CAAD 771/2015-T: IRC Corrections to Taxable Profit for Non-Resident Entity with ACE Structure

Arbitral Decision

I. REPORT

A… with tax identification number in Germany DE…, and with a branch in Portugal with tax identification number…, with address in Portugal at …, … –…, …-… … (A…, or applicant), covered by the local peripheral services of the Tax Office of … …, designated in the assessments in question herein as A… – Branch in Portugal, came, pursuant to Article 10, Nos. 1 and 2, of Decree-Law No. 10/2011, of 20 January, and Articles 1 and 2 of Order No. 112-A/2011 of 22 March, to request the constitution of an Arbitral Court.

The acts subject to this request for pronouncement of the Arbitral Court are the partial denials of hierarchical appeals – which it identifies – and, consequently (and in final or ultimate terms), part of the supplementary IRC (corporate income tax) assessments (and municipal surtax) Nos. 2013 … and 2013 … (Docs. Nos. 1 and 2), relating to the fiscal years 2010 and 2011, and corresponding interest, and the corrections to the taxable base made in the course of tax inspection that underlie them and which were subject to partial payment in the amount of €18,066.81 and bank guarantee in favor of AT (Tax Authority), concerning the assessment relating to fiscal year 2010 (cf. Docs. Nos. 5, 6, and 7), and bank guarantee concerning the assessment relating to fiscal year 2011 (Docs. Nos. 8 and 9).

The applicant herein intends to submit to the appreciation of the Arbitral Court (i) the legality of these (partial) denials of the hierarchical appeals, to the extent that (allegedly) they disregard the recognition of the illegality of part of the IRC (and surtax) assessments and corresponding interest relating to fiscal years 2010 and 2011 and, likewise, (ii) the legality of part of the IRC (and surtax) assessments and corresponding interest relating to these fiscal years 2010 and 2011, more specifically the alleged illegality with respect to the amounts of €568,787.80 (2010) and €174,373.30 (2011), respectively, in a total of €743,161.09.

The part of the assessments whose declaration of illegality and annulment are sought is as follows:

i) Assessment No. 2013 … (2010): corrections to taxable profit in the amount of €1,820,188.39, to which corresponds tax (including surtax) in the amount of €555,990.27 and interest in the amounts of €9,095.22 and €3,702.31, in a total of €568,787.80;

ii) Assessment No. 2013 … (2011): corrections to taxable profit in the amounts of €450,923.71 and €142,805.78, in a total of €593,729.49, to which corresponds tax (including surtax) in the amounts of €130,767.88 and €41,533.27, respectively, in a total of €172,301.15, and interest in the amounts of €1,573.76 and €498.40, in a total of €2,072.16, all in a total of €174,373.30;

iii) in a total, across the two years, of €743,161.09 in tax and interest,

all as further detailed in the spreadsheet attached as Doc. No. 10.

It alleges that those acts (including the corresponding interest) and corrections that underlie them should be declared illegal and annulled in the parts in question, inasmuch as they suffer from the defect of violation of law and, consequently, violate the principle of legality.

It thus grounds, in summary and in substance, its request:

The Applicant, A… (A…), is a German entity with tax identification number in Germany DE… – cf. p. 6, second paragraph, of the Tax Inspection Report (TIR) attached herein as Doc. No. 11.

The Applicant began by obtaining, on 3 March 2009, a tax identification number in Portugal (collective person identification number – NIPC) from the National Register of Collective Persons (NRCP), as a non-resident entity without a permanent establishment in Portugal – cf. p. 6, fourth paragraph, of the TIR attached above as Doc. No. 11. The NIPC was… .

This NIPC was obtained from the NRCP, and registered as such, for the sole purpose of performing an isolated act of acquisition of a shareholding (in this specific case, participation in a complementary grouping of enterprises – CGE –, as will be understood below) – cf. Doc. No. 12 –...

...with no registration of A… being associated with it for tax purposes in Portugal – cf. p. 6, fourth paragraph, of the TIR attached above as Doc. No. 11.

After little more than a month, the Applicant concluded that by legal obligation it had to recognize the legal emergence in Portugal of a permanent establishment (branch, in corporate language) and register itself for tax purposes in Portugal (declaration of commencement of activity), having promoted, on 7 April 2009, the recognition of a permanent representation in Portugal – cf. p. 6 of the TIR, second paragraph (Doc. No. 11), and Annex I thereto (Doc. No. 13).

To that end, a second NIPC was generated by the NRCP, the NIPC/contributor number…, since the previous one had been requested and obtained on the assumption of the non-existence of a permanent establishment (branch) in Portugal, and, thereupon, ...

...on 13 April 2009 the applicant then declared, by reference to this second NIPC, commencement of activity in Portugal as a non-resident taxable person with a branch (permanent establishment) in Portugal, indicating the activities of "engineering and related technical services" and indicating the Official Accountant who would ensure the preparation of the accounts for its activity/permanent establishment in Portugal – cf. p. 6 of the TIR, eighth paragraph, p. 7 of the TIR, first 3 paragraphs, and Annex I of the TIR.

To clarify, the relevant parts of the TIR (pp. 5 and 6 of Doc. No. 11) are transcribed herein:

"In compliance with Service Orders No. 012013…, 012013… and 012013…, issued on 2013.01.16, and with a dispatch dated 2013.01.21, pursuant to Articles 2, No. 1 and No. 2, subparagraph a), 12, No. 1 and 14, No. 1 subparagraph a), all of the RCIRC (Regulations on the Income Tax on Collective Persons), an external inspection procedure was ordered, relating to the fiscal years 2009, 2010 and 2011, to the taxable person A… BRANCH IN PORTUGAL, with the NIPC:…, and registered office at … …., … -…, …-… Lisbon.

(…)

In accordance with the information made available by the business portal of the Ministry of Justice, through the permanent certificate, it is concluded that the taxable person is a permanent representation, in the form of a branch, of the German law company A…, whose tax identification is DE…, hereinafter referred to as A… . This permanent representation was established on 2009.04.07 (cf. annex I).

The German entity A…, of which the taxable person is a branch, established, on 2009.04.17, a Complementary Grouping of Enterprises, together with B…(…).

For the establishment of the CGE, A… used the NIPC…, corresponding to a non-resident entity without a permanent establishment, obtained from the National Register of Collective Persons (NRCP) on 2009.03.03, not submitting any declaration for tax purposes, nor even for mere registration purposes.

(…)

It is, therefore, in this context of implementation of part of the project for expansion of the Terminal C…, together with the CGE D…, with which it celebrated a contract for works on 2009.05.04, that the branch in Portugal of the German entity A… emerges – permanent establishment for the carrying out of an activity in national territory (cf. annex III).

For tax purposes, it declared the commencement of activity on 2009.04.13, as a non-resident taxable person with a permanent establishment, and developing "engineering and related technical services activities", to which corresponds the CAE… ."

1. That is, nothing of what is described above is disputed. In particular, it is not controversial that it was the entity under German law A… (with tax identification number in Germany DE…) that obtained for itself in Portugal, first the NIPC … (entity without a permanent establishment/branch in Portugal, and for the exclusive purpose of an isolated act of acquisition of shareholding – Doc. No. 12) and then the NIPC … (entity with a permanent establishment/branch in Portugal) – cf. the description of facts relating to A… in Portugal contained in p. 6 of the TIR (Doc. No. 11).

2. What the Tax Inspection disputes, or attempts to impose, is something else: it attempts to impose the conclusion that there being two Portuguese NIPCs for this German company, there would (apparently) be a split in Portugal into two distinct entities: entity with, and without, a permanent establishment.

3. And, resting on this putative dichotomy of entities in Portugal, the Tax Inspection moreover imposed, in a second and distinct step, the conclusion that a series of costs or charges would not be attributable to the permanent establishment (branch) in Portugal of A…, but rather directly to A… in Germany (NIPC without a permanent establishment in Portugal and expressly obtained solely for the purpose of an isolated act of acquisition of shareholding), disregarding that this had, by legal obligation, a permanent establishment in Portugal. But this will be developed further below, as it is beginning to enter into matters of law.

