CAAD 770/2015-T: IRS Presumption on Category E Income – Shareholder Loans vs Advance on Profits

Arbitral Decision

Parties

Claimant: A… – … Sole Proprietorship Limited Company, Tax ID PT …, with registered office at … no. …, … – ...

Respondent: Tax and Customs Authority (AT).

I. REPORT

a) On 22-12-2015, the Claimant filed with CAAD a request seeking, under the Legal Regime for Arbitration in Tax Matters (RJAT), the constitution of a singular arbitral tribunal (TAS).

THE CLAIM

b) The Claimant requests the annulment of the self-assessed tax assessments for Personal Income Tax (IRS) – withholding at source – contained in document 2014 …, totalling 21,570.55 euros, dated 19.12.2014, assessments nos. 2014 … – 2010 and 2014 … – 2010, respectively, regarding the withholding at source and compensatory interest, disagreeing that it did not pay its shareholder B…, 86,400.00 euros as "advance on account of profits", the legal basis sustaining the assessments.

c) It further petitions for the annulment of the decision rejecting the gracious complaint it filed against the aforementioned assessments.

d) On the grounds that such acts are in non-compliance with the norm contained in Article 6, no. 4 of the Personal Income Tax Code, suffering from the defect of violation of law, due to errors in its factual and legal prerequisites.

e) Inasmuch as, at the origin of the IRS assessment lies the non-acceptance by the AT that the Claimant's shareholder B…, used 61,402.27 euros of advances reimbursement and 24,997.73 euros of a loan, for his benefit, to acquire a house, it argues that it proved, in previous procedures prior to the assessment, the origin of such financial resources (advances and loan from the company to the shareholder), for which reason the presumption of Article 6, no. 4 of the Personal Income Tax Code could not be applied here.

f) It concludes by further requesting that restitution be ordered of the entirety of the tax and other accruals which it paid, totalling 21,570.66 euros, plus indemnificatory interest.

REGARDING THE SINGULAR ARBITRAL TRIBUNAL (TAS)

g) The request for constitution of the TAS was accepted by the President of CAAD and automatically notified to the AT on 04-01-2016.

h) By the CAAD Deontological Council, the signatory of this decision was appointed arbitrator, with the parties being notified thereof on 16-02-2016. The parties did not manifest will to challenge the appointment, pursuant to Article 11, no. 1, subparagraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code.

i) The Singular Arbitral Tribunal (TAS) has been, since 02-03-2016, regularly constituted to appraise and decide the subject matter of this dispute (Articles 2, no. 1, subparagraph a) and 30, no. 1, of RJAT).

j) All these acts are documented in the communication of constitution of the Singular Arbitral Tribunal dated 02-03-2016, which is hereby reproduced.

k) On 02-03-2016, the AT was notified pursuant to and for the purposes of Article 17-1 of RJAT. It replied on 05.04.2016, attaching the PA, composed of 1 computerized file with 100 pages.

l) Inasmuch as the Respondent in its response waived the meeting of Article 18 of RJAT as well as arguments, arguing, should they be held, for written and successive form, the TAS by order of 09.04.2016 dispensed with holding the meeting of parties and fixed a deadline for written, successive and optional arguments, unless the Claimant were to object to this.

m) The Claimant presented its arguments on 20.04.2016. On 18.05.2016, in view of the absence of counter-arguments from the Respondent (which by oversight had not been notified to it) it was invited to present them, should it wish, given that the Claimant in its arguments adduced new relevant facts for the resolution of the dispute.

n) The Respondent, on 31.05.2016, presented counter-arguments maintaining what was already stated in the Response.

PROCEDURAL PREREQUISITES

a) Legitimacy, capacity and representation – The parties enjoy legal personality, procedural capacity, are legitimate parties and are represented (Articles 4 and 10, no. 2, of RJAT and Article 1 of Ordinance no. 112-A/2011, of 22 March).

b) Principle of adversarial proceedings – The Respondent was notified pursuant to item k) of this Report. All procedural documents and all documents attached to the proceedings were made available to the respective counterparty in CAAD's Case Management System. The attachment thereof was always notified to both parties. Specific compliance was given to the provision of Article 3, no. 3 of the Code of Civil Procedure pursuant to Article 29-1-e) of RJAT regarding new factual matter brought to the proceedings in the Claimant's arguments.

c) Dilatory exceptions – The arbitral procedure does not suffer from nullities and the request for arbitral pronouncement is timely since it was presented within the prescribed deadline in subparagraph a) of no. 1 of Article 10 of RJAT. In fact, neither did the Respondent challenge the timeliness of the presentation of the request, since notification of the decision on the gracious complaint occurred by letter dated 22.09.2015 and the request for pronouncement was filed on 22.12.2015.

SUMMARY OF THE CLAIMANT'S POSITION

d) The Claimant argues that the credit transfer, in the amount of 86,400.00 euros with the designation "Transfer of A… Ltd.", which it carried out on 2010.09.15, to the account of the taxpayer C…, spouse of the taxpayer B…, its sole shareholder,

e) results from the reimbursement of advances from previous years in the amount of 61,402.27 euros, according to the extract of the advances account from 2006 to 2010 which it attached, and a loan from the company to the shareholder in the amount of 24,997.73 euros.

f) As regards advances, it states that the POC account 25511 in the name of B…, on 31.12.2007, presented a credit balance of 23,402.50 euros corresponding to the amount of the advances made by him up to that date. In parallel, the POC account 2681011 in the name of the same and sole shareholder, presented on 31.12.2007 a credit balance of 37,999.77 euros "corresponding to payments made by him on behalf of the company and loans granted to it, up to that date".

g) In 2010, already with the SNC (National Accounting Standards) in force, the accounts that corresponded to codes 268511 and 27882105 had the same opening balances and on 30.09.2010 had the following movements:

• Account 268 511 – reimbursement to shareholder – 23,402.50 euros;
• Account 27882105 – reimbursement to shareholder – 37,999.77 euros;
• Account 27882105 – loan to shareholder – 24,997.73 euros,

concluding that on this date the reimbursement was made of the amounts recorded as credits to the shareholder and which originated from advances and payments made by him on behalf of the company in previous years in the amount of 61,402.27 euros.

h) On 01.10.2010 a loan was granted to the shareholder, in the amount of 24,997.73 euros, supported by a loan agreement executed with the company.

i) In its arguments it adds that in the "procedure for verification of the capital increase of the Claimant's shareholder and his spouse through the acquisition, in 2010, of real property of value exceeding 250,000.00 euros, the AT accepted the justification that the origin of part of the funds that enabled such acquisition resulted from the reimbursement of advances and loans from the shareholder to the company, effected on 30.09.2010 in the amount of 61,402.27 euros and a loan from the company to the shareholder, in the amount of 24,997.73 euros, which make up the amount of 86,400.00 euros transferred to the account in the name of the shareholder's spouse and of the shareholder himself".

j) Given that the Claimant attached, at the time of its hearing in the inspection procedure, the following documents:

it argues that it was proven the prior existence of the advances and loans and consequently, pursuant to no. 4 of Article 6 of the Personal Income Tax Code, those amounts delivered to the sole shareholder and his spouse could not be taxed, as they were, as profits or advances on account of profits.

