Process: 763/2015-T

Date: June 27, 2016

Tax Type: IRC

Source: Original CAAD Decision

Summary

Decision 763/2015-T addresses IRC withholding tax obligations on payments to non-resident entities under Portuguese corporate income tax law. The case involves a Portuguese sports club (A...) that made payments to Brazilian and Gibraltar-registered entities for athlete economic rights without performing mandatory withholding at source. The Tax Authority assessed missing withholding on two categories: (1) €350,000 paid to Brazilian intermediary entities for athlete activity income, subject to 25% withholding under Article 4(3)(d) CIRC, resulting in €87,500 tax due; and (2) capital income of €2,715,354.60 obtained by Gibraltar entity O... from economic rights investments, subject to 20% withholding. The arbitral tribunal ruled that despite the Portugal-Brazil Double Taxation Convention, the RFI certification form from Brazilian authorities was insufficient to exempt withholding obligations. Under Portuguese law, income from athletes performing activities in Portuguese territory and capital income from investments paid by Portuguese-resident debtors are subject to mandatory withholding at source. Article 98(5) CIRC establishes that the tax substitute (payer) must deliver amounts that should have been withheld, while Article 132 CIRC prohibits transfers abroad without tax being paid or secured. The decision imposed the missing withholding tax plus compensation interest for delayed revenue under Article 106(2) CIRC and Article 35 of the General Tax Code, emphasizing strict compliance with withholding deadlines (20th day of following month per Article 94(6) CIRC).

Full Decision

entity, in this case Brazil, the State of source of the income is empowered to exercise its taxation rights over the amounts attributed to interposed entities between the athlete entity and the Club/SAD paying the income.

Consequently, insofar as taxation is provided for in Portuguese territory, of the matter in question, pursuant to the aforementioned paragraph d) of no. 3 of Article 4 of CIRC, even with the presentation of the RFI model form, duly completed and certified by the Brazilian tax authorities, the income in question is not exempted from taxation under Corporate Income Tax and, consequently, from withholding at source with final character.

In these terms, with respect to the income in question, the taxpayer, as a tax substitute, was obliged to make the delivery of the amount that should have been withheld (cf. no. 5 of Article 98 of CIRC).

It should also be noted that pursuant to Article 132 of CIRC, transfers abroad of income subject to CIT, obtained in national territory by non-resident entities, may not be made without the tax that is due being shown as paid or secured.

Thus, pursuant to the Articles and statutes mentioned above, the taxpayer should, when making the payment or making available the income derived from the exercise in Portuguese territory of the activity of athletes, to non-resident entities, in the total amount of € 350,000.00, have performed withholding at source at the rate of 25%, which should have been paid into the State treasury by the 20th day of the month following the one in which those income were made available (cf. no. 6 of Article 94 of CIRC).

Given the foregoing, missing tax was ascertained for the period in which the payment was made, in the total amount of € 87,500.00 (€ 350,000.00 x 25%), plus compensation interest for the delay of revenue due to the State (no. 2 of Article 106 of CIRC and no. 1 of Article 35 of the General Tax Code).

III.1.2.3. Capital Income - Payment made to entity O...

Description of Operations

On 8 June 2005, A... formalized a partnership, through an "Agreement", with the entity O... (hereinafter O...) registered in GIBRALTAR with no. ..., where it partially transfers economic rights relating to sports rights of several athletes, including 25% of player S... (hereinafter, S...) (annex 107 - 5 pages).

Consequently, A... ascertained in fiscal year 2004 (period between 2004-07-01 and 2005-06-30) the capital gain corresponding to the transfer of 25% of the economic rights of player S..., having considered for that purpose the amount of € 1,688,034.19 as the realization value of the rights transferred relating to this athlete (annex 108-2 pages).

Subsequently, on 4/01/2006 the athlete was sold to ... for € 8,000,000, the taxpayer having made the payment in the amount of € 2,000,000.00 (2006/01/03) to O... which corresponded to 25% of economic rights that were held by this entity, without performing the due withholding at source.

