Process: 758/2014-T

Date: June 12, 2015

Tax Type: IRC

Source: Original CAAD Decision

Summary

Process 758/2014-T addresses critical issues regarding IRC autonomous taxation (tributações autónomas) on travel allowances and vehicle compensation, and capital gains calculation from share sales. The claimant company challenged a 2009 IRC assessment for fiscal year 2007, disputing €30,440.14 in autonomous taxation on employee travel expenses and allowances. The company's core argument was that these expenses were properly invoiced to clients and should therefore be exempt from autonomous taxation. Additionally, the company contested the capital gain calculation from selling B... S.A. shares, arguing that since the Tax Administration corrected B...'s company value, this correction must consistently apply to the capital gains computation. The case proceeded through tax arbitration under RJAT (Decreto-Lei 10/2011), with the arbitral tribunal constituted on January 20, 2015. The dispute illustrates the strict application of autonomous taxation rules under Portuguese IRC law, where certain expense categories face mandatory taxation rates regardless of business justification or client recharging. The case also highlights taxpayers' rights to claim refunds with compensatory interest (juros indemnizatórios) when assessments are successfully challenged. Key procedural aspects include the hierarchical appeal process, binding information requests, and the tax arbitration framework, demonstrating multiple administrative and judicial remedies available to Portuguese taxpayers contesting IRC assessments and seeking consistent valuation treatment across related tax matters.

Full Decision

ARBITRAL DECISION

I – REPORT

On 4 November 2014, A… S.A., hereinafter referred to as "Claimant", a legal entity number …, registered in the Commercial Registry Office of Lisbon under the same number, with registered office at Rua …, n.º …, …-… …, filed a request for 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 to:

(i) Partial annulment of the decision granting partial relief from the hierarchical appeal No. …2012… in the part corresponding to the autonomous taxation on allowances and compensation for travel in private vehicle of the employee and to the correction of the capital gain determined from the sale of shares in B…, S.A. ("B…");

(ii) Declaration of partial illegality of the tax assessment act for Corporate Income Tax ("IRC") of 2007 with number 2009…, in the part corresponding to the autonomous taxation on charges for allowances and compensation for travel in private vehicle of the employee;

(iii) Declaration of partial illegality of the self-assessment act for IRC and municipal surcharge No. 2014 … relating to the fiscal year 2007, in the part corresponding to the correction of the taxable base regarding the capital gain determined by the Claimant from the sale of shares in B…;

(iv) Determination of reimbursement to the Claimant of amounts paid in excess as a result of the aforementioned corrections, plus compensatory interest.

To substantiate its request, the Claimant alleges, in summary, that the autonomous taxation on allowances and compensation for travel in private vehicle of the employee were properly invoiced to its clients and that, given that the value of B… was corrected by the Tax Administration Services, the same should also be reflected in the calculation of the capital gain arising from the sale of shares in B… to C… on 23 September 2008.

On 5-11-2014, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Claimant did not proceed to appoint an arbitrator, therefore, pursuant to the provisions of paragraph (a) of No. 2 of article 6 and paragraph (a) of No. 1 of article 11 of the RJAT, the President of the Deontological Board of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable timeframe.

On 2-1-2015, the parties were notified of these appointments, with neither of them manifesting any intention to refuse them.

In accordance with the provision in paragraph (c) of No. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 20-1-2015.

On 23-2-2015, the Tax and Customs Authority (hereinafter the Respondent or AT), duly notified for this purpose, filed its response defending itself by way of exception and by way of objection.

On 5-3-2015, the Claimant, notified for this purpose, made representations on the matter of exception contained in the AT's response.

Given that, in this case, none of the purposes legally assigned to it were present, pursuant to the provisions of articles 16, paragraph (c), and 19 of the RJAT, as well as the principles of procedural economy and prohibition of useless acts, the holding of the meeting referred to in article 18 of the RJAT was dispensed with.

Having been granted a deadline for the presentation of written submissions, these were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the rendering of the final decision, after the AT's submission of arguments, and this period was extended for a further 30 days.

The Arbitral Tribunal is materially competent and is properly constituted, pursuant to articles 2, No. 1, paragraph (a), 5, and 6, No. 1, of the RJAT.