4. Continuing, neither is it controversial the reason why A… (applicant) found itself under the necessity (by legal obligation) of recognizing and registering a permanent establishment in Portugal: the applicant established with B…S.A. (B…) a Complementary Grouping of Enterprises (CGE), called "D…", which in turn was the instrument of cooperation between these two companies through which was celebrated, on 08 May 2009, with E…, S.A. (the owner of the project – hereinafter, E…), a contract for works for the expansion of Terminal C… – cf. p. 6 of the TIR, paragraphs 3 to 5, and its annex II (Docs. Nos. 11 and 13).

5. The CGE in turn – a legal instrument for temporary cooperation between B… and A…, for a specific project – celebrated two subcontracting contracts with its two members (B…, and TGE A…, or applicant), for the purpose of executing said expansion of Terminal C… – cf. p. 6 of the TIR, paragraph 6, and its annex III (Docs. Nos. 11 and 13).

6. This means that in final terms the physical execution of the works was the responsibility of the members of the CGE, among which, more specifically, the Applicant, the CGE being the legal instrument chosen that permitted the joint and unitary relationship of B… and of the applicant, on one side (single counterparty), with the project owner (E…), on the other side.

7. That relationship with the project owner that could not but be established jointly (as opposed to separately), it should be clarified, by obligation of E…, according to the relevant clause of the public notice of the call for tenders (Doc. No. 14) which is transcribed herein:

"III.1.3) Legal form to be assumed by the grouping of economic operators awarded

Companies or groups of companies may compete even if there exists no legal relationship between them, but, in the event of award, these shall necessarily associate themselves, before entering into the contract, in the form of a complementary grouping of enterprises, external consortium, under joint and several liability, in the terms provided for in the Procedure Programme and in Decree-Law No. 231/81, of 28 July, or European economic interest grouping (EEIG)."

1. With relevance for understanding why the applicant ended up concluding there was a necessity to recognize the legal emergence of a permanent establishment (branch) in Portugal with attribution to the same of the operations relating to the works contract for expansion of Terminal C…, the following clauses of the public call for tenders issued by E… for that purpose (Doc. No. 14) are transcribed, on which was based the contracting of the works contract between E… and the CGE of which the applicant was a member and subcontractor:

"SECTION II: SUBJECT MATTER OF THE CONTRACT

II.1) DESCRIPTION

II.1.1) Designation given to the contract by the awarding entity

Public Call for Tenders denominated "implementation of the "Project for Expansion of Terminal C…", in the form of global price, revisable, and "turnkey", for the execution of the WORKS CONTRACT for Engineering, Supply and Construction "Engineering-Procurement-Construction", also referred to as (EPC - PETS)" for the Project for Expansion of Terminal C… (…).

(…)

II.1.5) Brief description of the contract or acquisitions

The subject of this Public Call for Tenders is the WORKS CONTRACT for implementation of the "Project for Expansion of Terminal C…", in the form of global price, revisable, and "turnkey", comprising, in particular but not exclusively, Study Services, Design, Engineering, Insurance, Manufacturing, Transportation, Supplies, Site Preparation and Access, Construction, Assembly, Spare Parts, Pre-Commissioning, Commissioning, Interconnection to the Existing Terminal, Personnel Training and Instruction.

(…)

II.3) DURATION OF THE CONTRACT OR DEADLINE FOR ITS EXECUTION

(counting from the date of award)

Commencement on 02/03/2009 Completion on 16/05/2012"

1. The works contract (subcontract, if you will) in turn celebrated between the CGE and its member and applicant herein, A…, referenced in p. 6, paragraphs 6 and 7, of the TIR (Doc. No. 11), was a mirror of these same terms and conditions, among others (cf. the Recitals and initial Definitions and, among others, clauses 1 – subject matter of the works – and 6 – deadline for execution of the works/subcontract –, contained in Annex III to the TIR – Doc. No. 13).

2. Proceeding with the relevant facts, the entire relationship with E…, the project owner, including invoicing, was carried out by the CGE, as opposed to being carried out by each of its members separately. By requirement of the project owner, as was seen.

3. The CGE, in turn, was not merely fiscally transparent for its members. It was also contractually transparent for its members, namely (but not only) in the sense that all charges it incurred relating to the works for which it was established were assumed by its members, which was concretized, as is relevant here, through debits of those charges that the CGE made to them (cf., in particular, Recital 5 of the works or subcontract contract celebrated between the CGE and the applicant, and likewise its clause 2, contained in Annex III to the TIR, in particular subparagraph b) of No. 1 – cf. Doc. No. 13).

4. Making a relevant aside: these debits for the purposes of which the NIPC of A… corresponding to the Branch in Portugal, that is, its registration as an entity with a permanent establishment in Portugal, was indicated and used, namely the NIPC …(cf. Annex IX to the TIR contained in Doc. No. 13).

5. Moreover, these debits as referred to are based on the works or subcontract contract celebrated between the CGE and the applicant, where this identified itself and signed with the NIPC corresponding to the recognition of its permanent establishment in Portugal, the said NIPC … (cf. Annex III to the TIR, right on its p. 8, the opening page of the works contract, contained in Doc. No. 13).

6. Continuing, this means that, vis-à-vis the CGE, its respective members, among which, more specifically, the Applicant, contractually committed themselves to assume all responsibilities and charges that could result from the execution of the works contract between E… and the CGE for this latter.

7. In the case of the applicant, it fell to it a percentage of 64.29% of such charges, and in the case of B… the remaining percentage of 35.71% (cf. the agreement between the applicant and B… regarding the functioning of the CGE contained in Annex VI to the TIR, in particular its clause 8 – Doc. No. 13).

8. In return for this assumption of charges, and of other charges supported directly by the applicant or by B… with the execution of the works/subcontract, the CGE delivered to the applicant and to B… the totality of the price of the works received from the project owner (E…), as will be specified below.

9. In the case of the percentage to which the applicant was entitled in comparison with B…, this translated into the amount to be received of €102,058,508, provided for in clause 5, No. 3, of the works or subcontract contract celebrated between the applicant and the CGE (Annex III to the TIR – Doc. No. 13), which is nothing more than the result of the application of said percentage of 64.29% to the total price of the project awarded by E…, which was €158,743,766.06 (cf. paragraph 5 of p. 6 of the TIR).

10. The alternative to this total transparency ("full back-to-back principle") in the operation of the CGE in its relationships with its members, would be B… and A… to capitalize in advance the CGE with substantial means, with the inherent complexity (control and supervision) that this would originate for both, instead of, as they did, gradually providing it, against debit notes, with the means necessary to meet the charges that were being invoiced by third parties to the CGE.

11. This CGE established as a mere instrument of temporary cooperation between B… and A… (Applicant), it is recalled, for the purposes of the project for expansion of the C… terminal belonging to E… (cf. the purpose of the CGE, contained in Annex II to the TIR – Doc. No. 13).

12. There is nothing illegal about this latter option (the one followed), as will be seen below, and from the standpoint of business adequacy/management, it is without a shadow of a doubt the simplest/most adequate, since B… and A… are merely temporary partners for a single project with a fixed date for its conclusion (cf. the purpose of the CGE, contained in Annex II to the TIR – Doc. No. 13 – and the relevant points of the call for tenders for the terminal C…, belonging to E…, referenced above – Doc. No. 14).

B) The tax corrections in question here, and the grounds invoked by AT for them

1. In terms of corrections to taxable profit, what is in question here is the refusal, by the Tax Inspection, following a joint inspection of the years 2009, 2010 and 2011, to accept the tax attribution of charges from the works described above to the permanent establishment (branch) in Portugal of the applicant.

2. The charges in question in the corrections here being discussed are those referenced in the TIR (Doc. No. 11) in points III.1.1.1.1 and III.1.1.1.2 (pp. 10 to 12 and 12 to 14), in the amounts of €1,820,188.39 (2010) and €450,923.71 and €142,805.78 (2011). What is in question are charges relating to the works supported and debited by the CGE to its members (in the case of these proceedings relevant only to the debit to member A…), and charges relating to the works debited to the registered office, in Germany, of the applicant, and attributed for tax purposes, via internal allocation, to its permanent establishment (branch) in Portugal.

