IRC Deductibility of Expenses and Accrual Principle – CAAD Arbitral Decision 744/2016-T

ARBITRAL DECISION

The arbitrators Cons. Jorge Lopes de Sousa (arbitrator-president), Dr. José Coutinho Pires and Professor Doctor Ana Maria Rodrigues, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 27-02-2017, agree as follows:

1. REPORT

A…, Complementary Grouping of Companies registered in the Commercial Registry Office of …, under the single registration number and collective person number …, with Headquarters …, Building …, …, …-… …, (hereinafter designated as "CGE" or "Claimant"), came to file a request for constitution of the arbitral tribunal with a view to the annulment of the decision that expressly rejected the gracious complaint presented by the CGE and the annulment of the Corporate Income Tax assessment no. 2016 … relating to the fiscal year 2013.

The AUTHORITY FOR TAX AND CUSTOMS is the Respondent.

The request for constitution of the arbitral tribunal was accepted by the President of the Administrative Arbitration Centre and notified to the Authority for Tax and Customs on 29-12-2016.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the Administrative Arbitration Regulations, the Deontological Council designated as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable time period.

On 10-02-2017 the parties were duly notified of this designation and did not express any wish to refuse the designation of the arbitrators, in accordance with the combined provisions of article 11 no. 1, paragraphs a) and b) of the Administrative Arbitration Regulations and articles 6 and 7 of the Deontological Code.

In accordance with the provisions of paragraph c) of no. 1 of article 11 of the Administrative Arbitration Regulations, the collective arbitral tribunal was constituted on 27-02-2017.

The Authority for Tax and Customs responded, defending the lack of merit of the request for arbitral pronouncement.

On 22-06-2017, a hearing was held in which witness evidence was produced and it was decided that the proceedings would continue with successive written pleadings.

Only the Claimant presented pleadings.

The Tribunal is competent.

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

The proceedings do not suffer from any nullities.

2. FACTS

2.1. Proven Facts

The following facts are considered proven:

• The CGE is composed of the grouped companies – B… S.A (hereinafter "B…") and C…, S.A. (hereinafter "C…"), each company holding 50% of the respective capital (copy of the updated Statutes of the Complementary Grouping of Companies contained in document no. 5 attached to the request for arbitral pronouncement, the content of which is reproduced);

• The company B… S.A., part of the CGE, corresponds to the Company currently named D…, S.A. (Online publication of Corporate Act on the Justice Portal, a copy of which is contained in document no. 6 attached to the request for arbitral pronouncement, the content of which is reproduced);

• The CGE whose object is "(…) to improve the conditions of exercise and the result of the economic activity of the Grouped companies, through the joint performance of all material and legal acts necessary for the execution of the general construction works of the hydroelectric development of A…, which shall be awarded to it by E…, S.A. (…)" (document no. 5 attached to the request for arbitral pronouncement, the content of which is reproduced);

• The CGE was constituted in 2008, with a view to carrying out the general construction works of the hydroelectric development of A…, whose award provided for an initial period of 60 months (five years) for completion of the works;

• In May 2011, an extension of a further eight months was granted for completion of the works, this period having been postponed to 2015 and the dam having become operational in 2016;

• In terms of activity, the Claimant has a single client, the awarding entity of the contract, that is, E…, S.A.;

• The delay in completing the works and putting the dam into operation caused serious difficulties in managing the CGE's treasury;

• The CGE incurred delays in settling debts to suppliers, leading them to demand default interest on the corresponding amounts owed;

• The Authority for Tax and Customs carried out a tax inspection of the CGE, under service order no. OI2015…, which covered the fiscal period of 2013;

• In this tax inspection, the Tax Inspection Report was drawn up, a copy of which is contained in document no. 7 attached to the request for arbitral pronouncement, the content of which is reproduced, which states, among other things, the following:

III – 1. Thus, the accounts contain the following cost accounts with their respective values (annex III):

• Account 06.9.1.5.0000.001308 – Default interest and compensatory interest: €30,978.43

• Account 06.9.1.8.000.001311 – Other interest: €2,398,212.96

TOTAL: €2,429,191.39

From the supporting documents, it appears that, although recorded in differentiated accounts, all values refer to interest for late payment to suppliers, including to the grouped companies, and financial charges, considering the time span between 2010 and 2013.

III – 1.1. As mentioned in the previous point, the expenses of previous fiscal years, namely interest for late payment to suppliers relating to the years 2010, 2011 and 2012 and bank charges for 2012, are as follows:

a) Account 06.9.1.5.0000.001308:

Entry identified by batch no. …/2000, dated 31.01.2013 (annex IV):

Debit Note no. …/2012, dated 30.09.12, issued by F…, S.A., in the total amount of €2,375.66, referring to bank charges with interest on factoring operations and office expenses for the year 2012, bearing the CGE entry stamp dated 02 November 2012: €2,375.66

Entry identified by batch no. …/2000, dated 31.01.2013 (annex V):

Debit Note no. …/2012, dated 31.10.2012, issued by F…, S.A., in the total amount of €4,871.72, referring to bank charges with interest on factoring operations and office expenses for the year 2012, bearing the CGE entry stamp dated 30 November 2012: €4,871.72

Entry identified by batch no. …/2000, dated 31.01.2013 (annex VI):

Debit Note no. …, dated 10.12.2012, issued by G… S.A., in the total amount of €22,936.62, referring to financial charges for 2012, bearing the CGE entry stamp dated 12 December 2012: €22,936.62

b) Account 06.9.1.8.000.001311:

Entry identified by batch no. …/2000, dated 10.05.2013 (annex VII):

Debit Note no. …, dated 31.12.2012, issued by G… SA, in the total amount of €1,598.72, which contains interest relating to interest for 2012 in the amount of: €1,598.72

Entry identified by batch no. …/2000, dated 31.08.2013 (annex VIII):

Invoice no. …/13, dated 30.08.2013, issued by C… S.A., in the total amount of €73,433.13, which contains interest relating to 2010, 2011 and 2012 in the amount of: €38,345.32

Entry identified by batch no. …/2000, dated 31.08.2013 (annex IX):

Invoice no. …/13, dated 30.08.2013, issued by C… S.A., in the total amount of €208,881.78, which contains interest relating to the years 2010, 2011 and 2012 in the amount of: €150,365.56

Entry identified by batch no. …/2000, dated 31.08.2013 (annex X):

Invoice no. …/13, dated 30.08.2013, issued by C… S.A., in the total amount of €202.36, which contains interest relating to interest for 2010 in the amount of: €202.36

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XI):

Invoice no. …/13, dated 30.08.2013, issued by C… S.A., in the total amount of €13,171.53, which contains interest for 2010 in the amount of: €13,171.53

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XII):

Invoice no. …/13, dated 30.08.2013, issued by H…, CGE, in the total amount of €39,449.23, which contains interest relating to 2010, 2011 and 2012 in the amount of: €21,052.32

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XIII):

