CAAD Ruling 717/2016-T: Autonomous Taxation, Capital Losses & Impairments in IRC

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president, designated by the other Arbitrators), Dr. Joaquim Pedro Lampreia and Dr. Jorge Carita, designated, respectively, by the Claimant and the Respondent, to form the Arbitral Court, constituted on 17-03-2017, agree as follows:

1. Report

A… S.A., taxpayer no.…, with headquarters at Rua …, no.…, …, …-… Lisbon (hereinafter briefly designated as "Claimant"), requested the constitution of a collective arbitral court with a view to the declaration of illegality and consequent annulment of the additional assessment of Corporate Income Tax ("IRC") no. 2016…, of 02-07-2016, relating to the taxation period of 2012, as well as the statements of compensatory interest assessments nos. 2016… and 2016… and consequent statement of settlement of accounts with no. 2016…, referring to the compensation no. 2016…, from which resulted a total amount due (including compensatory interest) of €778,769.52.

The Claimant further requests that the Tax and Customs Authority be ordered to pay compensation for all expenses incurred by the Claimant with the provision and maintenance of a bank guarantee identified with no. … and issued by B… in the amount of €986,231.95 for purposes of suspension of the tax enforcement proceedings no. …2016… subsequently initiated by the Finance Service Lisbon-…, following the failure to voluntarily pay the alleged debt of IRC and compensatory interest.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant designated as Arbitrator Dr. Joaquim Pedro Lampreia, under the provisions of article 6, no. 2, paragraph b), of the RJAT (Regulation of Tax Arbitration Court).

The request for constitution of the Arbitral Court was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 16-12-2016.

Pursuant to the provisions of paragraph b) of no. 2 of article 6 and of no. 3 of the RJAT, and within the deadline provided in no. 1 of article 13 of the RJAT, the highest official of the Tax Administration service designated as Arbitrator Dr. Jorge Carita.

The designated Arbitrators did not agree on designating a third Arbitrator, following which the Deontological Council of CAAD designated Counselor Jorge Lopes de Sousa as arbitrator president, who accepted the designation.

Pursuant to and for the purposes of the provisions of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this designation on 02-03-2017.

Thus, in conformity with the provision of no. 7 of article 11 of the RJAT, the deadline provided in no. 1 of article 13 of that statute having elapsed without the Parties making any submissions, the Collective Arbitral Court was constituted on 17-03-2017.

The Tax and Customs Authority submitted a response in which it argued that the request for arbitral decision should be judged unfounded.

By order of 08-05-2017 it was decided to dispense with the holding of the meeting provided for in article 18 of the RJAT and that the proceedings should continue with written arguments.

The Parties submitted arguments.

With its arguments, the Claimant submitted documents relating to costs connected with the provision of bank guarantee and a copy of an IRC assessment and a statement of settlement of accounts for the financial year 2015.

The Tax and Customs Authority, in its arguments, argued that the documents submitted by the Claimant with the arguments should be withdrawn, and the Claimant commented on these requests.

The Arbitral Court was duly constituted.

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

It is important to assess as a priority the request for withdrawal of documents submitted by the Claimant with its arguments.

2. Matter of Withdrawal of Documents Relating to Expenses with Bank Guarantee

The Claimant submitted documents with its arguments, indicating that they relate to expenses with the provision of bank guarantee.

The Tax and Customs Authority argues, in summary, that the documents are prior to the submission of the request for arbitral decision and that they would have had to be submitted with it, invoking a procedural principle of preclusion.

In arbitral proceedings, the rules of the CPC (Code of Civil Procedure) or the CPPT (Code of Tax Procedure) do not necessarily apply, applying instead a principle of informality and imposing on the Arbitral Court the obligation to define the procedural course most appropriate to each case, an obligation that is considered of primary relevance, as can be inferred from the fact that it is referred to insistently in the RJAT, providing in paragraph a) of no. 1 of article 18 of the RJAT for the holding of a meeting to "define the procedural course to be adopted based on the circumstances of the case and the complexity of the proceedings" and imposing on the Arbitral Court, in no. 2 of article 29, the duty to "define the procedural course most appropriate to each case specifically considered".

For this reason, under this principle of informality, the Arbitral Court may admit the submission of documents to the case at any time, if it considers this appropriate for the proceedings, provided the principle of adversarial proceedings is guaranteed, without the rules on preclusion provided in the CPC relating to the submission of documents being applicable.

On the other hand, in harmony with the provision of article 171, no. 1, of the CPPT, subsidiarily applicable, by force of the provision of article 29, no. 1, paragraph c), of the RJAT, "compensation in case of bank guarantee or equivalent improperly provided shall be requested in the proceedings in which the legality of the enforceable debt is disputed", but it may also be fixed in enforcement of judgment, as the Supreme Administrative Court has consistently understood.

For this reason, in this specific case of compensation for improper guarantee, the preclusion of the right to submit documents in the contestation proceedings could not be justified, since their presentation may even be made after this proceeding ends.

In the case at hand, the Claimant requested compensation in the request for arbitral decision "for all expenses incurred by the Claimant with the provision and maintenance of a bank guarantee identified with no. … and issued by B… in the amount of €986,231.95 for purposes of suspension of tax enforcement proceedings no. …2016… subsequently initiated by the Finance Service Lisbon-…", not indicating its total amount, which is clearly justified because the expenses increase throughout the proceedings (the proceedings were initiated on 30-11-2016 and there are expenses dated 03-10-2016, 21-10-2016, 03-01-2017, 31-03-2017, 04-04-2017), being perfectly acceptable and even preferable, in harmony with the principle of procedural economy, to present the documents relating to the totality of expenses at once in the final phase of the proceedings, as before that moment the Claimant does not have all the documents relating to all the expenses for which it seeks recognition in the proceedings of the right to compensation.

It is considered, thus, for the purposes of no. 2 of article 29 of the RJAT, that what corresponds to the procedural course most appropriate to the arbitral proceedings is the submission with the arguments of documents evidencing the totality of expenses incurred up to that moment with the provision of bank guarantee, rather than the alternative which would be the partial submission of documents at various procedural moments, with the corresponding need to guarantee adversarial proceedings with respect to each one of the requests for submission.

However, although the aforementioned documents were submitted before the start of the deadline for arguments by the Tax and Customs Authority, which was able to exercise its right to adversarial proceedings, it is not clear that this right can be considered adequately guaranteed within the 10-day deadline that was set for arguments, as the possible relationship of some of them with the guarantee provided by the Claimant is not clear and investigations may be necessary to clarify them.

For the reasons stated, since it cannot be concluded that the aforementioned documents are impertinent or were submitted intemperately, the request by the Tax and Customs Authority for withdrawal of documents relating to expenses with bank guarantee is rejected.