In the inspection conducted for fiscal year/year 2006, missing withholding at source was ascertained, at the rate of 20%, on the net income obtained by O..., that is, on € 311,965.81 (= € 2,000,000.00 - € 1,688,034.19) since this corresponded to the income of the capital invested by O... .

On the other hand, A... terminated contracts with players T..., U... and V... (season 2006/2007), who had been included in the partnership concluded with "O..." (see clause 2 of annex 1), whereby, not having proceeded to their transfer to another club, the economic rights held, both by A... and by O..., ceased with the extinction of the sports rights from which they derived.

On 28 August 2007, A... transferred the athlete W... to ... and on 24 January 2008 transferred the athlete X... to ... . These transfer operations were carried out in fiscal year 2007/08, A... having received the value corresponding to 100% of the economic rights transacted for the referenced clubs, thereby becoming indebted to O... for the corresponding part of the economic rights held by this entity. However, during the years 2007 and 2008, no payment was detected in this respect made by A... to entity O... .

During the inspection action for fiscal year 2009, the taxpayer was asked to explain the two payments made to the entity Y... (hereinafter Y...) in the amount of € 2,558,532.00 each, totaling € 5,117,064.00. In response, A... presented the "Agreement", dated 9 January 2009, in which Y... appears to hold claims of entity O... From the documentary analysis conducted on the "Agreement", dated 9 January 2009, it is confirmed that the transfer of claims between these entities occurred, since, at the date of the transfer, the economic rights had already been transferred to another (different) sports entity, either by A... or by O..., as a result of the transfer of the player, or else had already been extinguished by the termination of the contract with these players (annex 109 - 10 pages). On 28 September 2010, the taxpayer made a single payment of € 597,000.00.

In this "Agreement" Y... and A... conclude the business of association established in annex 107, settling the accounts relating to the participation of the athletes, and ascertained the final payment values: "This Agreement sets out the terms for the payment of Y..."s..." and "...A... shall pay to Y... the sum of € 5,117,064 (...) A... shall further pay to Y...: 5.2.1 In relation to the first promissory note € 1,500,000 on 10 December 2009 (...) 5.2.2 In relation to the second promissory note € 1,500,000 on 10 December 2010... ».

In the settlement of accounts, it is ascertained that O... obtained an income of € 2,715,354.60220, which corresponds to the difference between the amount due to O..., of € 8,117,064.00221, and the investment made (see annex 107) of € 5,401,709.40222. Thus, € 2,715,354.60 constitutes the income from the capital invested by O..., in question, which results from annex 109.

Nature of Income

Pursuant to no. 1 of Article 5 of the Personal Income Tax Code, "capital income shall mean the yield and other economic benefits, of whatever nature or denomination, whether monetary or in kind, derived, directly or indirectly, from patrimonial elements, property, rights or legal situations, of a movable nature ....".

According to no. 2 of Article 212 of the Civil Code, yield is considered the income or interest that the property produces as a consequence of a legal relationship.

In these terms, the income obtained by O..., as yield or economic benefit, resulting from the financial investment made in the acquisition of percentages of the economic-sports rights of players (e.g.: W... and X...), are framed as capital income.

And, as such, are considered obtained in Portugal by a non-resident subject to CIT, by virtue of the location rule contained in sub-paragraph 3) of paragraph c) of no. 3 of Article 4 of the Corporate Income Tax Code, since these are income from the application of capital, whose subjection is not provided for in any of the remaining sub-paragraphs, and the debtor (A...) has residence in Portuguese territory.

Entity Subject to Taxation

In view of the provisions in the "Agreement" exhibited in annex 109, it appears that the entity Y... assumes the position of O..., giving rise to a transfer of claims of O... to Y..., regarding the claims held against A... .

As to the question of the transfer of claims, it is to be noted that, as results from Article 577 of the Civil Code and following, the Transfer of Claims is the contract by which the creditor, called the transferor, transmits, gratuitously or onerously, part or all of its credit, present or future, to a third party, called the transferee, regardless of the consent of the debtor.