3. The grounds for the refusal to attribute these charges to the permanent establishment (branch) of the applicant in Portugal have already been, in part, summarily introduced above, and are reduced to what follows, transcribed directly from the Inspection Report:

First Ground

i) "(…) the charges supported by the CGE should not be debited directly to its members, but should be taken into account for the purposes of determining the respective taxable profit or loss, to be attributed to its members, in the proportions established in the respective constituent agreement (…)" (p. 10, penultimate paragraph, of Doc. No. 11; emphasis ours).

The charges in question cannot be attributed to the member of the CGE "for the reason that since the CGE is an entity with registered office or effective direction in national territory, which is established and operates in accordance with legal terms, and with organized accounting, the expenses and income thereof should, pursuant to Article 17 of the CIRC, permit the determination of the profit or loss of the fiscal year, and this yes, attributable to the respective members in the proportion of their participation, pursuant to the provision in No. 2 of Article 6 of the CIRC." (p. 11, at the end, and 12, of the TIR).

Second Ground

ii) "But, in the specific case, it is to be noted another peculiarity: the taxable person under analysis does not correspond to any of the members of the CGE in question – D… . It is the very entity under German law, with registration in national territory as a non-resident without a permanent establishment – NIPC…– that integrates the CGE in question (annex II). It is further noted, the fact that at the date of establishment of the CGE -2009.04.17 - already the German law company A…, had established a branch (permanent representation) in this territory, without, however, using the respective NIPC for the establishment of the CGE in question. Therefore, it could be concluded, that it was the option of A… to use the NIPC of non-resident without a permanent establishment.

(…)

[The] taxable person under analysis [NIPC associated with the recognition of a permanent establishment] is not a member of that CGE, that is, its NIPC was not used for the establishment thereof and nor is any alteration known, in its composition, in that sense.

It is considered, thus, that the taxable person is not legally authorized to bear those charges debited by CGE D…, (whose copies of the respective debit notes are attached as annex IX), as common costs, and that are the responsibility of third parties [of the first NIPC obtained in Portugal], the same are not fiscally accepted, pursuant to the provision in Article 45 of the CIRC, in the amounts of 1,820,188.39 and €450,923.71, respectively in the fiscal years 2010 and 2011" (p. 11, second, penultimate and last paragraphs of Doc. No. 11; emphasis ours).

1. The first of the invoked grounds is what it is and does not require, at the stage of facts, further development in its description.

2. As for the second of the grounds, it may perhaps require some considerations, still at this stage of facts: the AT understood that because the applicant had been identified in the contract for establishment of the CGE by reference to the first NIPC obtained by it in Portugal – the NIPC for non-resident entity without a permanent establishment in Portugal –, it would be prevented from attributing to its permanent establishment (branch) in Portugal charges related to the works (this point is not disputed) at the origin of the CGE and at the origin of the necessity to recognize the legal emergence of a permanent establishment of the applicant in Portugal.

3. Why this impediment? In this reasoning just transcribed, it is to be underlined, in a first moment, the attribution by AT of an option to the taxpayer and, in a second moment, the conclusion that because the applicant had been identified in the contract for establishment of the CGE by reference to the first NIPC obtained by it in Portugal (obtained declaredly solely for the purpose of acquisition of shareholding, in the circumstances of the case, granting of a deed of participation in the CGE – Doc. No. 12), it would have exercised the option that allegedly would exist in the sense of excluding its permanent establishment from the works in Portugal.

4. The Tax Inspection further invokes, in the context of its second ground, here from the perspective of factual analysis, that both the Directorate of Services for Taxpayer Registration (DSRC) and the NRCP would converge in the conclusion that because two NIPCs were obtained in Portugal by the German law company A…, this would now be two entities (cf. p. 11 of the TIR – Doc. No. 11), attempting the Inspection to reinforce with this the reasoning that revolves around the existence of an option.

5. With relevance for the factual part, still, the AT concluded even knowing that the works contract between the CGE and the applicant, at the origin of the debit of such charges, was executed by the applicant by identifying itself by reference to the second NIPC obtained by it in Portugal, that is, the NIPC…, associated with the recognition of a permanent establishment in Portugal (cf. the works contract contained in Annex III to the TIR – attached above as Doc. No. 13), and even knowing, additionally, that the charges relating to the works, debited by the CGE to its members, were debited to the applicant also with indication and use, and by it thus accepted and accounted for, of the second NIPC obtained by it in Portugal, that is, the NIPC…, associated with the recognition of a permanent establishment in Portugal (cf. the debit notes of the charges here in question, referenced in the last paragraph of p. 11 of the TIR, contained in Annex IX to the TIR – attached above as Doc. No. 13).

6. Finally, for a smaller portion of the charges, the Inspection further invokes a third ground, namely that as to €142,805.78 in charges accounted for in 2011, internally reallocated by the registered office in Germany to its permanent establishment in Portugal, "(…) beyond the above referred, neither was the occurrence and indispensability of the same proved for the realization of income subject to tax of the taxable person, pursuant to Article 23 of the CIRC, [for which reason] the same cannot be accepted" (p. 14, second paragraph, of the TIR).

The Applicant further alleges:

The attribution of the operations of the applicant in Portugal (works contract for expansion of Terminal C…) to a permanent establishment (branch) in Portugal does not rest or rest on any option whatsoever.

It results from compliance with Portuguese law which, because it has been much absent from the Inspection Report, is transcribed here (Income Tax Code):

"Article 2

Taxable Persons

1 - The following are taxable persons in respect of the IRC:

(…)

c) Entities, with or without legal personality, that do not have registered office or effective direction in Portuguese territory and whose income obtained therein is not subject to IRS."

In the specific case the entity in question is, as was seen, the German law company A… Proceeding (Income Tax Code):

"Article 3

Tax Base

1 - The IRC applies to:

(…)

c) Profit attributable to a permanent establishment situated in Portuguese territory of entities

referred to in subparagraph c) of No. 1 of the previous article;"

As can be seen, the taxable subject, the entity subject to tax, is the non-resident foreign entity, and not the permanent establishment, a legal figure that, besides having nothing optional about it, is already related to the different plane of the particular mode of taxation in Portugal of the non-resident foreign entity.

This very point is recognized without any difficulty by jurisprudence. As the arbitral panel pronounced in case No. 1/2013-T (Counselor Jorge Lopes de Sousa, Dr. José Pedro Carvalho and Dr. João Sérgio Ribeiro), "[i]t will therefore be the non-resident who holds the permanent establishment and not the permanent establishment itself to be taxed, for, as it seems clear from what is provided for in No. 2 of Article 4 of the CIRC, to which refers the initial part of No. 3 of the same article (…), the permanent establishment, despite being treated as an autonomous patrimonial mass for the purposes of determining the amount of profits taxable in Portugal, does not have autonomous tax personality, being solely a specially relevant presence of the non-resident: are "collective persons and other entities that do not have registered office or effective direction in Portuguese territory (that) become subject to IRC only regarding income obtained therein"" (p. 27 of the PDF version published on the CAAD website).

From another perspective, as Paulo Olavo Cunha emphasizes, it is important to recall that "[the] branch does not have legal personality, and therefore does not constitute an autonomous subject of Law, despite having tax personality. Not being truly distinguished from the foreign company, to which it belongs and of which it constitutes an extension, the branch encounters natural legal limitations to the legal acts that it intends to enter into with the foreign company, notwithstanding the fact that Portuguese tax law permits that it invoice the branch for services rendered and that these be incorporated in the final invoicing thereof, as long as properly documented"[2] (emphasis and bold ours).

Proceeding with the law, let us then see below what it further tells us about the permanent establishment (Income Tax Code):

"Article 4

Scope of Tax Obligation

(…)

2 - Collective persons and other entities that do not have registered office or effective direction in Portuguese territory become subject to IRC only regarding income obtained therein.

3 - For the purposes of the foregoing number, income obtained in Portuguese territory is considered to be income attributable to a permanent establishment situated therein and, likewise, (…)"

Once again the legal confirmation that there is no option whatsoever: if there is income attributable to a permanent establishment (of a non-resident entity) situated in Portuguese territory, it must be taxed here.