However, in view of the doubts about the sufficiency of the deadline for the Tax and Customs Authority to submit and given that it is not proper, to ensure the celerity of the arbitral proceedings, to reopen the phase of discussion of the case, it is decided not to consider the aforementioned documents for purposes of compensation, in the event the request for arbitral decision is granted, without prejudice to the rights that the Claimant has within the scope of any enforcement of judgment.

3. Matter of Withdrawal of the Assessment and Statement of Settlement of Accounts Relating to the Financial Year 2015

The Claimant submitted to the arguments an assessment and statement of settlement of accounts relating to the financial year 2015.

The Tax and Customs Authority requests withdrawal because the present proceedings concern IRC assessments and compensatory interest relating to the financial year 2012.

The Claimant refers in article 54 of the arguments that "if the arbitral request submitted comes to be judged entirely well-founded by the learned Arbitral Court, the Claimant understands that the AT should proceed ex officio to annul the additional IRC assessment in the meantime issued with reference to the financial year 2015, also refraining from issuing any other additional assessments based on the correction relating to the financial year 2012".

This is not a request directed to the Arbitral Court, but rather a manifestation of the Claimant's understanding of the conduct that the Tax and Customs Authority should adopt.

In any event, since the object of the present proceedings is the declaration of illegality of the IRC assessments and compensatory interest relating to the financial year 2012, the submission of the assessment and statement of settlement of accounts relating to the financial year 2015 has no interest whatsoever for the decision of the case.

For this reason, the withdrawal requested by the Tax and Customs Authority would be justified.

However, as the aforementioned assessment and statement of settlement of accounts were not presented in autonomous documents, but in a single computer file that includes the arguments and documents relating to expenses with the provision of bank guarantee, the physical withdrawal does not appear viable, so it is decided to eliminate their legal relevance, deciding that no relevance will be given for the decision of the case to the aforementioned assessment and statement of settlement of accounts.

Thus, the request by the Tax and Customs Authority is granted in these terms.

4. Matter of Fact

4.1. Proven Facts

The following facts are considered proven:

• The Claimant is a subject of IRC, under the terms of paragraph a) of no. 1 of article 2 of the CIRC (Corporate Income Tax Code), framed in the general scheme for determining taxable profit, defined in paragraph a) of no. 1 of article 3 of the same statute, being taxed at the rate provided in no. 1 of article 87 of the CIRC;

• The Claimant initiated the activity of irregular air transport of passengers during the year 2007, and until 2012 belonged to the Group C…;

• With the bankruptcy of that group, on 26 February 2013, the transfer of all shares of the company to the Group D… took place;

• The taxation periods of the Claimant, in the financial years 2011 and 2012, began on 1 November and ended on 31 October of the following year;

• Following the acquisition, on 26 February 2013, of all the share capital of the company by the Group D…, the Claimant began to adopt the taxation period corresponding to the civil year, a fact that resulted in the financial year 2013 comprising only the period from 1 November to 31 December of that same year.

• Under OI 2015… the Claimant was subject to an external partial scope inspection action relating to the taxation period of 2012;

• In that inspection, the Tax Inspection Report was prepared that is part of the administrative proceedings, the content of which is given as reproduced, in which, among other things, the following is mentioned:

III - Description of Facts and Grounds for Mere Arithmetic Corrections to Taxable Matter / Tax

As a result of the analysis carried out on the documents supporting the accounting records of the company, the following situations were detected susceptible to correction, in IRC proceedings, in the financial year 2012:

III.1. Alienation of Credits Below Nominal Value

A… declared in field 762 of table 07 of IRC Form 22, the amount of €2,815,878.34. (see Annex 10, page 4)

When asked to justify the deduction of that amount in determining taxable profit and supporting documents of the underlying operation (see Annex 11, page 2), it was stated that:

"In the financial year 2011, A… held credits in the total amount of €3,266M against various companies in the Spanish group C… (see page 11 of the Spanish public deed of the credit assignment contract in annex as document no. 1). Under the applicable accounting rules, A… recognized an impairment in the amount of €2,815M at the end of the financial year 2011.

However, such impairment was not deductible in IRC proceedings and was therefore added in field 718 of Form 22 submitted with reference to the financial year 2011 (see Form 22 declaration).

During the financial year 2012, the impairment was remeasured, with the amount of impairment being updated to €3,066M and an additional amount of €0.251M recognized in accounting (€2,815M + €0.251M).

After the additional accounting recognition of €0.251, and still in the financial year 2012, the credits held against the companies of the C… group were sold for the amount of €0.2M (see clause 3, page 7 of document no. 1).

In this context, the loss of €3,066 resulting from the sale of the credits was accepted for tax purposes, while the income resulting from the reversal of the impairment of €2,815M previously added and taxed in the Form 22 declaration of the financial year 2011 should not contribute to the formation of taxable profit. For this reason, the aforementioned amount of €2,815M was deducted in field 762 of Form 22 of the financial year 2012.

Finally, we note that by mere oversight, the amount of €2,815M was deducted in field 762 referring to "Reversal of adjustments in inventories taxed (art. 28°, no. 2) and losses by impairment taxed (art. 35.º, no. 3)", instead of being deducted in field 781 relating to "Losses by impairment taxed in prior taxation periods (art.º 35° nos. 1 and 4)". However, the deduction made in field 762 does not alter the taxable profit determined in the respective Form 22 of the financial year 2012."

(see Annex 11, pages 3 to 43)

Following that explanation, through notification on 11 March 2016, it was requested:

• Listing of losses due to impairment of amounts receivable from customers, existing in the financial year 2012, broken down by NIF, name, document no., date, amount, due date, accumulated losses due to impairment as of 31-10-2012, impairment of the financial year, reason for its constitution and indication of its increase in table 07 of IRC Form 22;

• Proof of the risk of uncollectability of the impairment recognized in the financial year 2012, in the amount of €251,049.09, and measures taken for its collection, as provided for in articles 35.° and 36.° (at the date of the facts) of the CIRC;

• Presentation of elements proving that, in the financial year 2012, the conditions provided for in articles 35° and 36.° of the CIRC were met, so that the impairment constituted in 2011 and added in table 07 of Form 22 of that financial year, in the amount of €2,815,878.34, would be susceptible to tax deduction in 2012;

• Proof of the framework in article 41.° (at the date of the facts) of the CIRC, if the value of €3,066,927.43€ (Value of credits - value of sale: €3,266,927.43-€200,000.00) was considered as a bad credit;

• Demonstration of the accounting of the expense in the amount of €3,066,927.43, and respective bank account statements, movement journal and supporting documents.