Invoice no. …/13, dated 30.08.2013, issued by H… CGE, in the total amount of €833.71, which contains interest relating to 2010 in the amount of: €833.71

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XIV):

Invoice no. …/13, dated 30.08.2013, issued by I… S.A., in the total amount of €2,582.22, which contains interest relating to 2010 and 2011 in the amount of: €2,582.22

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XV):

Invoice no. …/13, dated 30.08.2013, issued by I… S.A., in the total amount of €192.01, which contains interest relating to 2011 in the amount of: €192.01

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XVI):

Invoice no. …, dated 30.08.2013, issued by J… S.A., in the amount of €132.62, which contains interest relating to the years 2010, 2011 and 2012: €132.62

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XVII):

Invoice no. …, dated 30.08.2013, issued by J… S.A., in the total amount of €4.38, which contains interest relating to 2010: €4.38

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XVIII):

Invoice no. …/13, dated 30.08.2013, issued by K… S.A., in the total amount of €9,359.80, which contains interest relating to 2010, 2011 and 2012: €9,359.80

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XIX):

Invoice no. …/13, dated 30.08.2013, issued by K… S.A., in the total amount of €620.08, which contains interest relating to 2010, 2011 and 2012: €620.08

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XX):

Invoice no. …/13, dated 30.08.2013, issued by L… S.A., in the total amount of €83,065.28, which contains interest relating to 2010, 2011 and 2012: €35,974.50

Entry identified by batch no. …/2000, dated 31.08.2013 (annex XXI):

Invoice no. …/117, dated 30.08.2013, issued by B… S.A., in the total amount of €1,964,686.11, which contains interest relating to 2010, 2011 and 2012 in the amount of: €1,292,864.99

c) Total value of interest / financial charges relating to the years 2010, 2011 and 2012 recorded in these accounts:

III – 1.2. In accordance with no. 1 of article 18 of the Corporate Income Tax Code: "Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the fiscal period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic accrual regime" and also no. 2 of the same article: "Positive or negative components considered as relating to previous periods are only attributable to the fiscal period when on the date of closure of accounts for the period in which they should have been attributed they were unforeseeable or clearly unknown."

III – 1.3. Notwithstanding that we are dealing with some documents dated in 2013, there is no doubt that, if such expenses are effective, they relate to previous fiscal years, and given the amounts thereof and the knowledge by the CGE and grouped companies of the delay in payment, their unforseeable nature and lack of knowledge at the date of account closure is not accepted, under penalty of the entire internal system of the CGE being called into question, which is why the principle of specialization of fiscal years cannot be derogated from, implying its non-acceptance as expenses in Corporate Income Tax in accordance with article 18 of the respective Code.

III – 2. In the contract for the constitution of the CGE are included the respective statutes (annex I), which, in article nine, state that "Each of the Grouped Companies, in the proportion of its respective participation, undertakes to contribute financially to the costs and expenses of the Grouping, including as regards the provision of guarantees, whenever the realization of such contributions is decided by unanimity in General Assembly."

III – 2.1. Furthermore, in order to internally regulate the relations between the Grouped Companies within the scope of the CGE, a Supplementary Internal Agreement was executed on 19 August 2009 (annex XXII), which states "… The parties shall perform the object of this agreement jointly, without making a physical division among themselves of the works and making available all the technical, human and financial means necessary for the proper execution of the works…" and "… on equal technical, economic and financial terms with third parties, the Grouping shall give preference to the use of equipment sold or leased by the Parties".

As regards the financial contributions of the Grouped Companies, the said agreement states in clause thirteen "The Board of Directors, … shall establish the financial policy of the Grouping to be practiced during the entire period of execution of the works provided for in the Works Contract, including as regards the financial contributions of the Parties, which should be made in proportion to their respective participations.

On this substance it is also stated "…. The Board of Directors shall request the parties, with 60 (sixty) days' notice, to make the necessary financial contributions." and further "… occurring unforeseen situations not contemplated in the monthly financial plans, the Board of Directors may also request the Parties, with 15 days' notice, to make the necessary financial contributions, proportionally to their participations, to meet such situations."

It is also stated that "… The parties that do not comply with the requests of the Board of Directors, within the periods and conditions stipulated, shall be obliged to make the financial contributions increased by interest which shall be owed from the date fixed by the Board of Directors until the date of their effective payment. The default interest to be applied shall correspond to the 3-month Euribor rate (or reference rate that replaces it), increased by 1.25% (one point twenty-five percent)."

Both the constituent contract and the Supplementary Internal Agreement of the CGE are of particular importance since this CGE was established without own capital, so it is these documents that regulate the financial contributions of the grouped companies.

III – 2.2. Now, from the analysis of the accounts and supporting documentation, between 2010 and 2013, only the following financial movements of the grouped companies to the CGE are verified, both in February 2012:

• €2,400,000.00, made only by B… S.A., for a period of 15 days, to meet a bank loan;

• €425,000.00, by each of the grouped companies, for a period of 8 days for payment to the CGE's employees

Beyond these records there is no other reference to requests for financial contributions from the CGE to the grouped companies despite having the power to do so at any time as provided in the statutes.

These facts were confirmed through statements made by the financial director, M…, NIF…, and N…, NIF…, as shown in annex XXIII.

III – 2.3. Thus, all the charges recorded in the accounts mentioned in point III.1., in the total amount of €2,429,191.39, without prejudice to the non-compliance with the provisions of no. 1 and 2 of article 18 of the Corporate Income Tax Code regarding the amount of €1,597,484.12, do not meet the conditions provided for in article 23 of the Corporate Income Tax Code, because they did not become necessary or guarantee the income subject to Corporate Income Tax of the CGE, since, by contract, this had the faculty to request from the grouped companies the necessary financial contributions in accordance with the statutes and supplementary internal agreement in order to proceed with the payment of invoices on their respective due dates, which it did not do.

With this procedure, in breach of its own statutes, it caused delays in payments and consequently an increase in expenses that negatively influenced its tax result, assuming them as its own and not attributing them to the grouped companies as was due.

III – 2.4. As a result, a correction to the taxable base is made in the amount of €2,429,191.39, as evidenced in the following table:

(1) For non-compliance with no. 1 and 2 of article 18 of the Corporate Income Tax Code: €1,567,300.12

(2) For non-compliance with article 23 of the Corporate Income Tax Code – including the amount referred to in (1): €2,429,191.39

TOTAL CORRECTIONS TO THE TAXABLE BASE: €2,429,191.39

Reported tax result: €1,768,975.41

Corrected tax result: €660,215.98

• Following the tax inspection, the Authority for Tax and Customs issued the Corporate Income Tax assessment no. 2016…, relating to the period of 2013, dated 11-01-2016 (document no. 2 attached to the request for arbitral pronouncement, the content of which is reproduced);

• The Claimant filed a gracious complaint (…2016…), which was rejected by dispatch of 23/09/2016 of the Director of the Finance Department of … which manifests agreement with information, a copy of which is contained in document no. 1 attached to the request for arbitral pronouncement, the content of which is reproduced, which states, among other things, the following:

II - ANALYSIS-GROUNDS

5-) Regarding the violation of the principle of specialization of fiscal years, inherent in articles 17 and 18 of the Corporate Income Tax Code:

5.1-) Position of the Tax Authority:

In brief, and taken from the tax inspection report, the Tax Authority understands that there is a violation of the principle of specialization of fiscal years, inherent in articles 17 and 18 of the Corporate Income Tax Code, given the attribution of part of the charges - in the amount of €1,597,484.12, and referring to interest for late payment to suppliers with reference to 2010, 2011 and 2012 - to the fiscal year 2013, when they relate to previous fiscal years - 2010 to 2012 -, not fulfilling the requirements of the exceptional rule contained in no. 2 of article 18 of the Corporate Income Tax Code, since, on the date of closure of accounts of the fiscal period to which such charges should have been attributed, they were not clearly unknown or unforeseeable.