The parties have legal capacity and standing, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Regulation No. 112-A/2011, of 22 March.

The proceedings are free from nullities.

Having examined everything, it is necessary to render:

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

1- The Claimant's tax period is between 1 October and 30 September.

2- On 26 February 2009, the Claimant proceeded to self-assess IRC for the tax period of 2007, by filing income tax return Form 22 of that period.

3- In March 2009, the AT issued the assessment note, with number 2009 …, (corresponding to document number 2009 …), which was subject to an administrative complaint by the Claimant (on 29 March 2010), on the grounds of the use of an autonomous tax rate higher than due and failure to consider the distribution of collection by the Autonomous Regions of the Azores and Madeira.

4- Following the partial granting of the administrative complaint referred to, and not being satisfied with the reasoning used by the AT to support the decision, the Claimant filed a hierarchical appeal of the same on 28 June 2012, which was fully granted.

5- On 20 March 2014, and as a result of the favorable outcome for the Claimant of the hierarchical appeal procedure mentioned in the previous point, the AT issued the assessment note with number 2014 …, pursuant to which it determined a tax refund to the Claimant in the amount of € 90,726.74.

6- The fiscal year 2007 was subject to an external tax inspection conducted on the financial statements and tax declarations of the Claimant, in the course of which various corrections were made to the IRC assessed.

7- The Claimant was notified of the final report in December 2009, in which the DSIT made, among other corrections to the taxable base, a correction relating to autonomous taxation on expenses for allowances and compensation for travel in private vehicle of the employee, in the amount of € 30,440.14.

8- The aforementioned correction was based on:

                                                i.          The procedures and criteria adopted by the Claimant remaining identical to those used in previous tax periods;

                                              ii.          The request for binding information submitted by the Claimant; and

                                            iii.          The obligation of the Tax Services to proceed in accordance with the order issued in response to the binding information request.

9- The tax inspection report states that "(...) it is necessary to assess whether or not autonomous taxation applies to the accounting entries made in accounts POC # 62227310 – Amount paid per km driven and # 634242100 Wages-Daily cost imputable to customers, the value of which is not shown in the invoice issued, but only in the travel control schedules."

10- As a result of the aforementioned corrections, which were reflected in the final tax inspection report, the Claimant was notified, on 29 December 2009, of the additional IRC assessment No. 2009 …, relating to fiscal year 2007, corresponding to Document No. 2009 …, resulting in tax due in the amount of € 85,761.16.

11- The aforementioned assessment note was subsequently subject to an administrative complaint by the Claimant, which made the following requests:

a. Review of the tax assessment act for IRC with number 2009 … relating to fiscal year 2007;

b. Partial reduction of the proposed correction of the taxable base for IRC, from fiscal year 2007 from €92,068.05 to €24,742.53, relating to the correction of the balance of net creation of jobs for the year 2007;

c. Total annulment of the correction for IRC shortfall, in the amount of €30,440.14, relating to autonomous taxation on charges for allowances and compensation for travel in private vehicle of the employee invoiced to clients; and

d. Correction of the taxable base for IRC for fiscal year 2007, in the amount of €816,000.00, in favor of the Claimant, relating to the annulment of the capital gain determined from the sale of shares in B….

12- Following the rejection of the aforementioned administrative complaint, the Claimant decided to appeal hierarchically, which gave rise to the hierarchical appeal with number 2015…, with its claims only partially granted in this context.

13- On 7 August 2014, the Claimant was notified of the decision granting partial relief from the aforementioned hierarchical appeal.

14- In fiscal year 2007, the Claimant had autonomous sub-accounts that allow for distinguishing situations in which costs are invoiced to clients from those in which they are not invoiced to clients, as follows:

                                                i.          Account 62.22.7310 "Amount paid per kilometer driven" (Amounts paid per kilometer);

                                              ii.          62.22.7320 "Cost/Km driven not imputable to customer" (Costs/kilometers not invoiced to clients);

                                            iii.          64.24.2100 "Wages daily costs imputable to customers" (Allowances invoiced to clients);

                                            iv.          64.24.2200 "Wages daily costs not imputable to customer" (Allowances not invoiced to clients).

15- The Claimant had, for fiscal year 2007, travel control schedules indicating the name of the beneficiary, the location to which they traveled, the date of travel, the daily amount allocated to them, as well as the amount invoiced, with indication of the services to which such costs would be attributed.