(see Annex 12, pages 2 and 3)

On the scheduled date, A…:

Submitted maps relating to losses due to impairment in amounts receivable from customers; (see Annex 12, pages 12, 19, 20, 23 and 24)

In order to justify the tax deductibility of the impairment recognized in the financial year 2012, in the amount of €251,049.09, under the terms of paragraph a) of no. 1 of article 35.° and paragraph a) of no. 1 of article 36.°, both of the CIRC, submitted a copy of the Official State Gazette (Boletín Oficial del Estado) of 12 April 2013, whose chapter IV refers to the insolvency proceedings within the scope of the insolvency process of various entities of the C… Group (identified in points 2, 3, 4, 5, 6, 7, 13 and 16 of the document), which was proceeding in the Trade Court no. … of Palma de Mallorca; (see Annex 12, pages 13, 21 and 22)

As for proof of the conditions provided for in articles 35.º and 36 of the CIRC, so that the impairment constituted in 2011 and added in table 07 of Form 22 of that financial year, in the amount of €2,815,878.34, would be susceptible to tax deduction in 2012, argued that the credit on which the impairment had been constituted in the prior financial year (added and taxed in the respective Form 22) was sold in the financial year 2012 and therefore the impairment previously taxed was deducted in Form 22 of the financial year 2012. It further stated that if the credits had not been sold, the deduction of the impairment would be accepted for tax purposes, given the insolvency of the debtor entities; (see Annex 12, pages 13 and 13)

Argued that the credit in the amount of €3,066,927.43 was not considered as bad in the financial year 2012, for purposes of article 41.° of the CIRC, in force at the date of the facts; (see Annex 12, page 140).

Presented the accounting of the amount of the expense determined in the amount of €3,066,927.43. (see Annex 12, pages 18 and 25)

Conclusion

Following analysis of the clarifications and supporting documents presented by the company, it is found that:

a) A… held credits granted against the following companies in the amount of €3,266,927.13€:

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b) As per the document annexed (see Annex 11, pages 9 to 43), designated as "Credits Assignment Agreement", dated 26 February 2013, the credits in question were sold for €200,000.00 to the company E… Lda (hereinafter designated as E…), NIPC….

c) To justify the expense determined with the alienation of the aforementioned credits, €3,066,927.43, the taxpayer states that the same were held against entities of the Spanish group C…, in which insolvency proceedings were pending in the Trade Court no. … of Palma de Mallorca.

d) At the time of the alienation of the credits, the company had a provision against those credits in the total amount of €3,066,927.43. The amount of €2,815,878.34 was provisioned in the financial year 2011 and the amount of €251,049.09 in the financial year 2012.

e) The amount of the provision constituted in 2011 was added for tax purposes, however, in the financial year 2012 it was deducted in table 07 of IRC Form 22. Such amount was not reflected in income, resulting in this way in a tax expense for this period.

f) As for the amount of the provision constituted in 2012, it was not added for tax purposes, being considered as a tax expense for this period.

g) Although the final trial balance of the financial year 2012 does not reflect the accounts moved in the operation in question (see Annex 4, pages 2 to 6 and 12 to 16), through the journal entry, it can be verified that the impairment constituted in 2011, in the amount of €2,815,878.34, was used in the loss resulting from the sale of the credits in 2012 (see Annex 12, pages 18 and 25).

Tax Implication Resulting from the Alienation of the Aforementioned Credits

Given that we are faced with an accounting loss caused by the alienation, at a loss, of credits granted to customers resulting from the normal activity of the company, it is necessary to assess whether the legal requirements for the tax deduction of that expense are met.

For this, we must have regard to the provisions of articles 23.°, 35.°, 36.° and 41.° (at the date of the facts) of the CIRC.

According to the principle of indispensability present in no. 1 of article 23.° of the CIRC, expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income source, namely, those listed in its paragraphs.

Well, with regard to the onerous alienation of credits at a loss, the application of the requirement of indispensability of expenses requires taking into account the very situation of the assets (credits) that are subject to alienation. What means that its acceptance depends significantly on the question of the very possibility of collection and the requirements of uncollectability.

Under the terms of paragraph a) of no. 1 of article 35.°, losses due to impairment accounted for in the same taxation period or in prior periods may be tax-deducted, which aim to cover credits resulting from the normal activity of the taxpayer, which at the end of the financial year may be considered of doubtful collectability and which are evidenced in the accounting.

What, according to no. 1 of article 36.°, is verified whenever the risk of uncollectability is duly justified, namely when: the debtor has a pending insolvency and company recovery process or execution process; the credits have been claimed judicially or in arbitral tribunal; or the same are in arrears for more than six months from the date of their maturity and there is objective evidence of impairment and that measures have been taken for their collection.

According to article 41.° of the IRC Code, bad credits may be directly considered costs or losses of the financial year provided that two requirements are met: that this result, among others, from an insolvency and company recovery process; and that with respect to the same, loss by impairment is not admitted or, if it is, it proves insufficient.

Losses Due to Impairment of Credits of Doubtful Collectability

Taking into account the provision of article 35.° of the CIRC, the type of credits in question and the accounting movements made by the taxpayer, it is concluded:

• That the credits in question are related to the normal activity of the company, and

• That in the terms and conditions provided for in article 36° of the CIRC, A… could recognize losses due to impairment related to those credits. However,

• There is no evidence in A…'s accounting of credits of doubtful collectability in specific accounts, nor in the Annex to the Balance Sheet and Income Statement or in the official map, Form 30 - Map of provisions, losses due to impairment in credits and adjustments of inventories, which integrates the tax file (see Annex 4, pages 2 to 6 and 12 to 39)

Thus, as not all conditions established in article 35.° of the CIRC are met, the expense resulting from the alienation of credits against customers has no framework in that rule.

It should only be mentioned that although A… has, from an accounting perspective, constituted an impairment in the financial year 2011, in the amount of €2,815,878.34, the same was added to table 07 of the respective Form 22 because it is not deductible in IRC proceedings, as justified by the taxpayer (see Annex 11, page 3).

What is accepted because of the fact that the risk of uncollectability of the credits in question only materialized in January 2013 (the month that includes the taxation period of 2012 of A…) with the entry into the Court of insolvency proceedings of the various debtor companies, (see Annex 12, pages 21 and 22)

Bad Credits

As for considering the loss resulting from the accounting alienation of credits against customers as a bad credit from 2012, it is necessary that it meets the conditions already identified in article 41.° of the CIRC at the date of the facts, namely, that bad credits result from an insolvency process, which is not verified by the elements provided by the taxpayer, (see Annex 12, pages 21 and 22)

It should also be noted that the taxpayer itself in response to the notification stated that the credit in the amount of €3,066,927.43 was not considered as bad in the financial year 2012, for purposes of article 41.º of the CIRC, in force at the date of the facts, (see Annex 12, page 14).

For the reasons stated, given that A… accounted for tax purposes an expense related to the alienation of credits held against customers, without any legal framework in articles 35.°, 36.° and 41.° (at the date of the facts) of the CIRC, a correction is proposed in the amount of €3,066,927.43, which will result in:

• The non-acceptance of the tax deduction made in field 762 of table 07 of IRC Form 22 of 2012, in the amount of €2,815,878.34, and

• The addition of the amount of €251,049.09 in field 718 of table 07 of IRC Form 22 of 2012.