SUMMARY OF THE RESPONDENT'S POSITION

k) To the contrary, the Respondent understands that the Claimant "did not deliver to the AT sufficient elements to prove what it alleged and which proved essential for its assessment", concluding that "it is not clearly and unequivocally evidenced that the delivery of advances as requested in the notification". It opposes:

l) As regards the alleged loan, in the IES (Financial Statement) for the year 2010 the alleged loan to the sole shareholder is not properly evidenced in the balance sheet accounts. And,

m) It does not even result from the accounting that it has earned, to date, any interest in compliance with the terms of the contract clause.

n) The Claimant did not deliver all the bank statements and cash accounts necessary for the analysis of the existence or not of advances, relating to the years of the alleged entry of advances - 2006 and 2007.

o) It attached copies of bank statement extracts from two accounts of D…, but discontinuous in time, relating to three months of 2007.

p) And, regarding the account … of D…, the holder(s) thereof are unknown.

q) The difference between the balance entered in the IES/Annual Declaration (in the amount of €4,223.45) corresponding to the year 2007 and the extract of the account exhibited from D… (in the amount of € 2,239.68) and the withdrawal in December 2007 of the amount of €8,000.00 from the cash account as a bank deposit whose entry is not evidenced in the bank statement exhibited, prove the existence of other bank accounts beyond those brought to the attention of the AT.

r) It was not demonstrated that the alleged advances, if they existed, would not have been withdrawn before the date of 2010.09.15.

s) The cash account (cash) in the year 2007, reveals inconsistencies:

1 - Entry in cash of payment of all invoices issued during the 3rd quarter of 2007 (in the amount of € 57,596.00), with only part of such receipts exiting cash as bank deposits (in the amount of €34,070.00);

2 - Bank deposits in the amount of €8,000.00, with cash withdrawal whose entry is not evidenced in the company's bank account, whereby the destination of this amount is also unknown;

3 - Exit from cash of the amount of €9,322.25 as an advance returned, supposedly to a client, without it being evidenced to whom it was destined and/or the issuance of a debit note, whereby the destination of that amount was neither evidenced nor justified;

4 - Cash withdrawal in the amount of €6,050.00 in October 2007 destined to a deposit, without it being evidenced the entry of such amount in the extract of the bank account provided.

t) It is not demonstrated that the aforementioned amounts, whose destination is unknown, for lack of elements provided by the Claimant, did not enter its accounts to carry out the alleged advances to the company itself from which they originated.

u) As to advances, the Respondent concludes (see Inspection Report – page 9/9): "The company, as well as its shareholder, to justify the withdrawal of 86,400.00 euros for its benefit, invokes the withdrawal of advances in the amount of 61,402.27 euros, and seeks to justify this, presenting only some bank elements, not exhibiting in its entirety its accounts, both of the company and of the sole shareholder, thereby preventing the Tax Authority from evaluating whether the amounts delivered by the shareholder to the company indeed had their origin in the shareholder's own means and did not result from the activity of the company itself, as well as from proving that they were not meanwhile withdrawn before 2010".

v) As to the company's loan to the shareholder (see Inspection Report – page 9/9), acknowledging that its form does not require public deed: "… the facts and prerequisites mentioned in point III.2 and contained in the Draft Report are maintained", that is, "- with respect to the loan, it is configured that the loan agreement presented was not properly certified, the signatures were not acknowledged, and since it is signed by the same subscriber on behalf of both contractors, the execution thereof on the stated date, 2010.09.01, was not proven. According to Article 1143 of the Civil Code, 'a loan contract of value exceeding 20,000 euros is only valid if executed by public deed', which was not the case herein. In the IES for the year 2010, it is not properly evidenced in the balance sheet accounts. The non-existence of interest and any amortization to date seems to confirm that we are not in the presence of any loan as the company seeks to demonstrate, but only a delivery from the company to the sole shareholder, which can only be considered as an advance on account of profits in light of no. 4 of Article 6 of the Personal Income Tax Code".

w) The Respondent considers, however, that "… the advances existed at the accounting level" (pages 5/9 of the Inspection Report).

x) It concludes by arguing for the rejection of the request for pronouncement and the absolution of the Respondent from the claim.

II. QUESTIONS FOR THE TRIBUNAL TO RESOLVE

Since both the Respondent's response to the request for pronouncement and the decision rejecting the gracious complaint refer to the merit of the contents of the Tax Inspection Report, it is easily ascertained that what is at issue here is, in the first place, to determine whether the documentation attached by the Claimant, in the gracious complaint proceedings (and prior hearing regarding the conclusions of the Inspection Report) is sufficient to prove, before 30.09.2010 (the reference date for the recording of the reimbursement of advances and loans from the sole shareholder of the company) the existence of the alleged advances and alleged loans.

What the Respondent questioned, in a first moment, before the Claimant, in the tax inspection procedure (within the scope of the duty of cooperation), was only and solely the question of the reimbursement of advances in the amount of 61,402.27 euros, because, comparing the content of the first request for clarification (letter … of 24.09.2014) and the content of the second request for clarification (letter … of 17.10.2014) only as to advances did it have doubts, having raised nothing further regarding the loan from the company to the sole shareholder.

Strictly speaking, what the Respondent asked the Claimant, as appears from the content of letter … of 24.09.2014, was only "the basis on which the bank transfer in the amount of 86,400.00 euros was made", not even requiring any documentation. The documentation that the Claimant sent on 08.10.2014 was not, or at least does not appear from the letter, requested by the Respondent, whereby it is not understood what is referred to in letter … of 17.10.2014 "Taking into account the response to our letter … proving insufficient".

It is also noted that, both when issuing the final basis of the Inspection Report (which is then adopted as the basis of the decision rejecting the gracious complaint), and in the response in this proceeding, it appears that the documents attached by the Claimant during the prior hearing, before the preparation of the Final Inspection Report, were not specifically reviewed.

On the other hand, two facts must still be taken into account, namely:

• What is referred to in i) of the Report of this decision, that the AT accepted the justification that the origin of part of the funds that enabled such acquisition resulted from the reimbursement of advances and loans from the shareholder to the company, effected on 30.09.2010 in the amount of 61,402.27 euros and a loan from the company to the shareholder, in the amount of 24,997.73 euros, which make up the amount of 86,400.00 euros transferred to the account in the name of the shareholder's spouse and of the shareholder himself;

• And what is referred to in w) of the Report of this decision, that the Respondent considers that "the advances existed at the accounting level".

Let us say that the appraisal of compliance with law (in this case it is essentially a matter of the application of the norm contained in no. 4 of Article 6 of the Personal Income Tax Code) of the decision rejecting the gracious complaint, results from the appraisal that is adopted, as is noted from the content of the contested decision reproduced below, on the sufficiency or insufficiency of the documentary evidence adduced by the Claimant in the Inspection and Gracious Complaint procedures. Consequently, the IRS assessment should be maintained or not in the legal order according to the appraisal that comes to be adopted on this specific matter.