We are faced with the transmission of the debt resulting from the income obtained by O... with the investment made in the acquisition of the economic rights of the players, to Y... . We are thus in the presence of a permutative fact and not a modifying fact in the patrimonial sphere of the SAD that, based on the document presented, comes to have the obligation to pay to the transferee (Y...) and extinguishes the debt to the transferor (O...).

As to the income, for tax purposes, it is considered obtained in the sphere of O..., since it was this entity that was the owner of the economic rights of the player when these were transferred and, with the transfer of claims there is not created a new tax fact but merely the existing claims are transferred between two distinct entities.

Thus, the fact that the company O... transfers its claims does not matter for subjection to taxation, since the income is generated in its personal sphere and it is this income that is intended to be taxed.

Therefore, the income that should be subject to taxation is the income obtained by the fund (O...) as a result of its investment in the economic rights of these players.

Withholding at Source

The taxation of income obtained by non-resident entities, without a permanent establishment, in Portuguese territory, is made by the application of a withholding rate, in principle, to payments made or made available. In the case of capital income subject to CIT by sub-paragraph 3) of paragraph c) of no. 3 of Article 4 of CIRC, its taxation at a withholding rate of 20%, with final character, is provided for.

This taxation provides that its incidence occurs on gross income, justifying itself to be, thus, in principle lower than the rate (general) of CIT that applies to the income obtained by resident entities, or non-resident entities with a permanent establishment. This is a principle expressed in the preamble itself (point 12) of the Corporate Income Tax Code: "As for non-resident entities, the taxation of their income not attributable to a permanent establishment, which will almost always be done by withholding at source with final character, is situated in values that take into account the nature of the income and the fact that, in principle, their respective rates apply to gross amounts".

Now, in the case of the income in question, the tax administration admits that the rate may not apply to gross income, despite the Corporate Income Tax Code encompassing this principle in the taxation of income of non-residents without a permanent establishment, but rather to the income obtained, net of the investment made.

This position is based on the fact that the entity obliged to perform the withholding at source has the necessary and sufficient information to demonstrate what the investment made and the net income generated by the non-resident entity are and on the fact of the specificity of the nature of capital income where its subjection to taxation is based, pursuant to Article 5 of the Personal Income Tax Code, on "yield and other economic benefits".

However, the fact that the tax administration opts to apply the withholding rate, not to gross income but to net income, does not prevent it, in each payment made, seeking to tax/withhold the proportional corresponding to the income obtained.

Indeed, the taxation of income in CIT is based on the economic perspective of obtaining a credit, patrimonial advantage, to the detriment of the financial perspective, whereby taxation should not be concentrated solely when the financial flow obtained translates the patrimonial advantage obtained by the non-resident entity, but rather in each payment that, proportionally, incorporates the patrimonial advantage obtained with the transfer of the economic rights transacted between the two entities.

Therefore, it is concluded that each payment made contains the due proportional of the income obtained by the taxpayer. Thus, on 28 September 2010, A... made a payment in the amount of € 597,000.00, which equates to 7.35%227 of the total value to be reimbursed to the fund and includes the corresponding proportional (7.35%) of the income obtained by O... . Thus, having been ascertained an income (net) of € 2,715,354.60, the payment incorporates a partial of the income obtained in the amount of € 199,578.56.

As already mentioned, these are considered capital income obtained in Portugal by a non-resident without a permanent establishment, subject to CIT, by virtue of the location rule contained in sub-paragraph 3), paragraph c) of no. 3 of Article 4 of the Corporate Income Tax Code.

According to paragraph c) of no. 1 of Article 94 of CIRC, capital application income, such as defined for purposes of PIT, obtained by non-resident entities in Portuguese territory, are subject to withholding at source.

To withholding at source with final character, i.e., those that apply to income paid to non-residents without a permanent establishment, or with a permanent establishment to which the income is not attributable, an internal withholding rate of 20% shall apply, when the income in question results from (other) capital income not expressly taxed at a different rate [cf. paragraph b) of no. 3 and no. 5 of Article 94, and paragraph c) of no. 4 of Article 87 both of CIRC].

