not, therefore, directly related to any activity of the taxpayer inscribed in its corporate purpose, which is undertakings and property management and not the management of social stakes or financing of venture companies, nor even do they relate, even indirectly, to its activity." (underlining ours)
To the Decisions of the Supreme Administrative Court indicated, there can be added, in the same sense, Arbitration Decisions of CAAD, of which I highlight that issued in Case n.º 538/2016-T with which I fully agree.
Based on the foregoing, the Tribunal should have formed the conviction that the financial charges in question are not directly related to the Claimant's own activity, and that their deductibility cannot be accepted in the sphere of the latter, in accordance with the provisions of Article 23.º of the CIRC, and therefore the Tax Authority acted correctly in correcting the respective amounts. Consequently, the arbitral request should have been denied in this part, maintaining the IRC assessment now contested.
Henrique Fiúza
(Economist)
[1] Cf. TOMÁS TAVARES, "On the relationship of partial dependence between accounting and tax law in determining the taxable income of legal entities: some reflections at the level of costs", in Tax Science and Technique, n.º 396, 1999, p. 137.
[2] VÍTOR FAVEIRO, "The Status of the Taxpayer: the person of the taxpayer in the social rule of law", Coimbra, 2002, pp. 847 and 848.
[3] ANTÓNIO M. PORTUGAL, "The Deductibility of Costs in Portuguese Tax Jurisprudence", Coimbra Editor, 2004, p. 112.
[4] RUI DUARTE MORAIS, "Notes to the IRC", Almedina, Coimbra, 2009, p. 86.
[5] ANTÓNIO MARTINS, "A Note on the Concept of Income-Producing Source under Article 23.º of the CIRC: its Relationship with Capital Stakes and Supplementary Contributions", in Journal of Public Finance and Tax Law, Year 1, n.º 2, Almedina, Coimbra, 2008, p. 37.
[6] Op. Cit., p. 83.
[7] Op. Cit., p. 87 and note 191.
[8] Cf. the authors cited, "The Limited Applicability of the Transfer Pricing Regime to the Financing of Sodium to the Company", in Transfer Pricing Notebooks 2013, Coord. João Taborda da Gama, Almedina (reprint), pp. 75 to 110 – p. 85, note 14.
[9] Ibid., pp. 88 to 90.
[10] Op. Cit., p. 86.
[11] In this sense, cf. Freitas Pereira, "Taxation", 5th Edition, Almedina, Coimbra, 2014, pp. 31 to 34.
[12] Cf. SOUSA, Jorge Lopes de, Tax Procedure and Process Code – Annotated and Commented, Volume I, Áreas Editora, 2006, p. 472.
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