Summary
Full Decision
ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (Arbitrator President), José Nunes Barata and Luís Alberto Ferreira Alves, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree:
I – REPORT
On 12 December 2016, "A…, LDA.", holder of NIPC…, with registered office at…, …-… …, filed a request for the constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the acts of assessment of Corporate Income Tax ("IRC") No. 2015… and 2015…, issued, respectively, on 24 August 2015 and 07 December 2015, relating to the tax periods of 2012 and 2013, in the amount of € 231,853.17 (two hundred and thirty-one thousand eight hundred and fifty-three euros and seventeen cents), as well as the acts of dismissal of gracious complaints No. …2016… and …2016…, which had the aforementioned as their subject matter.
To substantiate its request, the Applicant alleges, in summary, that the aforementioned acts suffer from error regarding the legal assumptions.
On 13-12-2016, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.
The Applicant did not proceed to the appointment of an arbitrator, whereupon, pursuant to the provision of subparagraph a) of paragraph 2 of article 6 and subparagraph a) of paragraph 1 of article 11 of the RJAT, the President of the Deontological Council of the CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the office within the applicable period.
On 08-02-2017, the parties were notified of these designations, and neither expressed any intention to refuse any of them.
In accordance with the provision of subparagraph c) of paragraph 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 23-02-2017.
On 29-03-2017, the Respondent, duly notified for this purpose, submitted its answer defending itself solely through contestation.
On 03-04-2017, pursuant to the provision of subparagraphs c) and e) of article 16, and paragraph 2 of article 29, both of the RJAT, the holding of the meeting alluded to in article 18 of the RJAT was dispensed with, as well as the submission of arguments by the parties, and a period of 30 days was set for the pronouncement of final decision, which period was extended for a further 30 days, once, and for a further 14 days.
The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the RJAT.
The parties have legal personality and legal capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.
The proceedings do not suffer from nullities.
Thus, there is no obstacle to the examination of the case.
Everything having been considered, it is appropriate to pronounce
II. DECISION
A. FACTUAL MATTERS
A.1. Facts established as proven
1- The Applicant is a commercial company dedicated to the hotel industry, tourist enterprises and similar activities and the provision of inherent services, agricultural and wine-growing operations, processing of beverages and their trade.
2- On 31 December 2012 its share capital was €50,000.00, represented by two shares, one with a nominal value of €40,000.00, belonging to B… and another with a nominal value of €10,000.00 belonging to the company C…, SA (hereinafter C…).
3- The Applicant, in the scope of its activity, carried out two investment projects: the rehabilitation of the "…" and its annexed structures in … and the construction of an Adventure Park and Golf Academy integrated into the Sports Complex …, in ….
4- The Applicant received incentives from the Institute of Tourism of Portugal, within the framework of PRIME – System of Incentives for Tourist Products of Strategic Vocation (project…) which amounted to Euro 3,535,564.00, with the amount of Euro 1,980,518.40 as reimbursable incentive, and the amount of Euro 1,555,045.60 as non-reimbursable incentive.
5- On 02-07-2009, the Applicant entered into with C… a commercial establishment lease contract whose object consisted, in light of the provision in the first clause, in the temporary transfer of the benefit of the building "…", together with the operation of the establishment and equipment already installed therein, to C… so that they could therein develop hotel and restaurant activities, for a period of 11 years, at a monthly price of €37,500.00 to which VAT was added, at the legal rate in force.
6- C… undertook, through the sixth clause of the aforementioned lease contract, to guarantee the full execution of the conditions stipulated in the incentive concession contract concluded between the Applicant and the Institute of Tourism of Portugal, namely the volume of sales and provision of services and the creation of jobs provided for in the application, contributing to the proper execution of the commitments undertaken.
7- The contract established the payment of a monthly rent which, in accordance with the third clause, would be subject to annual adjustment from 2010, in accordance with the adjustment coefficient in force in the previous year, for non-residential leases.
8- The ownership of the assets transferred for operation was not transferred nor was its transfer provided for in the aforementioned lease contract.
9- The values agreed for the rents were monthly charged by the Applicant to C…, complying with the rent plan established.
10- The values charged were regularly paid as summarized in the following table:
[Table data not fully legible in source]
11- In accordance with the contract entered into with C…, the Applicant recorded in the SNC account 7211100000 – Provision of Services – relating to the lease contract of the "…", for the years 2011 to 2013, the following values:
[Table data]
12- The aforementioned lease contract was covered by an incentive program of the Institute of Tourism of Portugal, being fundamental for the viability of the project the obtaining by the Applicant of formal approval of the new rent plan by this entity.
13- The Applicant, on 13 October 2011, requested from that Institute the restructuring of the incentive reimbursement plan.