The obligation to perform withholding at source, in whole or in part, may be waived pursuant to no. 2 of Article 98 of CIRC, i.e., in cases of the existence and activation of a convention intended to eliminate double taxation concluded by Portugal and the country of residence of the beneficiary of the income.

As there is no convention concluded between Portugal and the country of the beneficiary of the income (Gibraltar), nor did the taxpayer benefit from any total or partial exemption, A..., as a tax substitute, was obliged to make the delivery of the amount that should have been withheld (cf. no. 5 of Article 98 of CIRC).

Whereby, pursuant to no. 6 of Article 94 of CIRC, A... was obliged to withhold at source on the date of making available the income, which occurred on the date of the payment made.

It should also be noted that pursuant to Article 132 of CIRC, the transfer abroad of income subject to CIT, obtained in national territory by non-resident entities, may not be made without the tax that is due being shown as paid or secured.

Thus, pursuant to the Articles mentioned above, the taxpayer should, when making the payment made, have executed the withholding at source due, at the rate of 20%, in respect of the capital income obtained by O..., of € 199,578.56. In view of this, the amount of € 39,915.71 should have been withheld at source in the month of September 2010.

Given the foregoing, missing tax was ascertained in the total of € 39,915.71, as withholding at source, to which compensation interest shall be added pursuant to no. 2 of Article 106 of CIRC and Article 35 of the General Tax Code.

c) On 16-08-2013, the Applicant filed a gracious complaint of the aforementioned calculation (document no. 5 attached with the request for arbitral determination, whose contents are hereby reproduced);

d) On 30-05-2014 a ruling was issued dismissing the aforementioned gracious complaint (document no. 2 attached with the request for arbitral determination, whose contents are hereby reproduced), notified to the Applicant by Letter no. ..., of 02-06-2014;

e) On 20-06-2012, a decision was handed down dismissing the aforementioned gracious complaint, which was notified to the Applicant on 26-06-2012 (document no. 5 attached with the request for arbitral determination, whose contents are hereby reproduced);

f) On 02-07-2014, the Applicant filed a hierarchical appeal of the decision dismissing the gracious complaint (document no. 6 attached with the request for arbitral determination, whose contents are hereby reproduced);

g) By ruling of 21-08-2015, the Assistant Director General of the Tax and Customs Authority, by delegation of the Director General of the Tax and Customs Authority, dismissed the hierarchical appeal, in the terms set out in document no. 3 attached with the request for arbitral determination, whose contents are hereby reproduced, manifesting agreement with the draft decision in which it is stated, among other things, the following:

B) OF PAYMENTS MADE TO NON-RESIDENTS

The herein Appellant made several payments to non-residents (image rights and economic rights relating to athletes, capital income and entertainment, intermediation). Having the correlative income been subject to additional corrections by the Tax Inspection, these are contested herein.

Below and with some attention, we shall hear the positions of the Appellant and the Respondent and, after the necessary comparison, present our Opinion.

On the Use of Image Rights of Athletes

The herein Appellant made payments to non-resident companies, without a permanent establishment in Portuguese territory - to G... (of Irish law), to I... and to K... (both of Dutch law). Such financial movements will have been carried out under the use of image rights, respectively, of athletes F..., H... and J... .

Assessing by the corrections that are refuted in this Appeal, the same will be founded on the unbreakable or unequivocal connection between the contract for the acquisition of image rights and the sports employment contract, both concluded with reference to the same athlete. That is, the Tax Inspection considered that the payments made by the resident sports company (the Appellant) to a non-resident entity for the transfer of the image rights of an athlete would constitute, ultimately, income derived from the activity of that same athlete in Portuguese territory. Subjecting them to taxation, in view of the provision in Article 4, no. 3, paragraph d), of the Corporate Income Tax Code, at a liberatory rate of 25%.

To the contrary, according to what is stated in the Appeal that we have before us, each athlete would have transferred the exploitation of his image rights to a company (non-resident), which then came to conclude an agreement with the Appellant, which recognized as an expense in its accounts the expenses incurred with the consequent acquisition. Whereby the payments made will not have corresponded to income derived from the exercise of the sports activity of the athletes in question, excluding the application of the aforementioned paragraph d) of no. 3 of Article 4 of the Corporate Income Tax Code. And resulting undue the ascertained tax, plus the compensation interest that came to be, illegally, fixed.