III. PROVEN AND UNPROVEN FACTUAL MATTER AND GROUNDS

Relevant to the decision are these facts which are considered proven, indicating the respective documents (proof by documents), as grounds.

Proven Facts

1. The Claimant is a sole proprietorship company engaged in "real estate brokerage activities", having as its sole shareholder and manager the taxpayer B…, to whom, in compliance with Service Order no. OI2014…, the partial scope internal inspection procedure was carried out, with reference to the year 2010 – nos. 5, 6 and 7 of the Response, Tax Inspection Report of 02.12.2014 attached with the request for pronouncement and the Claimant's overall position in the request for pronouncement.

2. By letter …/… of 24.09.2014, the Finance Department of ... – Tax Inspection Services, sent to the Claimant a request for elements/clarifications – year 2010 – questioning: "on what basis was the bank transfer in the amount of 86,400.00 made, on 2010.09.15, to a bank account held in the name of C…, given that this amount was not considered in the Annual Declaration – Annex J of A… – … Sole Proprietorship Ltd." – Document no. 2 attached with the request for pronouncement and pages 2/8 and 3/9 of the Inspection Report which constitutes pages 50 and 50 verso of the PA.

3. The Claimant replied by email of 08.10.2014 in the following terms: "This amount was not considered in the Annual Declaration – Annex J, given that it did not constitute any income of shareholder B…, who only received his salary" "… I clarify on what basis this amount corresponds to: - reimbursement of advances from previous years in the amount of 61,402.27 euros, according to the advances account extract from 2006 to 2010" – loan to the shareholder in the amount of 24,99.73 euros, according to the attached extract. I attach the respective agreement signed between A… and shareholder B…" – Article 14 of the Response, Article 11 of the request for pronouncement, Document no. 2 attached with the request for pronouncement and pages 2/8 and 3/9 of the Inspection Report which constitutes pages 50 and 50 verso of the PA.

4. The extract referred to in the previous number regarding the accounts (according to SNC) 268 511 and 27882105, in the name of shareholder B…, record the following movements on 30.09.2010: the first "reimbursement to shareholder" of 23,402.50 euros, the second "reimbursement to shareholder" of 37,999.77 euros, and "loan to shareholder" of 24,997.73 euros. – Article 8 of the request for pronouncement, extracts attached to Document no. 2 attached with the request for pronouncement and pages 3/9 of the Inspection Report which constitutes page 50 verso of the PA.

5. On 01.09.2010, a loan agreement was executed between the Claimant, as lender, represented by B… and B…, as borrower, by which the Claimant delivers 24,997.73 euros. – according to agreement attached to Document no. 2 attached with the request for pronouncement.

6. By letter …/…, of 17.10.2014, the Finance Department of ... – Tax Inspection Services, sent to the Claimant a request for elements/clarifications – year 2010, referring to the following: "Taking into account the response to our letter … proving insufficient for the clarification of the facts indicated, it is requested, regarding the reimbursement of the advances invoked … the sending of copies of documents that justify in fact the entries in the company's accounts, more specifically copies of cheques (after bank clearing), bank transfers and/or deposit slips and other documents that clearly and unequivocally evidence the entry of the financial means into the company accounts as advances that you state to be in the amount of 61,402.27 euros, a demonstration that was not made in response to the previously mentioned notification". "All bank statements of A… and the cash accounts appearing in the accounting for the years in which the allegedly invoked advances would have entered the company". – Document no. 3 attached to the request for pronouncement, Article 15 of the Respondent's response and Article 12 of the request for pronouncement.

7. The Claimant replied by email of 31.10.2014, presenting copies of various documents, namely extracts of accounts (according to accounting) POC 25511 and 2681011 in the name of B…, with balances of 23,402.50 euros and 37,999.77 euros, on 30.09.2010, and also attached, regarding the period 2006 and 2007, 23 documents: two cheques and confirmations of bank transfers of amounts debited in its bank accounts of D… (nos. … and …) and credited in the Claimant's account at CGD (…); confirmations of transfers from B…'s account through D… online banking relating to expenses entitled by documents in the name of the Claimant, all these movements appearing in chronological order in the aforementioned accounts (according to accounting) POC 25511 and 2681011 in the name of B… – Article 13 of the request for pronouncement, 6th paragraph of the Claimant's arguments and page 3/9 of the Inspection Report.

8. Through letter …/… of 07.11.2014, the AT sent to the Claimant the draft corrections to the inspection report, granting a deadline for prior hearing pursuant to Articles 60 of the General Tax Law and RCPIT – Document 4 attached with the request for pronouncement and Article 14 of the request for pronouncement.

9. The Claimant exercised the right to prior hearing in writing, delivering to the Finance Department on 24.11.2014, entry 2014…, a statement and documents (A to F), namely:

Document no. 4 attached to the request for pronouncement; page 5/9 of the Inspection Report and agreement of the Respondent in this proceeding due to lack of contrary position on this fact, whereby the "separators" alluded to will be the capital letters placed in a document to serve in the subsequent ones.

1. By letter …/…, of 19.12.2014, the Finance Department of ... – Tax Inspection Services, sent to the Claimant pursuant to Article 62 of RCPITA the final version of the report/conclusions with the following content (in the grounds section):

"I – Conclusions of the inspection action

I.1 – Summary table of corrections resulting from the inspection action

As per the table on the attached cover page

I.2 – Brief description of the conclusions of the inspection action

Within the scope of the internal inspection action carried out on the aforementioned taxpayer, we verified a failure to remit required tax (Personal Income Tax subject to special taxation with a liberatory character) in the amount of 18,576.00 euros with reference to the period 2010, as provided in Article 5, no. 2 subparagraph h) and Article 71, no. 1 subparagraph c) both of the Personal Income Tax Code (CIRS).

II – Objectives, scope and extent of the inspection action

In compliance with Service Order no. 012014…, the internal inspection procedure was carried out with reference to the year 2010, of a partial scope, following the analysis of increase in assets of the taxpayer B…, with reference to the year 2010, due to the acquisition of real property in the amount of 485,000.00 euros, through verification of whether the declared income is or is not compatible with the increase in assets as per subparagraph f) of Article 87 of the General Tax Law.

III – Description of facts and grounds for corrections

III.1 – Classification of the taxpayer

After consultation of the AT's computerized database – Tax and Customs Authority, it was verified that the aforementioned taxpayer, exercising "Real estate brokerage activities" CAE 68311, since 2006.09.01, the date of commencement of activity, is classified for purposes of Value Added Tax (VAT) under the normal regime with quarterly periodicity. Regarding classification for Income Tax purposes, the taxpayer is under the general regime.

It is a sole proprietorship company having as its sole shareholder-manager the taxpayer B… NIF ….

