Process: 76/2017-T

Date: December 11, 2017

Tax Type: IRC

Source: Original CAAD Decision

Summary

CAAD Arbitration Decision 76/2017-T addresses fundamental procedural requirements for IRC (Corporate Income Tax) additional assessments in Portugal. The case involves a limited company challenging an IRC assessment of €3,786.82 for fiscal year 2012, plus compensatory interest, following a tax inspection that identified unreported income from tutoring services. The central legal dispute concerns whether the assessment notice and underlying inspection report satisfy Portuguese law's mandatory reasoning requirements under administrative procedure principles. The claimant argued the assessment notice was annullable due to form defects, specifically lack of adequate factual and legal justification. The notice allegedly only identified the tax period, payment amount, and appeal rights, without specifying the corrections made or applicable legal provisions. The company further contended that the inspection report relied on conclusory statements about discrepancies between bank deposits and declared income, without proper analysis. The company maintained that deposits in bank accounts held by the partner's son originated from the partner's separate employment activity, not company operations, and were not reflected in company accounting. The Tax Authority defended the assessment, distinguishing between the substantive reasoning contained in the inspection report and the formal assessment notification. It emphasized that the taxpayer exercised its right to be heard during the inspection procedure, and the final inspection report provided comprehensive factual and legal grounds. The Authority argued that when a taxpayer omits taxable income, the presumption of truthfulness ceases, and the bank account analysis revealed payments from individuals with descriptions clearly linked to the company's tutoring activities. The case illustrates critical tensions in Portuguese tax procedure between administrative efficiency and taxpayer protection, examining whether cross-references to inspection reports satisfy statutory reasoning obligations or whether assessment notices must be self-sufficient documents.

Full Decision

Arbitral Decision

The Arbitrator Dr. Maria Antónia Torres, appointed by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Single Arbitral Tribunal, constituted on 19 April 2017, hereby rules as follows:

1. REPORT

1.1 A…, Lda., taxpayer no. …, with registered address at Rua …nº…, … … …, notified of the rejection of the Gracious Complaint filed against the act of assessment of Corporate Income Tax (IRC) no. 2016 … and against the act of assessment of compensatory interest no. 2016 …, requested the constitution of an arbitral tribunal, pursuant to article 2, paragraph 1, subparagraph a), and article 10, both of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"[1]).

1.2. The request for arbitral ruling concerns the declaration of illegality, and consequent annulment, of the tax act assessing Corporate Income Tax with no. 2016…, and of the act assessing compensatory interest with no. 2016…, relating to the fiscal year 2012, better identified in the initial petition presented by the Claimant, which is hereby incorporated and reproduced for all legal purposes.

According to the initial petition, the Claimant was notified by official letter of 21 October 2016 of the said assessment notes for Corporate Income Tax and compensatory interest, in the total amount of €3,786.82 (three thousand seven hundred and eighty-six euros and eighty-two cents).

Not agreeing with such additional assessment, and considering that it is affected by various vices that determine its annullability, the Claimant filed a Gracious Complaint against the said tax assessment, which gave rise to a Gracious Complaint process that was subsequently rejected by the Respondent. On 19 January 2017, the Claimant requested the constitution of this Arbitral Tribunal, a request that was accepted.

1.3 The Claimant contends, first and foremost, that the assessment notice sub judice does not result in the necessary and adequate reasoning, either factual or legal, for the act in question. It states that from the act only results the identification of the period, the amount to be paid and the means of recourse, with no identification of the corrections that would have been at the origin of the determination of the tax, nor the applicable legal provisions. Therefore, the Claimant considers that the assessment act is incomprehensible for a normal recipient and, for this reason, annullable by vice of form. It further adds that this vice is not remediable by referral to a prior procedure of the Tax Administration, given that there is no referral to any concrete document, nor is any inspection procedure identified. In any case, the Claimant understands that such referral would not be sufficient.

As a precautionary measure, the Claimant further advances what it believes may have grounded the additional assessment act under analysis. The Claimant was subject to an inspection for the years 2011, 2012 and 2013, and the conclusions of the inspection report were notified to it through an official letter dated 30 December 2015. According to the said report, the Claimant would have omitted taxable income corresponding to the provision of tutoring services for which there would have been neither invoices nor payment documents.

Now, again on this point, the Claimant alleges that the inspection report does not contain the necessary reasoning of the act, it being unclear the "iter volitivo" of the Tax Administration but only mere conclusive judgments.

According to the Claimant, the reasoning merely consists of stating that there is a difference between the amounts deposited in the bank accounts and those declared for tax purposes, a difference that will constitute omitted taxable income in tax declarations.

The Claimant claims to have referred and reiterates that this difference is due to another remunerated activity of the partner.

The Claimant further states that the assessment act merely limits itself to assessing municipal surcharge and compensatory interest, which the Claimant also did not understand, no explanation being given in the said act.