Thus, we are led to make the following assessment:

We take as a starting point the contractual figure of the use of the image rights of the athlete by a resident sports company, by means of the transfer thereof by a non-resident entity in exchange for financial consideration. There is no difficulty whatsoever in recognizing image rights a personal nature, susceptible to patrimonialization and, also, to transfer to third parties for purposes of commercial exploitation.

In order to define the legal-tax relationship, the Corporate Income Tax Code establishes, in Article 2, that subject taxpayers are also "Entities, with or without legal personality, which do not have a seat or effective direction in Portuguese territory and whose income obtained there is not subject to PIT" - no. 1, paragraph c).

Thus, subjection of non-residents to tax only occurs as to the income obtained by them in Portuguese territory, even if they do not have a permanent establishment here - nos. 2 and 3 of Article 4.

For purposes also of extending the obligation of taxation to non-resident entities (with or without a permanent establishment), the same Article 4, in paragraph d) of its no. 3, provides that there are taxed "income derived from the exercise in Portuguese territory of the activity of entertainments or athletes". That is, the legislator attributes taxation competence to the State of source of the income, notwithstanding the fiscal residence of the beneficiary in another State.

However, it happens that in the inspection report that founded the additional calculation of the tax syndicated in the Gracious Complaint, it was stated that the Inspected entity, with respect to the contract for the transfer of image rights: "did not provide any documents/elements that would allow proving the economic rationality underlying a business in which "acquires" rights it already held and does not proceed to their commercial exploitation, in order to maximize their respective income" (pages 7 and 8).

Furthermore, it was noted that "no income associated with the exploitation of these rights was detected", as would already have been verified "in the external inspection procedures carried out for fiscal years 2008 and 2009 (pages 68 and 69, 75 and 78, 81 and 85)". Thereby leaving undemonstrated the indispensability of carrying out the contract for the acquisition of the rights by the Respondent company, understand well as "any income realizable with patrimonial increase in A..., which justifies the assumed expenses", and "when it had already acquired the image rights of the player, upon the conclusion of the sports employment contract, by expressed wording herein, on the same day (pages 71, 77 and 83)".

To conclude, "Now, if A... ensures the image rights of the player through the above-referenced clause of the employment contract and, as such, in the player's salary is already reflected the remuneration relating to these rights, it is not understood what the grounds are to legitimize the assumption of the expense in question, through a new contract" (pages 71, 77 and 84).

That is, doubts or reservations abound that suggest, in a well-founded manner, a dichotomy between, on one side, the form, and on the other, the substance, and that led to the correction of the taxable matter.

Our most qualified legal doctrine has much to say on this:

As asserted by PAULO MARQUES and CARLOS COSTA, "Form constitutes a logically indispensable requirement for the existence of the legal transaction, there being no such without it, independent of legal enactment". Notwithstanding this initial premise, we also agree with the same Authors when they then state that "The conceptualization and framing of Fiscal Law have not been unanimous, in the sense that in certain situations the legal form cannot serve as a shield against reality, and the substance must prevail over the form".