5.2-) Position of the Claimant:

The Claimant begins by recognizing, explicitly, in article 22 of the Initial Petition, that the charges, in the amount of €1,597,484.12, having been subject to accounting record in 2013, relate to previous periods.

However, in order to except from the possible violation of the principle of specialization of fiscal years, in light of the rule contained in no. 2 of article 18 of the Corporate Income Tax Code, it questions, concluding affirmatively, whether, on the date of closure of accounts of the fiscal period to which such expenses should have been attributed, such expenses were clearly unknown or unforeseeable.

5.2.1-) To this end, it invokes, essentially, two types of arguments, namely:

For debts whose invoices were issued in the period 2013:

In the first argument the claimant alleges that only with the issuance of invoices do default interest become owed, because only at that time are they effectively required by the supplier and the debt is consumed before the claimant/debtor.

However, at the same time, it does not fail to recognize that the period of default had been running in its calculation from the date of provision of service/transmission of the good, and that they are determinable or enforceable, being "...possible to presume their enforceability..."cf. Art. 30 of the Initial Petition, insofar as there already exists a determinable right of credit (cf. Art. 32 of the Initial Petition), as well as admitting the existence of "a present obligation to pay default interest..."cf. Art. 43 of the Initial Petition.

In the second argument the claimant alleges that only with the decision taken in the minutes of the Board of Directors' meeting of 9 May 2013, regarding the collection of interest and the definition of the respective applicable rate, was it possible to estimate with reliability the value of the default interest, so that before, it was not possible to recognize the existence of a liability and the corresponding expense.

For debts whose invoices were issued before the period 2013:

The claimant alleges that until the end of 2012 negotiations took place with suppliers in order to determine the amount of interest owed, and no definitive and certain conclusion was reached regarding the amount to be recorded in accounts.

5.2.2-) Furthermore, it invokes Jurisprudence and Doctrine, essentially to support a position whereby the strict observance of the rule of accrual of taxable profit may be set aside or mitigated when, as it understands to have occurred in the case, there does not exist or has not been demonstrated any tax advantage resulting from the transfer of results between fiscal periods.

5.2.3-) Finally, it alleges that the RIT insufficiently grounds the argument of foreseeability or knowledge of expenses relating to previous periods and it also alleges that if it proceeded with the correction now being claimed, it would imply, then, the reflex correction in the year in which the expense should have been attributed.

5.3-) Theoretical-Legal-Doctrinal Framework:

The principle of specialization of fiscal years, inherent in articles 17 and 18 of the Corporate Income Tax Code, or, in the terminology of SNC (Portuguese Accounting Standardization System), "Of specialization" (or of accrual), is, without doubt, one of the GAAP (Generally Accepted Accounting Principles) that has high binding force, not tolerating - outside the cases expressly provided for in law - any discretion on the part of the taxpayer in the temporal allocation of the company's economic-financial movements.

The reason is evident: it is to prevent manipulation practices of tax results that result in the attribution of more income in fiscal years in which there are tax losses or reduced profits and more expenses in years that generated higher profits.

The principle of specialization of fiscal years is a general principle, by virtue of which income and expenses of a period must be recorded in accounts in the fiscal year to which they relate, regardless of when they are paid or received.

Which is why income (and expenses) must be recognized in accounts when obtained or incurred, and must be presented in the financial statements of the fiscal years to which they relate.

Which means, as doctrine and jurisprudence have clarified, that the attribution of income or an expense to a given fiscal year obeys an economic criterion and not a financial criterion, so all credits and debits relating to that fiscal year must be considered and recorded in a given fiscal year, and not only the receipts and payments that occurred in it ~ Cf., among others, Saldanha Sanches, in "A Quantificação da Obrigação Tributária, Deveres de Cooperação, Auto-avaliação e Avaliação Administrativa", 2nd Edition, page 224 et seq., and António Moura Portugal, "A Dedutibilidade dos Gastos na Jurisprudência Fiscal Portuguesa", Coimbra Editora, 2004, page 172 et seq.

5.3.1-) Well then, in the Tax Inspection Report (RIT) the Tax Authority was clear when it pointed out the basis for the violation of the principle of specialization of fiscal years, inherent in articles 17 and 18 of the Corporate Income Tax Code, namely:

The charges, in the amount of €1,597,484.12, having been subject to accounting record in 2013, relate to previous periods, which the claimant accepts and recognizes - Cf. article 22 of the Initial Petition.

5.3.2-) The subject of disagreement rests on the recognition and interpretation that may be made regarding the fulfillment of the requirements of the exceptional rule contained in no. 2 of article 18 of the Corporate Income Tax Code, namely, to know whether on the date of closure of accounts of the fiscal period to which such charges should have been attributed, they were, or were not, clearly unknown or unforeseeable.

Now, it is precisely this indeterminate concept of "expenses clearly unknown or unforeseeable" that it falls to be ascertained whether it is present in the case at hand, since from its existence or non-existence there must result the conclusion of violation or non-violation of the principle of specialization of fiscal years.

And the answer is negative, and the ease in the answer has a decisive contribution given by the claimant itself in its pleadings in the Initial Petition.

5.3.3-) In fact, regarding default interest on debts whose invoices were issued in the period 2013, when it recognizes that default interest is determinable or enforceable, being "...possible to presume its enforceability..."cf. Art. 30 of the Initial Petition, insofar as there already exists a determinable right of credit (cf. Art. 32 of the Initial Petition), as well as admitting the existence of "a present obligation to pay default interest..."cf. Art. 43 of the Initial Petition, it seems evident that the emphasis placed is at the level of determinability and/or enforceability of the interest, which is very different from the clear lack of knowledge or unforseability of the same.

In fact, by placing the discussion at the level of determinability and/or enforceability of the interest, it is, implicitly, recognizing its knowledge and/or its foreseeability.

Similarly, by alleging that only with the decision taken in the minutes of the Board of Directors' meeting of 9 May 2013, regarding the collection of interest and the definition of the respective applicable rate, was it possible to estimate with reliability the value of the default interest, it shows only that what was at issue was not the knowledge or foreseeability of the interest, but only the knowledge of its exact value, since the knowledge as to the existence of the same was clear and certain, and even more so as to its foreseeability.