14- The Applicant recorded, in the tax period of 2012, in the Accounting Normalization System ("SNC") account #2721040000 (debtors for accruals of income) the amount of Euro 434,430.00, in accordance with the following table:
[Table data]
15- This recording had as its counterpart the recording of a debit of equal value in the SNC account #7211100000, relating to income whose taxation was deferred in 2012.
16- Thus, with respect to the invoices issued by the Applicant to C…, relating to the lease of the "…", in the overall amount of €455,580.00, the Applicant only considered subject to taxation in the year 2012 the amount of €21,150.00, in accordance with the following table:
[Table data]
17- The provision of services included in the VAT declarations for the year 2012 included the totality of the rents of the lease contract of the "…", charged to C….
18- C… considered in its accounting records an equal deferral in the corresponding expenses.
19- In October 2013 the Applicant informally became aware that Tourism of Portugal would approve its request.
20- On 9 October 2013 an Addendum to the aforementioned lease contract was entered into.
21- In accordance with the first clause of the contractual Addendum, a reduction in rents for 2011 to 2016 was agreed, which would be compensated by an increase in the same for 2017 to 2028.
22- The reduction and increase percentages would apply to the monthly value of €37,500.00, in accordance with the table below:
[Table data]
23- On 31 December 2013, the Applicant issued credit note No. …, in the amount of €927,412.69, in order to disregard the income relating to the tax periods of 2011, 2012 and 2013, debiting account #72111000000 and, cumulatively, regularized account #272 as the counterpart of account #72111000000.
24- The recognition of the credit note and consequent regularization of account #272 implied the following movements:
a. Account #72111000000 was credited, as the counterpart of account #272, in the amount of €434,430.00, relating to income whose taxation was deferred in 2012, in accordance with the following table:
[Table data]
b. With the recognition of the credit note, the amount of €927,412.69 was deducted from the recognized income.
25- With the aforementioned movements in account #72, the Applicant's income subject to taxation in the year 2013 amounted to €63,533.25, in accordance with the following table:
[Table data]
26- The claim filed by the Applicant to Tourism of Portugal, mentioned above, was officially accepted in May 2014.
27- The Applicant was the subject of an inspection action, which concerned the tax periods of 2011 and 2012, for IRC purposes, under Service Order OI2014….
28- Under Service Order OI2015… it was likewise the subject of an inspection action that concerned the tax period of 2013, for IRC purposes.
29- Given that part of the income resulting from the aforementioned contract, relating to the fiscal years of 2011, 2012 and 2013 were the subject of deferral and were not considered income for IRC taxation purposes in the fiscal years of 2012 and 2013, the AT requested, in both inspection procedures, clarifications from the Applicant regarding these deferrals.
30- After analysis of the justification then presented, the SIT (Tax Inspection Services) considered that the deferral of income relating to the lease contract entered into with C… was verified, based on the following facts/elements:
i. Request for extension of the reimbursement of project incentive… …3 (Hotel…) - temporal recomposition of the rents agreed upon by the parties involved;
ii. Agreement on rent renegotiation with C… through the execution of an addendum to the lease contract of the establishment "…", given that C… alleged the unsustainability of the business. This addendum aimed to alter the monthly payments which changed from fixed monthly payments to increasing monthly payments over the term of the contract.
iii. Recognition of credit note No. … relating to the recognition of the adjustments inherent to the redefinition of the rent plan agreed with C… – annulment of income as per addendum to the contract.
31- The recording, in 2012, of the values in the SNC account 272 – Debtors for accrual of income, was based on the request presented to Tourism of Portugal for restructuring of the reimbursement plan of project incentive… … (Hotel…).
32- In 2011, the Applicant did not record the deferral of any income, having accounted as income 12 rents of 37,500.00.
33- In December 2012, the Applicant recorded the deferrals relating to the three months of 2011.
34- From the Tax Inspection Reports, it is stated, among other things, that:
- "In light of all the foregoing, it is concluded that inherent to the recognition of income in the A… analyzed in the present inspection action is the lease contract of the establishment "…", which we now proceed to frame:
We are in the presence of a lease of a commercial establishment in which the temporary cession (11-year period) occurs, by means of payment (monthly periodic rent), of the benefit and usufruct of the establishment as a whole, as an economic unit "…", whereby the ceding entity, being bound by the application of the SNC (see point III.2) must account for the operation taking into account what is recommended in NCRF 9.
In accordance with what is prescribed in NCRF 9 the lease is considered an operating lease, pursuant to §42 to §50.
Being revenues associated with an operating lease, in light of the provision in §43 of NCRF 9, the revenues should be recognized on a linear basis throughout the contract.