And, as was seen, what is taxed when the non-resident (A…, in the case) qualifies legally as having a permanent establishment in Portugal, is the profit attributable to that permanent establishment, which in turn refers us to Articles 17 et seq. of the Income Tax Code: income or revenues, minus expenses or costs, that, in summary, is what is taxed.

And when is the activity of the non-resident qualified as generating the legal emergence of a permanent establishment in Portugal? Will the option be here that AT speaks of? It would be good for non-residents if it were thus, since that would mean they would not pay tax here for reference to numerous profitable activities, however prolonged, significant and evident their presence and activity in Portugal might be (as was the case in this works contract for expansion of Terminal C…). But it is not, evidently, thus (Income Tax Code):

"Article 5

Permanent Establishment

1 - A permanent establishment is considered to be any fixed place through which a commercial, industrial or agricultural activity is carried on.

2 - The notion of permanent establishment includes, provided that the conditions stipulated in the foregoing number are satisfied:

a) A place of direction;

b) A branch;

c) An office;

d) A factory;

e) A workshop;

f) A mine, an oil or gas well, a quarry or any other place for the extraction of natural resources situated in Portuguese territory.

3 - A place or building site for construction, installation or assembly, coordinating, supervisory and inspection activities connected with the same or the installations, platforms or drilling vessels used for the exploration or exploitation of natural resources constitute a permanent establishment only if its duration and the duration of the works or activity exceeds six months.

4 - For the purposes of counting the period referred to in the foregoing number, in the case of building sites for construction, installation or assembly, the period applies to each building site, individually, from the date of commencement of activity, including preparatory works, with temporary interruptions being not relevant, the fact that the works have been commissioned by various persons or the subcontracting.

5 - In case of subcontracting, it is considered that the subcontractor possesses a permanent

establishment at the building site if it carries on its activity thereat for a period exceeding six months.

(…)"

The underlining is ours. And No. 5 was also transcribed since, being the contractual relationship of works contract with the project owner assumed by the CGE, the relationship of this, in turn, with A… (and B…) for the purposes of the material realization of that works contract, will qualify as subcontracting.

All of this is settled: AT does not call into question that the works for enlargement of Terminal C… (with duration far exceeding six months) had as a consequence that A…, a non-resident entity in Portugal, had to recognize that its presence and activity in Portugal was subsumed in the legal figure of the permanent establishment.

And if by absurdity this were questioned by AT, no supplementary IRC assessment would be due. Indeed, in that case the costs supported would be irrelevant since also the €102,058,508 earned by A… from that works contract would not be attributable to a permanent establishment in Portugal, and the correction that AT would then have to make would be in favor of A…: all of the IRC calculated and paid by A… in Portugal would have been incorrectly paid.

So, if there is a permanent establishment, if because of that there is no doubt that one has to determine the profit attributable to that permanent establishment that will be subject to taxation in Portugal, if that profit is determined by considering the revenues and expenses related to the works that generated the emergence of that permanent establishment, if in its reasoning for the corrections AT does not call into question the relationship of the charges subject to inspection with that works and revenues obtained from the same, why the correction, why the exclusion of the charges here in question from the account of the profit of the permanent establishment of the non-resident entity A…?

Because, says AT in one of its two grounds, it is recalled, and if we understand it correctly, that having been obtained successively by the German company A… two NIPCs in Portugal, a first still without recognition that the activity would generate a permanent establishment, and a second associated with the recognition that the activity would generate a permanent establishment, there would be a split into two entities. And, starting from this basis, AT then adds to this its ground that, faced with these two entities in Portugal, it would have been the intention of A… to exercise an option (that, therefore, for AT would exist de jure) in using with respect to its relationships with the CGE the entity (NIPC) without a permanent establishment in Portugal.

As to the first stone in the foundation of this ground, it has no legal support whatsoever, nor does AT invoke any legal support: it merely invokes the manner in which the Directorate of Services for Taxpayer Registration and the NRCP allegedly handle procedurally and computationally the NIPCs, preventing, it seems, that to a pre-existing NIPC could subsequently be associated the recognition of the legal emergence of a permanent establishment in Portugal (cf. p. 11 of the TIR).

Now, as is evident, the practices, procedures or computational constraints, or method of organization adopted, computational or otherwise, do not create nor can create a split of entities. The entity always was and continues to be a single one, it just had to request a second NIPC from the moment it became aware that its activity would generate the legal emergence of a permanent establishment and that it was not possible, computationally or procedurally speaking, to limit itself to adding to the register of the previous NIPC this new element yet to be recognized therein.

Namely, the recognition of a permanent establishment does not create a new entity or taxable person. These pre-exist and are what they are, as results from law, and as is well explained in the arbitral decision cited above, pronounced in case No. 1/2013-T (Counselor Jorge Lopes de Sousa, Dr. José Pedro Carvalho and Dr. João Sérgio Ribeiro; cf. p. 27 of the version in PDF published on the CAAD website).

But even if by absurdity this were not so and this first stone of AT's reasoning were correct, the second stone (also necessary for its construction), that of the existence of an option, would still collapse, as it is believed to be immediately apprehensible after having reviewed in detail the facts of the case, and likewise the law respecting knowing when an activity in Portugal triggers, or does not trigger, the legal emergence of a permanent establishment.

That (before a given activity) there exists no option whatsoever is, therefore, a question of law that was already sufficiently analyzed above: if the activity generates, in accordance with the legal criteria, the legal emergence of a permanent establishment, automatically that activity should be treated for tax purposes in accordance with the rules of taxation applicable to the permanent establishment, in particular in terms of comparison of the revenues and expenses of that activity with a view to determining the profit obtained from the same and that will be taxed in Portugal (the profit said to be attributable to the legal figure of the permanent establishment).

In addition, this vision of AT that there would exist an option, besides the absence of legal basis, is particularly perverse and contradictory in the application that AT makes of it, and which reduces to treating the taxpayer as suffering from schizophrenia and masochism: the putative option of operating outside the permanent establishment would have been exercised for the purposes of the charges debited by the CGE to the applicant, but the same would not have occurred with the invoicing of the applicant (over 100 million) to the same CGE! Here is a rich example of lack of impartiality, incongruity, and disobedience to law, on the part of the Tax Inspection. In several directions.

If by absurdity this thesis of the existence of an option were to proceed (whose legal basis AT points out, nor will it ever be able to point out), it must, therefore, be taken to its ultimate consequences (which the Inspection did not do), under penalty of gross violation of the constitutional principles of equality, tax capacity and taxation of actual income, likewise disregarding the invoicing of A… to the CGE, with which the second element disappears without which this supplementary IRC assessment would not exist: the existence of revenues or, in the new language of the CIRC, of income.

Furthermore: the interpretation of the legal rule granting an option, a rule still to be identified by AT today, in the sense that based on this putative rule one could deny the attribution of costs related to the activity that generated the legal emergence of a permanent establishment, under the pretext that in one of the contracts related to that activity (the contract for establishment of the CGE) the entity identified itself by reference to a NIPC prior to that of recognition of the permanent establishment, or under the pretext, in the language of AT, that because a same foreign company obtained successively two NIPCs in Portugal, there would have been a split into two entities,

without simultaneously and by force of the same putative legal basis recognizing that then neither any of the revenues (invoicing) will be attributable to said permanent establishment, is unconstitutional, by violation of the constitutional principles of equality (and prohibition of arbitrary action), of neutrality and of tax capacity or actual income, enshrined in Articles 13 (and 2, as an emanation of the democratic rule-of-law state), 62, Nos. 1 and 2, 103, No. 1, and 104, No. 2, of the Constitution, and likewise of the principle of proportionality that finds qualified expression in Articles 18, Nos. 2 and 3, of the Constitution, and is an emanation of the principle of the democratic rule-of-law state (Article 2 of the Constitution).

Finally, and not wishing with that to lend credibility to a thesis that has none whatsoever, the applicant does not wish to stop recalling, in closing, that in any case it is not understood the conclusion of AT to the effect that the applicant would have exercised a putative option in its relationships with (at least) the CGE, of operating outside the legal-tax figure of the permanent establishment: how can AT conclude that an option would have been exercised of associating contractual relationships (as opposed to legal situations arising from the quality of member of the CGE), in the case of subcontracting, on which rest the debits of the CGE to the applicant, with the first NIPC obtained by the applicant in Portugal, if this was declared and expressly obtained exclusively for the purposes of an "isolated act of acquisition of a shareholding" (cf. Doc. No. 12)?