III.2 – Description of facts and legal framework

Within the scope of the analysis of the IRS Model 3 declaration for the year 2010, through verification of whether the declared income is compatible with the increase in assets provided for in subparagraph f) of Article 87 of the General Tax Law, observed through consultation of the IMT paid by individual taxpayers in the acquisition of real property, the taxpayer B… was selected, taking into account that in the fiscal year 2010, he acquired by notarial deed the real property located in the parish of …, … under article …, fraction … for the amount of 485,000.00 euros.

From the analysis of the bank statement of the account of the taxpayer C…, co-owner of the aforementioned real property and spouse of taxpayer B…, we verified that on 2010.09.15 a credit transfer was made in the amount of 86,400.00 euros with the designation "Transfer From A… Ltd."

Of note is that the transfer of the aforementioned amount occurred on 2010.09.15, the same date of the issuance of the 2nd cheque in the amount of 180,000.00 euros, used for advance payment in the form of a deposit relating to the acquisition of the aforementioned real property acquired by B… together with his wife C…, to whose account the transfer in the amount of 86,400.00 euros was made and from which the payment of the amount of 180,000.00 euros aforementioned was made.

By the foregoing, in view of the clarification of making available such amount by the company under analysis, elements/clarifications were requested from the taxpayer regarding the bank transfer made by A… which was used for payment for the acquisition of the real property under analysis under the credential Ol2012…, pursuant to our letter no. …/… of 2014.09.24.

The taxpayer sent a response to the aforementioned request via e-mail on 2014.10.08, clarifying that the amount corresponds to:

• "Reimbursement of advances from previous years in the amount of 61,402.27 euros. According to the advances account extract from 2006 to 2010",

• "Loan to the shareholder in the amount of 24,997.73 euros. According to attached extract. I attach the respective agreement signed between A… and shareholder B…".

He also attached extracts of accounts 25511/12, 2661011/12 and 268511/12 held in the name of shareholder B…, as well as a copy of the Loan Agreement between A… and B….

From the analysis of the elements sent, the financial movements alleged by the taxpayer were not objectively and unequivocally demonstrated.

Taking into account that the response proved insufficient for the clarification of the facts indicated, a request for elements/clarifications was sent to the taxpayer, our letter no. …/… of 2004.10.17, requesting copies of cheques (after bank clearing), bank transfers and/or deposit slips and other documents that clearly and unequivocally evidence the entry of the financial means into the company accounts, as well as all bank statements of A… and the cash accounts appearing in the accounting for the years in which the aforementioned advances are alleged to have entered the company.

The taxpayer sent a response via e-mail on 2014.10.31, attaching copies of bank statement extracts from two D… accounts, but discontinuous in time, relating to three months of 2007.

Thus, regarding the elements remitted by the taxpayer, we verified the following:

• It is not clearly and unequivocally evidenced that the delivery of advances occurred as requested in the notification;

Regarding the definition of advances, according to no. 1 of Article 243 of the Commercial Companies Code, "An advances contract is considered to be the agreement whereby the shareholder delivers to the company money or a fungible thing, whereby the latter is obligated to return another amount of the same kind and quality, or whereby the shareholder agrees with the company to defer the maturity of credits he holds against it, provided that in either case, the credit has a permanent character",

• Given that not all the bank statements and cash accounts requested were remitted, strictly necessary for the analysis of the existence or otherwise of advances, and relating to the years of the alleged entry of advances, relating to the time span that elapsed from 2006 to 2007, it was not possible to conduct a full analysis of the entire situation invoked nor to determine in fact whether the amount of 61,402.27 euros was actually withdrawn as advances.

• Regarding the account … of D…, the holder(s) thereof are unknown;

• With respect to the loan, it is configured that the loan agreement presented was not properly certified, the signatures were not acknowledged, and since it is signed by the same subscriber on behalf of both contractors, the execution thereof on the stated date, 2010.09.01, was not proven. According to Article 1143 of the Civil Code, "a loan contract of value exceeding 20,000 euros is only valid if executed by public deed", which was not the case herein.

• In the IES for the year 2010, the loan to the sole shareholder is not properly evidenced in the balance sheet accounts. The non-existence of interest and any amortization to date seems to confirm that we are not in the presence of any loan as the company seeks to demonstrate, but only a delivery from the company to the sole shareholder, which can only be considered as an advance on account of profits in light of no. 4 of Article 6 of the Personal Income Tax Code.

• Taking into account the company's accounting demonstrations and the financial reality, it becomes strictly necessary to analyze all financial movements of the company in 2006 and 2007, demonstrations which the taxpayer did not send in their entirety.

• Beyond the foregoing, from the statements sent, it was not demonstrated the entry of financial movements that justify counterparties resulting from the actual proceeds earned by the company.

• It was further evidenced after consultation of the AT's database that shareholder B… presented for tax purposes as taxable income in the years in question the following amounts: 2006 – 0.00; 2007 – 1,757.08; 2008 – 2,283.36 and 2009 – 9,672.00. Regarding the year 2010, taxpayer B… filed the Personal Income Tax Model 3 declaration as married, having presented Category A income in the amount of 21,000.00 euros + Category B income in the amount of 52.32 euros.

Given that this proceeding originated from an inspection action initially directed at the sole shareholder of this company B…, resulting from a divergence between the declared income not consonant with the property acquired, the advances invoked were also not justified, in light of the income normally declared by the shareholder of A…, whereby the aforementioned facts allow only to conclude to the non-separation of the manager's private bank accounts and those of the company of which he is shareholder, with reference to the years 2006 and 2007, with advances existing at the accounting level.

Thus, taking into account that advances movements must be carried out through a bank account, the taxpayer did not prove objectively and unequivocally that the advances which he says were withdrawn were actually loaned by the shareholder, whereby it does not therefore constitute advances delivered by the shareholder to the company.

Article 5 of the Personal Income Tax Code, at the time of the facts, provided in its no. 2, subparagraph h), that the following are considered income from capital: "profits of entities subject to Corporate Income Tax made available to their respective members or holders, including advances on account of profits with the exception of those referred to in Article 20, with Article 6 of the said legal instrument providing that 'entries in any current accounts of the shareholders, written in commercial or civil companies in commercial form, when they do not result from loans, the provision of work or the holding of corporate offices, are presumed to be made as profits or advances on account of profits'".

III.2 – Proposed corrections

Given the foregoing, it is highlighted that the company A… Sole Proprietorship, Ltd. did not proceed to withhold Personal Income Tax of a liberatory character relating to making available to the sole shareholder an advance on account of profits, withholding which should have been effected at the moment of making available the amount in question, on 2010.09.15 and delivered to the state coffers by the 20th of the following month, i.e., by October 20, 2010.

Pursuant to the provision of subparagraph c) of no. 1 of Article 71 of the Personal Income Tax Code, the tax rate applicable at the date of occurrence was 21.5% (wording given by Law no. 12-A/2010 of 30/06), whereby the following unpaid tax was calculated: amount subject to withholding at source 86,400.00 euros, liberatory tax rate to apply 21.5%, tax 18,576.00 euros (86,400.00 euros x 21.5%).