The omissions and inaccuracies committed in tax declarations are punished by no. 1 of article 119.° of the RGIT (General Tax Regime).

III.2. Per Diem Allowances - Autonomous Taxation

A… declared in field 365 (autonomous taxation) of table 10 of IRC Form 22, the amount of €72,849.86, calculated as follows:

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(see Annex 10, page 6)

Pursuant to no. 9 of article 88.° (at the date of the facts) of the CIRC, "charges relating to per diem allowances and compensation for travel in the taxpayer's own vehicle, in service of the employer entity, not invoiced to clients, recorded under any heading, are also taxed autonomously, at the rate of 5%, except to the extent that tax is assessed at the IRS level in the sphere of the respective beneficiary, as well as non-deductible charges under paragraph f) of no. 1 of article 45.° supported by taxpayers that present tax loss in the taxation period to which the same relate."

It further provides in no. 14 that "the autonomous taxation rates provided for in this article are increased by 10 percentage points for taxpayers that present tax loss in the taxation period to which any of the tax facts referred to in the preceding numbers relate."

Given that the expense recorded in account SMC 6325 Per Diem Allowances was €1,417,262.27 - see Annex 4, page 15 - the calculation map of autonomous taxation was requested, the extract of SNC 6325 account Per Diem Allowances and the respective documentary support, as well as justification for the difference between the amounts recorded in the accounting and the sum indicated in field 415 of table 11 of IRC Form 22 of 2012. (see Annex 13, page 2)

Only the calculation map of autonomous taxation and the documents supporting the amount indicated in field 415 of table 11 of IRC Form 22 of 2012 (€483,114.22) were presented, and in the notification made on 11 March 2016, the company was asked to demonstrate that the difference between the amount recorded in the accounting (€1,417,262.27) and the amount that served as the basis for calculating autonomous taxation (€483,114.22) had been invoiced to clients and/or taxed at the IRS level in the sphere of the respective beneficiary, in accordance with article 88.° of the CIRC. (see Annex 12, page 3)

In response to the notification, the taxpayer stated that this difference is justified because these are per diem allowances paid by A…'s branch in Spain in the context of the activity exercised through it, in accordance with the table it attached to the notification (see Annex 12, pages 14,15 and 27). It also attached, by way of example, a list of the processing of wages for July 2013 and copies of wage receipts of 3 workers issued in that month.

From the analysis of the documents sent, it was possible to validate the autonomous taxation applied to per diem allowances paid in Portugal (€483,114.22). However, regarding expenses or charges of permanent establishments located outside Portuguese territory and relating to the activity exercised through it, only from the taxation periods that begin, or tax facts that occur, on or after 1 January 2014, did they cease to be taxed, in accordance with the wording given to article 88.° of the CIRC, introduced by the State Budget law for 2014 (see no. 16 of article 88.° of the CIRC).

What means that, at the date of the facts (2012), all charges susceptible to being autonomously taxed, under the terms of article 88.º of the CIRC, were subject to tax, even though imputable to a permanent establishment located abroad. In the case at hand, representation expenses in the amount of €1,913.66 and charges with per diem allowances in the total amount of €1,417,262.27.

This fact constitutes an infraction of the provision of no. 9 of article 68.° of the CIRC, punishable by no. 1 of article 119.° of the RGIT.

However, taking into account the fact that, with the correction proposed in point III.1 of this chapter, the taxpayer will move from a tax loss to taxable profit, a correction to tax in favor of A… is proposed, in the amount of €1,795.39, because the increased rate provided for in no. 14 of article 88.° of the CIRC is not applicable.

(...)

VIII - Proposals

In the analysis carried out on the documents supporting the accounting records of the company, the irregularities described and quantified in chapter III of this report were verified with the following repercussions on determining taxable profit and calculating the tax declared by the taxpayer, in the financial year 2012:

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• Following the inspection, IRC assessment no. 2016 … was issued and compensatory interest assessments nos. 2016 … and 2016 …;

• The employees of the Claimant to whom per diem allowances were paid for activity exercised through the Claimant's branch in Spain are taxed there (document no. 6 attached with the request for arbitral decision, the content of which is given as reproduced);

• The Claimant provided a bank guarantee identified with no. … and issued by B… in the amount of €986,231.95 for purposes of suspension of tax enforcement proceedings no. …2016…, which was initiated by the Finance Service Lisbon-…, following failure to voluntarily pay the alleged debt of IRC and compensatory interest (document no. 14 attached with the request for arbitral decision, the content of which is given as reproduced);

• The Claimant spent with the provision of bank guarantee the amount of €5,917.39, as Stamp Tax (document no. 14 attached with the request for arbitral decision, the content of which is given as reproduced);

• On 30-11-2016, the Claimant submitted the request for constitution of an arbitral court which gave rise to the present proceedings.

4.2. Facts Not Proven

Regarding expenses with the bank guarantee, the Claimant submitted documents with the arguments, but the relationship of some of them to the guarantee provided is not clear and it is not certain that the Tax and Customs Authority had the opportunity to adequately exercise its right to adversarial proceedings, so they are not given probative relevance, without prejudice to the right of compensation being exercised in enforcement of judgment, if applicable.

There are no facts relevant to the decision of the case, regarding the defects imputed to the challenged assessments, that have not been proven.

4.3. Reasoning for the Determination of Matter of Fact

The proven facts are based on the documents submitted by the Claimant with the request for arbitral decision and on the administrative proceedings, with no controversy about them.

5. Matter of Law

5.1. Matter of Credits Alienated in the Year 2012 at a Value Below Nominal Value

The taxation periods of the Claimant, in the financial years 2011 and 2012, began on 1 November and ended on 31 October of the following year.

In 2011, A… held credits against various companies of the Spanish group C… in the amount of €3,266,927.13.

In the financial year 2011, the Claimant recognized an impairment in the amount of €2,815,878.34, relating to those credits. The basis invoked by the Claimant for recognizing such impairment was that insolvency proceedings were pending in the Trade Court no. … of Palma de Mallorca relating to the companies against which such credits were held.

The Claimant considered that this impairment recognized in the financial year 2011 was not deductible in IRC proceedings and its amount was indicated in field 718 of the respective Form 22 declaration (document no. 8 attached with the request for arbitral decision).

In the financial year 2012, this impairment was increased by €251,049.09, becoming €3,066,927.43.

On 26-02-2013 (date included in the financial year 2012), the aforementioned credits were alienated for the total amount of €200,000.00, when the insolvency of the debtors was imminent.