The entity did not comply with this accounting principle of balance between revenues and expenses. On the other hand,
- The revenues invoiced relating to the lease contract constitute revenues in light of the provision in art. 20 of the CIRC;
- These revenues must be considered in the determination of the result proportionally to the execution;
- In light of the provision in art. 18 of the CIRC, revenues and expenses must be recognized when they are obtained or incurred, regardless of their receipt or payment. This rule of allocation is therefore based on the criterion of economic competence of the fiscal years, as opposed to the so-called criterion of financial competence which the entity invokes for revenues.
That is, the s.p., did not comply with these legal provisions of the CIRC";
- "In light of the foregoing we conclude that the annulment of revenues of the fiscal year 2012 operated by the accounting of revenues to be recognized recorded in the account - SNC account 272 – Debtors for accrual of income, in the total amount of €434,430.00, does not present accounting and tax framework, whereby it is corrected for IRC purposes, as follows presented:
2012
The disregard in the fiscal year 2012 of the revenues subject to deferral by the entity results in the following change to the tax result of this fiscal year:
[Table data]
The agreement in question, if it were to be accepted for tax purposes would have as a consequence the alteration/manipulation of the tax results, allowing the deferral in time of the tax results due."
- "In light of the foregoing we conclude that the annulment of revenue of the fiscal year 2013 operated by the accounting of the credit note, in the total amount of €927,412.69, does not present accounting and tax framework, whereby it is corrected in the total amount of €927,412.69.
It should be noted that the amount of €434,430.00 constitutes revenues already subject to taxation in the fiscal year 2012, correction made through OI2014…. This amount was considered, by the s.p., revenue of 2013 operated by the regularization of account 272 – revenues to be recognized and subject to regularization (annulment) through the credit note under analysis.
2013
The disregard in the fiscal year 2013 of the revenues subject to annulment by the entity results in the following change to the tax result of this fiscal year:
"
35- Notified to exercise the right of hearing (through letters No. … … of 06/11/2015 - regarding the Draft Tax Inspection Report of 2012 - and … … of 03/07/2015 - Regarding the Draft Tax Inspection Report of 2013), the Applicant did not exercise that right.
36- The AT proceeded to the assessment of IRC No. 2015…, of 24 August 2015, correcting the taxable result relating to the tax period of 2012 and reducing the value of the tax loss previously declared by the Applicant, in accordance with the following table:
[Table data]
37- The AT proceeded to the assessment of IRC No. 2015…, of 7 December 2015, correcting the taxable result relating to the tax period of 2013 and reducing the value of the tax loss previously declared by the Applicant, in accordance with the following table:
[Table data]
38- On 04/01/2016 and 06/04/2016 filed a gracious complaint with the Finance Directorate of …, contesting the corrections made regarding the fiscal years of 2012 and 2013, which were filed under the numbers …2016… and …2016…, respectively.
39- By orders of 13/09/2016, notified on 14/09/2016, both complaints were dismissed.
40- From the decision of the gracious complaints it appears, among other things, the following:
"32. Now, the present gracious complaint is inseparable from the facts exhaustively analyzed in the Inspection Report and all the facts listed in the annexes that compose it, whereby here the entire framework and factual description of the operations and the participants that triggered the application of the described tax corrections is given as fully reproduced (...)
The addendum to the contract does not alter the overall value of the contract which remained unchanged, constituting only an alteration in the payment conditions (period and monthly value).
76. The services provided and to be provided within the scope of the lease contract underwent no alteration.
77. With the execution of the lease contract of the establishment designated "…" the entity acquired a monthly right, quantifiable by the amount of the rents stipulated between the parties.
78. C… enjoyed the benefit of the establishment "…", having monthly effected, in the fiscal year under analysis, the payment of the rents stipulated between both in the aforementioned lease contract.
79. The expenses supported by the claimant relating to these revenues are of fixed amount: the depreciations and the sub-lease contract were not subject to any reduction.
80. Being that the addendum to the contract does not concern a diminution of rents, constituting only a renegotiation of the periods of receipt/payment between the claimant and the company C…, since the price agreed in contractual terms (lease contract executed on 02/07/2009) did not undergo any alteration.
81. The addendum to the contract, as well as with the request to Tourism of Portugal, which was only approved in May 2014, did not create an uncertainty regarding the collectibility of an amount already included in the revenue, given that the invoiced amounts were already paid.
82. Indeed, the claimant with the addendum and with the request to tourism limited itself to negotiating the period of receipt/payment.
83. It should also be said that Tourism of Portugal does not have a direct relationship with the service provider, being only a financier of the project "…", whereby it is not justified the relationship established by the claimant between the request to Tourism of Portugal and the deferral of revenues.
84. The addendum to the lease contract and its accounting/tax recognition through the credit note resulted in an alteration of the tax results over the duration of the lease contract as a function of a mere payment agreement, situation not fiscally permitted, in light of the provision in article 18 of the CIRC (revenues and expenses must be recognized when they are obtained or incurred, regardless of their receipt or payment), likewise not complying with the accounting principles contained in NCRF 9 of the SNC.