IV – Infractions verified

The failure to remit the tax to the state coffers following the facts described configures a situation provided for and punishable pursuant to Article 114 of the General Regime of Tax Infractions (RGIT), approved by Law no. 15/2001, of 5 June.

VI – Right to Prior Hearing – Grounds

VI.1 – The taxpayer was notified through letter no. …/…, of 2014.11.07 to, if desired, exercise the right to prior hearing pursuant to Article 60 of the General Tax Law and Article 60 of the Complementary Regime of Tax and Customs Inspection Procedure, regarding the Draft Tax Inspection Report, having exercised the right to prior hearing in writing, received in this Finance Department on 2014.11.24, our entry no. 2014….

From the statement presented by the company "A… – …, Ltd., within the scope of the aforementioned exercise of the right to prior hearing, it comes to allege that the "… advances recorded in appropriate accounting accounts … and loan contained in the written document and recorded in the shareholder's account…" are proven.

Thus, in view of the elements remitted, we come to set forth the following:

VI.2 – Regarding the justification of the delivery of advances by the sole shareholder of the company in 2006 and 2007, it is a matter of verifying whether those values are indeed advances carried out, in accordance with the definition concept as referred to in point III.2 and if they were, whether they would have been or would not have been reimbursed by the company before 2010, evidence that was not demonstrated by the taxpayer.

Regarding the first point, as already mentioned previously, the income declared by taxpayer B…, with reference to the years 2006 and 2007 and immediately preceding years, are not capable of guaranteeing him a minimum subsistence, as well as allowing the possibility of still being able to make savings, in light of the income declared. Therefore, such advances can only be justified by the obtaining of income not considered or declared, which will not be dissociated from the resources and income from the company itself, meanwhile already constituted and in operation since 2008, since it is the only known activity of taxpayer B…, manager of the company and sole shareholder, not being known to him nor being declared income from benefits or loans from others.

Furthermore, from the analysis carried out on the personal bank account of the sole shareholder, which was made available to us, there is evidence of bank balances in that account, in divergence from his declared income, namely:

• 2002, 2003, 2005 and 2006 – without declared income;
• 2004 – With taxable income of 413.53 euros;
• 2007 – With taxable income of 1,757.08 euros;

The taxable results declared by the company between 2006 and 2010 generated substantial negative losses, however, in the years in which this did not occur, the positive profit was to absorb the losses declared in the immediately preceding years.

Thus, it is not possible to validate the fact that the advances recorded had their origin in the financial means of the sole shareholder of A…, and not others than those generated by the company, at least in light of the elements that were brought to us by the company, whether when questioned, or during the exercise of the Prior Hearing (DA).

Regarding the second point, since no other elements were made available, this fact also cannot be considered valid.

Thus, from the elements brought to the proceeding, the following is concluded:

• It was not demonstrated that the advances would not have been withdrawn before the date of 2010.09.15;

• It was not demonstrated the existence of other bank accounts of the company which supposedly will exist, taking into account the following:

a) Difference between the balance entered in the IES/Annual Declaration (in the amount of 4,223.45 euros) corresponding to the year 2007 and the account statement exhibited from D… (in the amount of 2,239.68 euros);

b) Withdrawal in December 2007 of the amount of 8,000.00 euros from the cash account as a bank deposit whose entry is not evidenced in the bank statement exhibited.

• The cash account (cash) in the year 2007, reveals several inconsistencies, which does not attest that the advances were not meanwhile received, namely:

a) Entry in cash of payment of all invoices issued during the 3rd quarter of 2007 (in the amount of 57,596.00 euros), with only part of such receipts exiting cash as bank deposits (in the amount of 34,070.00 euros);

b) Bank deposits in the amount of 8,000.00 euros, with cash withdrawal whose entry is not evidenced in the company's bank account, whereby the destination of this amount is also unknown;

c) Cash withdrawal in the amount of 9,322.25 euros as an advance returned supposedly to a client, without it being evidenced to whom it was destined and/or the issuance of a credit note, whereby the destination of that amount was neither evidenced nor justified;

d) Cash withdrawal in the amount of 6,050.00 euros in October 2007 destined to a deposit, without it being evidenced the entry of such amount in the account statement provided.

Other relevant facts which are concluded, even after the new elements brought by the taxpayer during the exercise of the Prior Hearing (DA), regarding the advances he invokes having been withdrawn;

• The company has a sole shareholder and presents negative results in all years between 2006 and 2008 and when they are not, they served to absorb the previous negative results;

• In the same sequence, the sole shareholder does not present another activity or remunerative or known work, does not have obtained income or declares quite reduced values in years when real estate sales activity was quite active in terms of transaction numbers, whereby eventual deliveries of amounts to the company can only have been generated within this, unless the company and its shareholder evidence or demonstrate with other facts the origin of such financial means which they claim entered the company with origin in the shareholder's financial means, which has not occurred to date.

It should also be noted that the accounts exhibited by the company's shareholder, as justification for the delivery of the alleged advances, already come evidenced with opening balances whose origin is unknown.

By the foregoing, we have:

• The company, as well as its shareholder, to justify the withdrawal of 86,400.00 euros for its benefit, invokes the withdrawal of advances in the amount of 61,402.27 euros, and seeks to justify this, presenting only some bank elements, not exhibiting in its entirety its accounts, both of the company and of the sole shareholder, thereby preventing the Tax Authority from evaluating whether the amounts delivered by the shareholder to the company indeed had their origin in the shareholder's own means and did not result from the activity of the company itself, as well as from proving that they were not meanwhile withdrawn before 2010.

The shareholder of A… – … Sole Proprietorship, Ltd., in a first phase justifies the financial means for the purchase of a home as originating from the company, but to justify the financial means originating from the company, for himself, he takes refuge in his own financial means.

2 – Company loan

Although the loan agreement of less than 25,000.00 euros does not require public deed, as the company invokes in its Prior Hearing, the facts and prerequisites mentioned in point III.2 and which are contained in the Draft Report are maintained, whereby what is invoked in the referred Prior Hearing changes nothing regarding the lack of justification by the entrepreneur between the company and its sole shareholder.

Thus, by the facts invoked the proposed corrections are maintained."

• as per pages 42 to 54 of the PA and Document no. 1 attached with the request for pronouncement.

1. The Claimant was notified of the Personal Income Tax assessment – note of calculation of withholding at source - document 2014 …, totalling 21,570.55 euros, dated 19.12.2014, assessments nos. 2014 … – 2010 and 2014 … – 2010, with a payment deadline of 16-02-2015 – pursuant to Document no. 5 attached to the request for pronouncement.

2. Against the aforementioned assessment, the Claimant filed a gracious complaint, which was rejected by order of 21.09.2015 of the Head of the Administrative and Contentious Justice Division of the Finance Department of ..., reproducing as grounds the conclusions of the Inspection Report as expressed in 10) above, with the Claimant being notified of the final rejection by letter … of 22.09.2015 – Document no. 6 attached with the request for pronouncement.