In the Form 22 declaration relating to the financial year 2012, the Claimant indicated in field 762 the amount of €2,815,878.34, understanding that the income resulting from the reversal of the impairment of that amount taxed in the Form 22 declaration of the financial year 2011 should not contribute to the formation of taxable profit. The Claimant stated that "by mere oversight, the amount of €2,815M was deducted in field 762 referring to "Reversal of adjustments in inventories taxed (art. 28°, no. 2) and losses by impairment taxed (art. 35.º, no. 3)", instead of being deducted in field 781 relating to "Losses by impairment taxed in prior taxation periods (art.º 35° nos. 1 and 4)".

Thus, the impairment constituted in the financial year 2011, in the amount of €2,815,878.34, was used in the loss resulting from the sale of the credits in the financial year 2012.

As for the amount of the provision constituted in 2012, it was not added for tax purposes, being considered as a tax expense for this period.

The Tax and Customs Authority understood, in summary, the following:

– in light of the principle of indispensability provided in no. 1 of article 23.° of the CIRC, expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the income source, namely, those listed in its paragraphs;

– regarding the onerous alienation of credits at a loss, the application of the requirement of indispensability of expenses requires taking into account the very situation of the assets (credits) that are subject to alienation. What means that its acceptance depends significantly on the question of the very possibility of collection and the requirements of uncollectability;

– the loss by impairment recognized in the financial year 2011 has no framework in articles 35.° and 36.° of the CIRC because all the conditions required are not met; specifically, there is no evidence in A…'s accounting of credits of doubtful collectability in specific accounts, nor in the Annex to the Balance Sheet and Income Statement or in the official map, Form 30 - Map of provisions, losses due to impairment in credits and adjustments of inventories, that integrates the tax file;

– the aforementioned credits could not be considered as bad in the financial year 2012, because the conditions provided for in article 41.° of the CIRC were not met;

– for this reason, it made a correction in the amount of €3,066,927.43, which will result in:

• The non-acceptance of the tax deduction made in field 762 of table 07 of IRC Form 22 of 2012, in the amount of €2,815,878.34, and

• The addition of the amount of €251,049.09 in field 718 of table 07 of IRC Form 22 of 2012.

– regarding the onerous alienation of credits at a loss, the application of the requirement of indispensability of expenses requires taking into account the very situation of the assets (credits) that are subject to alienation, what means that its acceptance depends significantly on the question of the very possibility of collection and the requirements of uncollectability of the same.

In the present proceedings, the Claimant argues, in summary, the following:

– it acknowledges that the requirements provided for in articles 35.°, 36.° and 41.° of the CIRC are not met;

– but, it does not follow from this that they may be accepted as expenses under the terms of article 23.° of the CIRC, reflecting the relevance of a tax loss realized with the sale of credits below their nominal value, at their market value;

– in the case, the alienation of credits for a value below their nominal value was "the management decision that best safeguarded the Claimant's interests by allowing the loss with those credits to be EUR 3,066,927.43 (instead of EUR 3,266,927.43)", because "the debtor companies for such credits would, two months after the sale, be declared insolvent";

– the limitations to deductibility provided for in articles 35.°, 36.° and 41.° of the CIRC are justified whenever the losses recorded result from value judgments of the taxpayer itself not validated by the market and other economic agents with whom it relates and because these are merely potential losses;

– in the case of a sale of credits below nominal value, we are faced with an effectively realized loss.

The essential question to be assessed is, thus, whether the tax relevance of losses resulting from the alienation of credits for a value below their nominal value is dependent on the verification of the requirements provided for in articles 35.°, 36.° and 41.° of the CIRC for the tax relevance of losses by impairment and bad credits.

Article 23.° of the CIRC establishes the following, insofar as relevant:

Article 23.°

Expenses

1 – Expenses are those that demonstrably are indispensable for the realization of income subject to tax or for the maintenance of the income source, namely:

(...)

h) Adjustments in inventories, losses by impairment and provisions;

(...)

l) Realized losses;

Articles 35.°, 36.° and 41.° of the CIRC establish the following, insofar as relevant:

Article 35.°

Losses by Impairment Fiscally Deductible

1 – The following losses by impairment accounted for in the same taxation period or in prior taxation periods may be deducted for tax purposes:

a) Those related to credits resulting from normal activity that, at the end of the taxation period, may be considered of doubtful collectability and are evidenced as such in the accounting;

Article 41.°

Bad Credits

1 - Bad credits may be directly considered expenses or losses of the taxation period provided that: (Wording of Law no. 55-A/2010, of 31-12)

a) This results from an insolvency and company recovery process, an execution process, an extrajudicial conciliation procedure for the viability of companies in a situation of insolvency or in difficult economic situation mediated by IAPMEI - Institute for Support of Small and Medium Enterprises and Investment, a decision of an arbitral tribunal in the scope of disputes arising from the provision of essential public services or credits that are time-barred in accordance with its respective legal regime for the provision of essential public services and, in this case, its value does not exceed the amount of (euro) 750; and (Wording of Law no. 55-A/2010, of 31-12)

b) Loss by impairment has not been admitted or, if it has, it proves insufficient.

It results from the literal content of article 23.° that the concept of losses by impairment relating to credits does not correspond to that of realized losses from their alienation.

As the Claimant rightly states, "the very terminology underlying the recording of impairments or the derecognition of bad credits as opposed to the terminology underlying gains from the sale of a given asset confirms this understanding: while in the first case, what is at issue is assessing the validity of the judgment as to 'realizable value'; in the second case, it is only a matter of confirming what the 'value realized' of that asset was".

The distinction between the two situations is clear and is correctly made by the Claimant, supported by the ruling of the Northern Central Administrative Court of 29-11-2013, given in case no. 1666/07.6BEPRT, attached with the request for arbitral decision as document no. 15, in which it states, on page 60:

"Bad credits" and transfer of credits at a value lower than recorded are different realities with distinct tax treatments. One thing is to have a "lost credit", whose uncollectability is known to be definitive because it results from one of those judicial processes provided for in article 39.°[3]. Another is to transfer a credit for a value lower than recorded. These cases presuppose that the debt is collectible, but the company decides to transfer the credit at a loss.

Uncollectable debts are subject to article 39.° of the IRC Code: the cost is only admitted directly if the requirements provided for in the law are met.

The second situation is subject to article 23.° of the IRC Code. What means that in these cases the taxpayer will have to prove the indispensability of the cost. It cannot, of course, do so by invoking the uncollectability of the credit. And as already expressed above in the consideration and filling of the concept of indispensability, the analysis of a specific cost must be made in fruition of company activity, that is, based on its objective within the scope of the company's activity.

And the reasons for the distinct treatment of those losses by impairment and realized losses are well evidenced by the Claimant by stating that "in the cases of art.ºs 35.°, 36.° and 41.° of the IRC Code, we are faced with merely potential losses, not yet realized and which, for that reason, lack the completion of objective requirements for validation by an entity external to the taxpayer itself (whether the debtor who does not comply after being called upon to do so, in the case of impairments, or the court that declares the insolvency of the debtor, in the case of bad credits).