5.3.4-) Identical grounds must be reported regarding default interest on debts whose invoices were issued before the period 2013, since by alleging that until the end of 2012 negotiations took place with suppliers in order to determine the amount of interest owed, with no definitive and certain conclusion being reached regarding the amount to be recorded in accounts, this evidences clear knowledge and/or foreseeability as to the existence of the interest, with only uncertainty remaining as to the effective and definitive amount to be determined and recorded.

Therefore, in light of the above, it seems evident that the requirements of the exceptional rule contained in no. 2 of article 18 of the Corporate Income Tax Code are not met, since on the date of closure of accounts of the fiscal period to which such charges should have been attributed, they were not clearly unknown or unforeseeable, quite the contrary, since the claimant's pleadings center on the level of determinability and/or enforceability of the interest and on the level of knowledge of its effective and definitive value, which, obviously, does not prejudice the evident consideration regarding knowledge and/or foreseeability as to the existence of the interest.

5.3.5-) As to the allegation of insufficient grounds in the RIT for the claim of foreseeability or knowledge of charges relating to previous periods, it must be said as follows:

In accordance with article 74/1 of the General Tax Law, "The burden of proof of facts constituting the rights of the tax authority or of taxpayers falls upon whoever invokes them".

It being presumed that the declarations of taxpayers presented in accordance with the provisions of law are true and made in good faith, as well as the data and determinations entered in their accounts or records, when these are organized in accordance with commercial and tax legislation" (article 75/1 of the General Tax Law).

Knowing that "he who has in his favor the legal presumption is excused from proving the fact to which it leads" (cf. article 350, no. 1 of the Civil Code, applicable by virtue of article 2, paragraph d), of the General Tax Law).

This rule relieves the taxpayer of the burden of proof of facts arising from his accounts and records. Provided that it is organized in accordance with legal requirements.

However, the presumption established regarding data arising from declarative elements, and accounts and records ceases, in particular, and in accordance with paragraph a) of that article 75/2 of the General Tax Law, when "a) The declarations, accounts or records reveal omissions, errors, inaccuracies or well-founded indications that they do not reflect or prevent knowledge of the actual taxable base of the taxpayer;"

Since the taxable matter is, as a rule, determined on the basis of the taxpayer's declaration, without prejudice to its control by the Tax Authority (cf. article 16 of the Corporate Income Tax Code), non-compliance in that declaration with the principle of specialization of fiscal years establishes the Tax Authority in the burden of allegation and proof of the fulfillment of the legal requirements binding its action, and therefore imposes on it the obligation to demonstrate non-compliance with that principle.

Burden observed insofar as the Tax Authority stated the formal and material, factual and legal grounds for the purpose in the tax inspection report.

Demonstration, moreover, corroborated by the claimant, since, as mentioned above, this recognizes, explicitly, in article 22 of the Initial Petition, that the charges, in the amount of €1,597,484.12, having been subject to accounting record in 2013, relate to previous periods.

Having made this proof, the burden of proof then falls upon the claimant/taxpayer to prove that it is in one of the exceptional situations in which it is permitted to not comply with the said principle, in light of the rules on burden of allegation and proof contained in article 342, no. 1 of the Civil Code and 74 of the General Tax Law.

Whence, on this point, the Tax Authority fulfilled its burden of proof, but, as evidenced in no. 5.3.1) to 5.3.4) already failed to fulfill the burden of proof of the claimant regarding the requirements of the exceptional rule contained in no. 2 of article 18 of the Corporate Income Tax Code.

5.3.6-) Finally, as to the allegation that, if it proceeded with the correction now being claimed, it would imply reflex correction in the year in which the expense should have been attributed, it must be said as follows:

On the date of the proposal for correction to taxable income the claimant was in time, and it was possible to file a substituting declaration or request revision of the act, and not being, at that date of becoming aware of the proposal for correction to taxable income, beyond the time limits for correction/revision of the tax act, so, having had the possibility of making the correction, in possession of all the elements, and not doing so, it cannot now come to claim that right.

Concluding, as concluded in no. 5) and following, that on the date of closure of accounts of the fiscal period to which such charges should have been attributed, they were not clearly unknown or unforeseeable, quite the contrary, since the claimant's pleadings center on the level of determinability and/or enforceability of the interest and on the level of knowledge of its effective and definitive value, it is legitimate to infer that the claimant/taxpayer acted intentionally in the omission of attribution of expenses in the periods owed, a presupposition that it denies and contradicts in the present legal argument of the right to have recognized any reflex correction, also by the possibility of tax advantage resulting from the transfer of results between fiscal periods.

6-) Regarding the violation of the rules of deductibility of expenses and losses in the face of non-acceptance of the indispensability of expenses ~ in the amount of €2,429,191.39 - for obtaining income or maintaining the productive source, in accordance with article 23 of the Corporate Income Tax Code - charge (non) deductible for purposes of determining taxable profit:

6.1-) Position of the Tax Authority:

In the case at hand, the Tax Authority disregarded the charges associated with interest arising from the delay in payment to suppliers, having considered that the claimant was statutorily obligated, it is emphasized, statutorily obligated, to obtain own financing, through the provision of financial contributions from the Grouped Companies, in order to support the CGE's financial policy (Complementary Grouping of Companies), and in particular for the execution of its corporate object, that is to say, in accordance with the Article Third of the Contract for the Constitution of Complementary Grouping of Companies and respective Statutes, for the performance of all acts necessary for the execution of the works provided for in the construction contract for the hydroelectric development of A…, awarded by E…, S.A. (Owner of the Works).

The claimant, by not conducting its financial policy in accordance with that to which it was statutorily bound, in particular, disregarding the required procedural course for the delivery of financial contributions for this purpose, incurred in the practice of strange financial policy, or, at a minimum, with a clear excess deviation, given the needs, policy and objective capacities of the company, and outside the scope of its normative internal policy of action, in short, alien to the corporate object.

6.2-) Position of the Claimant:

The Claimant alleges, in summary, in order to view the recourse to financial contributions as mere discretion arising from the observance of the principle of autonomy and freedom of business management, further considering that it was on the basis of financial and business management criteria and according to a judgment of opportunity and adequacy intrinsic to economic management decisions, that it assumed the payment of interest to suppliers at the expense of the raising of funds through the aforesaid financial contributions, always with a view to pursuing corporate/business interest and the obtaining of profit.

If not so, and by permitting the Tax Authority to act as it did in the present case, this would mean admitting an intolerable interference by the State in the sphere of private autonomy and the freedom of conformation of its own interests by economic agents and the consequent violation of the constitutional principle of taxation of actual profit, by disregard of expenses effectively incurred, but, be it noted, not alien to the company's interests or, in other words, interests abstractly subsumed in a profit-making profile.

It concludes, thus, by the illegal application of the concept of indispensability of expenses provided for in article 23 of the Corporate Income Tax Code.