The Claimant further defends itself by stating that the amounts contained in the accounts do not relate to the activity of the Claimant and are not reflected in its accounting. And that, if the Tax Administration understood that it could not trust that same accounting, it should have opted for the application of indirect methods. The Claimant further questions the amounts sub judice, claiming that if there is undertaxation, the value will be lower than that proposed by the Tax Administration.

Additionally, it questions that the Tax Administration did not carry out all necessary diligences, notably regarding the evidence presented by the Claimant. Finally, the Claimant further refers to vices of form relating to the assessment act of compensatory interest and to the decision dismissing the Gracious Complaint.

1.4. The understanding of the Respondent, as stated in the Reply and subsequent Submissions, is that the additional assessment sub judice is legal as it constitutes a correct application of the law to the facts. The Respondent understands that a distinction must be made between the reasoning of acts and the act of notification of that reasoning and that the final report of the tax inspection carried out on the Claimant contains all the necessary factual and legal reasoning for the contested assessments. In fact, the Respondent adds that the Claimant, having been notified for this purpose, exercised its right to be heard at a moment prior to the conclusion of the inspection report, as per the document attached by the Respondent to the record. The Respondent understands, supporting its position in case law of the TCA (Court of Administrative Disputes), that having had this right to be heard and the inspection report being duly reasoned, this will be sufficient to support the assessment notes that flow therefrom. The Respondent also notes that from the notification of the Tax Inspection Report it appears that additional assessments will flow therefrom, and therefore this should not have surprised the Claimant. It thus concludes that there is no vice of lack of reasoning, and therefore the assessment act should not be considered annullable.

The Respondent also disagrees that the reasoning of the inspection report is not clear and congruent, understanding that it allows for knowledge of the factual and legal reasons underlying the contested corrections.

As regards the factual and legal requirements, the Respondent states that unreported income was determined by the Claimant, and therefore the presumption of truthfulness of its income declaration ceases. There was indeed, as better explained in the inspection report, omission of income identified through the divergence between the amounts declared and the amounts deposited in the bank accounts, it being certain that the credit movements in the said account held by the son of the partners of the Claimant are carried out by individuals and with descriptions clearly associated with the activity of the Claimant.

Finally, it states that the Claimant throughout the entire process did not bring any probative means that can support its argument as to whether another the origin of the funds, the Respondent having carried out all necessary diligences to determine material truth.

Therefore, it concludes defending that the request sub judice should be judged groundless.

1.5. The meeting of the arbitral tribunal provided for in article 18 of RJAT was dispensed with, and Submissions were presented only by the Respondent.

2. CURE OF DEFECTS

The Tribunal was regularly constituted and is competent ratione materiae, in accordance with article 2 of RJAT.

The parties have legal personality and capacity, demonstrate themselves to be legitimate and are regularly represented (cf. articles 4 and 10, paragraph 2 of RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

No nullities were identified in the proceeding.

3. FACTUAL MATTER

With relevance to the merit decision, the Tribunal deems the following facts proven:

1) The Claimant carries out the activity of "other educational activities" since 2000, which consists essentially of school support and tutoring for secondary school and higher education entrance exams, and also language courses;

2) Following information from the Financial Information Unit (UIF) of the Judicial Police, which refers to the practice of suspicious banking operations, a tax inspection process was opened, initially only for the fiscal year 2011 but later extended to 2012 and 2013;

3) The conclusive report of the inspection procedure was duly notified to the Claimant, as were the assessment acts to which it gave rise;

4) The UIF information was related to a bank account held by B…, age 19, son of the partners of the now Claimant;

5) The Claimant did not contest the existence of the said bank account, nor the fact that it was used for its activity despite not being held by it. In fact, the Claimant and its representatives, at various moments, confirm such use, justifying it by the fact that, at a certain moment, all its other accounts were "frozen by the Tax Administration". Indeed, in the course of the interrogation carried out to C…, managing partner of the Claimant, in the context of the inquiry process …/2013 …TDLSB, the latter states that, at a certain moment, the account was opened in the name of his son so that customers would make payments relating to A… and that this account was operated by him as if it were his own.

6) C… was, at the date, manager of the Claimant, providing it with services which, according to the receipts, consisted of tutoring provided on a personal basis and exempt from VAT.

7) The financial information unit of the Judicial Police further determined (and this was not contested by the Claimant, by contrary proof) that the cheques deposited in the said account were deposited by individuals bearer or in the name of C… and that the transfers were also ordered by individuals with descriptions such as "enrolment", "payment", "A…", "monthly fee", "tutoring".

8) B… was declared at the date as a student, appearing as a dependent without income in the income tax declaration of his parents.

9) In the same account there are debit movements, the vast majority of which to personal accounts of the two partners of the Claimant, but also some payments to individuals who provided services to the Claimant.