16- The Claimant also had, for fiscal year 2007, other schedules that serve to control the value of allowances invoiced in the context of its service provision.

17- In fiscal year 2006, the Claimant entered into an agreement with B… (its subsidiary) pursuant to which, on 1 October 2006, it sold the assets and liabilities relating to the IC business area for the amount of € 157,000.00 to that company.

18- Under the terms of the agreement, the transaction value was adjusted in view of the finding that the amount of liabilities transferred exceeded the amount of assets by € 733,330.90, whereby the Claimant added cash in the amount of € 733,330.90 to the assets to be transferred to B…, which is assumed to be part of the asset transfer.

19- In the course of an inspection of fiscal year 2006 (Service Order No. OI…), the DSIT made a correction in the amount of € 1,233,131.94 relating to the aforementioned operation.

20- Considering that B… was held 100% by the Claimant at the time of the aforementioned transaction, the DSIT considered that the arm's length principle established in No. 1 of article 58 of the IRC Code (current article 63) was not satisfied, since the agreement entered into between the two entities in question did not incorporate the value attributed to Goodwill associated with the sale of assets and liabilities of the IC business area.

21- In this context, the DSIT made a correction to the Claimant's taxable base in the amount of € 1,233,131.94, which allegedly resulted from the evaluation of the income that would be generated by the intangible assets of the IC business area, so that the operation would be valued at its fair value.

22- On 23 September 2008 (fiscal year 2007), the Claimant proceeded to sell the shares it held in the capital of B… to C… – ("C...") for the amount of € 2,316,000.00.

23- As a result of this operation, the Claimant determined a capital gain in the amount of € 816,000.00, which was fully taxed in fiscal year 2007, and which corresponds to the difference between the sale price of the shares (€ 2,316,000.00) and their respective acquisition value (€ 1,500,000.00).

24- The acquisition value of shares in B… of € 1,500,000.00 corresponds to the contributions made by the Claimant for the realization of the initial capital of this (€ 50,000.00) and the increase in capital made on 10 May 2007, in the amount of € 1,450,000.00.

A.2. Facts Established as Not Proven

The value of B… on the date of its sale to C… was composed, among other elements, of the value of assets and liabilities transferred by the Claimant on 1 October 2006.

A.3. Reasoning of the Proven and Not Proven Factual Matters

With respect to the factual matters, the Tribunal is not required to pronounce upon everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish the proven facts from those not proven (see art. 123, No. 2, of the CPPT and article 607, No. 3, of the CPC, applicable pursuant to article 29, No. 1, paragraphs (a) and (e), of the RJAT).

Thus, the facts relevant for the judgment of the case are selected and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see former article 511, No. 1, of the CPC, corresponding to current article 596, applicable pursuant to article 29, No. 1, paragraph (e), of the RJAT).

Therefore, taking into account the positions assumed by the parties, in light of article 110/7 of the CPPT, the documentary evidence and the administrative file attached to the record, the facts listed above were considered proven, with relevance for the decision.

The assessment regarding the fact established as not proven is based on the total absence of evidence concerning it. Indeed, nothing in the record allows us to conclude that the value of assets and liabilities transferred by the Claimant on 1 October 2006 remained the same on 23 September 2008, the date of sale of B… to C….

B. ON THE LAW

Prior to the examination of the issues relating to the merits of the case, it is necessary to decide on the exception raised by the Respondent, which concerns the challengeability of assessment No. 2014….

As emerges from the factual matters established above, the assessment in question was issued following the complete acceptance of the hierarchical appeal filed from the partial granting of the administrative complaint submitted by the Claimant on 29 March 2010, relating to the assessment note with number 2009 … (corresponding to document number 2009 …), on the grounds of the use of an autonomous tax rate higher than due and failure to consider the distribution of collection by the Autonomous Regions of the Azores and Madeira.

The AT contends that "to the extent that this is a tax assessment entirely favorable to the Claimant, the question arises of the utility of its challengeability, given that the same, not reflecting any tax act unfavorable to the Claimant, merely implements what had been petitioned by it in its hierarchical appeal and administrative complaint."