It further invokes two types of complementary argumentation:

6.2.1-) The claimant considers that the Tax Authority did not prove that the expenses in question were alien to the business purpose in question, and, therefore, dispensable, thus failing to comply with the burden of proof that falls upon the Tax Authority.

6.2.2-) Considering the relationship of specialty between the claimant and the grouped companies, and application of the transfer pricing rules, the financial contributions would be subject to charges associated through the provision of remuneration interest, so there would always be expenses in the sphere of the claimant, which was not considered in the correction now being claimed.

6.3-) Theoretical-Legal-Doctrinal Framework:

One of the elements of the legal notion of expense, precisely the nexus of indispensability between the expense and income, constitutive of the grounds for the correction here in question, must be interpreted by direct integration of the expense in the scope or objective of corporate interest, cutting out, therefore, an economic-business perspective, with a view to obtaining profit.

The indispensable expense, and its consequent tax deductibility depends only on a causal and justified relationship with the company's productive activity, being adverse to the pursuit of interests alien to it, or at least, with clear excess, deviating, given the needs, policy and objective capacities of the company.

Expenses must, thus, be related to the pursuit of the company's corporate object, and aim at its pursuit with a profit-making objective.

Consequently, corporate operations must fit within its corporate capacity, interest and objective, within the scope of its internal normative policy of action, given the needs and objective capacities of the company and, insofar as they are connected with the obtaining of profit, and with the predetermined objective for that purpose.

On the other hand, as stated in the Decision of the Superior Tax Court no. 00365/03 of 20.06.2006 at www.dgsi.pt:

"Indeed, the principle of freedom of management (which emerges as a consequence of the constitutional freedom of private economic initiative) presupposes and requires the non-interference of the tax administration in the management of commercial companies, with the preclosure of administrative control over the concrete merit of business decisions. The tax authority cannot call into question the operations deemed economically indispensable by taxpayers, because they are subsumed in the corporate objective.

Although it is recognized the need to reconcile that irreducible and irrenounceabie margin of freedom of conformation of the interests of corporate entities themselves, with the principle of legality and the protection of the active subject of the tax relationship, through the definition of certain limitations of that freedom, the truth is that these limitations require, as we have already said, express legal positivization and specific intrinsic motivation. Thus, it is unfeasible to establish a general clause that would allow the Tax Authority to control the opportunity of business decisions, by judgment on the quality of results of the financial and commercial management of the organization."

6.4-) On the other hand, it is essential to keep well in mind, in this matter, the distribution of the burden of proof:

As stated in Decision of the Superior Tax Court 07375/02 of 30.11.2004 at www.dgsi.pt:

"The taxable matter is, as a rule, determined on the basis of the taxpayer's declaration, without prejudice to its control by the Tax Authority, which, in the exercise of its power to control the compliance of taxpayers' actions with the law (article 107 of the Corporate Income Tax Code) acts in the exercise of binding powers, subject to the principle of legality, and bears the burden of proof of the fulfillment of the requirements that led it to carry out the technical corrections and is required to demonstrate the factuality that leads it to disregard a certain amount as an expense or income.

That materiality must be apt to shake the presumption of veracity of the operations contained in the taxpayer's records and respective supporting documents (in light of the principle of declaration and veracity of records in force in our law - article 78 of the Code of Tax Procedure).

But, in the case, the issue of the burden of proof of indispensability of expense overlooks the presumption of veracity of properly organized records (articles 78 of the Code of Tax Procedure and 75 of the General Tax Law).

It is not here a matter of a question of veracity (regarding the existence and amount) of the expense recorded, which no one questions, but of its relevance, in light of the law, for tax purposes, in the case, of its qualification as a deductible expense.

Thus, if properly organized records enjoy the presumption of veracity and, therefore, the Tax Authority bears the burden of rebutting that presumption, demonstrating that the recorded facts are not true, as regards the qualification of recorded amounts as deductible expenses, the taxpayer bears the burden of proof of their indispensability for the obtaining of income or for the maintenance of the productive force, if the Tax Authority questions that indispensability. And it is understood that this is so, because the burden of proof must fall on he who, alleging the fact accordingly, can more easily document and clarify the operations and their connection with income (cf. Decision of the Superior Tax Court of 26/6/2001, Appeal no. 4736/01). As stated by Cons. Jorge de Sousa (Code of Tax Procedure and Process Annotated, 2nd edition, page 470), "the burden of proof of facts constituting the rights of the tax authority or of taxpayers falls upon whoever invokes them. Although this rule (article 74/1 of the General Tax Law) is provided for in tax procedure, its content must be transposed to the judicial process that follows, so that he who had the burden of proof in the tax procedure has the respective burden in the tax judicial process."

It is appropriate, therefore, to ask: In the case at hand has the claimant demonstrated that indispensability?

However, it is always incumbent upon the Tax Authority to bear the burden of proof of the requirements of its right to proceed with corrections, and, therefore, the burden of demonstrating the legitimacy of its action, that is to say, in the case, the legitimacy of the disregard of the expenses in question. And that legitimacy is assessed by the grounds of the respective corrections.

6.5-) Starting with the demonstration of the burden of proof of the requirements of the Tax Authority's right to proceed with corrections, it must be said:

6.5.1-) The correction of such amounts not accepted as tax expenses derives from the principle of tax legality, enshrined in article 106, no. 2 of the Constitution, because although the Tax Authority is bound by that principle, this does not prejudice the fact that it may not have margins of free discretion, always within the strict terms of the law, resorting, among others, to indeterminate concepts, as will be the case with indispensability of expenses, provided for in article 23 of the Corporate Income Tax Code.

The Tax Authority is thus legitimized to carry out the tax corrections provided for in the law, as derives from no. 1 of article 17 of the Corporate Income Tax Code, which states that taxable profit is constituted by the algebraic sum of net result and positive and negative patrimonial variations, determined on the basis of accounts and possibly corrected in accordance with this Code.

And the grounds therefor are contained in the RIT, and already briefly stated in no. 6.1) above.

6.5.2-) Thus, proved and grounded the right to the correction now being claimed, the question arises: in the case at hand has the claimant demonstrated the indispensability of the expenses?

It does not appear that any proof has been made, nor can it be inferred from the allegations put forward in the initial petition, that the interest arising from the delay in payment to suppliers constitutes an indispensable charge for obtaining income or maintaining the productive source, in accordance with article 23 of the Corporate Income Tax Code.

In fact, only theoretical-abstract considerations ensue in the sense of considering such expenses as assumed in the exercise of business management and with strictly corporate purpose and in its interest, but in concrete, no fact or element demonstrative and consequent of the alleged is evident, and it is certain that effective proof must be referred to the relevance of the expense, in the case, of its qualification as a deductible expense.

Questioned as to indispensability by the Tax Authority, the Claimant failed to prove the same, offering no elements to that end that would attest, concretely, to the nature and tax relevance of the expense.