85. The rule of allocation established in article 18 of the CIRC is based on the criterion of economic competence of the fiscal years, as opposed to the so-called criterion of financial competence.
86. The elements of the financial statements (assets, liabilities, equity, revenues and expenses) are recognized when they satisfy the definitions and recognition criteria contained in the conceptual framework and NCRF's of the SNC, regardless of the dates of receipt, payment or issuance of the documents.
87. The effects of transactions and other events are recognized when they occur (and not when cash or cash equivalents are received or paid) and are recorded accounting and reported in the financial statements of the periods to which they relate.
88. Whereby, the deferral of revenues carried out by the claimant, with the recognition of the credit note, having as its basis the renegotiation of the payment conditions with C… relating to the lease contract of the establishment "…", as well as the request for extension of the period of reimbursement of the incentive to Tourism of Portugal, lacks accounting and tax framework in the context of the SNC and IRC.".
41- The business volume of the tourist enterprise "…", in the years 2009 to 2014, corresponds to the table below:
[Table data]
A.2. Facts established as not proven
1- On 4 October 2011, the Applicant and C… reached an agreement regarding the alteration of the monthly payments due for the lease, an agreement which was not reduced to writing on that date.
A.3. Substantiation of the proven and not proven factual matters
Regarding the factual matters the Tribunal does not have to pronounce on everything that was alleged by the parties, the duty falling to it, yes, to select the facts that matter for the decision and discriminate the proven from the not proven matters (cfr. art. 123, para. 2, of the CPPT and article 607, para. 3 of the CPC, applicable ex vi article 29, para. 1, subparagraphs a) and e), of the RJAT).
Thus, the facts pertinent to the judgment of the case are chosen and cut out according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of Law (cfr. previous article 511, para. 1, of the CPC, corresponding to the current article 596, applicable ex vi article 29, para. 1, subparagraph e), of the RJAT).
Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the Case File joined to the records, the above-listed facts were considered proven, with relevance to the decision.
The fact established as not proven is due essentially to the lack of evidence to corroborate it, and to the existence of factual indications to the contrary.
Indeed, although the Applicant questions whether it would make any sense to submit to the approval of Tourism of Portugal, on 13 October 2011, within the scope of Ordinance No. 1020/2010, of 6 October, the flexibilization and restructuring of the reimbursement plan of the incentive, based on the renegotiation of the rent with C…, without having reached a prior agreement with its counterpart, the fact is that the rents continued to be invoiced, accounted and paid in accordance with the original wording of the contract, and not in accordance with the Contractual Addendum of 9 October 2013, which points, precisely, in the direction that the agreement that may have existed between the Applicant and C… would be in the direction of proceeding to the revision of the rents, only and if Tourism of Portugal gave its approval, even if, as it came to pass, with the retroactive reformulation of the rents in the meantime accrued, which, moreover, is confirmed by the circumstance that, as soon as there was knowledge that that approval was assured, the Contractual Addendum was granted and, shortly thereafter, its execution was begun.
Hence, it was not possible to establish as proven the fact established as not proven, with the wording presented.
B. ON THE LAW
The question of Law to be decided in the present proceedings essentially comes down to knowing whether, having the Applicant, as lessor, entered into an addendum to an operating lease contract, in October 2013, in which, among other things and as far as the case is concerned, the rents invoiced and accounted for in the years 2011, 2012 and 2013 were reduced, in exchange for an increase of the same in the years 2017 onwards, it is lawful for it to reduce the amount of rents invoiced, accounted and received in those years 2011 to 2013, in accordance with the original terms of the contract, or whether, as the AT understands, the Applicant is obliged to account for the rents in accordance with a linear basis, regardless of how the payment of those is agreed upon by the parties.
*
The assessments against which the Applicant revolts are legally based on the provisions of articles 17/1, 18 and 20/1/a) of the CIRC, and in §42 to §50 of NCRF 9.
The first of those provisions states:
"The taxable profit of legal entities and other entities mentioned in subparagraph a) of paragraph 1 of article 3 is constituted by the algebraic sum of the net result of the period and the positive and negative changes in equity verified in the same period and not reflected in that result, determined on the basis of accounting and eventually corrected in accordance with this Code."
The second of those same aforementioned provisions states:
"1 - Revenues and expenses, as well as other positive or negative components of taxable profit, are attributable to the tax period in which they are obtained or incurred, independently of their receipt or payment, in accordance with the economic accrual regime.
2 - The positive or negative components considered as relating to prior periods are only attributable to the tax period when on the date of closure of the accounts of the one to which they should have been attributed they were unforeseeable or manifestly unknown.