The Claimant, in turn, contends that "while it is true that the assessment notes No. 2014 … and 2009 … (Document No. 2009 …) originate in distinct administrative procedures, it is also true that both concern fiscal year 2007 and that, in that sense, the most recent assessment will necessarily reflect the determination contained in the preceding assessment."

It is understood that the AT is correct. Indeed, as it states, "it cannot be asserted (...) that assessment No. 2014… corresponds to an 'act of self-assessment for IRC', since the assessment relating to self-assessment is (...) assessment No. 2009…."

On this matter, it was decided in the Judgment of the TCA-South of 30-04-2014, rendered in case 05376/12[1], that:

"viii. The judicial challenge subsequent to an administrative complaint has as its object not only the defects inherent in the administrative decision (immediate object) rendered on the complaint but also the defects inherent in the assessment (mediate object), in relation to which there is no preclusive effect associated with the failure to raise them in the administrative complaint.

ix. However, as the tax assessment act is divisible, the failure to fully and timely challenge it (by way of administrative and or contentious proceedings) prevents the segments of the act that were not subject to the administrative complaint from being attacked in the judicial challenge that follows it, because in this case there is a situation of res judicata with respect to such segments.

x. The preclusion of the right to challenge segments of the assessment following an administrative complaint in which they were not raised does not violate the constitutional rights to access to justice and to challenge harmful acts.

xi. A new assessment, which merely revokes part of a prior assessment, does not have the nature of a substitutive act because it does not create a new legal framework governing a concrete situation, being instead an act that merely purges part of the original act and which, therefore, in not innovating in the legal order in the part not revoked, has a merely confirmatory nature that does not admit independent challenge."

Being able to read, further in the same judgment, that:

"As is well known, the tax act is divisible. This means that for purposes of contentious challenge, the interested party can attack the entire act or, accepting part of it, challenge it partially.

The failure to challenge the act within the period stipulated by law entails the expiration of the right of action, whereby the act – without ceasing to, possibly, suffer from intrinsic illegalities – becomes consolidated in the legal order. This conclusion applies to cases in which only part of the act is challenged, whereby the expiration of the right of action by the lapse of the applicable period consolidates the part not covered by the challenge.

If this is true for cases of direct challenge of the tax act, then the same solution should be adopted for cases of indirect challenge, that is, preceded by an administrative complaint, under penalty of introducing into the system an incoherence that the legislator certainly did not foresee or intend.

For by allowing that in case of rejection of the administrative complaint or the hierarchical appeal filed from that decision, the interested party can attack the assessment act, the legislator not only effectively prolongs the period for contentious challenge but also prevents such act from becoming consolidated in the legal order as res judicata; but this impossibility of consolidation of the assessment that the administrative complaint determines only occurs in relation to the part of the act that was challenged.

This does not mean that the object of the challenge is limited to the defects invoked in the complaint: in fact, this is subdivided into two: the immediate one concerning the defects inherent in the decision of the tax authority and the mediate one concerning the defects inherent in the assessment.

To understand, however, that the mediate object encompasses not only the defects of the assessment but also the parts that were not administratively challenged is to effect an improper interpretation of articles 68, No. 1, and 70, No. 1, of the CPPT, which postulate a close link between the administrative complaint and the judicial challenge. This link is so strong that No. 2 of article 70 prohibits the presentation of an administrative complaint when a judicial challenge has been presented on the same grounds. This means that if the taxpayer can react against the assessment act by attacking it in one part through judicial challenge and in another through an administrative complaint; mutatis mutandis, the part that was not subject to the administrative complaint cannot subsequently be the object of the challenge, because the obvious conclusion that emerges from these rules is that the grounds of the administrative complaint cannot be expanded in the subsequent judicial challenge, because not having been included in it, their raising is precluded by the preclusion resulting from the expiration of the period to file the challenge (see art. 102, No. 1, of the CPPT).

The opposite is not true: presented with a judicial challenge, the interested party still has an additional period (see art. 70, No. 1, of the CPPT) to raise a complaint on other grounds that they have not alleged in the challenge. But this possibility also demonstrates that only the grounds (read: 'the parts of the assessment') that were questioned in it can be the object of judicial challenge raised subsequent to the failure of an administrative complaint, and not any others."