It is to say, it does not ground, nor demonstrates, in the allegations put forward in the Initial Petition that the contracting of interest, arising from the delay in payment to suppliers, is inserted within the corporate capacity, interest and objective, in respect of its normative/statutory internal policy of action, given the needs and objective capacities of the company and, insofar as they are connected with obtaining profit, and with the predetermined objective for that purpose.

And, contrary to what the claimant alleges in the Initial Petition, in article 154 paragraph a) and referred to in no. 6.2.1-) above, and as explained above in no. 6.4), the burden of proof of indispensability of expenses does not fall upon the Tax Authority, but rather upon the claimant.

6.6-) Furthermore, and on the essential point, that is to say, the substantive issue relating to the violation of the rules of deductibility of expenses and losses in the face of non-acceptance of the indispensability of expenses, the subject of disagreement rests between:

The considering - by the Claimant - that recourse to financial contributions constitute mere discretion arising from the observance of the principle of autonomy and freedom of business management, and, in that logic of convenience and business opportunity, assumed as preferential the payment of interest to suppliers;

And the considering - by the Tax Authority - that the claimant was statutorily obligated to obtain own financing, through the provision of financial contributions from the Grouped Companies, as provided for in the Contract for the Constitution of Complementary Grouping of Companies and respective Statutes, as well as in the Supplementary Internal Agreement.

In fact, it is accepted and recognized, insofar as jurisprudentially and doctrinally settled and unanimous, that the Tax Authority is prevented from exercising administrative control over the concrete merit of business decisions, and should not make judgments of convenience and opportunity regarding the same nor regarding the quality of the results of management, rather it should focus the exercise of control, for purposes of considering indispensability of expenses, on the observance of a causal and justified relationship between the expenses incurred and the company's productive activity, and it should be considered that expenses are adverse to the pursuit of interests alien to the company, or at least with clear excess deviation (given the needs, policy and objective capacities of the company.

6.6.1-) Well then, thus properly framed, the question that must be posed is whether the claimant could opt for the contracting of default interest to suppliers instead of requesting the provision of financial contributions to the grouped companies.

And the answer cannot but be negative.

First and foremost, it is to be noted that, in terms of Article Fifth of the Contract for the Constitution of Complementary Grouping of Companies and respective Statutes, the CGE is established without own capital.

In that logic, in accordance with Article Ninth of the Contract for the Constitution of Complementary Grouping of Companies and respective Statutes, "Each of the grouped companies, in the proportion of its respective participation, undertakes to contribute financially to the costs and expenses of the grouping...".

Consequently, and in accordance with Clause Thirteenth of the Supplementary Internal Agreement, it is stipulated that, for purposes of execution of the CGE's financial policy, and for purposes of execution of the works provided for in the works contract, the Board of Directors must request the Parties, that is to say, the grouped companies, with 60 days' notice, to make the necessary financial contributions - Cf. clause 13.1 and 13.2

Financial contributions which must also be requested in unforeseen situations not contemplated – Cf. clause 13.3.

With it being that, from non-compliance with that, payment of default interest arises, as well as, in the case of non-provision of voluntary financial contributions, provision is made for the use of the mechanism of retention and use of subsequent payments to be made by the Grouping to the defaulting Party, and, in case of necessity, the non-defaulting party shall provide the missing financial contributions provisionally, and shall be later reimbursed for the amounts paid increased by interest. Cf. clause 13.4 and 13.5.

6.6.2-) Therefore, a rigorous and disciplined mechanism of financing corporate operations is statutorily provided for, and to which the claimant is unquestionably bound, in the execution of its financial policy, for the performance of all acts necessary to execution of the works provided for in the construction contract for the hydroelectric development of A…, awarded by E…, S.A. (Owner of the Works).

By deviating from this regime, statutorily binding, of execution of the CGE's financial policy, and specifically, of financing of corporate operations, is equivalent to saying that it deviates from its normative (financial) internal policy of action and pursues interests with clear excess deviation, given the needs, policy and objective capacities of the company, compromising the causal and justified relationship with the company's productive activity and respective connection with obtaining profit.

In a word, by deviating from this regime, statutorily binding, it deviates, in the aforementioned terms, from the attainment of its corporate object.

The claimant, by not conducting its financial policy in accordance with that to which it was statutorily bound, in particular, disregarding the required procedural course for the delivery of financial contributions for this purpose, incurred in the practice of strange financial policy, or, at a minimum, with clear excess deviation, given the needs, policy and objective capacities of the company, and outside the scope of its normative internal policy of action, in short, alien to the corporate object.

6.7-) Finally, addressing the allegation in the Initial Petition regarding the circumstance that financial contributions would always be subject to charges associated through the provision of remuneration interest, given the relationship of specialty between the claimant and the grouped companies, and application of transfer pricing rules, saying only that, in accordance with Clause Thirteenth of the Supplementary Internal Agreement, only in the case of non-fulfillment, as well as in the case of non-provision of voluntary financial contributions, does payment of default interest arise.

Whence, provided that the financial contributions are made in accordance with statutorily provided for, no accrued or supplementary charge ensues.

III PROPOSAL

7-) In accordance, it is proposed:

To render a decision of total rejection of the Gracious Complaint, against the note of additional Corporate Income Tax assessment no. 2016…, in the total amount of €2,429,191.39.

Consequently, to maintain in the legal order, as legal, valid and regular, the assessment now being complained of.

• The construction of the dam at A…, to which the CGE was destined, suffered considerable delays due to work stoppages and slow execution of works for archaeological reasons, which were much greater than what was foreseen (testimony of witness M…);

• The work of construction of the dam at A…, which was the objective of the CGE, was scheduled to be carried out in 60 months, but commenced in June 2008 and ended in September 2016, having suffered delays due to work conditioning by reasons related to archaeological monitoring, because the archaeological heritage found was much greater than what was foreseen and there was a need to safeguard it, carrying out many additional works (testimony of witness M…);

• The delays referred to and additional works related to the archaeological heritage that were not paid for by E… (awarding entity) caused financial difficulties for the CGE (testimony of witness M…);

• In 2012, there was a suspension of the credit line by the Bank of …, with need for payment of what had been received under it, which led to requests for support from the two grouped companies (testimony of witness M…);

• The grouped company C… had economic difficulties in 2012, so it did not have the possibility of providing financial support, with the grouped company B… (D…) being the one that provided it, to the extent of what was lacking from the CGE to make that payment (€2,400,000.00), leaving the CGE completely undercapitalized (testimony of witness M…);

• In the subsequent month, the CGE did not have money to pay salaries, so the two grouped companies had to finance the CGE to the extent necessary, about €425,000 (testimony of witness M…);

• The grouped company B… (D…) had made a much greater effort than that of C… through provision of services, in particular supply of labor (testimony of witness M…);

• In May 2013, there was a meeting of the Board of Directors of the CGE in which it was decided that interest would be paid relating to the provision of services by the grouped companies and the rates to be applied were set, lower than the rate of bank financing (testimony of witness M…);

• Interest rates of 4.5% were set for the year 2010 and 6.5% for the years 2011 and 2012 (testimony of witness M…);