3. Within the scope of a procedure (not attached to the proceeding) for verification of increase in assets of the Claimant's shareholder and his spouse, through the acquisition, in 2010, of real property of value exceeding 250,000.00 euros, the AT accepted the justification that the origin of part of the funds enabling such acquisition resulted from the reimbursement of advances and loans from the shareholder to the company, effected on 30.09.2010 in the amount of 61,402.27 euros and a loan from the company to the shareholder, in the amount of 24,997.73 euros and was further proven a gift from the parents of the sole shareholder of the Claimant in the amount of 95,450.00 euros, resulting from the sale of an autonomous fraction – last paragraph of page 3 and 3rd paragraph of page 4 of the Claimant's arguments, taking into account the AT's implicit agreement in not taking a dissenting position on the matter.

4. On 22-12-2015, the Claimant filed the present request for pronouncement with CAAD – entry registration in the SGP of the request for pronouncement.

Unproven Facts

There is no other alleged factual matter that has not been considered proven and that is relevant to the resolution of the procedural dispute.

IV. APPRAISAL OF THE QUESTIONS FOR THE TRIBUNAL TO RESOLVE

The questions to be addressed are those referred to in point II above.

The Claimant's Loan to Its Sole Shareholder – item 5) of proven factual matter

As results from the factual matter contained in items 2) and 6) of part III of this decision, the AT did not request from the Claimant further concrete elements that would corroborate the circumstances under which the loan agreement (item 5) of the factual matter is based) was executed between the Claimant, represented by its shareholder, and its shareholder in his own right, in the amount of 24,997.73 euros.

As aforementioned, what the Respondent questioned before the Claimant, in the tax inspection procedure (within the scope of the duty of cooperation), was only and solely the question of the reimbursement of advances in the amount of 61,402.27 euros, because, comparing the content of the first request for clarification (letter … of 24.09.2014) and the content of the second request for clarification (letter … of 17.10.2014), only as to advances did it have doubts, having raised nothing further regarding the loan from the company to the sole shareholder.

Strictly speaking, it strikes upon consideration what the Respondent asked the Claimant, as appears from the content of letter … of 24.09.2014, was only "on what basis the bank transfer in the amount of 86,400.00 euros was made", not even requiring any documentation. However, the Claimant sent it on 08.10.2014 the content of the loan agreement, whereas the question raised referred to "advances".

The AT in the Final Report of the Tax Inspection came to state: "With respect to the loan, it is configured that the loan agreement presented was not properly certified, the signatures were not acknowledged, and since it is signed by the same subscriber on behalf of both contractors, the execution thereof on the stated date, 2010.09.01, was not proven. According to Article 1143 of the Civil Code, 'a loan contract of value exceeding 20,000 euros is only valid if executed by public deed', which was not the case herein. In the IES for the year 2010, the loan to the sole shareholder is not properly evidenced in the balance sheet accounts. The non-existence of interest and any amortization to date seems to confirm that we are not in the presence of any loan as the company seeks to demonstrate, but only a delivery from the company to the sole shareholder, which can only be considered as an advance on account of profits in light of no. 4 of Article 6 of the Personal Income Tax Code".

And here the arguments for disregarding the existence of the alleged loan agreement end.

In fact, since the amount in question is less than 25,000.00 euros, it will not be required to have public deed, but only the signature of the borrower (Article 1143 of the CC pursuant to Article 11-2 of the GTL).

The fact that the agreement is signed by the same individual as borrower and lender, although in different capacities, will result from the very nature of the type of company (sole proprietorship), which, by itself, will not invalidate its substance, all the more so as its falsity was not alleged. Also, the acknowledgment of signatures, although it would have been an element which the Claimant should have taken care to secure to set the date of the contracting, will not, also, by itself, be invalidating of the contractual relationship.

"The legal qualification of the business executed by the parties must result in the first place from the very terms of the business executed, since it was a written business, and in the second place from the manner in which the parties acted in relation to that same business, taking into account the concrete clauses stipulated by them" – judgment of the STA, case 01426/14 of 17.06.2015, at www.dgsi.pt.

From the clauses of the agreement neither does it appear that one should conclude to its invalidity: interest, repayment term and forms of payment are provided for.

Not having been challenged, or at least not appearing in the proceeding, the regularity of the Claimant's accounting records, and with the loan being represented in its accounts, to state that in the IES of 2010 the same is not properly evidenced in the balance sheet, would configure as a fact whose effects it is not possible here to scrutinize. It could even be an oversight by the TOC which could be clarified at the appropriate moment, since it does not appear in the proceeding that clarifications were requested from him.

This argument was moreover rebutted by the Claimant as appears from item 3) of the proven matter (part III of this decision). It refers to: "this amount was not considered in the Annual Declaration – Annex J, given that it did not constitute any income of shareholder B…, who only received his salary". And he is right. In fact, the tax accessory obligation at issue seems to apply only to income paid and withholding at source effected.

As to the amount transferred by the Claimant to its sole shareholder as a loan (24,997.73 euros), only can the request for pronouncement proceed, making no sense, in view of the evidence made in the proceedings and especially in view of the absence of requests for supplementary elements from the Claimant that would attest or not to the effective contracting (e.g., access to the "word" file with its creation date), to consider that it is an advance on account of profits pursuant to no. 4 of Article 6 of the Personal Income Tax Code.

The Advances (accounts, according to accounting / POC 25511 and 2681011 - and according to SNC 268 511 and 27882105 - in the name of B…, with balances on 30.09.2010 of 23,402.50 euros and 37,999.77 euros, respectively).

We must observe that the Respondent at page 5/9 of the Inspection Report, in the first paragraph, considers that "the advances existed at the accounting level", with reference to 2006 and 2007.

We further verify from the content of the Inspection Report (point IV – infractions verified), that as aforementioned, constitutes the true grounds of the contested acts (decision rejecting the gracious complaint and resulting Personal Income Tax assessment - withholding at source), that no penalty was applied or any proceeding opened for violation of the norm prescribed in Article 129 of the RGIT (non-use of bank account for movements) and likewise of the norms prescribed in Articles 118, 119 or 121 of the RGIT, whereby, implicitly, one must infer that the regularity of the organization of accounting was not placed in question, even citing the respective TOC.

What is referred to in the second paragraph of the Inspection Report at page 5/9: "given that advances movements must be carried out through a bank account" was not anything other than a mere observation without subsequent consequences that is here to be weighed.

It appears clear that no. 4 of Article 6 of the Personal Income Tax Code, at issue here, when it refers to "entries for him, in any current accounts of the shareholders, recorded in companies … when they do not result from loans" refers to "current accounts" according to Accounting and not to the concrete use of movements through one or more bank accounts.

We cannot, therefore, support what is referred to in the second paragraph of page 5/9 of the Inspection Report that the fact of advances not having entered the Claimant's bank account has as a consequence not considering that the amounts in question were not loaned by the shareholder to the company.