This tax correction lives in the realm of fantasy. A fantasy that is aggravated by the omission by the Inspection of what will be seen further below.

Indeed: how can AT conclude this if the relationships with the CGE in question in the debits disregarded by AT rest on the works contract (subcontract) signed between the applicant and the CGE, and in that contract the NIPC used was the second, the NIPC associated with the recognition of the legal emergence of a permanent establishment in Portugal?

Moreover: how can AT conclude this (exercise of such a putative option), if debit note after debit note issued by the CGE, in turn based on the works/subcontract contract, the applicant was identified using the NIPC associated with the recognition of the legal emergence of a permanent establishment in Portugal?

How can AT conclude this if in the flows in the opposite direction, those that generated income in Portugal for the applicant – the invoicing to the CGE of the subcontract, by the applicant – likewise rest on the same NIPC (the second obtained in Portugal) associated with the recognition of the legal emergence of a permanent establishment in Portugal? And if by absurdity this were not so, for the same "reason" indicated by AT for the debits here in question of the CGE to the applicant, why was the taxable profit then corrected upwards (+), instead of concluding, coherently, that if there were to be a correction it would have to be downwards (-) (equal irrelevance, in this frame of mind of AT's reasoning, of the invoicing of the applicant to the CGE)?

It is a case for saying that even if AT could be right in Law (in what would be an absurd Law), in the application of its law it makes a completely distorted and partial selection of the facts to which it had access (and are contained in the TIR and its annexes) for the purposes of the discourse with which it attempts the legitimation of the corrections it made.

But the absurdity does not end there. It is that it further accrues that, never was activity commenced, for tax purposes (IRC or VAT), of the said first NIPC, the …, no activity having been developed in Portugal by means of this number (as referenced in the facts part – p. 6 of the Inspection Report, attached above as Document 11), expressed and declaredly obtained from the NRCP solely for the purpose of "isolated act of acquisition of shareholding" (Doc. No. 12).

On the contrary, the Applicant always acted in national territory through its Branch (NIPC…) which was established in order to ensure compliance with the legal and tax imperatives arising from the development of a single undertaking in Portugal (the Project for Expansion of Terminal C…), as was seen above.

The NIPC that AT now intends to consider never had any activity associated with it, has no tax effect whatsoever, and had no tax registration as was seen above in the facts (cf. p. 6 of the TIR Doc. No. 11). In truth such NIPC does not exist for tax/AT purposes.

And, the Applicant continues:

There is no legal impediment whatsoever to the CGE debiting to the applicant (or to B…, the other member of the CGE) charges it incurs.

This is the first of the grounds described in the facts part, invoked by AT, as was seen above, treated in the law part of this request for arbitral pronouncement in second and last place: it appears that, in the vision of the Inspection, Article 6, No. 2, of the CIRC, would prevent a CGE from relating to its members in a mode of total transparency of revenues and expenses, as occurred in the specific case.

Let us see then what Article 6, No. 2, of the CIRC says:

"Article 6

Tax Transparency

(…)

2 - The profits or losses of the fiscal year, determined in accordance with this Code, of complementary groupings of enterprises and European economic interest groupings, with registered office or effective direction in Portuguese territory, that are established and operate in accordance with legal terms, are also directly attributable to the respective members, integrating themselves into their taxable income."

Nothing in this legal basis invoked by AT, and even less Article 17 of the CIRC (which merely prescribes how profit is determined), imposes that the CGE refrain from debiting its respective charges to its members.

Put otherwise, this legal basis merely provides that the profit or loss determined by the CGE be attributable to its members. In no way does it prevent that in the calculation of that profit there enter, on the positive side, debits to its members and, on the negative side, invoicing of its members to the CGE, as occurred in the case.

It is perhaps this the moment to underline the circularity and neutrality, on the tax plane, of the alternatives of functioning: the CGE is furnished with its own means, technical, human, financial, and directly does the works contracted by E…, debiting nothing to its members and these debiting nothing to it, and at the end determines a result which it attributes to its members.

Or the CGE remains as a simple and light structure, with only what is strictly necessary for the temporary function for which it was established in the case (unification of the position and responsibility of two distinct companies, B… and the applicant, before the project owner, E…), and in that case, as occurred, A… and B… assume the physical execution of the works through a subcontract for works, celebrated with the CGE, then invoicing to the CGE the price corresponding to its percentage of execution of the works and providing the CGE, against debit notes issued by it, with the means necessary for this to meet both expenses that do not directly result from the physical execution of the works (v.g., operating expenses of the CGE, however minimal, and costs of bank guarantees that the CGE has to present in its own name to the project owner, etc.), and expenses that directly pertain to the execution of the works when perchance incurred in the name of the CGE (contracts for water, electricity, tools or materials that the CGE acquires for the execution of the works by its subcontractors, etc.).

In both alternatives the tax result is exactly the same: the CGE is never taxed (Article 12 of the CIRC), and to its members, whether through attribution of results of the CGE (Article 6, No. 2, of the CIRC), whether through invoicing to the CGE and re-debiting by the CGE of its costs (re-debiting in the case contractually provided for in the subcontract for works with the CGE), falls in its entirety the result of the economic activity formally intermediated by the CGE.

Whence yet another legal reason to add to that of the absence of legal basis for the correction: how can the Inspection refuse the re-debiting of charges by the CGE to the applicant without simultaneously making the consequent and symmetric correction of reducing the result of the CGE (or increasing its loss) by reason of the disregarding of these re-debits that benefited it and, with this, reducing in the same amount the result (or increasing the loss) of the CGE attributed to the applicant?

This mode of asymmetric proceeding, besides flagrantly violating the constitutional and legal principle of justice, further violates the constitutional principles of tax capacity, of actual income, of equality and of proportionality, above better identified for another purpose, and the interpretation of Article 55 of the General Tax Code, in particular of the principles of legality, equality, proportionality, justice and impartiality provided for therein, to the effect that it would authorize this mode of proceeding, is unconstitutional by violation of the said constitutional principles.

It should further be added that besides the absence of legal basis in No. 2 of Article 6 (or in Article 17) of the CIRC for the correction made, it further accrues that the same, and the philosophy that underlies it, kill, contradict, the legal regime and purposes of the CGE: structures of cooperation, conceived to be also usable with flexibility, lightness and simplicity, whenever two or more economic agents want or need to cooperate (in a given project, for example) without thereby merging, or merging the project and activity of each one, in a new entity, in particular in a new company.

Base II, No. 1, of Law No. 4/73, of 4 June (which establishes and regulates the figure of the CGE), sums up everything about the lightness, legal irrelevance of the CGE's own profit and legal permission for the simplicity of its patrimonial and means:

"Base II

Complementary groupings of enterprises cannot have the main objective of realization and sharing of profits and shall be established with or without own capital." (emphasis ours).

And further adds Article 1 of Decree-Law No. 430/73, of 25 August (which develops the regulation of the CGE), that:

"The complementary grouping of enterprises may have as an ancillary objective the realization and sharing of profits only when expressly authorized by the constituent agreement."

And the constituent agreement of the CGE in question, in turn, imposes nothing, merely permits: "(…) being able to have as an ancillary objective the realization and sharing of profits" (cf. Annex II to the TIR, contained in Doc. No. 13, and the purpose of the CGE transcribed therein).

There is, therefore, no legal or contractual obligation whatsoever that CGEs determine profits, or that this particular CGE determine profits, or that they have patrimonial structure or otherwise in sufficient dose to permit them to be more than a transparent intermediary that unifies, in the relationship with third parties, two independent cooperating parties. As to profits the principle is even just the reverse. And Article 6 of the Income Tax Code changes none of that. It merely provides, as could not be otherwise, that the profits (or losses) that may exist will be attributed directly to the members of the CGE.