10) In the income tax declaration of the two partners of the Claimant, presented jointly, there will be income of category A paid by the Claimant and income of category B, a fact that was not contested by the Claimant.

11) The income tax declarations presented by the Claimant were analyzed and the values of services rendered declared were identified;

Unproven Facts:

Although the Claimant refers that the amounts transferred to the bank account of B… by individuals and with the descriptions already mentioned have an origin different from that which is being imputed to them, it did not present any proof of this fact, namely in the sense of supporting that they are income from another activity.

Furthermore, the Claimant makes reference to the fact that, if one were to consider that income was omitted, the value of such omission would be lower than that presented by the Respondent, again making no proof of this.

No other essential facts were found, with relevance for the assessment of the merits of the case, which were not proven.

Reasoning of Factual Matter

The conviction regarding the facts deemed proven was based on the evidence presented by the Respondent and also by the Claimant, whose authenticity and correspondence to reality were not questioned by either Party.

4. ON THE LAW

Having established the factual matter, it is important to examine the law raised by the parties.

Lack of Reasoning

The Claimant alleges that the assessment sub judice is not duly reasoned, as, according to its judgment, it is not possible to understand the reasons for the decision as it contains no factual or legal motivation.

Now, case law holds regarding the reasoning of the assessment act that: "The act will be sufficiently reasoned when the addressee, placed in the position of a normal recipient – the bonus pater familiae of which article 487, paragraph 2 of the Civil Code speaks - may come to know the factual and legal reasons that are at its genesis, in order to allow him to opt, in an informed manner, between acceptance of the act or the activation of legal means of challenge, and so that, in the latter circumstance, the court may also exercise effective control of the legality of the act, assessing its legal correctness in light of its contextual reasoning". In other words, the reasoning must incorporate elements of fact and law that allow the addressee of the act to understand the iter of the Tax Administration's decision.

Now, in the concrete case, the inspection report contains, in detailed form, the facts and the legal norms that frame the corrections to taxable profit. Furthermore, in the report itself, it states that additional assessments will flow therefrom, if applicable. And finally, it should not be forgotten the inquiry process …/2013 …TDLSB, in the context of which C…, managing partner of the Claimant, was interrogated, precisely on the facts here under analysis.

Now, in light of this, the Tribunal understands that the Claimant can hardly allege ignorance of the facts that gave rise to the contested additional assessment, having already, in the exercise of its right to be heard, fully identified all the facts in dispute. Therefore, it is concluded that the act is sufficiently reasoned, since it contains the necessary references to the factual and legal matter used by the Respondent for its adoption, it having been clear from the record that such facts were known to the Claimant, there having been no obstacle for the Claimant to understand them and, consequently, to defend their illegality and consequent annulment.

In sum, the act does not suffer from the vice of lack of reasoning that the Claimant imputes to it.

On the Law

As identified above, the matter to be decided concerns whether the contested additional assessment is legal by virtue of the omission of income carried out by the Claimant.

Beyond the informative function of the accounting of an organization, it is important to note its performative function for purposes of taxation.

Article 17 provides on the heading "Determination of Taxable Profit":

1 - The taxable profit of legal entities and other entities mentioned in subparagraph a) of paragraph 1 of article 3 is constituted by the algebraic sum of the net result of the period and of the positive and negative patrimonial variations verified in the same period and not reflected in that result, determined on the basis of accounting and possibly corrected in accordance with the terms of this Code.

2 – (…).

3 - In order to allow the determination referred to in paragraph 1, the accounting must:

a) Be organized in accordance with accounting standardization and other applicable legal provisions for the respective sector of activity, without prejudice to compliance with the provisions set out in this Code;

b) Reflect all operations carried out by the taxpayer and be organized so that the results of operations and patrimonial variations subject to the general regime of Corporate Income Tax may clearly be distinguished from those of the remainder.

Article 63-C of the LGT (General Tax Code) further provides that taxpayers must have a bank account exclusively devoted to business activity:

"Taxpayers of Corporate Income Tax, as well as taxpayers of Personal Income Tax who have or should have organized accounting, are obligated to possess at least one bank account through which payments and receipts relating to the business activity developed must be exclusively transacted.

2 - There must also be carried out through the account or accounts referred to in paragraph 1 all movements relating to drawings, other forms of loans and advances by partners, as well as any other movements to or from the taxpayers.

Now, in the concrete case, the Claimant used an account of which it was not the holder to receive payments relating to its activity. As stated, this fact is confirmed by the managing partner of the Claimant in the interrogation carried out to him in the process above better identified. The same account is used to make some payments to service providers and, above all, to transfer funds to the personal accounts of the partners.