Thus, in the case at hand, being realized in the financial year 2012 losses from the alienation of credits for which no prior tax relevance had been considered as losses by impairment, the deductibility of those losses as expenses of that financial year is only dependent on the general requirements provided in no. 1 of article 23.° of the CIRC, namely being demonstrably "indispensable for the realization of income subject to tax or for the maintenance of the income source".

As has been consistent jurisprudence, to satisfy the requirement of indispensability provided in article 23.°, no. 1, of the CIRC, it is sufficient that the expenses are incurred in the interest of the company and are connected with its activity, regardless of whether profits have been obtained with them or whether their relevance for the maintenance of the income source has been confirmed.

In the case at hand, the Tax and Customs Authority does not question in the Tax Inspection Report the indispensability of the aforementioned alienation of credits for the purposes of forming taxable profit. But, in any event, as the Claimant states, given the difficult economic situation in which the companies owing the alienated credits found themselves, which had already justified the realization of a substantial provision in the financial year 2011, it appears that the alienation of credits for a value below nominal value should not cease to be considered as an act of management, carried out in the interest of the Claimant. Indeed, the AT never questioned the agreed price, nor did it question the transfer pricing rules or the existence of any relationship between buyer and seller, so the issue does not arise in the proceedings of whether the agreed price does not correspond to the market value of the credits.

For the reasons stated, the correction made suffers from a defect of violation of law (articles 23.°, 35.°, 36.° and 41.° of the CIRC), which justifies the annulment of the IRC assessment in the respective part, in accordance with article 163.°, no. 1, of the Administrative Procedure Code, subsidiarily applicable, by force of the provision of article 2.°, paragraph c), of the LGT (General Tax Law).

5.2. Matter of Per Diem Allowances and Autonomous Taxation

The Claimant A… declared in field 365 (autonomous taxation) of table 10 of IRC Form 22 relating to the financial year 2012, the amount of €72,849.86, being €382.73 relating to representation expenses (20% x €1,913.66) and €72,467.13 relating to charges with per diem allowances and compensation for travel in the taxpayer's own vehicle in service of the employer entity, not invoiced to clients (15% x €483,114.22).

This amount of €483,114.22 corresponds to per diem allowances paid in Portugal.

The Tax and Customs Authority understood that, in 2012, all charges were subject to autonomous taxation, under the terms of article 88.° of the CIRC, even though imputable to a permanent establishment located abroad, in this case per diem allowances paid in Spain and imputable to the activity of the Claimant's Branch in Spain, in the total amount of €1,417,262.27, for which reason it levied autonomous taxation with respect to the difference between this amount and that on which the Claimant calculated the autonomous taxation indicated in Form 22 declaration (€934,148.05), proceeding to apply autonomous taxation without the rate increase provided for in no. 14 of article 88.° of the CIRC because, with the aforementioned correction relating to alienated credits, the Claimant ceased to present a tax loss.

In the present proceedings, the Tax and Customs Authority expressed the understanding that "only with the new wording of article 88.° of the CIRC (introduced by the State Budget Law for 2014), it was established by the legislator that autonomous taxation does not apply to expenses and charges of permanent establishments located outside Portuguese territory and relating to the activity exercised through it", that "until that date, all charges susceptible to being autonomously taxed, under the terms of article 88.° of the CIRC, even though imputable to a permanent establishment located abroad, had to be included in the respective calculation for autonomous taxation" and that the new wording is not interpretive, contrary to what the Claimant argues.

Article 88.°, no. 9, of the CIRC in the wording in force in the taxation period 2012, used by the Claimant, establishes the following:

9 – Charges relating to per diem allowances and compensation for travel in the taxpayer's own vehicle, in service of the employer entity, not invoiced to clients, recorded under any heading, are also taxed autonomously, at the rate of 5%, except to the extent that tax is assessed at the IRS level in the sphere of the respective beneficiary, as well as non-deductible charges under paragraph f) of no. 1 of article 45.° supported by taxpayers that present tax loss in the taxation period to which the same relate.

In this wording, reference is made to charges relating to per diem allowances and compensation for travel in the taxpayer's own vehicle, in service of the employer entity, without making any distinction between those supported in Portugal and abroad.

Law no. 2/2014, of 16 January, added a no. 16 to article 88.° of the CIRC in which the following is established:

16 – The provision of this article does not apply with respect to expenses or charges of a permanent establishment located outside Portuguese territory and relating to the activity exercised through it.

From the entry into force of this new wording, it became clear that autonomous taxation does not apply to charges relating to activity exercised by a permanent establishment located outside Portuguese territory, but the Claimant argues that it should previously have been understood, regarding the autonomous taxation provided for in no. 9 of article 88.° of the CIRC.

The Claimant argues the following, in summary:

– in the case of per diem allowances, the anti-abuse scope reflected in the intention to prevent that, through the attribution of per diem allowances, non-taxed income is attributed at the IRS level to employees of companies that are beneficiaries of such per diem allowances, is evident from the fact that the legislator makes the obligation of autonomous taxation fall on the part of the per diem allowances that was effectively subject to IRS in the sphere of beneficiaries;

– the purpose is to prevent the defrauding of the state fiscal interest in the collection of IRS revenue on employment income not subject to that tax;

– only in cases where the beneficiaries of per diem allowances are IRS taxpayers, whether as residents or as non-residents in Portuguese territory, can the hypothesis be conceived that the state fiscal interest in the collection of revenue is defrauded;

The exception that appears in no. 9 of article 88.° of the CIRC, removing autonomous taxation "except to the extent that tax is assessed at the IRS level in the sphere of the respective beneficiary" points clearly in the direction argued by the Claimant.

In fact, this exception reveals that autonomous taxation is connected with the taxation of dependent employment income, aiming to prevent companies, in collusion with their workers, from making payments of remuneration disguised as per diem allowances and compensation for use of the worker's own vehicle, without the corresponding taxation of income at the IRS level in the sphere of beneficiaries. It is this that explains why, to the extent that these payments are taxed at IRS in the sphere of the worker, under the terms of article 2.°, no. 3, paragraph d), of the CIRS, autonomous taxation ceases to apply. To the same conclusion about the purpose of this autonomous taxation leads its non-application in cases where these charges are invoiced to clients, because in this case there is an external entity that pays these charges and has the opportunity to verify whether they were effectively incurred by the company.

In this context, autonomous taxation is only justified in cases of workers who are taxed in Portugal under income tax, because only in these cases Portuguese State would be defrauded by the aforementioned payments of remuneration as if they were per diem allowances or charges incurred with the use of own vehicle in service of the employer entity. It is in this sense that, decisively, the fact that specific reference is made to IRS, and not generically any other income tax that applies in any other country, points.