What makes the difference between a company advances contract (Article 243 of the CSC) and a company loan agreement or from it to shareholders (both being fundamentally "broadly speaking" loan agreements) concerns, regarding the contractual relationship that integrates the concept of an advance, stability (exceeding one year) and the fact that it does not depend on any special form, notably written. It also does not depend on a shareholder resolution, standing any contractual provision to the contrary.

In truth, what the AT does not agree with is the fact that the Claimant's shareholder paid, as he proved, vide item 7) of proven factual matter (part III of this decision), various expenses entitled by documents issued in the name of the company and then those amounts were entered in the Claimant's shareholder account as advances made to the company. That is, it appears that it would only accept them to be advances if they were numerary which entered the Claimant's bank account.

In this case, this type of operations in which the shareholder and the company are somewhat confused, only seems possible, in practical terms, because it is a sole proprietorship, in which the shareholder is sole, with the natural and apparent confusion between the company and its sole shareholder.

But this specific situation must also be taken into account in assessing what is reality, material truth. It is not a company with multiple quotaholders or shareholders.

Being a sole proprietorship, with such expenses being properly documented, both at the level of concrete realization (at the level of the regularity of documentary titling), that is, not placing in question that they are not expenses invoiced to the company, essential to the development of its activity, and being the same recorded chronologically in the correct accounts according to the rules of accounting, we see no reasons why they cannot or should not be considered as "advances" from the shareholder to the company. What will matter here is the prevalence of content over form, the prevalence of material truth over formal truth.

Following the prior hearing of the Claimant, in the inspection procedure, regarding advances, there is placed in question:

• That they were not the shareholder's own means that contributed to the same

• And if they were, whether they would have been already reimbursed by the company before 2010.

Regarding the first point, it is stated that in 2006 and 2007 (and earlier years), the company's shareholder does not have declared income that would have allowed him to provision such advances nor evidence that would guarantee him a minimum subsistence, concluding that it can only be associated with undeclared income, that is, resources of the company itself.

In the first place, this reasoning clashes with the fact that no correction to the income subject to Corporate Income Tax of the company is brought to the proceeding, since, in the first line, if there is income from the company that was not considered or declared by the shareholder (and of which he appropriated himself without passing through Corporate Income Tax), the first line of action in the face of any tax evasion would be at the level of the taxation of the company.

It is true that there is reference to bank balances in the Claimant's shareholder account incompatible with his level of income. However, just as occurred in the procedure referred to in item 13) of part III of this decision, such balances may result from very varied situations. In the aforementioned case, it was verified that a gift from a family member occurred. Which, certainly was only not taxed in IS because it is of a legitimate heir.

What is intended here to be signified is that, without a concrete investigation or determination (and there are procedures for this purpose) of the origin of bank account balances incompatible with the level of declared income of the company's shareholder, it does not seem possible to affirm with full certainty that such balances result from values diverted from the company and not declared and taxed there.

And if, as is stated in the Inspection Report, the "taxable results" declared by the company generated high losses between 2006 and 2010 and in the years in which this did not occur, the positive profit was to absorb such losses, it would be necessary to act immediately on the regularity of accounting and on the potential tax evasion of the company itself, at the level of Corporate Income Tax.

It does not appear to us, by what is described, that the arguments adduced should be relevant, in the first line, for purposes of not considering valid the advances recorded in the accounting in the name of the shareholder, but rather could serve as motivation to act on the regularity of the Claimant's accounting and on the possible tax evasion at the level of the company's Corporate Income Tax, since in the AT's appraisal, it is configured that company means were used (not taxed therein). In a second line and as a consequence of the eventual correction of the company's taxable profit in Corporate Income Tax, then indeed, the advances made to the company with resources of the same, without subjection to taxation, could be disregarded, with the legal consequences.

Regarding the second point – even if the advances were made with resources of the shareholder, they would have been already reimbursed by the company before 2010.

The reference that "it was not demonstrated that the advances would not have been withdrawn before 15.09.2015" is not consonant with the rules on the burden of proof and, being placed as an alternative to the question aforementioned (that they were not the shareholder's own means that contributed to the advances), appears to be inconsistent with the principle that, when a fact is alleged or adduced, one does not subsequently argue the opposite. Admitting that the advances may have been withdrawn beforehand presupposes the admission that they existed and were regularly contracted and recorded in the company.

Doubting that there was more than one bank account in the name of the company, it is to be verified that no. 1 of Article 63C of the GTL requires to have "at least one bank account". That is, it is in accordance with law that companies subject to Corporate Income Tax have multiple bank accounts. The bank movements in such accounts are only not scrutinized by the AT if it so chooses not to.

Access by the AT to bank information is today facilitated. It does not appear in the proceeding that the AT itself even requested from the Claimant authorization to access the bank accounts (indeed, in this case, such was not even necessary "pursuant to" no. 4 of Article 63 C of the GTL).

Through a consultation of Annex J (former Model 10) – which banking entities deliver pursuant to no. 12 of Article 119 of the Personal Income Tax Code – the taxpayer could be confronted to prove from which accounts those income resulted.

A request for information to the TOC could serve to obtain the necessary clarifications. It could be a means of gathering information which is presumed reliable, given the obligations that fall upon these professionals.

It also appears to us that the relevant questions raised regarding the inconsistencies of the cash account of availability for the year 2007 could and should, in the first place, be clarified by the certified accountant.

In truth, inconsistencies of the accounting records are pointed out, but then the TOC was not confronted with these facts, nor was the validity of the accounting placed in question in concrete terms, on the basis that no penalty was applied or proceeding opened for irregularities or vitiation thereof. At least, there is no notice of this in this proceeding.

The same can be said regarding the reference that the "… accounts exhibited by the company's shareholder, as justification for delivery of the alleged advances, already come evidenced with opening balances whose origin is unknown". Now, if so, confront the TOC to concretely clarify this fact.

In the same line of thinking, if the company's shareholder presents "… only some bank elements, not exhibiting in its entirety its accounts, both of the company and of the sole shareholder", it makes no sense to place the lack of access to the company's bank accounts because the AT has access without authorization thereof. As to the bank accounts of the shareholder and spouse, the AT does not even evidence, in the first place, that it has requested authorization to access them. Refusal would be an indication to weigh that something was intended to be hidden. Then, in case of refusal of access, there are the legal means of access to such accounts, on the part of the AT.

The accounting account extracts attached to the proceeding show that they were prepared by "E… – … UNI. Ltd.", presuming that this is the company associated with the preparation of the accounting records according to instructions from the TOC. On the other hand, as appears from the Inspection Report, the Claimant, in terms of Corporate Income Tax, is classified under the general regime (and not the simplified regime).