Adhering to the transcribed case law, it is understood that assessment No. 2014… would only be challengeable in the part in which it is innovative, and not in the part in which it is merely confirmatory.

Now, the part in which that assessment innovated in the legal order was entirely favorable to the Claimant.

In the remaining part, where could be included the part whose annulment is petitioned by the Claimant, that assessment is merely confirmatory, whereby it is not challengeable.

Thus, and in light of the foregoing, taking into account the provision of article 51 of the CPTA, applicable by virtue of article 2, paragraph (c), of the CPPT, this exception raised by the AT must be upheld, rendering moot the examination of the other exception raised by it, relating to the material incompetence of CAAD to examine the request for illegality of assessment No. 2014….

Having established this, it is necessary to examine, following the order indicated by the Claimant, the requests for partial annulment of the decision granting partial relief from hierarchical appeal No. …2012… and for declaration of partial illegality of the tax assessment act for Corporate Income Tax ("IRC") of 2007 with number 2009…, the object thereof, both in the part corresponding to autonomous taxation on allowances and compensation for travel in private vehicle of the employee.

At the time of the facts, article 81, No. 9, of the CIRC governed the matter, as worded by article 29, No. 1, of Law No. 55-B/2004, of 30 December, which provided:

"9 - Are also taxed autonomously, at the rate of 5%, the deductible charges relating to expenses with allowances and compensation for travel in private vehicle of the employee, at the service of the employer, not invoiced to clients, recorded in any account, except to the extent that there is taxation under IRS in the sphere of the respective beneficiary, as well as the non-deductible charges under paragraph (f) of No. 1 of article 42 incurred by taxpayers who present tax loss in the year to which they relate".

The AT contends that "to demonstrate the requirements of the CIRC norm in question here, the then Claimant, now Claimant, would have to demonstrate that, although not invoiced to the client, these values were in fact included in the 'price', and that 'That norm, by resorting to the expression 'not invoiced to clients', expressly intended to oblige taxpayers to show in the invoices issued the amount corresponding to allowances and kilometers traveled.'"

Indeed, as was stated in the Judgment rendered in case 85/2012-T of CAAD[2]:

"The wording of paragraph (f) of No. 1 of art. 42 of the CIRC, by referring to expenses 'not invoiced to clients', does not explicitly require that the amount of allowances and compensation for travel in private vehicle of the employee be itemized in the invoices.

On the other hand, it is not a requirement of invoices relating to service provision that each of the costs necessary for their provision be itemized, as inferred from art. 35 of the CIVA in effect in 2011/2002 (current art. 36).

The fact that it is provided, in the final part of that paragraph (f), that the totality of expenses of these types is not deductible when the company does not have 'for each payment made, a schedule through which it is possible to monitor the travel to which those expenses relate, in particular the respective locations, duration of stay and objective, except to the extent that there is taxation under IRS in the sphere of the respective beneficiary' reveals that complete substantiation is legally required with respect to the identification of such expenses 'for each payment made', but does not imply that this indication must appear in the invoices. On the contrary, the requirement for the existence of a 'schedule through which it is possible to monitor the travel to which those expenses relate through which it is possible to monitor the travel to which those expenses relate' points to the direction that express indication in the invoices is not necessary, as the schedule will ensure the possibility of the desired monitoring. (...)

In any event, it was not due to the absence of the schedule that the Tax Authority made the correction, but rather solely on the grounds of the absence of express indication in each invoice of expenses of those types included therein.

Therefore, since it is not a requirement of invoices relating to service provision that all expenses necessary for their provision be itemized (which, furthermore, would be practically unfeasible in view of the existence of multiple general expenses whose reflection on a given service is impossible to determine with accuracy), the proper interpretation of that paragraph (f) is that the 20% increase provided therein relates only to expenses for allowances and compensation for use of the employee's vehicle whose value is not included in invoices, wherefore the correction made, on the grounds invoked by the Tax and Customs Authority, is not justified."

Also in the decision of case 733/2014T of CAAD[3], between the same parties of the present proceedings, it was stated:

"16. It is thus clear that it is not required by law that the amounts of allowances be expressly itemized in the invoice. It is stated only that these must be 'invoiced', that is, they must be included in the price to be paid by the client.

  1. In no way can it be understood that the expression 'invoiced' means 'expressly itemized in the invoice', a requirement that is not legally provided for.