3 - For purposes of application of the provision in paragraph 1:(...)
b) Revenues relating to provision of services are generally considered realized, and the corresponding expenses incurred, on the date when the service is completed, except when it comes to services consisting in the provision of more than one act or in continued or successive performance, which are attributable proportionally to their execution;"
By its turn, article 20/1/a) of the CIRC states:
"Revenues are considered to be those resulting from operations of any nature, as a result of a normal or occasional action, basic or merely accessory, namely: a) Those relating to sales or provision of services... ".
Finally, §42 to §50 of NCRF 9 have the following content:
"Lessors shall present assets subject to operating leases on their balance sheets according to the nature of the asset.
Lease income from operating leases shall be recognized in profit or loss on a straight-line basis over the lease term, unless another systematic basis is more representative of the pattern in which the benefit of use of the leased asset is diminished by the incentive granted by the lessor.
Costs, including depreciation, incurred to generate lease income are recognized as an expense. Lease income (excluding receipts of services provided such as insurance and maintenance) is recognized on a straight-line basis during the lease term even though the receipts do not follow that pattern, unless another systematic basis is more representative of the pattern in which the benefit of use of the leased asset is diminished.
Initial direct costs incurred by lessors in negotiating and arranging an operating lease shall be added to the carrying amount of the leased asset and recognized as an expense during the lease term on the same basis as the lease income.
The depreciation policy for depreciable leased assets shall be consistent with the lessor's normal depreciation policy for similar assets, and depreciation shall be calculated in accordance with NCRF 6 - Intangible Assets and NCRF 7 – Tangible Fixed Assets.
To determine whether a leased asset has become impaired, an entity shall apply NCRF 12 – Impairment of Assets.
A manufacturer or dealer lessor does not recognize any profit on the sale upon entering into an operating lease because it is not equivalent to a sale.
Lessors shall make the following disclosures for operating leases:
(a) the future minimum lease payments under non-cancellable operating leases in aggregate and for each of the following periods;
(i) not more than one year;
(ii) more than one year and not more than five years;
(iii) more than five years;
(b) the total of contingent rents recognized as income during the period;
(c) a general description of the lessor's lease arrangements.
Furthermore, the disclosure requirements in accordance with NCRF 6 - Intangible Assets, NCRF 7 - Tangible Fixed Assets, NCRF 11 - Investment Property, NCRF 12 - Impairment of Assets and NCRF 17 - Agriculture shall apply to lessors in respect of assets under operating leases."
*
As is verified from the proven facts, in the situation before us the Applicant entered into in 2009 a contract that can be qualified as being an operating lease, for 11 years, with fixed and constant rent, and in October 2013 entered into a Contractual Addendum by which the value of the rents for 2011 to 2016 was reduced, and the value of the same increased from 2017 onwards, the contract having been extended until 2018.
Before proceeding to the substantive issue that presents itself for decision, it becomes necessary to understand what the implications of entering into the Contractual Addendum in 2013 are for the lease relationship and, specifically, for the rights of the Applicant.
It is verified, then, that when the Contractual Addendum was granted, the rents that had accrued since 2011 up to the date of that grant were already due, having formed in the legal sphere of the Applicant, the right to the credit thereof, which was invoiced, accounted and, in its vast majority, paid.
From the execution of that same Addendum, the value of the rent was altered (downwards, until 2017, and upwards thereafter), whereby the credits that were formed, from that time onwards, in the legal sphere of the Applicant correspond to the value of the rents fixed in the Addendum.
Viewed in this way it is understood, from the outset, that the alteration of the value of the rents relating to the periods prior to the execution of the Addendum does not correspond, strictly speaking, to an alteration of the rents, as the Applicant claims, nor, equally, to an alteration of the form of payment of an accrued credit, as the AT refers.
Indeed, as regards the aforementioned understanding propounded by the Applicant, its credit to each rent was formed at the time of its accrual, as the counterpart of the benefit of the leased property ceded, and in accordance with the contractual regulation in force at that moment, whereby the value of the credit resulting from the rents accrued is that which results from the contract, as it was in force at the moment of its accrual, being that, as results from the table set out in point 10 of the proven facts, such credits were, in its vast majority, paid and, consequently, settled, thereby extinguishing themselves.
On the other hand, the Contractual Addendum, properly understood, does not translate into a deferment of the payment of the rents (in the terms as has been stated) accrued, until the moment when the amount of increased rents is foreseen, since the right of the Applicant to these will only be formed at that moment, as a function of the benefit of the leased property that it provides to the lessee. That is, the Applicant does not have at this time, and did not have at the date of either the Addendum, or of the tax facts or of the corrections now contested, any formed right to the rents (namely the increased ones) that will be formed in the future, nor even to the value of the difference between the rents accrued in accordance with the original wording of the contract, and that which came to be considered, for the same periods, in the Contractual Addendum.
Thus, the understanding contained in the TIR (Tax Inspection Report) is not corroborated, to the effect that the Applicant "with the addendum to the contract and with the request to Tourism of Portugal limited itself to negotiate the period of receipt/payment"[1].