Furthermore, given the nature of the payments received in that account (carried out by individuals with descriptions associated with the activity of the Claimant), without the Claimant having presented any proof that its nature and origin be different, it is concluded, as the Respondent concluded, the existence of omission of income by the Claimant. Now, the non-existence of a bank account held by it, exclusively devoted to its activity, plus the existence of omitted income makes it so that the accounting of the Claimant cannot be seen as fulfilling its purpose.

In light of this, the Respondent carries out the following exercise:

- Identification of the values of deposits in the bank account of B… in the fiscal year 2012;

- Deduction from such deposits of the values declared as category A and category B in the model 3 declaration presented by the partners of the Claimant referring to that same fiscal year;

- Concluding with the value of unreported income regarding which the Claimant did not present any proof as to the possible nature or origin different from that attributed to it by the Respondent;

- The taxable matter of the Claimant is then corrected considering the omitted income and deducting available tax losses for carryforward;

- To the amount of tax thus determined, the special installment payment was deducted resulting in the amount payable of €3,434.53 to which is added compensatory interest in the amount of €352.29.

5. DECISION:

In light of the above, one can only conclude that the Claimant was correctly taxed, in such terms that, and with the reasoning hereby set out, this arbitral tribunal decides to judge the request for declaration of illegality of the tax act assessing Corporate Income Tax and respective compensatory interest, relating to the year 2012, better identified above, as groundless.

* *

The value of the case is fixed at €3,786.82 (three thousand seven hundred and eighty-six euros and eighty-two cents) in accordance with the provisions of articles 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Processes (RCPAT), 97-A, paragraph 1, subparagraph a) of CPPT and 306 of CPC.

The amount of costs is fixed at € 612 (six hundred and twelve euros) pursuant to article 22, paragraph 4 of RJAT and Table I attached to RCPAT, to be paid by the Claimant, in accordance with the provisions of articles 12, paragraph 2 of RJAT and 4, paragraph 4 of RCPAT.

Let it be notified.

Lisbon, 11 December 2017

The Arbitrator

(Maria Antónia Torres)

Text prepared by computer, in accordance with article 131, paragraph 5 of the Code of Civil Procedure, applicable by referral from article 29, paragraph 1, subparagraph e) of RJAT.

The wording of this arbitral decision is governed by the spelling prior to the Orthographic Agreement of 1990.

[1] Acronym for Legal Regime of Tax Arbitration.

Frequently Asked Questions

Automatically Created

What are the legal requirements for proper reasoning in an IRC additional tax assessment in Portugal?
Under Portuguese tax law, IRC additional assessments must comply with the general duty to provide reasons (fundamentação) established in the Tax Procedure Code (CPPT) and Administrative Procedure Code (CPA). The assessment must enable the taxpayer to understand the factual basis for the correction, the legal provisions applied, and the calculation methodology. While the assessment notice itself may be concise, it must reference the underlying inspection report where detailed reasoning exists. The inspection report must identify specific income omissions, explain the investigation methods used, present supporting evidence, and justify why the taxpayer's accounting was rejected. Courts have held that reasoning can be incorporated by reference to prior procedural acts, provided the taxpayer had the opportunity to be heard and the referenced document is adequately identified and accessible.
Can an IRC tax assessment be annulled due to insufficient factual and legal justification under Portuguese law?
Yes, Portuguese administrative and tax law permits annulment of IRC assessments for insufficient reasoning, which constitutes a vice of form (vício de forma). Article 77 of the LGT (General Tax Law) requires tax acts to be grounded in law and properly reasoned. Lack of reasoning renders an act annullable when it prevents the taxpayer from understanding the tax authority's rationale and effectively exercising defense rights. However, courts distinguish between complete absence of reasoning and insufficient reasoning. Minor deficiencies may not lead to annulment if the taxpayer could reasonably comprehend the basis for the assessment through the overall administrative file. The assessment will be annulled only if the reasoning defect substantially impairs the taxpayer's ability to contest the decision. CAAD arbitral tribunals review whether the combined documentation (assessment notice, inspection report, hearing procedures) provides adequate justification for the tax determination.
What is the procedure for filing a Reclamação Graciosa against an IRC additional tax assessment?
The Reclamação Graciosa is an administrative pre-litigation remedy filed with the Tax Authority to contest tax assessments. The taxpayer must file within 120 days from notification of the contested act (Article 70, CPPT). The complaint must identify the taxpayer, the contested act, the grounds for contestation, and desired outcome. It suspends the statute of limitations and, if filed within the voluntary payment period, suspends enforcement if accompanied by bank guarantee or comparable security. The Tax Authority has a maximum timeframe (generally 4 months, extendable) to decide, after which silence may constitute tacit rejection. If the Reclamação Graciosa is rejected or tacitly denied, the taxpayer may pursue judicial review through administrative courts or, for tax matters within CAAD jurisdiction, request arbitration within 90 days of notification. The decision on the complaint should address all grounds raised and provide reasoning for its conclusions.