  2. It is therefore understood that the documents belonging to the accounting of the Claimant are sufficient to assess the payment of allowances, there being no reason for the correction made by the Tax Authority."

Indeed, from the tax inspection report itself it appears that "(...) it is necessary to assess whether or not autonomous taxation applies to the accounting entries made in accounts POC # 62227310 – Amount paid per km driven and # 634242100 Wages-Daily cost imputable to customers, the value of which is not shown in the invoice issued, but only in the travel control schedules."

Thus, with the value of allowances charged to the client evidenced in the accounting of the Claimant, combined with the control schedules made available, it must be concluded that the requirement of non-invoicing to the client is not met, a requirement presupposed for the autonomous taxation now in question, being therefore illegal in that part the tax acts above identified, which should be annulled.

The Claimant further requests partial annulment of the decision granting partial relief from hierarchical appeal No. …2012… in the part corresponding to the correction of the capital gain determined from the sale of shares in B…, S.A. ("B...").

The Claimant's understanding with respect to this matter rests essentially on the presumption that the value of B… on the date of its sale to C… was composed, among other elements, of the value of assets and liabilities transferred by the Claimant on 1 October 2006, including the goodwill that was underlying the corrections made by the AT to the results of the Claimant in fiscal year 2006.

However, as was seen above, nothing was proven in that regard, in particular that that same goodwill had been maintained between 1-10-2006 and 23-9-2008. That is, in summary, it was in no way demonstrated in the record that the value of B… on 23-9-2008 was the same as existed on 1-10-2006.

On the other hand, the Claimant alleges that[4]:

"76. Had the assets been transferred to B… through an in-kind contribution to its capital, with there being a reflection of the operation in its own capital, this change would necessarily have a direct impact on the acquisition cost of B… in the sphere of the Claimant, both from an accounting perspective and from a tax perspective.

  1. That is, the acquisition cost of the participation held in B… would increase by the amount of € 1,233,131.94, thus reducing the tax capital gain to be determined from the sale of that participation by the same amount. (...)

  2. In fact, given that B… did not have monetary resources to meet the payment of the additional amount of € 1,233,131.94, the Claimant would have to record in its accounts an asset relating to a debt receivable from B…, for the same amount (which would consequently correspond to a liability in the sphere of B… relating to a debt payable).

  3. In this context, in a scenario of sale of the participation held by the Claimant in the capital of B…, the Claimant could choose between two situations: (i) it would sell the participation together with the credit it had to receive from B… in the amount of € 1,233,131.94; or (ii) it would sell only the participation.

  4. Should the first hypothesis be chosen, the value of realization of the transaction would be allocated first to the value of the debt that B… would have toward the Claimant in the amount of € 1,233,131.94, whereby from the total amount of realization obtained from the operation of sale of the participation of € 2,316,000.00, only the amount of € 1,082,868.06 would be allocated to the shares sold.

  5. In this sense, and given that the acquisition cost of the participation in question amounted to € 1,500,000.00, as mentioned previously, the Claimant would determine a tax loss of € 417,131.94.

  6. On the other hand, should the second hypothesis be chosen, the new shareholder of B… would have to provide that company with sufficient funds to enable it to liquidate the debt it had before the Claimant, in the amount of € 1,233,131.94.

  7. Thus, and as would be expected, the value of realization to be contracted in the sale of the participation held in B… would be reduced by the amount of € 1,233,131.94, corresponding to the value of additional funds to be provided by the new shareholder, whereby even in this scenario the Claimant would determine a tax loss of € 417,131.94.

  8. As a result of this correction, the Claimant would cease to determine a capital gain of € 816,000.00 and would begin to determine a loss of € 417,131.94, which does not contribute to the formation of the taxable income of the Claimant relating to fiscal year 2007, since the sale of B… was made to a related party, pursuant to paragraph (a) of No. 4 of article 58 of the IRC Code."

As is evident from the underlined passages, the Claimant's claim rests on mere hypotheses or suppositions, evidenced by the conditional verb tenses employed.

Now, legal decisions rest on the application of rules to facts, and not on hypotheses or suppositions, and it is certain that, in the case, nothing is proven (by no fact having been alleged to that effect) regarding the matters to which the Claimant's allegations relate.