Indeed, if the lease contract, by force of any vicissitude, were to terminate before the periods for which, in that Addendum, increased rents were foreseen, the Applicant would have no right to demand the difference between the value of the rents originally fixed and the value fixed, for those periods, in the Addendum[2], as would happen if this were merely a payment agreement.
It cannot be overlooked, note, that the lease contract is not analogous, for example, to an installment sale, in which, notwithstanding payment being protracted over time, the right to the full price is generated, with the valid and effective formation of the contract, ab initio, in the legal sphere of the seller.
To the contrary, in the lease contract, being a contract of periodic execution[3], the right to the rents is only generated as the counterpart of the benefit of the thing effectively provided, as that benefit is being provided, whereby future rents are merely eventual, constituting an uncertain event not dependent exclusively on the control of the lessor[4].
Thus, in reality, what occurred was that the Applicant, on one hand, renounced its accrued and unpaid credits up to the time of the Addendum, corresponding to the difference between the original unpaid values (in a total of €159,733.78[5]) and the new values agreed, and on the other hand, assented to financing the lessee in the rents subsequent to that Addendum, in the amount corresponding to the difference between the values originally provided and actually paid[6], in exchange for the fixing of future rents, of higher value, and the extension of the period of validity of the contract.
Thus, and in summary, it is considered that:
a) the Contractual Addendum did not proceed to an alteration of the value of the rents accrued in the periods prior to its grant, since such rents had already accrued, and the corresponding credit of the Applicant had already been formed in its legal sphere;
b) such credit, moreover, was extinguished as the payments referred to in point 10 of the facts established as proven were made by the lessee;
c) the said Addendum does not translate into a mere payment agreement, or a deferment of this, since:
i. on one hand, the payments referred to in point 10 of the facts established as proven were made;
ii. on the other hand, and with the grant of that Addendum, the Applicant lost – by renunciation – the right to the difference between the value of the rents accrued and unpaid and the new value fixed, and only in the future and in an eventual and uncertain form (that is, if the contract remains on the same terms until then), will it have the right to the difference in value between the rents initially agreed and the increased rents;
d) the Contractual Addendum thus integrates:
i. financing to the lessee, in the rents subsequent to that Addendum, in the amount corresponding to the difference between the values originally provided and actually paid by it, prior to the grant of the Addendum;
ii. a renunciation by the Applicant of its accrued credits in value corresponding to the difference between the values originally provided and unpaid, and the new values agreed.
*
Having established this, the dispute in the present proceedings of the arbitral process arises, in the first place, from the interpretation to be given to § 43 of NCRF 9, designedly, as regards knowing whether, as the rule of that provision states, the income from the operating lease in question should be recognized on a linear basis, as the AT understood, or whether, as the exception to that same provision allows, they could be recognized on another systematic basis, for being more representative of the time pattern in which the benefit of use of the leased asset is diminished by the incentive granted by the lessor.
NCRF 9 has a correspondence in IAS 17, which in its point 49 states that "Lease income should be recognised over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished."
Now, the exception to the rule of the linear basis enshrined in these provisions (NCRF§43 and IAS17.49) has been understood as presupposing a diminution in the physical use of the leased asset, which, moreover, the Applicant seems to understand, by referring, in point 67 of its initial Request, that "in cases where lease payments are not constant throughout the contract, being increasing or decreasing [as is the present case], the income from the operating lease should be recognized on a constant basis unless another basis is more consistent with the physical use of the asset subject to operating lease."[7].
It happens that, from the factual matters ascertained, nothing permits the conclusion that the physical use of the leased asset has been, in any way, diminished.
To the contrary. The entire argumentation of the Applicant goes in the direction that the economic benefit that the lessee derives from the property will, predictably, be greater, as time goes on, which, moreover, cannot but be considered a normal risk inherent in the activity itself of that entity.
The understanding of the Applicant is not thus sustained, according to which it would be "the leased asset used in an increasing manner", which would be "proven by the increase in income resulting from the operation of the leased asset"[8]. Indeed, the increase in income will be exclusively resulting from a greater economic success in the operation of the same leased asset. Put in another way, the use of the leased property by the lessee is always the same (provision of the totality of the same hotel unit to its customers), being that it could be subject to a more or less intense use by the customers that the lessee manages to attract, not identifying, however, this use with that which is provided to the lessee by means of the lease contract.
In any event, it is considered – following what is, as has been seen, recognized by the Applicant itself – that the content of the accounting norms to be applied, on the basis of which the taxable profit of the Applicant should be calculated, does not accommodate the interpretation that the rule for accounting for lease income on a constant basis can be set aside on the basis of a differentiation of the foreseeable economic benefits that the lessee may derive from the thing leased.