Put otherwise, at no moment does Article 6 of the CIRC impose that the CGE have profits, and even less does it impose in any way that it and its members establish its mode of functioning and patrimonial and financial relationship, in the manner "A", "B" or "C". And if by absurdity it did, it would be frontally contradicting the legislation (and purposes that this serves) that regulates CGEs, as referenced above, and illegitimately and blindly interfering with the freedom of business organization.

Beyond the lack of foundation in tax legislation, this tax correction carried out by the Inspection further contradicts the legislation that has just been transcribed, inasmuch as what it does is prevent fiscally (punishing fiscally) the use of the CGE as a mere transparent intermediary figure, of cooperation, between two companies, these yes with patrimonial and financial means, and with profitable purpose.

Finally, but not less importantly, the alleged interpretation of Article 6, No. 2, of the CIRC, or of its Article 17, that underlies the corrections here in question, to the effect that these articles would prevent the CGE from debiting to its members the charges it will incur, gives body to a normative sense that, if prevailing (which is not conceded), constitutes an undiscriminating tax interference with the organization and management of enterprises and entities auxiliary to the same that violates, without any apprehensible justification, Articles 62 (right to private property), 80, subparagraph c) (freedom of initiative and business organization), 81, subparagraph f) (freedom of business management, which has as its counterpart a State that promotes neutrality as opposed to creating distortions) 82, Nos. 1 and 3 (guarantee of existence of the private sector) and 86, No. 2 (prohibition of State intervention in the management of private enterprises), all of the Constitution.

Finally, regarding in particular the correction to the portion of the taxable base of fiscal year 2011 in the amount of €142,805.78 and to the invocation, additional, in that respect, that regarding these charges internally reallocated by the registered office in Germany to its permanent establishment in Portugal, "(…) beyond the above stated, neither was the occurrence and indispensability of the same proved for the realization of income subject to tax of the taxable person, pursuant to Article 23 of the CIRC, [for which reason] the same cannot be accepted" (p. 14, second paragraph, of the TIR; and its Annex XI – Doc. 15), there is a manifest insufficiency, and a manifest incorrectness.

The insufficiency of this ground is rooted in the lack of knowledge of the reason why the Inspection thus concluded; the incorrectness lies in that the bank guarantees provided directly to the project owner (E…), or indirectly (via intermediary CGE or B…) with the corresponding necessity of presenting counter-guarantees to the intermediary, are an inescapable necessity in works contracts of this nature and scale (cf. point "III.1.1) Bonds and guarantees required", of the public notice of the call for tenders for the expansion of Terminal C… – Doc. No. 14).

Regarding the interest and indemnification for losses resulting from the provision of guarantee

The IRC assessments and corresponding interest here in question were subject to a bank guarantee (Docs. Nos. 6, 7, 8 and 9) legally required in order to operate the suspension of the tax enforcement proceedings directed at collection of the amounts (plus accrued penalty interest), with the assessment concerning 2010 furthermore being subject to a partial payment in the amount of €18,066.81 (cf. Docs. Nos. 5 and 6).

The losses resulting from the provision of this guarantee shall be compensated to the applicant in case of merit – as is expected and is law – of this request for constitution of an Arbitral Court, and the partial payment made shall be reimbursed, with payment of compensatory interest calculated from 20 December 2013 (cf. Doc. No. 5).

Indeed, the amounts of tax in question in this request for arbitral pronouncement and corresponding interest are not shown to be owed, for the reasons and with the grounds explained above.

It further accrues that the errors from which the assessments in question whose legality is now being discussed suffer are errors of the services in the understanding of law and facts, as was well demonstrated above.

In these circumstances – error attributable to the Services – recognition should be given to the applicant of the right to indemnification for losses resulting from the provision of guarantee (cf. Article 53 of the General Tax Code), and compensatory interest on the amounts incorrectly paid (Article 43 of the General Tax Code).

It should be noted, in this respect, that doctrine and jurisprudence have advocated a very broad position regarding error attributable to the services.

In accordance with doctrine, "error attributable to the services that carried out the assessment is demonstrated when they proceed to voluntary reconsideration or to the challenging of that same assessment" (Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Code Commented and Annotated, Vislis, 1999, p. 141).

Jurisprudence, for its part, has aligned itself with the same tune: "in general, it can be stated that error attributable to the services, that carried out the assessment, understood in a global sense, is demonstrated when they proceed to voluntary reconsideration or challenging of that same assessment" (cf. Decisions of the Supreme Administrative Court, of 31 October 2001, Case No. 26167, of 28 November 2001, Case No. 26405).

In the same sense, regarding the identical situation of compensatory interest "once the assessment act is judicially annulled, error of the services in proceeding to it is demonstrated, with compensatory interest being owed in favor of the claimant who paid the assessed amount" (cf. Decision of the Supreme Administrative Court, of 15 November 2000, pronounced within Case No. 22791).

In summary, "the tax administration is generically obliged to act in conformity with law (Articles 266, No. 1, of the Constitution of the Portuguese Republic and 55 of the General Tax Code), for which reason, independently of proof of fault of any of the persons or entities that compose it, any illegality not resulting from action by the taxable person will be attributable to fault of the services themselves" (cf. Decision of the Supreme Administrative Court, of 12 December 2001, Case No. 26233).

Thus being, no doubts remain that, once the IRC assessments and corresponding interest are annulled in the part in question herein, error attributable to the Services should also be held to be verified for the purposes of indemnification for losses resulting from the provision of guarantee.

The losses resulting from the provision of guarantee can only, evidently, be determined at the moment when AT returns and thereby finally cancels the guarantee, which has not yet occurred.

In light of the above, no doubts remain that the merit of this request for declaration of illegality of the IRC assessments and corresponding interest in the part in question herein should determine indemnification of the applicant for the totality of costs incurred with the guarantee provided.

And likewise the merit of this request for declaration of illegality of the IRC assessments and corresponding interest in the part in question herein should determine the reimbursement of the amount, incorrectly paid, of €18,066.81, and the payment of compensatory interest calculated on this amount from 20 December 2013 until full reimbursement.

Conclusions

From the above exposition, in summary, it results that both the partial denials of the hierarchical appeals, and the corrections made to the taxable base here in question and above better identified, as well as the part of the IRC assessments (including surtax) Nos. 2013 … and 2013…, relating to fiscal years 2010 and 2011, respectively, and corresponding interest, that followed them, suffer from the material defect of violation of law, and should:

a) the illegality be declared and the partial denials of the hierarchical appeals be annulled to the extent that they refused the annulment of the illegal part, in the terms that have been discussed herein, of the supplementary IRC assessments of fiscal years 2010 and 2011, thereby violating the principle of legality;

b) the illegality of the corrections (and be consequently annulled) here in question made by the Tax Inspection to fiscal years 2010 and 2011, in the amounts of €1,820,188.39 (fiscal year 2010) and €593,729.49 (fiscal year 2011) be declared;

c) the illegality of the part of the assessments (and be consequently annulled) relating thereto be declared, more specifically illegality in the amounts (including interest) of €568,787.80 (2010) and €174,373.30 (2011), in a total of €743,161.09;

d) be, consequently, recognized the right to indemnification for losses resulting from the provision of guarantee and further, with respect to the assessment relating to fiscal year 2010, the right to reimbursement of the amount of the partial payment incorrectly made of €18,066.81, and the right to compensatory interest calculated on that same amount from 20 December 2013 until full reimbursement.

Constitution of the Arbitral Court

The request for constitution of the Arbitral Court was accepted by the President of CAAD and immediately notified to the Respondent, all in accordance with legal terms.

Pursuant to the provisions and for the purposes of subparagraph a) of No. 2 of Article 6 of the Regulations of the Arbitral Court by decision of the President of the Deontological Council, duly communicated to the parties, within the prescribed periods, were designated as arbitrators, Judge Dr. José Poças Falcão as president, and, as members, Professor Doctor João Sérgio Ribeiro and Professor Doctor António Martins, who communicated to the Deontological Council and to the Administrative Arbitration Centre their acceptance of the appointment within the period stipulated in Article 4 of the Deontological Code of this Administrative Arbitration Centre.

The Collective Arbitral Court was constituted on 2-3-2016, in accordance with the prescription of subparagraph c) of No. 1 of Article 11 of the Regulations of the Arbitral Court.