• It had not been communicated to the CGE, in particular to its Financial Director, before that meeting, that interest would be debited by the grouped companies, so it had not been decided to provision such interest (testimony of witness M…);

• Only in August did the CGE complete the verification of invoices from the grouped companies related to that provision of services (testimony of witness M…);

• Other suppliers debited interest at the prevailing commercial suppletory rate (testimony of witness M…);

• At times the demand for interest by suppliers was used as a way to pressure for timely payments, with the interest being canceled after the capital owed was paid (testimony of witness M…);

• For the CGE it was indifferent to record the interest in the year 2013 or in the previous years to which it related, because every year it closed its accounts with the grouped companies, transferring to them the positive or negative results, in accordance with the transparent taxation regime (testimony of witness M…);

• The demand for interest by the grouped companies was decided because of the great imbalance in the financial effort of both grouped companies, that of B… (D…) being much greater, so it was intended to restore fairness in the effort of both (testimony of witness N…);

• In the years 2010 to 2013, the results of D… were positive, being indifferent the invoicing of the interest in that year or in the years 2010, 2011 and 2012 (testimony of witness M…);

• In the years 2010, 2011 and 2012 the CGE had negative results, considering financial charges (testimony of witness N…);

• The grouped company D… had the possibility to finance the CGE, but the same did not occur with the grouped company C…, so it was not possible to resort to financing by the grouped companies while maintaining the balance of contributions of both (testimony of witness M…);

• The additional works amounted to a high value, the works having been awarded for about 250 million euros and the final value was about 490 million euros (testimony of witness M…);

• The delays in payment of additional works by E… implied the delays of the CGE in payment to subcontractors, despite having given them preference in relation to payment of services to the grouped companies (testimony of witness M…);

• In the works contract sector it is frequent practice for there to be delays in payments and it is frequent that no interest is debited for the delays (testimony of witness M…);

• There was never any announcement that interest would be debited before 2013, despite there already being delay in payment for several years (testimony of witness M…);

• The CGE's accounts were closed annually and audited by an independent entity and it was never suggested by this that interest be provisioned or that an increase in cost relating to interest be made, in particular regarding debts to the grouped companies (testimony of witness N…);

• On 16-12-2016, the Claimant presented the request for constitution of the arbitral tribunal that gave rise to the present proceedings.

2.2. Facts Not Proven and Grounds of Decision on the Facts

There are no facts relevant to the decision of the case that have not been proven.

The proof is based on the documents submitted by the Claimant and on witness testimony (the administrative file was not attached, but the most relevant documents were presented by the Claimant).

The witnesses M… and N… appeared to give evidence with impartiality and with knowledge of the facts on which they pronounced, and no grounds are discerned for doubting the veracity of their testimony.

3. LEGAL MATTERS

3.1. Issue of Application of the Principle of Specialization of Fiscal Years (now in SNC designated as periods)

The Authority for Tax and Customs made a correction to the Claimant's taxable base by understanding that the default interest recorded by the Claimant in 2013 and which related to the years 2010, 2011 and 2012, could not be considered expenses of 2013, by force of the principle of specialization of fiscal years, saying, in short:

"Notwithstanding that we are dealing with some documents dated in 2013, there is no doubt that, if such expenses are effective, they relate to previous fiscal years, and given the amounts thereof and the knowledge by the CGE and Grouped Companies of the delay in payment, their unforeseeable nature and lack of knowledge at the date of account closure is not accepted, under penalty of the entire internal system of the CGE being called into question, which is why the principle of specialization of fiscal years cannot be derogated from, implying its non-acceptance as expenses in Corporate Income Tax in accordance with article 18 of the respective Code."

Article 18 of the Corporate Income Tax Code establishes the following in its nos. 1 and 2, which are relevant here:

Article 18

Accrual of Taxable Profit

1 – Income and expenses, as well as other positive or negative components of taxable profit, are attributable to the fiscal period in which they are obtained or incurred, regardless of their receipt or payment, in accordance with the economic accrual regime.

2 – Positive or negative components considered as relating to previous periods are only attributable to the fiscal period when on the date of closure of accounts for the period in which they should have been attributed they were unforeseeable or clearly unknown.

In light of this principle, the default interest relating to the years 2010, 2011 and 2012 should have been attributed to the years to which they relate, being attributable to the fiscal year 2013 only if, on the dates of closure of accounts for the years 2010, 2011 and 2012, they were unforeseeable or clearly unknown.

The Claimant argues, in summary, that the charges with the said interest were unforeseeable, because it is usual in construction contracts for delays in payments to occur and interest is not always demanded.

Furthermore, the Claimant argues that the application of the principle of specialization of fiscal years to situations of this type, in which there was no intentional action aimed at transferring expenses between fiscal years, is inappropriate.

The evidence produced points in the direction argued by the Claimant, which is corroborated by the fact that the interest relating to the periods 2010, 2011 and 2012, in the cases in which its payment came to be claimed, was not demanded by creditors in those years, but only in 2013.

In any case, the issue ceases to be relevant in light of the principle of fairness invoked by the Claimant, supported by repeated jurisprudence of the Supreme Administrative Court.

The principle of fairness is imposed on the entirety of the activity of the Tax Authority by articles 266, no. 2 of the Constitution and 55 of the General Tax Law.

From the joint observance of the principles of legality and fairness it follows that the duty of the Tax Authority to apply the principle of legality does not translate into a mere formal subordination to the norms that specifically regulate certain situations, but also encompasses the duty of the Tax Authority to take account of the consequences of its activity and to refrain from the strict application of norms when therefrom results a manifestly unjust outcome.

The Supreme Administrative Court has decided, regarding the principle of specialization of fiscal years, that "this principle must tendentially conform itself and be interpreted in accordance with the principle of fairness, with constitutional and legal conformation (articles 266, no. 2 of the Constitution and 55 of the General Tax Law), so as to permit the attribution to a fiscal year of costs (now expenses) relating to previous fiscal years, provided that they do not result from voluntary and intentional omissions, with a view to operating the transfer of results between fiscal years."

Indeed, it is long since the Tax Authority recognized the need for flexibility in the application of the principle of specialization of fiscal years, in Circular Memorandum no. C-1/84, of 8-6-84, published, together with the respective opinion, in Science and Technical Taxation, nos. 307-309, pages 781-791, in which the following understanding was adopted, regarding the parallel issue that arose in the field of Industrial Contribution:

Whenever in a given fiscal year there exist costs and income of previous fiscal years, the corresponding tax treatment should obey the following rules:

a) Non-acceptance of costs and income resulting from voluntary or intentional omissions in the fiscal year in which they are recorded, considering such, as a rule, as those carried out with fiscal intentions, namely when:

• it is about to expire or is about to commence a period of tax exemption;

• the taxpayer has an interest in reducing losses in a given fiscal year to derive greater benefit from the loss carryforward provided for in article 43 of the Code;

• the taxpayer seeks to reduce the amount of taxable profit to ease its tax burden.

b) In the remaining cases, costs and income of previous fiscal years should not be corrected.