Hence there is no doubt that, in the present case, one should proceed to account for the income from the lease on a linear basis, which moreover is accepted that the Applicant did in 2011, 2012 and 2013, having recorded in the corresponding account the income invoiced in correspondence with the lease contract then in force.
It happens, however, that in the year 2012 the Applicant entered in account #2721040000 (debtors for accruals of income) the value of €434,430.00, a recording which had as its counterpart the recording of a debit of equal value in account #7211100000, relating to income whose taxation was deferred in 2012.
It was with respect to this recording that the AT, for the tax period in question, considered that the annulment of income of the fiscal year 2012 does not present accounting and tax framework, from which the first correction against which the Applicant revolts results.
In light of all that has previously been stated, one cannot but consider that the AT is right, in this part.
Indeed, and as is noted in the respective TIR (Tax Inspection Report):
a. The Contractual Addendum, in light of the proven facts, does not occur in the year 2012, or earlier, but in the year 2013;
b. In the year 2012 the rents were invoiced, accounted and paid in conformity with the contractual regulation then in force;
c. By force of that same contractual regulation, there was formed in the year 2012, in the legal sphere of the Applicant, the right to the credit of the rents provided for in the original lease contract, as the counterpart of the benefit of the leased property ceded, a credit that was extinguished by the satisfaction of the payment of the rents by the lessee.
Thus, no basis existed, or exists, for the Applicant to have proceeded as it did, by entering in account #2721040000 (debtors for accruals of income) the value of €434,430.00, as the counterpart the recording of a debit of equal value in account #7211100000, relating to income whose taxation was deferred in 2012.
The conclusion formulated does not integrate any violation of the principle of private autonomy of the Applicant, since it is not taking away any effects from the Contractual Addendum by it granted, rather, to the contrary, one is properly framing juridically and delimiting in what manner the same should be repercussed in its accounting, within what, in the proceedings, is proven, and taking into account that the alleged by the Applicant regarding the new rent plan having been negotiated in October 2011, in the sense that from that date it was assumed as a definitive and concluded commitment between the parties, was not proven.
Moreover, note that being the lease of a commercial establishment a formal contract (cfr. art. 1069 of the Civil Code), the alterations to the same should take the same form of the contract, whereby always the private autonomy of the Applicant would be, from the outset, limited by the requirements of form.
In light of the foregoing, the correction must be upheld, the arbitral request being improcedent, in this part.
*
With respect to the year 2013, it is verified that the Applicant issued credit note No. …, in the amount of €927,412.69, whose recognition and consequent regularization of account #272 implied the following movements:
a. Account #72111000000 was credited, as the counterpart of account #272, in the amount of €434,430.00, relating to income whose taxation was deferred in 2012;
b. With the recognition of the credit note, the amount of €927,412.69 was deducted from the recognized income.
In light of these recordings, the AT considered that the annulment of revenue of the fiscal year 2013 operated by the accounting of the credit note, in the total amount of €927,412.69, does not present accounting and tax framework, whereby it was corrected in the total amount of €927,412.69, taking into account that the amount of €434,430.00 related to income already subject to taxation in the fiscal year 2012, by means of the correction made by OI2014….
Thus, the correction made was limited to the repercussion of the credit note No. …, in the amount of €492,982.69, as it was considered to relate to income annulled without legal framework.
As detailed above, in light of the facts established as proven, it is verified that by means of the Contractual Addendum, in 2013, the Applicant proceeded to:
i. financing to the lessee, in the rents subsequent to that Addendum, in the amount corresponding to the difference between the values originally provided and actually paid by it, prior to the grant of the Addendum;
ii. a renunciation by the Applicant of its accrued credits in value corresponding to the difference between the values originally provided and unpaid, and the new values agreed in that Addendum.
Now, the aforementioned financing will be unsusceptible to repercussion accounting by means of the aforementioned credit note, whereby, also here the AT will be right when it proceeded to the correction in question, considering that the credit note does not present accounting and tax framework, there being no here, for the same reasons pointed out above, any violation of the private autonomy of the Applicant.
As to the credits, in the value of €159,733.78, to which the Applicant renounced in exchange (together with the financing mentioned above) with the extension of the lease contract and a future increase in rents, is contained in the credit note, whereby in this part, contrary to what the AT considered, in this part the annulled income has legal basis.
Indeed, as referred to in §92 of the Conceptual Framework of the SNC, "the recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets".
Now, the credit right of the Applicant – following a resolution of an entrepreneurial nature whose goodness is not questioned[9] – was extinguished in its patrimony, decreasing its assets, whereby, naturally, such must necessarily be reflected in the calculation of its taxable profit, the issued credit note being an apt means to carry out such operation.