Frequently Asked Questions

Automatically Created

What IRC withholding tax obligations apply to payments made to non-residents in Portugal?
IRC withholding tax obligations on payments to non-residents in Portugal depend on the income type and applicable CIRC provisions. Under Article 4(3) CIRC, income obtained in Portuguese territory by non-resident entities is subject to withholding at source. For athlete activity income under Article 4(3)(d) CIRC, the withholding rate is 25%, while capital income from investments typically faces 20% withholding. The tax substitute (payer) must withhold at the time of payment or making income available, and deliver the withheld amount to the State treasury by the 20th day of the month following payment per Article 94(6) CIRC. Article 132 CIRC prohibits transfers abroad of CIT-subject income without demonstrating tax has been paid or secured. These obligations apply regardless of the non-resident's jurisdiction, with specific rates and exemptions potentially modified by Double Taxation Conventions.
How do Double Taxation Conventions affect corporate income tax retention at source under Portuguese law?
Double Taxation Conventions (DTCs) interact with Portuguese IRC withholding obligations through a hierarchy of applicable norms, but do not automatically eliminate withholding requirements. As Decision 763/2015-T demonstrates, even when a DTC exists (Portugal-Brazil Convention), Portuguese domestic law under Article 4(3)(d) CIRC may preserve the source state's taxation rights, particularly for athlete income and intermediary entity payments. The mere presentation of an RFI model form certified by foreign tax authorities is insufficient to exempt withholding obligations when Portuguese law specifically provides for taxation. DTCs typically allocate taxation rights between contracting states, but the source state (Portugal) retains power to tax certain categories of income obtained in its territory. Taxpayers must analyze both the specific DTC provisions and domestic CIRC articles to determine actual withholding obligations, as domestic anti-avoidance rules and source taxation principles may override treaty benefits in cases involving interposed entities or specific income types like athlete remuneration.
Can taxpayers challenge IRC withholding tax assessments through arbitration at CAAD?
Yes, taxpayers can challenge IRC withholding tax assessments through arbitration at CAAD (Centro de Arbitragem Administrativa), as evidenced by Decision 763/2015-T itself. The Portuguese tax arbitration system allows taxpayers to contest tax authority determinations regarding withholding obligations, missing withholding assessments, compensation interest charges, and related IRC matters. Arbitration provides an alternative to judicial courts for resolving tax disputes, offering faster resolution and specialized tax expertise. Taxpayers subject to withholding tax assessments—including those deemed tax substitutes under Article 98(5) CIRC who failed to withhold—may submit their cases to CAAD arbitration. The arbitral tribunal examines whether withholding was legally required, whether rates were correctly applied, whether Double Taxation Convention exemptions apply, and whether the tax authority's assessment complies with CIRC provisions and procedural requirements. This arbitration mechanism is particularly valuable for complex international tax situations involving non-resident entities, economic rights transfers, and interpretation of treaty provisions.
What are the legal consequences of failing to withhold IRC on payments to non-resident entities?
Failing to withhold IRC on payments to non-resident entities triggers significant legal consequences under Portuguese tax law. Pursuant to Article 98(5) CIRC, the tax substitute (payer) becomes obligated to deliver the amount that should have been withheld, meaning the payer bears liability for the missing tax even if not deducted from the payment. Article 132 CIRC establishes that transfers abroad of income subject to CIT obtained in Portuguese territory cannot be made without demonstrating the due tax has been paid or secured. Additionally, compensation interest applies for delayed revenue to the State under Article 106(2) CIRC and Article 35 of the General Tax Code, calculated from when the withholding should have occurred until actual payment. As demonstrated in Decision 763/2015-T, on €350,000 of athlete income with 25% withholding rate, the missing €87,500 was assessed against the payer plus interest. The tax substitute cannot recover these amounts from the non-resident recipient after the fact. These consequences emphasize the critical importance of identifying withholding obligations at the time of payment and ensuring compliance with the 20th-day deadline under Article 94(6) CIRC.
Is compensation for undue guarantees available in Portuguese tax arbitration proceedings?
The text excerpt from Decision 763/2015-T does not specifically address compensation for undue guarantees in Portuguese tax arbitration proceedings. This particular decision focuses on substantive withholding tax obligations, missing withholding assessments, and compensation interest for delayed tax revenue rather than guarantee-related compensation issues. However, Portuguese tax arbitration law generally allows taxpayers to seek various forms of relief including challenges to guarantee requirements imposed by tax authorities. Compensation for undue guarantees would typically arise when tax authorities improperly require or maintain guarantees during assessment procedures or collection processes, and such matters can be subject to arbitration jurisdiction. To definitively answer whether such compensation was available in this specific case would require reviewing the complete arbitral decision and any claims made by the taxpayer beyond the withholding tax issues discussed in this excerpt. Taxpayers facing guarantee requirements in IRC withholding contexts should consult the full scope of relief available under Portuguese tax arbitration rules and applicable CAAD jurisprudence.