The new no. 16 of article 88.°, added by Law no. 2/2014, excluding the application of this autonomous taxation regarding expenses or charges of a permanent establishment located outside Portuguese territory and relating to the activity exercised through it, confirms that there is no concern whatsoever of the Portuguese State in preventing abusive behaviors of companies that have no negative impact on national tax revenues.

For the reasons stated, the correction made regarding this autonomous taxation suffers from an error of interpretation of no. 9 of article 88.° of the CIRC, which constitutes a defect of violation of law that justifies the annulment of the assessment in the respective part.

5.3. Compensatory Interest Assessments

Compensatory interest assessments are based on the IRC assessment (article 35.°, no. 8, of the LGT), for which reason they are affected by the defects that affect this, justifying also the annulment as to those.

5.4. Matter of Prejudicial Knowledge

Being to be judged as founded the request for arbitral decision regarding this matter of autonomous taxation by defect of violation of law, which ensures effective and stable protection of the interests of the Claimant, the knowledge becomes prejudicial, as it is useless (article 130.° of the CPC), the defect of lack of reasoning that the Claimant also imputes to the aforementioned correction.

6. Compensation for Expenses of Bank Guarantee Provision

The Claimant requests that the Tax and Customs Authority be ordered to pay compensation for expenses incurred by the Claimant with the establishment, provision and maintenance of a bank guarantee for suspension of tax enforcement proceedings no. …2016… initiated by the Tax and Customs Authority for the collection of amounts relating to the IRC assessments and compensatory interest that are the subject matter of the present proceedings.

As already mentioned in point 2 of this ruling, in harmony with the provision of article 171.°, no. 1, of the CPPT, subsidiarily applicable, by force of the provision of article 29.°, no. 1, paragraph c), of the RJAT, "compensation in case of bank guarantee or equivalent improperly provided shall be requested in the proceedings in which the legality of the enforceable debt is disputed", for which reason the arbitral proceeding is an appropriate procedural means to assess requests for compensation for the provision of guarantees connected with the impugned assessments.

The regime for the right to compensation for improper guarantee is contained in article 53.° of the LGT, which establishes the following:

Article 53.°

Guarantee in Case of Improper Provision

1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be compensated totally or partially for the damages resulting from its provision, if he has maintained it for a period exceeding three years in proportion to the time period in administrative appeal, impugnation or opposition to execution that have as their subject matter the debt guaranteed.

2. The deadline referred to in the preceding number does not apply when it is verified, in gracious complaint or judicial impugnation, that there was error attributable to the services in the assessment of the tax.

3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed amount of the rate of indemnificatory interest provided for in this law and may be requested in the own proceedings of complaint or judicial impugnation, or autonomously.

4. Compensation for provision of improper guarantee shall be paid by abatement against the tax revenue of the year in which the payment was made.

In the case at hand, the errors underlying the impugned assessments are attributable to the Tax and Customs Authority, because they were of its initiative and the Claimant contributed in no way to the commission of these errors.

For this reason, the Claimant has the right to compensation for the guarantee provided.

It was considered proven that the Tax and Customs Authority incurred €5,917.39 in Stamp Tax (document no. 14) and other expenses may have been incurred, the payment of which is invoked by the Claimant.

In the absence of elements that allow determining the total amount of compensation, the judgment will have to be rendered with reference to what has already been considered proven and what comes to be liquidated in enforcement of this ruling [articles 609.°, no. 2, of the Code of Civil Procedure and 565.° of the Civil Code, applicable in this sense under the terms of article 2.°, paragraph d), of the LGT].

7. Decision

For these reasons, this Arbitral Court agrees on:

• Judging as founded the request for declaration of illegality of the IRC assessment no. 2016…, of 02-07-2016, relating to the taxation period of 2012, as well as of the compensatory interest assessments nos. 2016… and 2016…;

• Annulling the aforementioned assessments;

• Judging as founded the request for payment of compensation for improper guarantee and ordering the Tax and Customs Authority to pay to the Claimant the amount of €5,917.39, as well as other expenses with the provision of the guarantee attributable to the Tax and Customs Authority that come to be liquidated in enforcement of this ruling.

6. Value of the Proceedings

In harmony with the provision of article 306.°, no. 2, of the CPC and 97.º-A, no. 1, paragraph a), of the CPPT and 3.°, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings are valued at €778,769.52.

Lisbon, 03-07-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Joaquim Pedro Lampreia)

(Jorge Carita)
(dissenting, as per the vote that follows and is part of this ruling)

DISSENTING OPINION

I cannot agree with the interpretation that the majority of the members of the Court makes of no. 1 of art. 23.° of the IRC Code, in the wording prior to that given by art. 2.° of Law no. 2/2014 of 16 January, which subordinated the recognition of the financial year's expenses, for the purposes of determining taxable profit, to indispensability for the realization of income subject to tax or for the maintenance of the income source. The winning interpretation adopted by the Court would have, in fact, as a logical consequence, the complete emptying of the principle of indispensability: in determining the financial year's profit, all expenses recorded by the company in the scope of its activity would be relevant, which the law expressly did not exclude.

Outside of no. 1 of art. 23.°, in addition to the cases listed in art. 45.°, which, with Law no. 2/2014, would become art. 23.°-A, only expenses resulting from the granting of advantages to third parties or benefits to the personal property of the entrepreneur would remain, that is, activities criminally punishable, with a marginal character.

It would be the taxpayer who would exclusively define, at its discretion, what is, or is not, deductible expense of the financial year and any attempt by the tax administration to examine the indispensability of the deducted expense would be illegitimate, because it could not evaluate the opportunity or merit of the taxpayer's management.

It would be a paradigm shift in no. 1 of art. 23.° of the CIRC, which has always been understood as a rule of an indeterminate character on the deductibility of the financial year's costs, subordinating their acceptance to the criterion of indispensability.

It is true that such a position has explicit, although scattered, support in superior jurisprudence (see, for example, the Ruling of the Southern Central Administrative Court of 24 June 2003, case no. 6350/02). One cannot accept, however, that this be the meaning and scope of no. 1 of art. 23.°.

It should be noted that, on pages 98 to 106, the so-called Draft Reform of the IRC, endorsed by the IRC Reform Commission, would propose the amendment of the wording of no. 1 of art. 23.°, then in force, in order to consider deductible, for the purposes of determining taxable profit of IRC, the expenses or losses incurred or borne by the taxpayer.

The wording proposed by the IRC Reform Commission for no. 1 of art. 23.° of the IRC Code would, furthermore, cease to make reference to the requirement of indispensability of the expense.

The suppression of the reference to the principle of indispensability would be justified, in that document, by the need to adapt that legal rule to the interpretation that would allegedly be made by the superior courts of the requirement of indispensability: it would be exhausted, without more, in the obligation for the expense or loss to be borne or incurred in the scope of the taxpayer's activity, having no autonomous relevance whatsoever.