Note that what has just been stated does not contend with the correctness of the interpretation made by the AT regarding § 43 of NCRF, nor with the corresponding incorrectness of the corresponding interpretation propounded by the Applicant, since, as has been seen and results from the factual matters, the lease was recorded in the corresponding account in conformity with what the respective contract provided. Moreover, the contested correction and now under examination concerns the disregard of credit note No. …, and not the accounting of the operating lease in account #72111000000.
*
Having in mind some confusion that has been generating in the matter, note is taken that, although it can be understood that the argumentation above set forth does not coincide, point by point, with either the argumentation of the Applicant, or with the argumentation of the AT, in the matters decided favorably to each of them, it is considered that there is no excess of pronouncement, insofar as the arbitral Tribunal limited itself to applying the law invoked by the parties to the proven and not proven facts alleged by the parties, and it is pacifically understood that:
"On matters of law, the tribunal is not subject to the allegation of the parties, nor even as regards the legal qualification of the facts by them effected, and enjoys freedom in the investigation, interpretation and application of the Law (art. 664 of the CPC)."[10].
*
Finally, although the Applicant conveys, in its initial Request, the understanding that, having the A… and C… special relations, in light of the provision in article 63, paragraph 4 subparagraphs a) and d) of the Code of the IRC, if the arbitral request formulated were to be improcedent, one should proceed to an adjustment (downward) to the individual taxable profit of that entity, with impact on the tax result of the RETGS of Group D…, in the tax periods in question, the fact is that it does not formulate any concrete request in this respect, whereby nothing falls to this arbitral Tribunal to know in respect thereof.
*
C. DECISION
In terms of which it is decided in this Arbitral Tribunal to judge the arbitral request formulated as partially granted and, in consequence:
a) Annul partially the act of additional IRC assessment No. 2015…, relating to the year 2013, insofar as it did not consider the value of €159,733.78 contained in credit note No. …, as well, in the same measure, the decision of the gracious complaint that had it as its subject;
b) Judge the remaining arbitral requests as improcedent;
c) Condemn the parties in the costs of the proceedings, in the proportion of their respective defeat, fixing in €3,605.00 the amount to be borne by the Applicant, and in €679.00, the amount to be borne by the Respondent.
D. Value of the proceedings
The value of the proceedings is fixed at €231,853.17 (two hundred and thirty-one thousand eight hundred and fifty-three euros and seventeen cents), pursuant to article 97-A, paragraph 1, a), of the Code of Procedure and Tax Procedure, applicable by force of subparagraphs a) and b) of paragraph 1 of article 29 of the RJAT and of paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The value of the arbitration fee is fixed at €4,284.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the parties in the proportion of their respective defeat, above fixed, once the request was partially granted, pursuant to articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and article 4, paragraph 4, of the cited Regulation.
To be notified.
Lisbon, 11 July 2017
The Arbitrator President
(José Pedro Carvalho - Rapporteur)
The Arbitrator Member
(José Nunes Barata)
The Arbitrator Member
(Luís Alberto Ferreira Alves)
[1] Page 25 of the TIR/2012 and page 24 of the TIR/2013.
[2] Without prejudice to any right to compensation that may be due and may take into account the difference in values in question, but which in any case will always be a new and distinct right, different from the right to credit corresponding to the rents accrued and reduced in its amount by the Contractual Addendum.
[3] Reason for which, for example, termination does not, in principle, have retroactive effect, pursuant to article 434/2 of the Civil Code.
[4] And which may therefore correspond to the definition of contingent asset, in the sense of § 8 of NCRF 21.
[5] € 239,686.34 (balance at 12/2013) - € 79,952.56 (rents of 11/2013 and 12/2013, subsequent to the Addendum).
[6] Indeed, having the Applicant invoiced, accounted and received the rents in accordance with the original wording of the contract, up to the grant of the Addendum, the income corresponding to the rents actually paid was consolidated in its legal sphere. The reduction in the value to be considered for past rents received, provided for in the Addendum, corresponds to the disposition of such income. Indeed, in order to balance accounts with the lessee, the Applicant will have, from one perspective or another: either to deliver at once the amount received in excess of what was agreed in the Addendum, receiving it back as the future rents fall due; or to dispense the Applicant from the payment of future rents, until that amount received in excess is made up, recovering such amount as the increased rents from 2017 onwards become due. Whether in one case or the other, the execution of the Contractual Addendum will function, as far as the rents accrued and paid at the date of its grant are concerned, as credit from the Applicant to the lessee.
[7] Underlined text in original.
[8] Point 68 of the initial request.
[9] Not being able, therefore, to equate the application of the doctrine of the Administrative Supreme Court Decision of 04-11-2015, issued in case 0963/13, and available at www.dgsi.pt, being that the factual situations between the present case and that one are, equally, configured in a distinct manner.
[10] Cfr. Administrative Supreme Court Decision of 05-06-2013, issued in case 0433/13, available at www.dgsi.pt.
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