The Response of the Tax Authority and Customs Authority (AT)

In response to the request for pronouncement, AT contested the grounds thereof on the basis, in essence, of the reasons already invoked in the reasoning for the partial denial of the hierarchical appeals presented.

It invoked, namely, that on 17 April 2009 the German entity A…–…–, using the TIN/NIPC…, established a Complementary Grouping of Enterprises (CGE), together with B… SA, in the proportions, of generic contribution for the charges thereof, of 15% and 85%, respectively, called "D…, CGE" (hereinafter D…), with that CGE being assigned the NIPC/TIN… .

On 08 May 2009 that CGE signed a works contract with the commercial company Terminal of F…, SA, NIPC/TIN … (property of E…), the subject of that works contract being the realization of expansion of Terminal C… .

For the execution of that contract the CGE celebrated two subcontracting agreements, one of them with the Applicant herein -A…– Branch in Portugal.

It concludes from this that AT there are two distinct entities, with two distinct NIPC/TIN: one with a permanent establishment [TIN…] and another without a permanent establishment [TIN…], with whoever signed the CGE contract and received the respective award being the entity not possessing a permanent establishment [TIN…], that is A…(emphasis ours), it being of the exclusive responsibility of the Applicant the choice of the TIN of the branch (permanent representation).

It further alleges that AT the National Register of Collective Persons considered that it was not feasible to associate NIPCs, in the following terms:

For this reason it understands to raise what it denomines "incident provoked by third parties" and asks for the calling into the proceedings of the National Register of Collective Persons (NRCP), pursuant to Article 316 of the Code of Civil Procedure or, this incident not being admissible, that the NRCP then be called into the proceedings as an assistant in the terms and for the purposes of Article 326 of the Code of Civil Procedure.

Meeting provided for in Article 18, of the Regulations of the Arbitral Court – Dispensation – Final Written Arguments

The meeting of the Court with the parties (Article 18 of the Regulations of the Arbitral Court) was, without opposition from these, dispensed with, with the proceedings continuing with the grant of a period for final written arguments.

Both parties produced their final arguments within their respective periods and in which they developed and updated the arguments in light of the Jurisprudence produced in the meantime.

Procedural Sanation

The Arbitral Court is materially competent and is regularly constituted, pursuant to Articles 2 No. 1 subparagraph a), 5 and 6 No. 1 of the Regulations of the Arbitral Court.

The parties enjoy legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the Regulations of the Arbitral Court and Article 1 of Order No. 112-a/2011, of 22 March.

Incident of calling of third parties and/or of assistance (Articles 316 and 326 of the Code of Civil Procedure)

In Articles 18 et seq., of the Response presented by AT, this raises the incident (of instance) of intervention of third parties or, subsidiarily, of assistance, of the National Register of Collective Persons.

The aforesaid incidents of instance are provided for in Articles 316 and 326 of the Code of Civil Procedure.

The intervention of third parties in tax proceedings does not constitute a case of omission, to be filled by the norms of the Code of Civil Procedure.

Indeed, as is generally known, Portuguese tax litigation departs from an objectivist matrix, being structured, broadly speaking, as a "proceeding on a single act" (tax). That is, tax litigation, as a rule and as occurs in the case sub judice, has as its object a tax act whose legality it is incumbent to scrutinize.

In coherence with such a model, passive legitimacy belongs to the author of the act, being incumbent upon him to defend the legality of his action. Hence, for example, in the initial petition it is only incumbent upon the applicant to identify that party (Article 108/1 of the Code of Tax Procedure), and nothing further in that respect.

On the other hand, active legitimacy will belong to those targeted by the tax act impugned, which, in the case where this is an assessment, will be those to whom the assessed tax has been demanded, in addition to jointly and severally liable and subsidiarily liable parties, provided that the requirements respectively of Nos. 2 and 3 of Article 9 of the Code of Tax Procedure and of Articles 2 and 3 of the Regulations of the Arbitral Court are met.

Understood thus, it is easy to see that the intervention of third parties interested in the maintenance or annulment of the tax act impugned should be strongly restricted, if not even excluded. The absence of regulation relating to the intervention of third parties in tax proceedings should not, therefore, be regarded as an omission, but as a deliberate intention to exclude it, insofar as it does not result as admissible pursuant to the Code of Tax Procedure itself and the Regulations of the Arbitral Court.

Moreover, with regard to the passive side, that deliberate intention to exclude the intervention of third parties provoked will stand out, moreover, from the contrast with the provisions of administrative procedure, where it is provided that the applicant, moreover, must, in the initial petition, identify the parties with contrary interests in the maintenance of the act impugned [Article 78/2/b) of the Code of Administrative Procedure].

This very point was already stated by the Supreme Administrative Court in an analogous situation, within the scope of case 0624/10, in whose decision dated 17-11-2010 it was written that "(…)given the subjective nature of tax litigation in general and the structure of the judicial challenge procedure … there is no room for the defense of contrary particular interests in the maintenance of the act impugned(…)" (decision available for consultation at www.dgsi.pt).

Indeed, the admissibility of third-party interests in relation to the act impugned within the scope of tax proceedings would result in the profound subversion of its structure.

Even if this were not so, duly weighing the requirements of celerity that should guide the decisions of this arbitral court in matters of regulation of the procedural relationship, and the foreseeable repercussions of granting the claim of the entity sued which is now being appreciated in the course of the procedural march, consideration should always be given to the norms of the Code of Civil Procedure relating to the intervention of third parties provoked and incident of assistance, which could found the claim of the entity sued in this matter, will be, in concreto, inapplicable to this arbitral instance.

Thus, the request for intervention of third parties provoked and/or of assistance, formulated by AT, is denied.

The proceeding does not suffer from nullities, and no exceptions were invoked.

It is incumbent to appreciate the merits of the request.

II. REASONING

Proven Facts

a) The applicant, A… (A…), is a German entity, with tax identification number in Germany DE…, which began by obtaining, on 3 March 2009, a tax identification number in Portugal (collective person identification number – NIPC) from the National Register of Collective Persons (NRCP), as a non-resident entity without a permanent establishment in Portugal –NIPC… .

b) This NIPC was obtained from the NRCP for the purpose of performing an isolated act of acquisition of a shareholding (in this specific case, participation in a complementary grouping of enterprises – CGE) with no registration of A… being associated with it for tax purposes in Portugal.

c) After a little more than a month the applicant concluded that it should recognize the legal emergence in Portugal of a permanent establishment and register itself for tax purposes in Portugal (declaration of commencement of activity), having promoted, on 7 April 2009, the recognition of a permanent representation in Portugal and

d) ...for that purpose a second NIPC was generated by the NRCP, the NIPC/contributor number …, since the previous one had been obtained on the assumption of the non-existence of a permanent establishment (branch) in Portugal.

e) On 13 April 2009 the applicant then declared, by reference to this second NIPC, commencement of activity in Portugal as a non-resident taxable person with a branch (permanent establishment) in Portugal, indicating the activities of "engineering and related technical services".

f) The Tax Inspection Services, in inspection carried out, concluded that a series of costs or charges would not be attributable to the permanent establishment (branch) in Portugal of A…, but rather directly to A… in Germany.

g) On 17 April 2009, the applicant established with B… S.A. (B…) a Complementary Grouping of Enterprises (CGE), called "D…, CGE", which in turn was the instrument of cooperation between these two companies through which was celebrated, on 08 May 2009, with E…, S.A. (the project owner – hereinafter, E…), a works contract for the expansion of Terminal C… .

h) The CGE – a legal instrument for cooperation between B… and A…, for a given project – celebrated two subcontracting agreements with its two members (B… and A…, or applicant), for the purpose of execution of said expansion of Terminal C… .

i) The physical execution of the works was the responsibility of the members of the CGE, among which the applicant, the CGE being the legal instrument chosen that permitted the joint and unitary relationship of B… and of the applicant, on one side (single counterparty), with the project owner (E…), on the other side. That relationship with the project owner was jointly by obligation of E…, in accordance with the relevant clause of the public notice of the call for tenders.

j) The relationship with E…, the project owner, including invoicing, was carried out by the CGE, as opposed to being carried out by each of its members separately, by requirement of the project owner.