Indispensable would be any expense related to the company's activity.

However, the finally approved wording of no. 1 of art. 23.° would subordinate the recognition as costs of the financial year of the expenses or losses incurred or borne by the taxpayer with a view to obtaining or guaranteeing the income subject to IRC.

In light of this legal change, it cannot but be understood that the criterion of indispensability of the cost maintains today autonomous relevance, compared to that of the relationship with the company's activity.

It is not sufficient for the qualification as deductible expense the mere relationship of the charge with the company's activity: the specific expense must relate, as it did prior to Law no. 2/2014, to the obtaining or guaranteeing of income subject to tax, the only case in which it truly has an entrepreneurial nature.

Conversely, the exclusion of the application of no. 1 of art. 23.° does not depend on demonstrating that the expense aims at the granting of advantages to third parties or benefits to the personal property of the entrepreneur, sufficing the demonstration of the absence of a profit purpose.

This relationship refers, without doubt, to the moment when the expense is incurred or the loss borne, being not relevant whether the intended result was effectively obtained, a fact only susceptible to later determination.

Were it otherwise, the tax administration would, one concedes, be evaluating the opportunity or merit of the taxpayer's management based on elements which the latter did not know nor could have known at the time of assuming the charge.

A different question from the evaluation of the opportunity or merit of management is the possibility of the tax administration, according to criteria of economic rationality, evaluating whether the specific expense, at the time of its incurring, is, or is not, in light of objective criteria, useful and inevitable for the realization of profits or maintenance of the income source, whose denial would translate into the pure and simple absence of any effectiveness of no. 1 of art. 23.° of the CIRC.

The tax administration should not recognize as costs of the financial year expenses which, in light of these criteria, could not, by their nature, contribute to the realization or guarantee of income subject to tax.

The non-recognition of these expenses does not imply any appraisal of the opportunity or merit of the management exercised, but the recognition of the impossibility of the purposes which the taxpayer declared to achieve.

The tax deductibility of losses was - and continues to be even after Law no. 2/2014 - subject to the sieve of indispensability for the realization of income subject to tax or for the maintenance of the income source (in that sense, see the Ruling of the Southern Central Administrative Court 05295/12, of 13 November 2014, which contradicted the doctrine of Ruling no. 00595/06, of 13 September 2013, of the Northern Central Administrative Court).

Paragraph l) of no. 1 of art. 23.° of the IRC Code should be understood without prejudice to the principle of indispensability: only losses resulting from genuinely business operations are deductible.

It is what, moreover, even if only theoretically, the majority of the members of the Court admits in declaring the indispensability of the loss realized with the transfer of credits that gave rise to the assessment that is the subject matter of this request for arbitral decision.

In that measure, losses realized in the scope of the company's activity as a result of the transfer of credits for a value below nominal value do not fall within the concept of costs, unless, at the time of transfer, any losses by impairment with tax relevance had been accounted for, under the terms of no. 2 of art. 36.° of the IRC Code, by the debtor having a pending insolvency or company recovery process or execution process, the credits having been claimed judicially or in arbitral tribunal or being in arrears for more than six months from the date of their maturity or, if there are objective proofs of impairment and that measures have been taken for their collection, or, in the case of inadmission or insufficiency of loss by impairment, the credits in question were not directly considered costs or losses of the financial year on the basis of their uncollectability, in light of the provision of art. 41.° of the CIRC.

That is, without having demonstrated the irrecoverability or even the risk of irrecoverability of the credit.

The sale of a portfolio of credits for a value below nominal value, except when the credits have already been previously accounted for as bad or of doubtful collectability, is not, thus, an operation that may contribute, in a perspective of economic rationality, to the profit of the company.

It may, at best, contribute to the inflation of expenses and consequent reduction or elimination of tax to be paid.

In the concrete case, from the application of the criterion of indispensability of expenses, only losses realized with the transfer of credits accounted for as of doubtful collectability or bad at the time of transfer can be considered as costs of the financial year, accounting that the Claimant itself acknowledges did not happen.

As, therefore, the transferred credits were still fiscally recoverable by not being of doubtful collectability or bad, the losses in question do not fall within the concept of costs of the financial year, by violation of the principle of indispensability.

Such conclusion does not imply any judgment on the merit or opportunity of the company's management decisions, but results purely and simply from the impossibility of such type of expenditure being considered a cost.

The requirement of non-recoverability must be verified at the time of transfer, that is, of the definitive transfer of the assets, and not subsequently, with the declaration of bankruptcy of the debtor of the credits.

If that circumstance occurred subsequently, as it would have been the case, it would be to the assignee of the credit that it would be incumbent to register the respective impairment, under the terms of the IRC Code and of Financial Reporting Standard no. 27.

It should be noted that, under the terms of paragraphs c) and d) of no. 3 of art. 36.° of the CIRC, the fact that debtor and creditor are related entities does not prevent the accounting of credits as of doubtful collectability or bad.

To the present case, the doctrine of Ruling no. 0963/13, of 4 November 2015, of the Supreme Administrative Court is applicable, relating to the extinction of a credit, "by forgiveness", outside the discipline of no. 2 of art. 36.° of the IRC Code, with the sole basis of the company's interest, which was not considered sufficient for the respective loss to be considered cost or loss of the financial year.

The doctrine of that Ruling, by identity of grounds, is applicable both to the pure and simple extinction of the credits as to their transfer, by transfer.

The main ground of the judgment of inadmissibility of the expense was not, for the Supreme Administrative Court, that said forgiveness had no relation to the company's activity, but that the credit in question was still recoverable, by not having been accounted for as of doubtful collectability or bad.

It must, finally, be mentioned that from the position sustained in the present statement, a double legal taxation of the transferred credits would result, which would already have been taxed upon their obtaining, regardless of their effective receipt, under the terms of no. 1 of art. 18.° of the IRC Code.

Even if such double legal taxation had occurred, it is perfectly legitimate and not shocking, to the contrary of the consequences that result from the abandonment in practice of the principle of indispensability, that the tax legislator has subordinated the recognition for tax purposes of the write-down of the obtained credits to specific requirements, with a view to avoiding situations of absence of taxation.

Although I believe that the interpretation made in the Decision of the concept of autonomous taxation is narrow and reductive, as if all of them were related to the opposition of work income, I agree with the sense of the Decision, in this particular.

Lisbon, 3 July 2017

(Jorge Carita)

[1] Among many, the ruling of the Supreme Administrative Court of 9-10-2002, case no. 09/02, can be seen.

[2] Without prejudice to, in the case of founding of the annulment claim, it still being possible for the Claimant, in enforcement of judgment, to submit other documents relating to expenses with the provision of bank guarantee, as it states it intends to do, in the final part of the arguments.

[3] Current article 41.°.