It is not demonstrated, thus, and in light of the factual matters determined in this proceeding, contrary to what the Claimant intends, that on 23-9-2008 there was any other circumstance to be considered in the calculation of the acquisition value of shares in B… than the actual contributions made by the Claimant for the realization of the initial capital of this (€ 50,000.00) and the increase in capital actually made on 10 May 2007, in the amount of € 1,450,000.00.

It is equally not demonstrated that any "double taxation" exists, in any manner whatsoever, since as emerges from everything stated, it is not determined in any way that the same taxable event has given rise, more than once, to the subjection of the same tax, whereby the alleged violation of the constitutional principle of taxation on real income, enshrined in No. 2 of article 104 of the Constitution of the Portuguese Republic, will also not occur.

There is also no need to "restore justice to the tax situation of the Claimant, by virtue of the first transaction (sale of assets and liabilities to B…) being indissociable from the second (sale of shares in B… to C…), as well as the elimination of double taxation on the same economic reality", since, as has already been noted, the relationship between the two transactions is not demonstrated, nor, much less, the identity of the economic reality, which rests on the presumption – unproven – of the equivalence of the situation of B… on the dates of 1-10-2006 and 23-9-2008.

Thus, and in light of all the foregoing, the arbitral request now in question should be dismissed.

The Claimant combines with the request for annulment of the tax acts that are the object of the present proceedings, the request for condemnation of the AT to pay compensatory interest on the amount paid by it as a result of the assessments that are annulled.

It is a prerequisite for the awarding of compensatory interest that the error in which the AT labored be imputable to it (see article 43 of the LGT).

In the case of the proceedings, it is manifest that, as a result of the illegality of the tax assessment act for Corporate Income Tax ("IRC") of 2007 with number 2009…, in the part corresponding to autonomous taxation on allowances and compensation for travel in private vehicle of the employee, for the reasons pointed out previously, there is entitlement to reimbursement of the tax paid by the Claimant, by force of the provisions of the aforementioned articles 24, No. 1, paragraph (b), of the RJAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been performed".

It is also clear in the record that the illegality of the assessed tax act impugned is directly imputable to the Respondent, which, on its own initiative, performed it without legal support, suffering from an erroneous assessment of the legally relevant facts and consequent application of the legal norms to the concrete case.

Thus, the Claimant is entitled to the receipt of compensatory interest, pursuant to the provisions of articles 43, No. 1, of the LGT and 61 of the CPPT.

Compensatory interest is due to the Claimant from the date on which it made the payment of the tax obligation in question in the proceedings until the full reimbursement of the amount paid, at the legal rate.

C. DECISION

In view of the foregoing, this Arbitral Tribunal decides to render partial judgment in favor of the arbitral request and, consequently:

a) The exception of unchallengeability of assessment No. 2014…, raised by the AT, is upheld;

b) Partially annulled are the decision granting partial relief from hierarchical appeal No. …2012… and the tax assessment act for Corporate Income Tax ("IRC") of 2007 with number 2009…, that was the object thereof, both in the part relating to autonomous taxation on allowances and compensation for travel in private vehicle of the employee, corresponding to the amount of € 30,440.14;

c) The AT is condemned to restore the aforementioned amount, unduly paid by the Claimant, plus compensatory interest, counted from the date of that payment until the date of its complete restitution;

d) The remaining arbitral requests are dismissed as unfounded;

e) The parties are condemned to bear the costs of the proceedings, in the proportion of their respective failure to prevail, fixing the part chargeable to the AT in the amount of €528.35 and the part chargeable to the Claimant in the amount of €3,755.65.

D. Value of the Proceedings

The value of the proceedings is fixed at € 246,680.14, pursuant to article 97-A, No. 1, paragraph (a), of the Code of Tax Procedure and Process, applicable by force of paragraphs (a) and (b) of No. 1 of article 29 of the RJAT and No. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

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 failure to prevail, as determined above, since the request was partially granted, pursuant to articles 12, No. 2, and 22, No. 4, both of the RJAT, and article 4, No. 4, of the aforementioned Regulation.

Let notification be made.