k) The CGE, in turn, was not merely fiscally transparent for its members. It was also contractually transparent for its members, namely (but not only) in the sense that all charges it incurred relating to the works for which it was established were assumed by its members, which was concretized, as is relevant here, through debits of those charges that the CGE made to them.

l) For those debits the NIPC of A… corresponding to the Branch in Portugal, that is, its registration as an entity with a permanent establishment in Portugal, was indicated and used. Those debits are based on the works or subcontract agreement celebrated between the CGE and the applicant, where this identified itself and signed with the NIPC corresponding to the recognition of its permanent establishment in Portugal, the said NIPC… .

m) The CGE provides for generic contribution for the charges of CGE D… of 15% by A… and 85% by the other member.
In accordance with the agreement between the applicant and B… regarding the functioning of the CGE, in the case of the applicant it fell to it a percentage of 64.29% of such charges, and in the case of B… the remaining percentage of 35.71%. (cf. Annex 6 of the TIR-clause 8)

n) In return for this assumption of charges, and other charges supported directly by the applicant or by B… with the execution of the works/subcontract, the CGE delivered to the applicant and to B… the totality of the price of the works received from the project owner (E…).

o) In the case of the percentage to which the applicant was entitled in comparison with B…, this translated into the amount to be received of €102,058,508, provided for in clause 5, No. 3, of the works or subcontract agreement celebrated between the applicant and the CGE which is nothing more than the result of the application of said percentage of 64.29% to the total price of the project awarded by E…, which was €158,743,766.06.

p) The grounds for the refusal to attribute the disputed charges to the permanent establishment of the applicant in Portugal are reduced, in essence, to what follows, transcribed from the Inspection Report:

i) "(…) the charges supported by the CGE should not be debited directly to its members, but should be taken into account for the purposes of determining the respective taxable profit or loss, to be attributed to its members, in the proportions established in the respective constituent agreement (…)"

The charges in question cannot be attributed to the member of the CGE "for the reason that since the CGE is an entity with registered office or effective direction in national territory, which is established and operates in accordance with legal terms, and with organized accounting, the expenses and income thereof should, pursuant to Article 17 of the CIRC, permit the determination of the profit or loss of the fiscal year, and this yes, attributable to the respective members in the proportion of their participation, pursuant to the provision in No. 2 of Article 6 of the CIRC."

ii) "In the specific case, it is to be noted another peculiarity: the taxable person under analysis does not correspond to any of the members of the CGE in question – D… . It is the very entity under German law, with registration in national territory as a non-resident without a permanent establishment – NIPC…– that integrates the CGE in question (annex II). It is further noted, the fact that at the date of establishment of the CGE -2009.04.17 - already the German law company A…, had established a branch (permanent representation) in this territory, without, however, using the respective NIPC for the establishment of the CGE in question. Therefore, it could be concluded, that it was the option of A… to use the NIPC of non-resident without a permanent establishment.

(…)

The taxable person under analysis is not a member of that CGE, that is, its NIPC was not used for the establishment thereof and nor is any alteration known, in its composition, in that sense. It is considered, thus, that the taxable person is not legally authorized to bear those charges debited by CGE D…, (whose copies of the respective debit notes are attached as annex IX), as common costs, and that are the responsibility of third parties, the same are not fiscally accepted, pursuant to the provision in Article 45 of the CIRC, in the amounts of 1,820,188.39 and €450,923.71, respectively in the fiscal years 2010 and 2011".

q) The IRC assessments and corresponding interest here in question were subject to a bank guarantee (Docs. Nos. 6, 7, 8 and 9) legally required in order to operate the suspension of tax enforcement proceedings directed at collection of the respective amounts (plus accrued penalty interest), with the assessment concerning 2010 furthermore being subject to a partial payment, on 20 December 2013, in the amount of €18,066.81 (cf. Docs. Nos. 5 and 6).

Unproven Facts

There are no facts relevant to the decision, proven or unproven.

Reasoning for the Establishment of the Facts

The facts were considered proven on the basis of the documents attached with the request for arbitral pronouncement and on the copy of the administrative instructing file attached to the records by AT, there being no controversy regarding the same.

II REASONING (continued)

THE LAW

It is necessary to recall what has been understood by Jurisprudence for years, namely, that Courts do not have to appreciate all the arguments formulated by the parties (Cf. inter alia, Decision of the Plenary of the 2nd Section of the Supreme Administrative Court, of 7 June 95, case 5239, in Official Gazette – Appendix of 31 March 97, pgs. 36-40 and Decision Supreme Administrative Court – 2nd Sec – of 23 April 97, Official Gazette/Appendix of 9 October 97, p. 1094).

This jurisprudential understanding is currently supported by the provisions of Articles 607-2 and 3 of the Code of Civil Procedure and 123-first part of the Code of Tax Procedure, when they impose only upon the Judge (or Court) that, after identifying the parties and the subject matter of the dispute and enumerating the questions to be decided, grounds the decision by discriminating the proven and unproven facts and indicates, interprets and applies the corresponding norms to reach its final conclusion (decision).

The Regulations of the Arbitral Court (DL No. 10/2011, of 20 January and amendments) also support this understanding when, in Article 22-2 of the Regulations of the Arbitral Court, it provides that "(...) to the arbitral decision applies the provision of Article 123, first part, of the Code of Tax Procedure, with regard to the judicial decision (...)"

1. Complementary Groupings of Enterprises: brief general framework

The establishment of Complementary Groupings of Enterprises (CGE) may only be done by entities with singular or collective legal personality, being naturally included companies, as results from Law No. 4/73, of 4 June, Base I:

«1. Individual persons or collective persons and companies may group themselves, without prejudice to their legal personality, in order to improve the conditions of exercise or result of their economic activities.

1. The entities thus established are called «complementary groupings of enterprises».

CGEs are subject to a regime of tax transparency (Article 6, No. 2 of the CIRC) that implies the exemption of profits obtained by these in the field of IRC (Article 12 of the CIRC) and an attribution of profits or losses to the respective members, integrating themselves in their taxable income in the context of the CIRC (Article 6, No. 2 of the CIRC). This attribution is made to the members in the terms that result from the constituent act of the CGE (Article 6, No. 3), whether these are resident or non-resident. In the case of non-residents it is considered that these obtain the profits or losses through a permanent establishment situated in Portugal, being these, consequently, attributed in that framework (Article 5, No. 9).

The charges incurred by the CGE are only considered within the scope of the determination of its taxable income, not being, consequently, attributed to the members. The attribution is limited to the profits or losses of the fiscal year.

CGEs cannot have as their main objective the obtaining of profits, as results from Law No. 4/73, of 4 June, Base II:

«1. Complementary groupings of enterprises cannot have the main objective of realization and sharing of profits and shall be established with or without own capital».

In this context, it is, therefore, conceivable that the CGE may not have profits and that, in an arrangement of this type, there may not be any place for any attribution of profits to its members.

2. The case sub judice

2.1. On the involvement of the branch in the establishment of the CGE

In the case under analysis the establishment of the CGE presupposed the involvement of two companies. That is, it could not have been established by a branch or any other entity without legal personality, there being no possibility whatsoever of an option for the involvement of the Branch, given that the law, transcribed previously, is absolutely clear in this respect: the CGE could only have been established by A… and never by its branch in Portugal.

The permanent establishment is nothing more than a presence of the non-resident taxable person that, by its expressivity, justifies that that non-resident be taxed, in this case in Portugal, in the same manner as would be if it were a resident. In this context, when the activity meets the necessary requirements for a permanent establishment to arise (Article 5 of the CIRC) to this, by legal obligation and by an imperative of practical order, must be associated a NIPC, for the purposes of taxation of profits susceptible of being attributed to the activity developed within the scope thereof. It being settled, in that framework, that the subject of the tax legal relationship that may arise in that scope, is not the permanent establishment, naturally, for it does not have tax personality, but the non-resident company, in this case A… . This understanding, solidly established, flows not only from the nature of the PE, but from the law itself (Article 4, Nos. 2 and 3 of the CIRC) and jurisprudence.

This approach implies, consequently, that all activities of the permanent establishment are activities of the non-resident collective person to whom the permanent establishment belongs. This circumstance is not, however, incompatible

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