It is a situation of this type that occurs in the case at hand, since the Claimant gives an explanation for the non-recording of interest before they were debited by creditors with some reasonableness, since situations occurred in which no interest was demanded for delays and no intentional action is discerned aimed at reducing the tax burden.

In fact, the lack of tax interest on the part of the Claimant itself in benefiting from the deferment to 2013 of the consideration of expenses with interest is evident, since it was subject to the transparent taxation regime, by virtue of the provisions of article 6, no. 2 of the Corporate Income Tax Code, with the respective profit or loss being attributed to the grouped companies. On the other hand, regarding the eventual tax advantage gained by any of the grouped companies with the recording of interest in 2013, this is not even raised by the Authority for Tax and Customs in the grounds of the corrections made, in which there is not even a reference to the taxation of the grouped companies in those years 2010 to 2013. Indeed, the only reference to the taxation of the grouped companies is made by the Claimant, in articles 94 and 175 of the request for arbitral pronouncement, to the effect that both recorded positive results in 2013, an assertion that is not contradicted by the Authority for Tax and Customs.

Furthermore, not having it been demonstrated that the Authority for Tax and Customs made corrections to the taxable base of the years 2010, 2011 and 2012, corresponding to the correction made in 2013 by application of the principle of specialization of fiscal years (which is not even raised), the application of the principle of specialization of fiscal years led to a manifestly unjust situation, which is that such interest is not considered an expense either in the period 2013 or in the previous periods, despite it being unquestionable that they must have negative relevance in the formation of taxable profit, in light of the provision in article 23, no. 1, paragraph c) of the Corporate Income Tax Code.

For the foregoing, the correction made suffers from a defect of violation of law, due to erroneous application of the principle of specialization of fiscal years interpreted in light of the principle of fairness, which justifies the annulment of the assessment and the decision on the gracious complaint, in the corresponding part (article 163, no. 1 of the Code of Administrative Procedure).

3.2. Issue of Non-Relevance of Expenses with Interest as Expenses

Article 23, no. 1 of the Corporate Income Tax Code, in the wording in force in 2013, establishes the rule that "expenses are considered those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the productive source."

The Authority for Tax and Customs understands that the interest paid by the Claimant should not be considered as expenses because, in summary, it is provided for in the contract for creation of the CGE that "each of the Grouped Companies, in the proportion of its respective participation, undertakes to contribute financially to the costs and expenses of the Grouping, including as regards the provision of guarantees, whenever the realization of such contributions is decided by unanimity in General Assembly" and the Claimant did not use this possibility of financing in order to avoid delays in payments to its suppliers who debited default interest.

The Claimant only twice resorted to financing by the Grouped Companies, in the amounts of €2,400,000.00 and €425,000.00 respectively, with the Authority for Tax and Customs understanding that it should have resorted to more financing instead of bearing interest charges with debts to its creditors.

Consequently, the Authority for Tax and Customs understood that:

"Thus, all the charges recorded in the accounts mentioned in point III.1., in the total amount of €2,429,191.39, without prejudice to the non-compliance with the provisions of no. 1 and 2 of article 18 of the Corporate Income Tax Code regarding the amount of €1,597,484.12, do not meet the conditions provided for in article 23 of the Corporate Income Tax Code, because they did not become necessary or guarantee the income subject to Corporate Income Tax of the CGE, since, by contract, this had the faculty to request from the Grouped Companies the necessary financial contributions in accordance with the statutes and supplementary internal agreement in order to proceed with the payment of invoices on their respective due dates, which it did not do.

With this procedure, in breach of its own statutes, it caused delays in payments and consequently an increase in expenses that negatively influenced its tax result, assuming them as its own and not attributing them to the Grouped Companies as was due."

It is evident, from the outset, that this understanding of the Authority for Tax and Customs, in not considering indispensable for the formation of income any expense with interest because the Claimant could finance itself through the Grouped Companies, has embedded the wrong presupposition that the financings by the Grouped Companies would be free, which has no legal support, since, dealing with entities between which there are special relations, in accordance with article 63, no. 4 of the Corporate Income Tax Code, the transfer pricing rules would impose that it be considered, for tax purposes, that the financings were made in the terms in which they would be between independent entities and, therefore, the Claimant bearing the respective interest.

Being so, starting from the presupposition that the Claimant would have to bear interest for financings that the Grouped Companies would make to it, it falls within the options of business strategy to contract such financings or to delay payments to its creditors, and it is certain that in relation to the latter, because there are no special relations, it was not necessary that they be considered for tax purposes as subject to interest and these could not be demanded, as they were not in some cases, according to the witness testimony.

Furthermore, for the performance of contractual obligations to be obtained it is indispensable that he who is obliged has the possibility to perform and, in the case at hand, it follows from the evidence produced that the Grouped Company C… was not in financial conditions to support the financings to which it would be obligated if there had been a unanimous decision of the Board of Directors of the Claimant (as provided for in the contract).

Therefore, it cannot even be considered demonstrated that the Claimant could obtain from the Grouped Companies the financings that could prevent it from delaying the payment of debts to its suppliers.

Consequently, the correction made by the Authority for Tax and Customs, which rests on the wrong presupposition that the Claimant had such a possibility, suffers from a defect of error on the factual presuppositions, which constitutes a defect of violation of law and justifies the annulment of the assessment made and the decision on the gracious complaint which confirmed it, in the respective part.

3.3. Issues of Prejudiced Knowledge

Being to decide the merit of the request for arbitral pronouncement for the reasons given, it is prejudiced, by being unnecessary (article 130 of the Civil Procedure Code), the knowledge of the remaining issues raised.

4. DECISION

In these terms, the members of this Arbitral Tribunal agree:

a) To decide that the request for arbitral pronouncement is well-founded;

b) To annul the Corporate Income Tax assessment no. 2016…, relating to the fiscal year 2013 and the decision rejecting the gracious complaint no. …2016….

5. VALUE OF THE PROCEEDINGS

In accordance with the provisions of article 306, no. 2 of the Civil Procedure Code and 97-A, no. 1, paragraph a) of the Code of Tax Procedure and Article 3, no. 2 of the Regulations for Costs in Tax Arbitration Proceedings, the value of the proceedings is set at €2,429,191.39.

6. COSTS

In accordance with article 22, no. 4 of the Administrative Arbitration Regulations, the amount of costs is set at €31,518.00, in accordance with Table I attached to the Regulations for Costs in Tax Arbitration Proceedings, to be borne by the Authority for Tax and Customs.

Lisbon, 11-09-2017

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(José Coutinho Pires)

(Ana Maria Rodrigues)

[1] Decision of the Supreme Administrative Court of 2-4-2008, case no. 0807/07.

In the same line, see the Decisions of the Supreme Administrative Court of 5-2-2003, case no. 01648/02, of 25-6-2008, case no. 0291/08 and of 21-11-2012, case no. 0809/12.