In the terms set forth above, also, the request for pronouncement proceeds regarding the disregarding of advances, since, in view of the concrete elements brought to the proceeding, weighing,

• on the one hand, what is proven by documents and by the accounting records, and

• on the other hand, the situations adduced in the grounds of the contested acts (decision rejecting the gracious complaint and resulting Personal Income Tax assessment - withholding at source),

• and especially because diligences were not promoted which could have been promoted, in particular at the level of access to the bank accounts of the company and the shareholder of the company and at the level of the clarifications of who concretely prepares the accounts (the TOC),

It appears to us that, it strikes upon consideration, with the elements brought to the inspection procedure, especially those which appear in item 9) of proven matter, the gracious complaint should have been granted and consequently the Personal Income Tax assessment should not have been carried out, since, in the weighing which we here advocate, the prerequisites for application of the essential segment of the norm contained in no. 4 of Article 6 of the Personal Income Tax Code are not verified, that is, it was verified that advances from the shareholder to the company and a loan from the company to the sole shareholder existed, facts which are integrated in the segment contained in the cited norm which excludes its application.

Restitution of the tax paid and other accruals.

The Claimant requests in the final part of the request for pronouncement that "restitution be ordered of the entirety of the tax and other accruals paid … totalling 21,570.56 euros, plus indemnificatory interest".

However, it has not attached any proof that it has paid the amount in question. And neither has it attached proof of having paid compensatory interest. The annulment of the assessment implies "the immediate and full reconstitution of the legality of the act or situation subject to the dispute".

Pursuant to Article 100 of the GTL, "the tax administration is obligated, in case of total or partial merits of a complaint, judicial impugnation or appeal in favor of the taxpayer, to the immediate and full reconstitution of the legality of the act or situation subject to the dispute, comprehending the payment of indemnificatory interest, if applicable, from the end of the term of execution of the decision."

Having the Claimant paid the debt of tax and interest, it will have the right to reimbursement in execution of this decision.

Indemnificatory Interest

(we reproduce, regarding this matter, what was written in the judgment of CAAD – case no. 673/2015-T – with which we agree)

Regarding indemnificatory interest, in accordance with the provision of subparagraph b) of Article 24 of RJAT, the arbitral decision on the merits of the claim to which no appeal or impugnation applies is binding on the Tax Administration from the end of the deadline provided for appeal or impugnation, whereby it must, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for spontaneous execution of the decisions of tax judicial courts, "restore the situation that would exist if the tax act subject to the arbitral decision had not been practiced, adopting the acts and operations necessary for this purpose", which is in harmony with the provision of Article 100 of the GTL [applicable by force of the provision of subparagraph a) of no. 1 of Article 29 of RJAT] which establishes that "the tax administration is obligated, in case of total or partial merits of a complaint, judicial impugnation or appeal in favor of the taxpayer, to the immediate and full reconstitution of the legality of the act or situation subject to the dispute, comprehending the payment of indemnificatory interest, if applicable, from the end of the term of execution of the decision".

Although Article 2, no. 1, subparagraphs a) and b), of RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals operating in CAAD, not making reference to condemnatory decisions, it should be understood that the competencies comprehend the powers that, in judicial impugnation proceedings, are attributed to tax tribunals, with this being the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve RJAT, in which it proclaims, as a first directive, that "the tax arbitration proceeding must constitute an alternative procedural means to judicial impugnation proceedings and to actions for recognition of a right or legitimate interest in tax matters".

The judicial impugnation proceeding, although being essentially a proceeding for annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnificatory interest, as appears from Article 43, no. 1, of the GTL, in which it is established that "indemnificatory interest is due when it is determined, in gracious complaint or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due" and from Article 61, no. 4 of the Code of Tax and Customs Procedural Process (in the wording given by Law no. 55-A/2010, of 31 December, which corresponds to no. 2 in the initial wording), that "if the decision that recognized the right to indemnificatory interest is judicial, the payment deadline is counted from the beginning of the deadline for its spontaneous execution".

Thus, no. 5 of Article 24 of RJAT, when stating that "payment of interest is due, regardless of its nature, pursuant to the terms provided in the general tax law and the Code of Tax and Customs Procedural Process", must be understood as permitting recognition of the right to indemnificatory interest in the arbitral proceeding.

In the case at hand, following the illegality of the tax assessment and interest act, there is place for reimbursement of the tax which provably has been paid and likewise of compensatory interest, by force of the aforementioned Articles 24, no. 1, subparagraph b), of RJAT and 100 of the GTL, for such is essential to "restore the situation that would exist if the tax act subject to the arbitral decision had not been practiced", which should be determined in execution of judgment.

The substantive regime of the right to indemnificatory interest is regulated in Article 43 of the GTL, which establishes, in what here matters, the following:

Article 43

Undue payment of the tax obligation

1 – Indemnificatory interest is due when it is determined, in gracious complaint or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in an amount superior to that legally due.

2 – There is also considered to be error attributable to the services in the cases in which, despite the assessment being made based on the taxpayer's declaration, the taxpayer has followed, in its completion, the generic guidance of the tax administration, duly published.

The illegality of the gracious complaint decision is attributable to the Tax Administration, which rejected it on its own initiative. The same occurs with the Personal Income Tax assessment and with the compensatory interest assessment.

Consequently, the Claimant has the right to indemnificatory interest, pursuant to Article 43, no. 1, of the GTL and 61 of the Code of Tax and Customs Procedural Process, from the dates on which it made the payment in question, until reimbursement.

V. OPERATIVE PART

In terms and with the grounds set forth above, the request for arbitral pronouncement is judged to have merit, and in consequence:

• The decision rendered within the scope of the gracious complaint – order of 21.09.2015 of the Head of the Administrative and Contentious Justice Division of the Finance Department of ... – is annulled, where the conclusions of the Inspection Report are reproduced as grounds, notified to the Claimant by letter … of 22.09.2015, due to non-compliance with the norm contained in no. 4 of Article 6 of the Personal Income Tax Code.

• Consequently, the assessments contained in document 2014 …, totalling 21,570.55 euros, dated 19.12.2014, assessments nos. 2014 … – 2010 and 2014 … – 2010, with payment deadline of 16-02-2015, are annulled, due to non-compliance with the norm contained in no. 4 of Article 6 of the Personal Income Tax Code.

• The Tax and Customs Authority is condemned to reimburse the Claimant the amounts which it provably demonstrates to have paid regarding the annulled assessments and to pay it indemnificatory interest, computed from the date of payment until reimbursement.

Value of the case: in accordance with the provision of Article 3, no. 2, of the Regulations of Costs in Tax Arbitration Proceedings (and subparagraph a) of no. 1 of Article 97A of the Code of Tax and Customs Procedural Process), the case value is fixed at 21,570.55 euros.

Costs: pursuant to the provision of Article 22, no. 4, of RJAT, the amount of costs is fixed at 1,224.00 Euros, according to Table I attached to the Regulations of Costs in Tax Arbitration Proceedings, to the charge of the Respondent.

Notify.

Lisbon, 06 June 2016

Singular Arbitral Tribunal (TAS),

(Augusto Vieira)

Text prepared on computer pursuant to the provision of Article 131, no. 5, of the Code of Civil Procedure, applicable by reference of Article 29 of RJAT.

The drafting of the present decision is governed by the orthography prior to the Orthographic Agreement of 1990.