Lisbon

12 June 2015

The President Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Luís Máximo dos Santos)

The Arbitrator Member

(Henrique Fernando Rodrigues)

Frequently Asked Questions

Automatically Created

What is the autonomous taxation (tributação autónoma) applicable to travel allowances (ajudas de custo) and employee vehicle compensation under Portuguese IRC?
Autonomous taxation (tributação autónoma) under Portuguese IRC applies mandatory tax rates to specific expense categories, including travel allowances (ajudas de custo) and employee vehicle compensation. This special tax regime, governed by Article 88 of the IRC Code, imposes fixed percentage rates on certain expenses regardless of their deductibility or business necessity. The rates vary depending on whether the company has taxable profit or tax losses, and whether expenses are properly documented. For travel allowances and vehicle-related compensation, autonomous taxation typically applies at rates ranging from 5% to 35% of the expense amount, creating an additional tax burden beyond standard corporate income tax on profits.
Can a company avoid autonomous taxation on travel allowances if the expenses were duly invoiced to clients?
No, under Portuguese IRC law, a company generally cannot avoid autonomous taxation on travel allowances simply because the expenses were invoiced to clients. Autonomous taxation is a standalone tax imposed on specific expense categories regardless of whether those costs are recharged, recoverable from third parties, or economically justified. The legislation aims to discourage certain types of expenditure through additional taxation, independent of the expense's ultimate economic treatment. This is precisely the issue contested in Process 758/2014-T, where the claimant argued that properly invoiced client expenses should be exempt, but Portuguese autonomous taxation rules apply based on the nature of the expense itself, not its invoicing status or recoverability. Only expenses meeting very specific legal exemptions can avoid this taxation regime.
How is the capital gain (mais-valia) from the sale of shares calculated when the tax authority has corrected the company's value?
When calculating capital gains (mais-valias) from share sales under Portuguese IRC, the taxable gain is determined by the difference between the sale price and the acquisition cost (adjusted tax basis). If the Tax Authority corrects a company's valuation for one tax purpose, taxpayers can argue for consistent application of that corrected value across all related tax calculations, including capital gains computation. In Process 758/2014-T, the claimant contested that since the Tax Administration corrected B... S.A.'s value, this revision should logically flow through to the capital gain calculation from selling those shares. This reflects the principle of tax consistency and proper valuation methodology, though each correction must be analyzed for its specific legal basis and applicability to different tax periods and transactions.
What is the procedure for filing a tax arbitration request (pedido de constituição de tribunal arbitral) under the RJAT (Decreto-Lei n.º 10/2011)?
The procedure for filing a tax arbitration request under RJAT (Decreto-Lei n.º 10/2011) involves submitting a formal petition to CAAD (Centro de Arbitragem Administrativa) within the legal deadline, typically within 90 days after the administrative appeal decision or when administrative remedies are exhausted. The request must identify the contested acts, state the legal and factual grounds, specify the relief sought, and include supporting documentation. Upon acceptance, the Tax Authority is automatically notified. Parties may appoint arbitrators or have them appointed by CAAD's President. The arbitral tribunal is constituted once arbitrators accept, typically within 30-45 days. The Tax Authority then files a response, followed by possible hearings and written submissions. The entire process from filing to decision generally takes 6-12 months, offering a faster alternative to judicial courts for resolving IRC disputes, autonomous taxation challenges, and assessment contests.
Is a taxpayer entitled to a refund with compensatory interest (juros indemnizatórios) after a successful challenge of an IRC assessment?
Yes, under Portuguese tax law, a taxpayer is entitled to a refund with compensatory interest (juros indemnizatórios) after successfully challenging an IRC assessment. Article 43 of the General Tax Law (Lei Geral Tributária) and Article 61 of the Tax Procedure Code (Código de Procedimento e Processo Tributário) establish the right to compensation interest when tax amounts are paid or retained beyond legal deadlines or due to Tax Authority errors. The interest accrues from the date of undue payment until the refund date, calculated at the legal rate established annually. In Process 758/2014-T, the claimant explicitly requested reimbursement of excess amounts paid plus compensatory interest. This right incentivizes correct tax administration and compensates taxpayers for the financial cost of funds improperly held by the State, applying to IRC assessments, autonomous taxation corrections, and other tax matters where assessments are annulled or reduced through administrative appeals, hierarchical reviews, or arbitration decisions.